Is There a New Phillips Curve for Malaysia?

The Phillips curve (advanced by A.W. Phillips in 1958) is the inverse relationship between inflation and unemployment – as unemployment decreases, inflation increases.

In this graph, an economy can either experience 3% employment at the cost of 6% inflation, or increase unemployment to 5% to bring down inflation level to 2%.

Two researchers from USM (Chor Foon Tang, Hooi Hooi Lean), concluded in their article in the Malaysian Journal of Economic Studies (Dec 2007) that for the sample period of 1970 to 2005, the trade-off Phillips curve is “alive and well in Malaysia”.

Fumitaka Furuoka (2007) of UMS in “Does the Phillips Curve Really Exist? New Empirical Evidence from Malaysia”, Economics Bulletin, Vol 5, No. 16 pp 1-14, concluded that “there existed the cointegrating relationship – as well as casual relationship between relationship between inflation rate and unemployment rates in Malaysia”.

Nevertheless, the accuracy of the Phillips curve has been questioned by many sane economists. It is probably nothing to do with the curve but the more complex economy we face. Consumer credit at peak levels has flattened consumer spending, causing a low inflation environment (but not deflation), decoupling perhaps unemployment and interest rates. In Malaysia, with a decline in disposable incomes as a result of high household debt levels inflation is tepid at best. In an economy where technology has taken jobs and debt levels impact inflation, there is more than the casual impact of inflation and unemployment. Perhaps, a New Phillips Curve could be established.

For more information about Philips Curve, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

Oil Price Impact on Ringgit Exchange Rate

According to Bloomberg’s report (Read more here), oil-related sources contributed about 41% of Malaysia government revenue in 2009.  This dropped to 13% – 14% in 2016.  As such, crude oil price has an impact on Malaysia’s economy, including the Ringgit exchange rate.

The following graph shows the regression plot of USD/RM vs Brent Crude Oil from July 2005 to July 2017.  It shows that the Ringgit movement was significantly influenced by oil price.  Ringgit strengthened when oil price was high while the Ringgit weakened when oil price was low. 

The scattered dark blue dots are the actual data of USD/RM corresponding to respective Brent Crude Oil price from July 2005 to July 2015 while the scattered red dots are the actual data of USD/RM corresponding to respective Brent Crude Oil price from August 2015 to July 2017.  The light blue curve is the fitted regression line between USD/RM and Brent Crude Oil price (July 2005 – July 2017, R² = 0.74) while the dashed red line is the + one standard deviation plot from the fitted regression line.

It is interesting to observe that before Aug 2015, the Ringgit was stronger and was well predicted by the regression line.  However, since Aug 2015, the Ringgit has weakened by + one standard deviation.

In the World Economic Outlook, April 2017 report, International Monetary Fund (IMF) predicted the oil price to be trading around USD55 per barrel in 2017 – 18 (Read more here).  Based on this, the Ringgit could be forecasted using the above regression analysis.  If all the post-2015 negative issues in Malaysia are resolved, Ringgit could trade around USD/RM 3.80.  Nevertheless, if the negative issues persist, the Ringgit may trade around USD/RM 4.18 as the above graph suggests.

For more information about regression analysis and business forecast, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

  

Factors That Impact Foreign Exchange (Forex) Rates

Forex is a means to understand a country’s relative level of economic health. If you are thinking of sending or receiving money from overseas, you will keep a keen eye on currency exchange rates. This short article suggests the factors that impact Forex.

·       Inflation - changes in inflation impact exchange rate, a lower inflation (or its perception thereof) will see appreciation in the value of its currency.

·       Interest Rates – changes in interest rates affect currency value and Dollar exchange rate. An increase in interest rate causes a country’s currency to appreciate because higher interest rates provide better returns (in a relative sense) thereby attracting more funds into the country.

·     Current Account / Terms of Trade – a deficit in the current account due to higher imports of goods and services compared to export of the same causes depreciation.

Related to current account is the ratio of export prices to import prices, which are the terms of trade. A country’s terms of trade improves, if export prices rise at a greater rate than import prices. Higher revenue means higher demand for the currency and an appreciation of the exchange rate.

·     Government Debt – The level of Government debt owed by the Central Government impacts on exchange rate. If debt levels exceed prudent limits, investors flee the market and bonds (or other assets) are sold and a decrease in exchange rate ensues.

·    Political Stability and Economic Performance – A stable state with good economic performance reflects a country’s currency strength. Less turmoil is obviously more attractive (than discord). It is in the interest of political leaders then to minimise issues and create stable environment for investors.

Steady economic growth will see foreign investors vying for projects in a country. On the other hand, a downward trajectory (or expectation thereof) will weaken the currency as authorities may have to lower interest rates and provide liquidity to the system.

·        Market Makers – the Forex market is a global decentralised or over-the-counter (OTC) market for trading currencies. It is the largest market in the world.

The main participants in this market are the large international banks, central banks, institutional investors, commercial corporations, individuals and currency speculators.

Based on Bank for International Settlements data, global trading in Forex markets averaged USD5.1 trillion per day in April 2016.  In May 2016, the top three currency traders by volume were: Citi (12.9%); JP Morgan (8.8%); and UBS (8.8%).

                                                           

While exchange rates are determined by several factors, which may leave some economists in confusion, investors who have some understanding of currency values and exchange rates play a key role in determining the rate of return on their investments.

For more information about forex impact to your business, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

Senior Housing in Malaysia

The next stage of property development is senior housing in Malaysia.  With a growing ageing population senior housing becomes essential.

The Continuing Care Retirement Community (CCRCs) or also known as life plan communities usually offer the range below,

• Apartments for independent living
• Both multi-family rental housing to specific designed for older adults and are age restricted – 55 plus
• Prepared meals; transportation; laundry services; house-keeping; planned recreational activities with an all-inclusive rent

• Homes for sale or rent
• Single family dwellings that may or may not be exclusive to older persons. Age-qualified homes are in retirement communities 

• Manufactured homes (factory-built houses)
• Installed on site. Age-qualified senior residences have amenities like landscaping, maintenance and planned social and recreational activities 

• Assisted living – adults requiring support care facilities
• Prepared meals
• House-keeping
• Laundry services
• Transportation
• Housing and health care
• Planned recreational facilities
• Assistance with activities of daily living (ADL) 

• Alzheimer’s / Memory Care
• Medication management
• Physical therapy
• House-keeping and laundry
• Daily meals
• 24 hours supervised care

Seniors enter a CCRC for independent living and move onto a nursing care as need arises.

At MPCA, we are interested in assisting the financing of such CCRCs – key elements may include suitably priced land, location, facilities and professional operators.

For more information about senior housing financing, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

         Picture source: www.thestar.com.my

Time Series Forecasting for Business Plans

Forecasting is always an interesting topic.  We could precisely calculate the trajectory path of a free fall mass using the law of physics but we could not predict a thunderstorm accurately in two weeks’ time.  Yet, forecasting remains as a very important practice in many areas such as business, economics, medicine, transportation, politics and others.  It helps to improve business and resource planning.  Over the years, it has attracted many researchers to develop various forecasting methodologies.

By studying the past observations of a time series data, and then develops a model that fit the pattern of the past data is called time series modelling.  Once the model has been developed, it could be used to forecast the near future behaviour of the underlying process.  One of the common methodologies is the Box-Jenkins method, or sometimes known as Autoregressive Integrated Moving Average (ARIMA) model.

Diagram 1 shows the actual vs forecasted data of Kuala Lumpur International Airport (KLIA) international passengers traffic from Jan 2012 to Dec 2015.  The red curve is the actual traffic data taken from Malaysia Airport Holding Berhad (MAHB) annual report (Read more here).   Three different traffic scenarios – typical, optimistic and pessimistic, were forecasted using ARIMA and were plotted as blue, green and orange curves respectively.  In Diagram 1, the pessimistic scenario trended closely to the actual data.

Diagram 1.  KLIA International Passengers Traffic Jan 2012 – Dec 2015

Diagram 2 shows the actual vs forecasted data of KLIA international passengers traffic from Jan 2012 to Dec 2016.  The legend labelling is the same as in Diagram 1.  In this case, the typical scenario trended similarly to actual data.

Diagram 2.  KLIA International Passengers Traffic Jan 2012 – Dec 2016

Time series forecasting methodology such as ARIMA is a very useful tool for companies to manage risk or project budgeting in a systematic way.  The forecasted results provide an insight to the magnitude of the unforeseen circumstances.  As such, the management could react to future developments promptly and confidently, having developed at least three possible outcomes.

For more information about time series forecasting and projections in setting business plans, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

Business Finance: A Journey with No End

Starting a business from an idea is never a linear journey.  In fact, it may not even have a final destination.  But for any business it will need finance at all points of its journey.  Some are started on credit cards, overdrafts or help from friends or family.

The first three years is the critical phase.  Many small enterprises fail in this early stage.  But once it is on a growth trajectory, bank finance or other institutional support will be required.  Here, it is good to look at “START”.

Step out – detach yourself and ask the questions for a proper business plan.

Take a position – assess the prospects and challenges at hand.

Analyse opportunities – have a detailed look at prospects.

Reach for the future –  forecast; a vision is now cast – how much new equity/ debt will be required.

Think about finance – assess the financing options available and make clear business proposition.

At MPCA, we have helped companies to “flesh-out” their business plans, and they have then moved-on to funding their projects.  This is the growth phase of their journey.  Invest in good advice and the whole gamut of equity and debt finance becomes available to you.

For more information about START, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.

Photo source: www.shutterstock.com

Bursa Malaysia Listing Requirements Highlights

Bursa Malaysia has announced a new market namely Leading Entrepreneur Accelerator Platform (LEAP) on 15 June 2017 (Read more here).   The Chief Executive Officer of Bursa Malaysia, Datuk Seri Tajuddin Atan said that the LEAP market complemented both the Main Market and ACE Market by addressing the funding gap faced by small and medium-sized enterprises (SMEs).

As a general rule of thumb, large companies that have paid-up capital more than RM50 million could seek listing on the Main Market, while fast growing companies that have paid-up capital approximately RM5 million to RM10 million may seek for listing on ACE Market.  For a smaller company, based on our understanding, a paid-up capital of RM2 million is suitable for the LEAP Market.

  

Additional listing requirements such as “Profit Test”, “Market Capitalization Test” or “Infrastructure Project Corporation Test” is mandatory for listing on Main Market while there is no strict test requirement for listing on ACE or LEAP Market.  The highlights of the Main Market tests are as follows:

  

There are also Bumiputera Investors participant recommendation on best effort basis as highlighted below.

Additional requirements highlight such as financial position and liquidity, management continuity and capability are as follows:

Companies or entrepreneurs who are interested to list their business on Bursa are required to appoint Advisers or Sponsors as part of the listing process.  For Main Market, Principal Adviser is required while for ACE Market, a Sponsor is required.  For LEAP Market, an Approved Adviser is required during the initial listing activities and/ or post-listing activities.  The company must appoint Continuing Adviser for post-listing activities.

To list your business on Bursa Malaysia, the following documents for pre-admission consultation work are required:

n  Last 5 years audited financial statements;

n  Latest management accounts;

n  Net profit forecast and projection for the next 3 years (rough estimation)

n  Estimated funds size required and expected utilisation of proceeds, e.g. for capital expansion, working capital requirements, details of potential acquisition, etc; and

n  Company profile and its shareholding structure

For more information about listing requirements, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.