A Potential threat Against RCE

There seems to be something in the air these days.

First it was CUEPACS wanting to do its own deductions for civil servant retail loans. If they could do so, it would save some money for civil servants and literary break the monopoly of the National Cooperative Organisation of Malaysia, or Angkasa, as a middle man conduit for such payments.

Now, rumour has it that a number of commercial banks are planning to break into the lucrative market of lending to government employees after being allowed to make automatic salary deductions.

Presently, only credit cooperatives and a number of government-owned financial institutions are provided with the special codes that allow these salary deductions.

It is understood that the move is aimed at liberalising the landscape in order to benefit the borrowers, namely the over one million government employees.

The entry of commercial banks should spell lower interest rates and better service levels but may also jeopardise the profitability of existing players.

The market for these loans is huge.

According to a document obtained by StarBiz, civil servants forked out a whopping RM590mil in loan repayments for the month of August alone under this scheme.

It does seem to be a great business to be in.

The government-initiated monthly salary deduction means that the loans are virtually risk free, keeping non-performing loan levels extremely low.

Angkasa, the national union integrating the various cooperatives in Malaysia is weary of such developments.

Over the years, Angkasa has built a robust interface system with the Accountant-General’s office that enables the salary deductions.

The approved lenders – the 450-odd credit cooperatives and government-owned financial institutions such as Bank Rakyat, Malaysia Building Society,Bank Simpanan Nasional and Agrobank – have to use Angkasa’s services for the deductions.

Angkasa netted RM6.3mil in transaction fees in August alone.

To be sure, commercial banks are already in the business.

But their role has been limited to funding those holding the Angkasa codes.

Public-listed RCE Capital has made a profitable business out of funding three cooperatives to reach government servants.

Due to the many layers involved, the interest rates on the loans to government employees have historically been high.

But competition among the existing players has driven down rates to an average of 5% to 6% presently.

Still, if commercial banks are allowed in the market, interest rates can be driven down more, considering their lower cost of funds and the lower risk involved due to the banks’ ability to “garnish” the salaries of borrowers.

That, in turn, can lead to existing borrowers migrating to the commercial banks.

And that can spell trouble for existing players.

The status quo, however, is unlikely to be rocked overnight.

The interested commercial banks are believed to be working on building an electronic interface similar to what Angkasa has.

Due to the complexity of such a system, it may take months before it is up and running.

Furthermore, Angkasa is unlikely to open its system up to the newcomers.

Angkasa’s members are the cooperatives involved and they have their rationale for keeping things as they are.

Angkasa vice-president Mustapa Kamal Maulut said: “The profits that Angkasa make are channelled back into society in the form of free training programmes on skill development for cooperative members.

"Opening up the market to other players could hurt Angkasa’s bottom line and hence these activities.”

Another concern is that with cheaper loans available to them, civil servants may be tempted to borrow more.

Former chief executive of Malaysia Building Society, Ahmad Farid Omar, said more checks needed to be in the system to ensure there was no over-borrowing.

“There should be some way of determining that loans should only be given for productive purposes such as buying of land. An unnecessary high debt level among civil servants can lead to all sorts of problems,” he said.

Still, the argument for liberalisation does make sense.

There must be other ways to fund the cooperatives’ social objectives without denying the benefits that a freer market place will bring to the country’s civil servants.

So,companies like RCE will have to view all this new development seriously;so as not to lose too much to these johnny-come-lately banks.

Singapore is Unconvinced!

Singapore is yet to be convinced that an early economic rebound can be sustainable. As such on Oct 12, its central bank kept its loose monetary policy unchanged. Economists now expect tightening only to begin next year.

New data has shown the economy expanded a forecast-beating 0.8 per cent in the third quarter from a year ago, returning to growth after three quarters of contraction. however, the central bank was quick to point out that there continue to be no decisive recovery in export demand.

This cautious outlook for export-dependent Singapore mirrors its policymakers’ concerns from the United States to South Korea that an economic revival could taper off, underscoring the urgent need for growth-supporting policies.

“Going forward, do we see this kind of growth in Q4? It is quite unlikely,” said Wai Ho Leong, economist at Barclays in Singapore. “On the policy front ... the chances are the central bank is building towards an April normalisation.”

The Monetary Authority of Singapore, which next reviews policy in April, manages the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates.

The currency fell as far as 1.4010 per US dollar, down nearly 0.4 per cent from Friday’s close and compared to levels of 1.3950 just before the policy announcement. The Singapore dollar had risen last week as some investors had placed bets on a possible tightening of policy.

The central bank said there could be some upward consumer price pressure from higher oil and food prices, though underlying domestic cost pressures will be contained. It forecast inflation of 1 per cent to 2 per cent next year.

“MAS will continue to be vigilant over developments in the external environment including the medium-term risk of stronger global inflationary pressures,” the Monetary Authority of Singapore (MAS) said in a statement.

Singapore’s economy continued to grow robustly in the third quarter as the base of the recovery extended beyond pharmaceuticals into the wider manufacturing and services industries.

GDP grew 14.9 per cent from the previous quarter on a seasonally adjusted basis.

The government lifted its forecast for 2009 GDP to a contraction of between 2.5 to 2 per cent, from a forecast of a contraction of 6 to 4 per cent.

“Inflationary pressure is still benign, growth is showing steady improvement. But overall economic fundamentals and external conditions are still below the historical trend, or where MAS would extend a tightening policy,” said Irvin Seah, economist at DBS Group in Singapore.

So, do not bring out the beer cans out yet, hear?

US Housing Boom?

Are we reading more into this than we should?

A report from New York on October 10th has this.

The sudden rise in home prices suggests that the psychology of the market has shifted substantially. But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom. To a large extent, where we’re heading depends on what home buyers are thinking.

Some clues are found in the annual home-buyer surveys that Karl Case, the Wellesley economics professor, and I have run for years. For the surveys, we canvass recent home buyers in four cities — Los Angeles, San Francisco, Milwaukee and Boston; the surveys are now being conducted under the auspices of the Yale School of Management. We have just received the 2009 results, with responses from June and July.

This year’s survey coincides nicely with the upturn in home prices, the sharpest change in direction we have ever seen. The data show that the Standard & Poor’s/Case-Shiller 10-City Composite Home Price Index for the United States rose 3.6 per cent between April and July. While that is not a whopping increase, it followed a decline of 4.8 per cent in the previous period, between January and April.

The suddenness of this shift surprised me. In my column in June, I wrote that home prices might well continue to decline for years. As of that time, the S&P/Case-Shiller price index had fallen every month for almost three years. Add to that the prospect of continuing high unemployment and a weak economy for years to come, and the prospects for home prices did not seem rosy.

But the new data are startling. Since the indexes began in 1987, the closest parallel to such a change came at the conclusion of the last housing bust, at the end of the 1990-91 recession. Home prices rose 2.3 per cent from April to July 1991 after having fallen 2.1 per cent from January to April that year. By July 1996, five years after that “turnaround,” home prices were down 0.6 per cent from their July 1991 level, and down 13.8 per cent in inflation-adjusted terms.

Could the more extreme recent shift mean that home prices will just keep rising this time? Here is where our new survey results are helpful.

We looked at both the long- and short-term attitudes of home buyers. In our survey, we ask, “On average over the next 10 years, how much do you expect the value of your property to change each year?” The average answer among 311 respondents in 2009 was an increase of 11.2 per cent. The median response — with half above, half below — was 5 per cent, also high. That sounds rather like bubble thinking.

For a home buyer who borrows 90 per cent of the money to acquire a house, an appreciation rate of 11.2 per cent offers an investment bonanza. By putting a small amount of money down, investors stand to make a large gain if home prices climb. That is the power of leveraging. Recently, however, home buyers have also experienced the unpleasant consequences of leverage when home prices fall. Investing in a home during the wild past few years has been like gambling in a casino: You can leave with riches or empty pockets.

In our survey data from one year earlier, when prices were falling at an annual rate of nearly 20 per cent, buyers were still expressing long-term optimism. Then, the average answer to the question about expected yearly increases in home values was 9.5 per cent a year, with a median of 5 per cent — high figures indeed for that time. The bubble thinking is not new.

Those long-term expectations may not have changed much in character, but short-term expectations certainly have. In the survey, we also ask, “How much of a change do you expect there to be in the value of your home over the next 12 months?” Here, the average answer for June-July 2009 was a 2.3 per cent rise, versus a negative 0.4 per cent a year earlier. That was a dramatic change.

Another survey question is this: “If you think that present trends will not continue forever, what do you think will stop them?” Respondents were asked to answer in their own words. In 2008, when the current trend was unambiguously down, people nonetheless made it clear that they thought a housing recovery would come as the recession ended, with a new president after the election, and after home prices have come back down. What has changed in 2009 is that they suddenly see this anticipated scenario as actually playing out.

An additional question pertains to short-run considerations of market timing. We have been asking respondents whether they agree with this statement: “I bought now because I felt that I had to even though I might have done better financially if I had waited.” During the housing boom in 2004, only 17.9 per cent agreed with that statement. That figure doubled, to 36.7 per cent, when prices were dropping fast in 2008, and now has come back to 24.8 per cent.

What should we conclude? Given the abnormality of the economic environment, the sudden turn in the housing market probably reflects a new home-buyer emphasis on market timing. For years, people have been bulls for the long term. The change has been in their short-term thinking. The latest answers suggest that people think the price slide is over, so there is no longer such a good reason to wait to buy. And so they cause an upward blip in prices.

At the moment, it appears that the extreme ups and downs of the housing market have turned many Americans into housing speculators. Many people are still playing a leverage game, watching various economic indicators as well as the state of federal bailout programs — including the $8,000 first-time home-buyer tax credit that is currently scheduled to expire before Dec 1 — in an effort to time their home-buying decisions. The sudden turn could signal a new housing boom, but is more likely just a sign of a period of higher short-run price volatility.

So is it fact or fiction?

Space Clowns!

Just fancy that!

Canadian circus tycoon Guy Laliberte was sent to space. He returned to Earth today, wearing his trademark red clown nose, when a Soyuz capsule carrying him and two astronauts landed safely in the steppes of Kazakhstan.

These Canadians! Are they doing it just for laughs?