Could the Brexit Trade Deal Collapse?

British Prime Minister Boris Johnson has warned Britain could walk away by October 15 from post-Brexit trade talks with the European Union if no deal is achieved in the next round of discussion. The key sticking points are European boats' access to UK fishing waters and state aid to industries.

Mr Johnson insisted a no-deal exit would be a "good outcome for the UK". The EU, in turn, accused Britain of failing to negotiate seriously. Britain left the now 27-nation EU on January 31, more than three years after the country voted in favour of ending more than four decades of membership. The political departure will be followed by an economic break when an 11-month transition period ends on December 31 and the UK leaves the EU's single market and customs union.

Without a deal, 2021 will bring tariffs and other economic barriers between the UK and the bloc, its biggest trading partner.

Why does the UK need an EU trade deal? A post-Brexit trade deal will stop tariffs and reduce other trade barriers coming into force after the transition period ends on 31 December 2020.

During the transition period, the UK remains part of the EU's trading arrangements - the single market and the customs union. That means no tariffs, quotas or checks will be introduced.

The point of the transition is to give both sides some breathing space while a trade deal is negotiated, and to give businesses time to get ready.

What about a Canada-style deal?

Prime Minister Boris Johnson has spoken in favour of an EU trade agreement that builds on the deal that Canada has.

Tariffs on most Canadian goods, such as machine parts, have been eliminated. However, there are some additional checks, such as customs and VAT.

Services, like banking, are much more restricted.

The financial sector is important to the UK economy - so getting a deal in this area will be a priority.

How easy will it be to negotiate a UK-EU trade deal? Right now, the UK and the EU share the same rules in areas like workers' rights, competition and environmental policy - they're known as level playing-field rules.

While the EU insists the UK must stick to these rules - so UK businesses don't gain an advantage - the UK government says it wants the freedom to move away.

Access to fishing waters has also proved to be a major sticking point.

Even if a trade deal is agreed, it will not eliminate all checks, because the EU requires certain goods (such as food) from non-EU countries to be checked.

What happens if UK-EU trade talks fail?

If negotiators fail to reach a deal, the UK faces the prospect of trading with the EU under the basic rules set by the World Trade Organization (WTO). If the UK had to trade under WTO rules, tariffs would be applied to most goods which UK businesses send to the EU. This would make UK goods more expensive and harder to sell in Europe. Having WTO terms would also mean full border checks for goods, which could cause traffic bottlenecks at ports and lead to significant delays.

And the UK service industry would lose its guaranteed access. This would affect everyone from bankers and lawyers, to musicians and chefs.

What trade deals has the UK done so far?

While it was an EU member, the UK was automatically part of around 40 trade deals which the EU had struck with more than 70 countries. So far, 19 of these existing deals, covering 50 countries or territories, have been rolled over. This represents just over 8% of total UK trade.

All of the following agreements are expected to take effect at the end of the transition period, according to the Department for International Trade:

The government says it is still in negotiation with a further 18 countries which have existing EU trade deals, including Canada and Mexico. In addition, the UK government is also holding trade talks with the US, Australia and New Zealand.

Whatever Johnson says or believes, a no-trade deal is a massive disaster for the UK and EU. Will commonsense prevail?

References:

1. United Kingdom to quit Brexit trade-deal talks if no agreement with European Union by October 15, ABC News (https://www.abc.net.au)

2. Brexit: What trade deals has the UK done so far, Tom Edgington, BBC Reality Check, 20 July 2020

Retail Industry to Contract Further?

Source: http://edition.cnn.com

  

The extension of the Recovery Movement Control Order (RMCO) to December is expected to delay the recovery of the retail industry. Annual performance will be down by 9.3%, from an earlier forecasted contraction of 8.7%. A 9.3% contraction means retailers will only be able to report sales of about RM97.5 billion compared with RM98.2 billion projected previously.

“The RMCO started on June 10, 2020, and is expected to extend until the end of this year. With strict social distancing measures continuing to be enforced in the next few months, shopping centres and retailers will not be able to operate at full capacity compared to the pre-COVID-19 period,” according to the Malaysia Retail Industry Report (September 2020) that was released on 3rd September.

“This year has been the worst period for retailers in Malaysia since 1987. The retail market turned into a bloodbath since the middle of March with the implementation of the MCO.” The report was compiled by Retail Group Malaysia on behalf of the Malaysia Retailers Association (MRA).

And with the six-month moratorium on loan repayments ending on Sept 30, 2020, consumers are expected to tighten their spending in the final quarter of the year as they recommence servicing their loans, the report wrote.

The retail sector is now expected to contract 2.5% in the fourth quarter, as opposed to just 1.5% previously. Retailers who had traditionally relied on year-end festivities, school holidays, back-to-school purchases and bonuses may not see much, as many companies are not expected to give bonuses. The year-end school holidays have also been shortened to just two weeks from the usual six.

Retail data tabulated by RGM does not include big-ticket items such as cars and houses. Also not included are online retail sales, unless they were conducted on sites established by brick-and-mortar stores.

Retailers in Malaysia recorded their worst quarterly performance in the April to June 2020 period (Q2), with a sales contraction of 30.9%, as the MCO forced a majority of retailers to remain shut for a prolonged period during the quarter. The Q2 contraction was worse than the decline in the country’s economy during the same period, when Gross Domestic Product shrank by 17.1%.

The worst-hit retail sub-sector was department stores — which included retailers like Parkson Holdings Bhd — with sales shrinking by 62.3%, followed by fashion and fashion accessories (down 44.2%). Fashion retailers in Malaysia that have closed in the past few months include German-based ESPRIT, which has shut all its stores in Malaysia, and US-based NYX Cosmetics.

Sales at specialty retail stores shrank by 40.9%. These are stores which sell items like toys, photographic equipment and optical stores, which have been performing well over the years,

Meanwhile, the department store-cum-supermarket category declined by 34.6%. Aeon Co (M) Bhd, for example, sank into the red with a net loss of RM9.56 million during the period.

The pharmacy and personal care segment saw retail sales contract by 26.2%. This segment has not been immune to the impact of the COVID-19 as outlets within malls experienced the biggest sales decline, with many pharmacies having to shut to cap losses.

Meanwhile, supermarkets and hypermarkets, which were also allowed to operate as usual during the MCO to sell essential goods, recorded a 9.9% decline in sales.

Coupled with the Q1 retail sales decline of 11.4 %, retail sales in the first half of 2020 have already contracted by 20.2%.

Moving forward, retailers are expecting some improvement in Q3. The department stores-cum-supermarkets, in particular, are expecting to see sales growth to rebound to 5.7%, outpacing all other sub-sectors, while the fashion and fashion accessories segment expects a 4% expansion.

However, four segments are still expecting to show declines in the Q3, namely the pharmacy and personal care segment (down 10.6%), specialty retail stores (down 9.5%), supermarkets and hypermarkets (down 6.7%) and department stores (down 3.5%).

The Government seems oblivious to the implications – GDP shrinks, job losses increase, stores close, and manufacturers will totter to bankruptcy. Why can’t there be a government-private sector recovery plan drawn-up for retail, tourism, manufacturing and other sectors?

Reference:

Bigger annual retail sales contraction seen after 2Q’s record 30.9% slump, Vasantha Ganeson, TheEdge CEO Morning Brief, September 3, 2020

Composition of Wealth: Middle Class vs. Ultra- Rich

A person’s wealth can be made up of many different assets. It can comprise of liquid savings, stocks, mutual funds, bonds, real estate, vehicles, retirement accounts (IRAs, pensions), and other types of assets. But how does the composition of net worth differ for a person with middle income compared with that of an ultra-rich?

The chart above breaks down the difference in the composition of wealth between middle income, upper income, and ultra-wealthy (top 1%) Americans.

Middle Income: Home is Where the Wealth is

For Americans in the middle class ($0 to $471k of net worth in 2017), principal residence is their main asset. For households that fall in this wide range the combination of housing and pension accounts make up nearly 80% of total wealth on average.

Assets like stocks and mutual funds only make up about 4% of wealth in this income bracket. As their income ladder moves up this situation changes.

Upper Income: A Diversified Portfolio

If a household has a net worth that ranges between $471,000 and $10.2 million, it is in the upper income band. This represents the 20% richest households in the U.S., minus the top 1%, which are put in a separate bracket.

For this group, the principal residence makes up a smaller slice of the wealth pie. Instead, we see a higher mix of financial assets like stocks and mutual funds, as well as business equity and real estate. Almost half of the households in this group own real estate in addition to their principal residence.

As households become wealthier, we tend to see a lower share of liquid assets as compared with the other components of net worth.

The Top 1%: The Business Equity Bulge

In the richest 1% of households, the principal residence makes up a mere 7.6% of assets. At this stage, almost half of their assets fall under the category of business equity and real estate.

A prime example of this is Jeff Bezos. The lion’s share of the Amazon founder’s net worth is tied to the value of his company. Another example is President Trump, whose sprawling real estate empire comprises two-thirds of his estimated $3.1 billion net worth.

One of the more prominent features of the ultra-rich wealth bracket is a much higher level of financial asset ownership. In fact, the top 1% of households own over 50% of the US equities.

Reference:

1.     Nick Routley, How the Composition of Wealth Differs, from the Middle Class to the Top 1%, www.visualcapitalist.com

2.     Jeff Desjardins, Chart: What Assets Make Up Wealth? www.visualcapitalist.com

Air Travel Recovery Delayed?

The International Air Transport Association (IATA) released an updated global passenger forecast showing that the recovery in traffic has been slower than had been expected.

In the base case scenario:

·       Global passenger traffic (revenue passenger kilometres or RPKs) will not return to pre-COVID-19 levels until 2024, a year later than previously projected.

·       The recovery in short haul travel is still expected to happen faster than for long haul travel. As a result, passenger numbers will recover faster than traffic measured in RPKs. Recovery to pre-COVID-19 levels, however, will also slide by a year from 2022 to 2023. For 2020, global passenger numbers (enplanements) are expected to decline by 55% compared to 2019, worsened from the April forecast of 46%.

The more pessimistic recovery outlook is based on a number of recent trends:

·         Slow virus containment in the US and developing economies

·         educed corporate travel

·          Weak consumer confidence

Owing to these factors, IATA’s revised baseline forecast is for global enplanements to fall 55% in 2020 compared to 2019 (the April forecast was for a 46% decline). Passenger numbers are expected to rise 62% in 2021 off the depressed 2020 base, but still will be down almost 30% compared to 2019. A full recovery to 2019 levels is not expected until 2023, one year later than previously forecast.

Meanwhile, since domestic markets are opening ahead of international markets, and because passengers appear to prefer short haul travel in the current environment, RPKs will recover more slowly, with passenger traffic expected to return to 2019 levels in 2024, one year later than previously forecast. Scientific advances in fighting COVID-19 including development of a successful vaccine, could allow a faster recovery. However, at present there appears to be more downside risk than upside to the baseline forecast.

Image: www.theedgemarkets.com

Reference:

Recovery Delayed as International Travel Remains Locked Down, International Air Transport Association, 28 July 2020

Is There a Future for Plastics?

                                         

TheStoryTellers

Plastics are so useful because they are cheap, mechanically strong, light in weight, pliable and can be shaped into pretty much any form. Plastics have been used for nearly 200 years and have replaced other more traditional materials such as metals and wood.

S&P Global Ratings forecast that plastic packaging is unlikely to be replaced in the near future. Plastics has advantages over alternative packaging options like paper or glass. Global plastic production now stands at over 300 million tonnes per year. Changes to plastic production are more likely, including a possible increase in the amount of recycled plastics over time.

Of the 14 percent that is collected globally for recycling, 8 percent is made into plastics of inferior quality, while 4 percent is lost in the process and only 2 percent is recycled into plastic of the same or equivalent quality. Most of these plastics are designed for single use only and end up in landfills, dumps or in the open environment.

Plastics are produced from crude oil through chemical reactions. About 8% of global oil production is used for plastics. In 2017, the Ellen MacArthur Foundation proposed three strategies to transform the global plastic packaging market, which were: 1) fundamental redesign and innovation, 2) reuse and 3) recycling with radically improved economics and quality.

On the first strategy, an important way forward could be to develop new plastics from renewable resources instead of fossil fuels. A Nature article has reviewed potential renewable sources such as carbon dioxide, plant or vegetable oils, and carbohydrates (e.g., sugar) which could be used to produce sustainable plastics. Sustainable plastics made from components of plants and animals (or bio-resources) can be called bioplastics.

Besides bioplastics that are produced from simple organic matters, there are also bioplastics that are directly obtained from plants and animals. These naturally existing plastics include biomass (e.g., starch and cellulose), protein, and chitin. Biomass can be found everywhere on planet Earth including from agricultural bioproducts or wastes. Proteins can be from soy, zein, whey and gelatin.

There is still a lot of ongoing research to explore the chemistry and engineering aspects for working with these bioplastics. If we can find safe and environmentally friendly bioplastics to replace traditional plastics for high-volume applications like packaging, foams and disposable items, we can reduce the carbon footprint of production, produce minimal plastic waste and create products which are better for humans to use. If these bioplastic materials are used for biomedical applications, then there is less pain and better recovery of patients. With the development and use of bioplastics, we are closer to a more sustainable future.

Reference:

1.     Dr Fengwei (David) Xie (2019), Plastics of the future https://warwick.ac.uk/

2.     MESTECC (2018), Malaysia’s Roadmap Towards Zero Single-Use Plastics 2018-2030

3.     What is the future for plastics? https://www.spglobal.com/

RMCO Extended But The Loan Moratorium...?

The RMCO has been extended to end December 2020 but is this necessary and how about the loan moratorium?

Source: https://www.theborneopost.com / BERNAMA

The Covid-19 numbers are below 15 for last 60 days. The borders are closed and we have 14-day quarantine for those returning Malaysians or permanent residents. The economy is impacted with closed borders. In addition, loan moratorium and wage subsidies will end by 30 September.

What is required? If RMCO is extended as a precautionary measure to avoid a possible spike or second wave, then please provide a further 6 months of moratorium on bank loans and an additional injection of RM35-RM40 billion for supporting jobs, SMEs, hotels and tour related sectors.

Surely, the PM is aware of the consequences of extending the RMCO without any attendant financial support. More than 41% of Malaysian manufacturers had said their businesses would be sustainable for less than 12 months. Why?  With Covid-19 lockdown, there is a complete loss of revenue. No amount of cost-cutting can save a business unless everyone is on furlough and rent is suspended. Unemployment will spike from 4.9% in June and bankruptcies will rise even if banks are willing to reschedule.

Urgent economic measures are needed to pull Malaysia out of this quagmire. Where is the Minister of Finance in all of this, besides “politicking” with his 101 projects? The Malaysian economy recorded a contraction of 17.1% (Q2), the worst economic performance in ASEAN. Pray move quickly, and not wait for next year!

References:

1. Think-tank questions Malaysia’s move to extend RMCO, with cases under control, FMT Reporters, August 29, 2020 (www.freemalaysiatoday.com)

2. Extending the RMCO without extending the moratorium on bank loans by another 6 months and an additional RM45 billion to the Covid-19 Fund will adversely affect efforts to save Malaysian jobs, SMEs and now manufacturers, Lim Guan Eng, August 29, 2020 (www.dapmalaysia.org)

Altman Z-Score: More Bankruptcies Soon?

The six-month loan moratorium is ending soon in September 2020. A surge in bankruptcy filings by companies and individuals is quite possible. Governments around the world are taking steps to save businesses battered by lockdowns. Collapse of demand, retrenchment of employees and financial sustainability of businesses are challenges faced by many companies. The risk of insolvency is real.

"Covid-19 is creating an insolvency time bomb," said Euler Hermes, an insurance firm providing insurance for trade deals, predicting a 35-per cent cumulative jump in the number of companies that could go bust between 2019 and 2021. According to Euler Hermes, this would be a record for its global insolvency index – and that about half of the countries worldwide would be setting new highs since the 2009 financial crisis.

The biggest increase will be in the United States, with a 57 per cent jump in insolvencies in 2021 compared to 2019, before the pandemic hit. In Brazil, bankruptcies are expected to soar by 45 per cent, in Britain by 43 per cent, and Spain by 41 per cent. China has forecasted a 20 per cent surge in bankruptcies.

To assess the financial health of companies listed on Bursa Malaysia, we have conducted an Altman Z-Score Analysis. The Z-score model was developed by New York University Professor Edward Altman in 1968 as a measure of the financial stability of companies. The result should be interpreted as the lower the score, the greater the risk of the company falling into financial distress.

Altman Z-Score
Zone	Range	No. of Companies (Dec 2019)	No. of Companies (Mar 2020)	Change %
Safe Zone	Z ≥ 3.0	301	260	-14%
Grey Zone	1.8 < Z < 3.0	195	168	-14%
Distress Zone	Z ≤ 1.8	346	414	20%
Total		842	842

Companies without sufficient data were eliminated. Based on our analysis, out of 842 listed companies, 346 were under distress zone in late December 2019. The number then surged by 20% to 414 in March 2020. The distress zone suggests a considerable risk for companies likely to go into bankruptcy soon.

KPMG tested Z-score using 10,098 companies that were declared bankrupt since 2014. They found Altman Z-score as highly relevant to use for prediction of bankruptcies. A Z-score below 1.1 is in a high critical stage.

In March 2020, 243 companies listed on Bursa were below 1.1 score. In other words, 29% of stocks analysed were in the high critical stage! Companies in the safe zone and grey zone, on the other hand, dropped by 14% from December 2019 to March 2020. We will further investigate this once the June quarter results are available.

The key to this is how do banks and the Government intend react to a development that must happen surely!

Reference:

1.     World facing bankruptcy time bomb, 21 July 2020, New Straits Times

2.     Covid-19 Financial outlook: How will Denmark’s business sectors cope? 28 May 2020, KPMG