MCO 3.0: Can I have Another Relief Package Please?

Under MCO 1.0, there were many possibilities of securing some relief for my business. But, lo and behold, my application was too late for the fund – “kuota sudah habis”. As a SME (bordering on a Micro), it is a struggle to survive for more than a year under Covid-19. The only good point was that there was a loan moratorium for a while.

We are now in MCO 3.0 with a full lockdown to be implemented tomorrow. What relief is possible?

On official count, the Government has rolled out seven economic stabilisation, stimulus and recovery packages. Some say it totalled RM340 billion or 24% of GDP. But fiscal injection was only RM72.6 billion (to March 2021).

 

Source:www.kualalumpurpost.net

GDP recovered somewhat from negative 17% in Q2 2020 to a lower decline of 0.5% in Q1 2021. Businesses at 40-50% of capacity at best were looking forward to a higher tempo with the vaccine roll-out. But alas, the roll-out is so slow, it may take at least one year to reach “herd” immunity.

Under MCO 3.0 and dine-in banned, restaurants, retail outlets lost 70-80% of the pre-pandemic revenue. Others are further behind – especially hotel and airline sectors. In all probability, MCO 3.0 or a full lockdown will be extended to mid -July. Then more SMEs will fold-up. SME Association expects 40% of SMEs to close operations. Even if it is a new version of MCO 1.0, we will have more bankruptcies as well.

In the current lockdown phase the economy will lose RM 2.4 billion per day or about RM 72 billion if it is for a month.

So, what do SMEs want?

We need cash relief for wages, rental relief, loan relief or another loan moratorium. Small/micro businesses, the self-employed and those paid on daily or weekly wages should be given relief because they are the most impacted by the restriction on movement.

Is that too much to ask when this is not our doing? And the pandemic is not going away soon, even with the vaccine rollout at full steam. SMEs will need 12-18 months to get back on their feet after it is finally over. Meanwhile, how will one sustain monthly wages, rental or interest on loans – key components of total expenses? This idea of cutting OPR is optical, why bother with interest cost when we are dead!

Remember Makcik Kiah?

Makcik Kiah sells (or used to sell) banana fritters (pisang goreng) as our PM claims. She lives in a Government housing project. Her husband, a Government pensioner, earns extra income as a Grab driver. Their daughter depends on PTPTN for her studies while their unmarried son lives with them.

She is livid! No savings, no money to pay rent, no customers and no funds to settle loans or utilities. She is in deeper debt and no idea where help will come from. Mr. PM can you see her after taking a 50% wage cut?  

 

Wirecard Scandal: The Enron of Germany?

Reuters

German payments provider Wirecard filed for insolvency on June 25, 2020, just days after admitting €1.9 billion (RM9.1 billion) missing from its accounts.

What does Wirecard do?

At its heart, Wirecard is a payments processor, offering companies services allowing them to accept credit cards and digital payments like Apple Pay or Paypal in stores, online or on mobile.

The company collects a commission for ensuring that merchants will receive the money they are owed.

Beyond that, it sells to its customers extra services like analytics based on the data generated from those transactions that it says can help boost sales and track trends.

Wirecard claims around 300,000 firms worldwide as customers and deals with giants in the sector like China’s AliPay and WeChat, Apple and Google.

How did Wirecard make it big?

Wirecard was founded in 1999, starting out offering its services to porn and gambling sites.Such stable revenue streams helped it survive the early-2000s dotcom crisis, and as more savoury forms of online commerce ramped up through the 2000s and 2010s, the Group’s star rose.

In the early days, CEO Markus Braun increased his stake to 7 per cent, becoming the largest shareholder.

Wirecard had clients like KLM, Deutsche Telekom and FedEx on its website.

First listed on the Frankfurt stock exchange in 2005, by 2018 it elbowed traditional lender Commerzbank out of the blue-chip DAX share index.

In early 2019, Wirecard’s market value hit around €17 billion, matching crisis-ridden Deutsche Bank with 15 times fewer workers and revenues.Revelations in June 2020 collapsed its value to around €350 million.

Why weren’t weak spots uncovered?

Beginning in January 2019, a string of Financial Times reports highlighted accounting irregularities, notably in Wirecard’s Asian division. Bosses denied any wrongdoing and the German financial world appeared to close ranks around its favourite.

Markets watchdog BaFin, the German Securities and Exchange Commission, announced a probe into potential links between the FT and short sellers betting against Wirecard stock. The hammer blow came when auditors Ernst & Young said they were unable to find €1.9 billion of cash meant to be sitting in trustee accounts at two Philippine banks. The fact the regulator did not catch the scandal sooner was a “disaster”.

Wirecard’s status as a Payment Service Provider (PSP) subjected it to multiple EU directives since 2008 obliging it to better fight payment fraud, but companies are not subject to as much scrutiny over their accounting practices.

Who controls Wirecard?

Wirecard has been run by Austrian computer scientist Braun since 2002.

He resigned abruptly after the company was forced to acknowledge the missing cash. He was detained after Munich prosecutors accused him of market manipulation and falsifying accounts. Braun turned himself in and was freed on a €5 million bail. American James Freis is serving as Wirecard’s interim CEO.

Chief operating officer and management board member Jan Marsalek meanwhile was dismissed, with media reports placing him in the Philippines.

Braun and other senior board members were already under investigation by Munich prosecutors over “market manipulation” relating to how they presented updates of KPMG audit findings of their old accounts.

Who is behind the missing cash?

German news weekly Der Spiegel named Mark Tolentino, a lawyer working in the Philippines, as the trustee responsible for the missing cash. Based in Philippine financial centre Makati City, his website vanished, although a Facebook page with public legal Q+A video sessions remained online.

Meanwhile one of Philippines largest banks — BPI — where some of the missing money was supposedly deposited — confirmed to AFP that an employee was on “preventive suspension”. Media have reported that an assistant manager at BPI signed a forged document relating to the supposed deposits at the bank.

 

It is not just BaFin that needs to stand up to scrutiny, analysts say. There are also questions about why EY, Wirecard’s long-time auditor, didn’t pick up on accounting irregularities that date back years.

EY has faced mounting legal pressure over its auditing of Wirecard’s accounts. German shareholders’ association SdK has filed a criminal complaint against Wirecard’s auditors. The complaint targets two current employees and one former staff member at EY.

It comes after law firm Schirp & Partner brought a class action lawsuit against the firm on behalf of Wirecard investors, alleging it failed to flag improperly booked payments on Wirecard’s 2018 accounts.

“There are clear indications that this was an elaborate and sophisticated fraud, involving multiple parties around the world in different institutions, with a deliberate aim of deception,” EY said in a statement. “Collusive frauds designed to deceive investors and the public often involve extensive efforts to create a false documentary trail. Professional standards recognize that even the most robust and extended audit procedures may not uncover a collusive fraud.”

The upshot of the matter is it can happen anywhere—Germany, U.S., India, Malaysia (1MDB), China or the U.K. What matters is how it is dealt with and what mechanisms are introduced to improve governance and prevent a recurrence. That’s the difference between a more developed economy and one that is not.

 

 

Reference:

1.     Five things to know about the Wirecard scandal, 25 Jun 2020, Malay Mail

2.     ‘The Enron of Germany’: Wirecard scandal casts a shadow on corporate governance, 29 Jun 2020, CNBC

3.     The Weird, Extremely German Origins of the Wirecard Scandal, 21 April 2021, The New Republic

LRT Accident: Who is To Blame?

 

Bernama

How could two light rail transit trains coming from opposite directions be travelling on the same track? That was the question posed in MalaysiaKini on 25 May 2021.

This was among several questions which a former Transport Ministry officer said. Many industry players are asking these questions but are too afraid to speak out because of how close-knit nature of the rail industry.

Chung Yi Fan, a former special functions officer to then transport minister Anthony Loke, said many in the industry are suspecting systemic or organisational failure as the root cause.

“Everyone knows each other. They don’t want to be harsh critics, or they might ruffle feathers and lose some potential jobs in the future,” said Chung on his Facebook page.

Among others, Chung asked why a four-car train set was driven in manual mode and undergoing testing at 8pm on 24 May 2021.

He also wanted to know if the Automatic Train Protection (ATP) system had malfunctioned or whether it was manually disabled.

But most importantly, Chung said the public should be told what happened to the signalling and interlocking systems which would have never allowed trains coming from opposite directions to be on the same track.

“There are many more questions. Incidents of such magnitude can only happen because of multiple errors and oversight. A series of wrongdoings, not just one guy pressing a wrong button,” said Chung.

“Investigations must not rule out the possibility of an underlying systemic issue or organisational failure or both.”

Details of the LRT accident are scant although it has been established that it involved two train sets along the busy Kelana Jaya line. According to the former Chairman of Prasarana the trains had just kissed each other in the tunnel. The Government did the right thing to terminate him. Otherwise there would be more kissing going on!

According to Dang Wangi district police chief Mohamad Zainal Abdullah, preliminary investigations suggested that one train set was undergoing testing and was driven manually on the wrong track while the other which carried 232 passengers was driven autonomously.

The accident has resulted in 47 hospitalisations.

The Kelana Jaya LRT line began operations in 1998. The train sets are from Canadian firm Bombardier which are fully automated while the signalling system is from French firm Thales.

Will there a full independent investigation? Or, a Parliamentary Select Committee to investigate? No! Why? Because it may unearth some unsavoury matters (or characters) in Prasarana and MOT. The public should demand an independent review of the accident; systems; competency of personnel; leadership, and the back-up plans. The word, otherwise, will be a “cover-up”. For a public transport operator, public scrutiny is necessary, especially when its liabilities are close to RM40 billion.

 

Reference:

Ex-MOT officer: LRT accident not caused by just one guy pressing a wrong button, 22 May 2021, Malaysia Kini

Happy Wesak Day!

 

US Consumer Prices Jump?

 

US consumer prices climbed in April by the most since 2009. The consumer price index (CPI) increased 0.8% from the prior month, reflecting gains in nearly every major category and a sign burgeoning demand is giving companies latitude to pass on higher costs. Excluding the volatile food and energy components, the so-called core CPI rose 0.9% from March.

The gain in the overall CPI was twice as much as the highest projection in a Bloomberg survey of economists. Sharp increases were reported in prices for motor vehicles, transportation services, and hotel stays as businesses hardest hit by the pandemic reopen more broadly and vaccinated Americans resume social activities and travel.

Treasuries fell on the inflation surprise, with the 10-year yield touching 1.66%, while S&P 500 futures remained lower. The annual CPI figure surged to 4.2%, the most since 2008. Primarily, because of base effect.

While Federal Reserve (Fed) officials and economists acknowledge the temporary boost, it is unclear whether a more durable pickup in inflationary pressures is underway against a backdrop of soaring commodities costs, trillions of dollars in government economic stimulus, and incipient signs of higher labour costs.

The core CPI measure, which was also biased higher by the base effect, rose 3% from 12 months ago. That was the largest since 1996. For the last year the annual core inflation metric had held below 2%.

While challenging for producers, swelling consumer demand has also given firms more confidence that they will be able to pass along some of the new costs. If sustained, the production bottlenecks could pose a risk of an acceleration in consumer inflation.

“Cost-push” factors and imported inflation will drive consumer prices in Malaysia. It is best to implement pre-emptive measures to contain any potential rise in CPI. Supply-side improvements and demand containment strategies are needed to stave off the worst-case possibilities taking shape in the near future.

 

Reference:

1. US consumer prices jump most since 2009, outpacing estimates, 12 May 2021, The Edge

Toll Highways into a Highway Trust?

 

Gamuda Bhd has confirmed it is currently in talks with the Government to sell its 4 highway concessions to a private highway trust.

The value? Probably an enterprise value of RM5.2 billion, paid through bond issuance, according to Kenanga Research. Investors have an annual return of 4-5% supported by cash flows from the tolls. No guarantee or support from the Government is required. Toll hikes are waived with extension of concession periods. This means road users will continue to pay the same amount but for a longer period.

The Government will not have a stake and as such there is no outlay required.

Gamuda Bhd however on 10^th of May, denied that its proposal to have four tolled highways acquired by a highway trust involved an enterprise value of RM5.2 billion. “The speculated enterprise value of RM5.2 billion for a highway trust proposal is incorrect,” Gamuda said

In the previous model of 2019, the Government acquired the concessions for RM6.2 billion. Also, it required a congestion charge which would reduce toll rates by 30% during non-peak hours and free travel during off peak hours.

From the Government’s point of view, they could save on RM5.3 billion of toll compensations (from the toll hike freeze) for the remaining concession period for the tolls through this initiative. This also benefitting Gamuda by raising private funding initiative (PFI) equity to jump-start its MRT 3 project, or partly fund its 10-year Penang South Islands (PSI) plans. Road users in addition would get to enjoy zero toll hikes too.

Sounds like a win-win idea? If this proposal be accepted, it opens doors for other existing toll concessionaires to sell matured highway and channel proceeds to new ventures.

In the U.S., the Highway Trust Fund (HTF) was established in 1956 to provide a more dependable source of funding from the federal government for the construction of the interstate highway system. The HTF is comprised of two constituent accounts:

·       The Highway Account, which is largely devoted to construction and maintenance of highways and bridges; and

·       The Mass Transit Account, which is used to make capital expenditures on buses, railways, subways, ferries, and other modes of public mass transit.

The Congressional Budget Office estimates that Highway Trust Fund tax revenue will total $43 billion in fiscal year 2020 (figure 1). Revenue from the federal excise tax on gasoline ($25.8 billion) and diesel fuel ($10.5 billion) accounts for 84 percent of the total. The remaining trust fund tax revenue comes from a sales tax on tractors and heavy trucks, an excise tax on tires for heavy vehicles, and an annual use tax on those vehicles. In addition to dedicated tax revenue, the trust fund receives a small amount of interest on trust fund reserves.

The current tax rates are 18.4 cents per gallon for gasoline and ethanol-blended fuels and 24.4 cents per gallon for diesel (0.1 cent of each tax is dedicated to the Leaking Underground Storage Tank Trust Fund). The tax rates on motor fuels have not changed since 1993 and thus have failed to keep pace with inflation. If tax rates had been indexed for inflation since 1993, the current tax on gasoline would be about 33 cents per gallon and the tax on diesel fuel would be about 44 cents per gallon. Although the current taxes on motor fuels (except for a residual tax of 4.3 cents per gallon) are set to expire at the end of September 2022, Congress has routinely extended the taxes in the past.

Why can’t we have a similar system to fund highways and rail projects?

 

Reference:

1.     Cheah Chor Sooi, Gamuda’s highway trust proposal may just be a viable idea, 10 May 2021, Focus Malaysia

2.     Emir Zainul, Gamuda confirms plan to sell four highway concessions to govt, 11 May 2021, The Edge

3.     Gamuda clarifies proposal on tolled highway trust, 10 May 2021, SunBiz

4.     The Highway Trust Fund Explained https://www.pgpf.org/

5.     What is the Highway Trust Fund, and how is it financed? Tax Policy Center

Bullish Outlook for Mr DIY?

Mr DIY unveiled that its 1Q FY2021 net profit almost doubled year-on-year to RM124.79 mil (1Q FY2020: RM58.46 mil) while its revenue rose 63% to RM870.18 mil (1Q FY2020: RM534.08 mil) on 30 April 2021.

The strong results were supported by higher average monthly sales per store, underpinned by recovering consumer spending and double-digit profit margin. It was also a result of positive contribution from new stores, where its store network increased from 628 in 1Q FY2020 to 788 in 1Q FY2021. The home improvement retailer’s store expansion plan is well on track with net new addition of 54 stores in 1Q 2021 versus the target of at least 175 stores in 2021.

AmInvestment Bank Research is bullish on Mr DIY’s future earnings outlook due to:

·       Unrivalled gross profit margins of about 43%;

·       Expansion into less urban areas;

·       Quick store breakeven periods (less than two years); and

·       Expected success of multi-store format

The research house is positive with Mr DIY outlets’ earnings but is cautious of the performances of Mr DOLLAR and Mr TOY (subsidiaries of Mr DIY) amid a possible re-tightening pandemic restriction in light of the recent spike in cases.

Mr DOLLAR is not making profits yet but the group believes that after it achieves a critical mass of stores, it can take advantage of economies of scale and has a higher leverage over suppliers. Similarly, Mr TOY’s mall outlets generally saw a weaker performance as compared to stand-alone stores. Given that the majority of Mr TOY outlets are located within malls, the segment saw reduced transaction volume and footfall in general.

The latest stock prices targeted by research houses are as follows:

Date	Open Price	Target Price	Upside	Source
3/5/2021	4.05	4.79	18.27%	HLIB
3/5/2021	4.05	4.48	10.62%	AmInvest

 

Not everyone has a positive view on the group. Asia Analytica, for example, thinks this pace of growth may not be sustainable given the fierce competitive outlook. This is mentioned in its report ‘Mr Don’t Invest Yet’ published in The Edge Malaysia (19 October 2020) before Mr DIY’s IPO.

In fact, Malaysia’s number of home improvement stores per million population is well ahead of Indonesia and Singapore, and on par with some of the developed economies like the UK (see chart).

What’s next?

The continued expansion of Mr DIY could make it a potential candidate for the exclusive FBM KLCI league. This would place it among the 30 largest stocks on Bursa Malaysia in terms of market capitalisation. At RM25.36bil market cap as of April 15, Mr DIY is already larger than Supermax Corp Bhd, Telekom Malaysia Bhd and Kuala Lumpur Kepong Bhd, to name a few FBM KLCI constituents.

Disclaimer: We are not recommending any counter or share nor accept any liability or loss for the stock mentioned above.

 

Reference:

1.     Cheah Chor Sooi, Gravity-defying growth prospect beckons for Mr DIY Group, 3 May 2021, Focus Malaysia

2.     Ganeshwaran Kana, Bullish outlook for Mr DIY, 16 April 2021, The Star

3.     Harizah Kamel, Mr DIY to gain from potential FBM KLCI entry, 16 April 2021, The Malaysian Reserve

4.     Mr Don’t Invest Yet, 19 Oct 2020, The Edge Malaysia

 

 

 

 

CTOS: Will it Double in Value on Listing?

 

The last time a company sold so much of its equity through an IPO was when FGV Holdings Bhd sold 60% of its shares in 2012. And now CTOS is offering 50% of its total equity for sale to investors. The typical size of listing is only 25% of a company’s equity. So, why this pursuit of a large public spread?

Sources say that it was large funds like the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) who had nudged CTOS shareholders to consider an offering larger than 25% of equity. In the past several years, there has not been many large IPOs that could cater to the demand of large institutional funds like EPF and PNB. The reduced number of IPOs on the Main Market has also made it difficult for large institutions to find companies that are suitable for them to invest.

CTOS is expecting to raise about RM1.2 billion through 50% of its equity offered, driving the company’s post-IPO market capitalisation to RM2.4 billion.

Ganeshwaran Kana (8 May 2021), quoting sources, says CTOS may be valued at about 35 to 37 times, based on its price-to-earnings (PE) ratio. The other listed credit reporting companies around the world have a PE of around 50 times.

Big data and financial technology features make this company interesting and therefore likely to see a heavier demand. There are, so far, no exact comparable businesses among listed Malaysian companies that are like CTOS. But if you take technology stocks as examples, Greatech Technology Bhd and Pentamaster Corp Bhd have PE ratios of 61 times and 51 times, respectively.

In addition, the main shareholder of CTOS is Creador, the private equity firm who recently floated Mr DIY Group (M) Bhd on the Main Market. The market capitalisation of the group has doubled from RM10.98 billion on the first day of trading to over RM23 billion as of 12 May 2021.

The credit reporting industry has high barriers to entry and a key barrier is the access to credit profiles. CTOS has built this over three decades. The other CRAs in Malaysia are Experian, Credit Bureau Malaysia, FIS Data Reference, Dun & Bradstreet and CRIF Omesti. Malaysia’s credit reporting industry is still in its early stage. About a quarter of the Malaysian population don’t have credit scores. This may provide a great growth potential for the company. What do you think? Will CTOS double in value on listing, like Mr DIY?

Disclaimer: We are not recommending any counter or share nor accept any liability or loss for the stock mentioned above.

 

Reference:

1.     Joyce Goh, CTOS submits for IPO on Bursa Malaysia, eyes valuation of over RM2b — sources, 19 March 2021, The Edge

2.     Liz Lee, CTOS targets RM1.2 bil IPO in third quarter, sources say, 11 March 2021, The Edge

 

Malaysia’s Economy to Rebound in 2Q21?

RAM Rating Services (“RAM”) expects Malaysia’s economy to rebound in second quarter (2Q). And they have accounted for rise in Covid-19 injections and re-imposition of MCO 3 in their forecast.

RAM is maintaining GDP growth of 5.0 per cent for 2021.

Meanwhile, AMRO – the macroeconomic research office of ASEAN+3 – expects an upswing of 5.6% owing to a low base and the strong pick-up in global demand induced by vaccination programmes.

All this sounds very promising, but Q1 results were weak and Q2 with MCO 3.0 is not expected to rebound strongly. Export markets – U.S., China – have improved significantly but that’s because they are well ahead of us in vaccination.

But if the Government were to do a more selective, targeted MCO and continue stimulus, then perhaps a better outcome could be realized.

AMRO is projecting 6.2% growth for 2022 with herd immunity in Malaysia and abroad achieved. Let’s hope that these “prophets” of “green shoots” may realize their forecasts.

 For me, a 4% growth in 2021 would still be great! Why? Although exports have improved significantly, domestic consumption is constrained. Sales are below by 20-30% compared to pre- pandemic levels—never mind about Hari Raya! Nevertheless, remain positive!

Reference:

1.     RAM Rating expects Malaysia’s economy to rebound in 2Q21, 7 May 2021, Malay Mail

2.     Malaysia is well-positioned for a strong vaccine-led recovery but ... 4 May 2021, Focus Malaysia

3.     Sulhi Khalid, Malaysia's GDP growth could dip to 4% on MCO 3.0, slow vaccination and Covid-19 resurgence — SERC, 7 May 2021, The Edge

What’s More Urgent Than Being in a Middle-Income Trap?

 

Paolo Casadio from HELP University and Professor Geoffrey Williams from Malaysia University of Science and Technology pointed out in their latest article – ‘The trap of the ‘middle-income trap’’ that among mature economists, the classification of countries into high-, middle- or low-income economies has no particular economic meaning and formally it is simply a way of deciding whether or not a country will be eligible for financial assistance from international agencies.

asiasociety.org

For 2021, the high-income economies are those with a Gross National Income (GNI) per person of US$12,536 (RM51,341), using a statistical calculator called the World Bank Atlas method which adjusts for exchange rates and purchasing power.

High-income status doesn’t tell us much about the level of development and, for example, some high-income economies, including the oil exporting countries of the Middle East, are classified as developing countries. It tells us nothing about how the high income was achieved and among the 83 high-income countries we find many oil-based economies with little or no manufacturing and financial services or high-tech industries touted as the future of growth.

The average income per person also tells us nothing about the distribution of income with massively wealthy elites and desperately poor masses in even the highest income countries. The US$12,536 limit is best viewed as a bureaucratic cut-off point, an achievement rather than a policy target.

The World Bank has projected Malaysia to join the club of high-income nations, but at a slower pace than its predecessors. For a vital and dynamic economy like Malaysia with historical growth close to five per cent, reaching this threshold is more a matter of time than a measure of extraordinary performance. Therefore, the authors pointed that focusing on high-income as a policy target is not only misleading, it can be a dangerous distraction from the more urgent underlying challenges in economic growth, development and distribution.  

The challenges, for example, the downward trend in growth rate for Malaysia, must be placed above the high-income target. Structural unemployment rises with slower rate of growth. Why? The economy has insufficient capacity to accommodate the flow of people entering the labour market. And with automation and substitution of workers due to the Fourth Industrial Revolution (IR4.0) this could get worse. Meanwhile, many college graduates are underemployed, suffering from low wages coupled with ever higher cost of living.

The second implication of lower potential growth is the further contraction of the fiscal space. When the government targets a fixed level of debt and deficit to GDP, lower growth constraints resources available for economic and social interventions.

We need to be more creative and innovative in our economy. We should move away from labour intensive investment to digital infrastructure. And skills upgrading on a continuous level to prepare the workforce for the new knowledge economy. Solve current issues including Covid-19 and political instability to attract more foreign investments. So, instead of focusing on a high-income target which will happen anyway, its best to resolve urgent concerns of the current lower underlying growth.

 

Reference:

1.     Paolo Casadio and Geoffrey Williams, The trap of the ‘middle-income trap’, 4 May 2021, Malay Mail

2.     Malaysia: On track for long-term growth, 20 March 2020, Standard Chartered

 

 

 

Selamat Hari Raya!

 

Malaysia: Is Inflation Inching Up?

 

Many economists expect inflation to rise in 2021. What are the Government’s options? And what has been the official rate for the last 4 years?

Year	Rate (%)
2020	-1.13
2019	0.66
2018	0.97
2017	3.8

Source: www.statista.com

For 2021, the expectation is a rise of 2.42% (some say it may go higher to 3% p.a.). About 20 million Malaysians will get ready to celebrate Hari Raya Aidilfitri by 13th May, and concerns arise of cost of necessities. The economy is still fragile – drifting between CMCO and MCO, unemployment is still on the rise and others are having to suffer pay cuts or a “freeze”.

In March 2021, the headline rate increased to 1.7%. Why? Petrol and diesel prices were higher than a year ago. Then the weak ringgit has made imported products – food and intermediate goods-- more expensive. And if consumer demand recovers, which is unlikely, then that may add further fuel to the small fire.

The Government is subsidising fuel prices, extended sales tax exemption for cars and electricity bill discounts to June 2021. Is that enough?

Price control enforcement, targeted cash transfers to the B40 group and a higher exchange rate policy will reduce cost of imports and mute any nascent advance of inflation. Keeping it below 3% will reduce the burden of the most vulnerable low-income group. The other is to improve savings deposit rate to above 3.5% p.a. for a fair return to savers. It then suggests OPR to move up from 1.75% currently. Inflation currently is a “cost-push” development than a monetary phenomenon. Nevertheless, a higher OPR will improve exchange rate and reduce effects of any imported inflation.

When inflation is too high it will reduce the value of money unless interest rates are higher than inflation. It is the real return that savers look for unless the Government is deliberate in its actions to “move” people from savings to investments! The key effects of inflation could be described as:

−         Erodes purchasing power – not too surprisingly some in the public sector are oblivious to this idea and look at nominal value rather than present value of a stream of projected cashflow for a project. Price of nasi lemak today and 10 or 20 years ago is significantly different;

−         Encourages spending, investing – a predictable response to declining purchasing power is to buy now rather than later. If cash is to lose value, then shopping is better now than later.

Businesses may do capital investments now than later, since costs may look more manageable today than later.

−         Continued rise in inflation – with the urge to spend because of inflation, it tends to boost more inflation – a disastrous feedback loop.

−         Raises cost of borrowing – central banks’ may damper rising inflation with higher interest rates. That raises cost of doing business.

−         Unemployment may fall – as the Phillips curve suggests there is an inverse relationship between unemployment and inflation.

For Malaysia, inflation is not on a “runaway” trend right now, but savers and lower income groups are impacted by sustained increase in price. The Government must keep a close watch on price movements and devise targeted measures to mitigate any adverse development.

Reference:

Ganeshwaran Kana, Inflation Inching Up, 27 April 2021, StarBiz

 

Opportunities for Digital Banks in Malaysia

 

The Monetary Authority of Singapore (MAS) has approved four digital bank licenses in 2020, and surprisingly three out of four (Grab, Sea, and Ant) are non-banking players. In Malaysia, the deadline for the submission of applications for digital banking licenses is set for June 30, 2021. Five digital banking licences will be granted by the first quarter of 2022. This will be one of the biggest disruptions to the financial services market in decades.

Unlike Singapore or Hong Kong, Malaysia has larger rural areas with unbanked population. Therefore, a digital bank will definitely help Malaysians, especially under the pandemic.

The increasing internet and mobile phone penetration rates as well as the rise in popularity of mobile and internet banking, even before the pandemic, offers a highly supportive environment for digital banks and fintech to flourish. The country is a market awash with mobile wallets. There are now 53 such wallets, but 85% of payments are still settled in cash, according to Mastercard (2020).

Given the lower capital threshold required in Malaysia of RM300 million versus Singapore’s S$1.5 billion, it added that smaller fintech companies with strong technology are also well-placed to succeed.

The diversity of population, high internet penetration rate and low capital threshold requirement create significant opportunities for digital-only banks to develop in Malaysia. The introduction of digital banks will expand market access and optimize SMEs’ business performance. And with more investment in technology, we could be ready for fintech!

 

Reference:

1.     Ahmad Naqib Idris, Significant opportunities for digital-only banks in Malaysia’s 'fertile ground for fintech', says S&P Global Ratings

2.     Dashveenjit Kaur, Digital banking gets real in Malaysia in 2021, 6 Jan 2021,  https://techwireasia.com/