UK: Bracing for Limited Growth Upside

This Reuters report  highlights the concerns of the British banking system.

Let us read it.

"British banks warn that upcoming banking regulation could shave two percentage points off the country’s economic growth," said Sky News today, citing an unpublished report by PriceWaterhouseCoopers.

Forcing banks to keep more capital on their balance sheets would stymie bank lending and prevent credit flowing into the economy, the report quoted Sky.

In a statement, the British Bankers’ Association confirmed PwC was carrying out an analysis on behalf of the banks on the economic effects of capital, liquidity and other proposals being considered for the industry.

“The analysis is yet to be completed but we will at all times be discussing with the various authorities the issues that arise from the study,” BBA said.

Sky said the report looked at measures being proposed by the financial regulator, the Financial Services Authority, and at the international level, but did not include the bank taxes recently proposed by the International Monetary Fund.

The broadcaster said the banks — including Barclays, HSBC and the Royal Bank of Scotland — and the BBA had wanted to delay publication until after the UK’s May 6 general election.

On the campaign trail, Prime Minister Gordon Brown told reporters: “We have got to reform the banks, the banks have got to serve the public.

“The recapitalisation of the banks and a proper system of remuneration and dealing with liquidity ratios is absolutely crucial to the future of British industry and the future of everybody who is a homeowner in this country.”

Barclays earlier on Friday followed other banks in reporting a fall in bad debts as Britain and other economies pulled out of recession.

In a statement at the bank’s AGM, Chairman Marcus Agius told shareholders: “We fully recognise that changes to regulation need to be made.

“But there are important and difficult trade-offs to be made between improving the stability of the financial system, reducing the risk of a recurrence of a financial crisis and stimulating and supporting economic growth.”

Greece: A Silver Lining for Bursa?

After reading the possibility of Malaysia becoming another Greece in the former posting, it is with relief that we read that our stock market can indeed benefit from this Grecian fall-out.

Let us read this report from Bloomberg.

"Malaysia, which is seen as a defensive market, could benefit if concerns over the Greek fiscal crisis continues.

Asian stocks ex-Japan could fall as much 17 per cent due to the Greek fiscal crisis according to a BNP Paribas report.

The bank said that US$6 billion (RM19.1 billion) may be withdrawn from funds investing in Asian shares next month, wiping out most of the estimated US$7 billion of inflows this year and recommended that investors buy Malaysian shares. [So who would be losing out? Possibly China.]

“If regional markets are weak, investors might look toward more defensive markets,” said Hwang-DBS Group senior analyst Wong Ming Teck.

OSK Research head of research Chris Eng said however that the Greek crisis will blow over quite quickly and the Asian markets will take the cue from the US.

“Malaysia is always a defensive market and a safe market to go into generally,” he said.

Most Asian equity markets closed higher yesterday due to upbeat earnings reports on Wall Street and expectations that a bailout for Greece would be ready soon.

So let us see whether the oracle readers are right.

Malaysia: Another Greece?

This is indeed a Mayday Call.

This is the postulation of Prof Danny Quah of the LSE.

He opines that Malaysia could find itself in the same fiscal mess currently facing several European countries such as Greece if planned economic reforms are not undertaken.

So what gave us away?

Let us look at what is happening in the Eurozone these last few weeks.

"Portugal, Ireland, Greece and Spain, the so-called PIGS, are under international scrutiny and have roiled global markets due to their level of national debt. Greece, whose government bonds were downgraded to junk status this week, has a debt to Gross Domestic Product (GDP) ratio of about 115 per cent which could hit 150 per cent by 2012.

Quah, who is also a member of the National Economic Advisory Council (NEAC), said that while Malaysia’s debt to GDP ratio is below that of the PIGS, it isn’t far off either.[He is sounding warning bells!]

“It won’t be too long before we push into PIGS type territory,” said the Prof at a dinner lecture organised by LSE alumni last night where he spoke in his capacity as an LSE economist.

He said that Malaysia needs to take out its stimulus spending, implement the New Economic Model (NEM) reforms and ensure that growth takes place in order to stabilise the nation’s debt to GDP ratio.

Quah also cautioned that Malaysia is expected to become a net oil importer by 2014 and that the country is one of the most sensitive to oil price volatility.[We will be in trouble now that we have supposedly lost RM320 billion to Brunei. Wonder whether there is any truth in this?]

He added however that “it is not all doom and gloom” as Malaysia’s financial sector is relatively robust and Malaysia’s debt consists largely of medium and long term instruments. [Saving grace,at last!]

He said the NEAC, which drafted the NEM, is studying the possibility of reducing corporate and income tax by one per cent per year for several years in tandem with tightening public finances via measures such as the goods and services tax (GST).

The council is also studying a proposal of a “1 Malaysia Supply Chain” to make business promotion efforts more integrated and streamlined.[We have talked about this close to 30 years or more)

Asked by the audience if he thinks the government has the political will to see through economic reforms, Quah replied that while he acknowledged widespread scepticism, his reading of the situation is that the government is serious as it has continued to stress the importance of change. [PM needs to balance off political pressure for level-headed action!]

“I have been impressed over and over again that the leadership doesn’t want to take the easy way out,” said Quah. “I feel even more optimistic, energised and enthusiastic and that we (the NEAC) are not wasting our time. We’re not paid anything at all. Some of us fly halfway around the world.” [Junkets?]"

After having read this article, I think the Prof may possibly be an unintended alarmist.

Genting: Now It Has Gone into Banking

So listen here. What do you know?

Genting has now put its money into banking as well. It is with many parties moving slowly into a Sri Lanka ban called the Union Bank of Colombo (UBC).

Let us read excerpts of  this news article.

Managed by a high-powered Board of Directors and Management Team, UBC has received commitments for an additional equity capital of Rs. 2 billion and is set to join hands with several new foreign investors in achieving its objective of becoming one of Sri Lanka's topmost financial services organisations.

In a significant move, Genting Berhad, the Malaysian conglomerate engaged in leisure and hospitality, and USA based fund Shorecap would be strategic investors in Union Bank.

Mr. Ajita de Zoysa, Chairman of Union Bank said, "This investment demonstrates the solidity and strength of Union Bank. Genting Group is Malaysia's leading Multinational Corporation and one of Asia's best-managed companies."

"A significant factor enabling Union Bank to raise new capital is the safe and viable environment for investment created by the progressive financial and economic policies being adopted by the Government. With the end of the conflict and the prevailing peaceful conditions, Sri Lanka's sound financial markets, rapid economic development programmes and the immense resource base, will attract new investors globally, thus enabling Sri Lankan corporations to make rapid progress.  Sri Lanka today is being regarded as a favourable investment destination."

Mr. Ajita de Zoysa added, "In progressing towards further growth, the Union Bank developed a five year Strategic Plan in consultation with an International Organisation. The objective of the equity raising is to fund the expansion envisaged under the plan and to meet the Central Bank's Minimum Capital Requirement."
Mr. Ajita de Zoysa had a special word of praise for the Central Bank officials for the efficiency and guidance demonstrated during the approval process.

Speaking on the Bank's performance Mr. Nilanth De Silva, Acting Chief Executive Officer of Union Bank stated that that Bank aims to build on the extensive re-organisation carried out in the last few years.
He stated, "Union Bank achieved new heights in 2009, recording an impressive growth after posting a profitability of Rs. 62.1 million. The profitability recorded in the previous year was Rs. 23.1 million. The Bank's deposit base grew from Rs. 10.4 billion to Rs 12 billion, while the Bank's asset base saw upward movement from Rs. 12.5 billion to Rs. 14.1 billion."

Mr. Anil Amarasuriya, Consultant/Director stated, "Part of the strategic plan is to reach out to a wider customer base, hence, the Bank aims to open several new branches this year. The Bank has already opened new branches in the North and plans to expand to other parts of the Island."

Mr. Amarasuriya added, "In order to achieve shareholders' aspiration in terms of growth and profitability, the Bank will expand organically and through acquisition. The end game is to elevate Union Bank to be a financial services powerhouse. The Bank is also working towards an Initial Public Offering (IPO).

"The Bank is led by an experienced Board of Directors comprising entrepreneurs, experts from banking, financial and management fields and industry leaders, who, have provided leadership and vision in taking the bank towards its goals. The entry of the new investors will give added impetus," he noted.

So,do you think it is a good move by Genting?

Sounds promising. Time will tell.

USA: Slow but Sustainable Growth in 1st Q

This Reuters Report dated 30 April is quite re-assuring as we await confirmation. Read on.

"US economic growth probably slowed in the first quarter, data is expected to show today, but resurgent consumer spending should offer evidence of a sustainable recovery.

The economy expanded at a 3.4 per cent annual rate in the first three months of the year, economists polled by Reuters believe. That would mark a slowdown from the 5.6 per cent pace logged in the fourth quarter when the economy got a big lift as businesses curbed efforts to cut inventories.

The advance report on US gross domestic product from the Commerce Department due at 8.30am (1230 GMT) should mark three straight quarters of growth as the economy digs out of its worst recession since the Great Depression.

GDP measures total goods and services output within US borders.

Though the economy took a step back from its brisk pace in late 2009, today’s report should show areas such as consumer and business spending proved more robust in the first quarter, analysts said.

The bulk of the growth in the fourth quarter came as businesses met more demand with new production and less by selling off goods sitting on the shelf.

Inventories are expected to play a lesser role in the first quarter, when consumers are seen taking up the baton.
“The key thing for sustaining and growing the US economy is consumer spending. Everything we know about the first quarter is looking very strong in that area,” said Kurt Karl, head of economic research at Swiss Re in New York.

Data that has already come in on consumer spending has been robust. Analysts expect consumer spending during the quarter grew at a rate anywhere between 3.2 per cent and 4 per cent.

Consumer spending, which normally accounts for about 70 per cent of US economic activity, grew only at a 1.6 per cent pace in the fourth quarter.

There have been worries the US recovery, which has been led by the manufacturing sector as businesses begin to rebuild inventories, could sputter if consumers did not come on board. These concerns are beginning to take a back seat.

“There is growing evidence of a handoff from stimulus and inventory-driven growth to broader sources of demand, although we still look for overall moderate growth,” said Julia Coronado, an economist at BNP Paribas in New York.

The US Federal Reserve on Wednesday noted economic activity had continued to strengthen in recent week and the labor market was starting to improve.

However, saying it still expects a modest recovery, it left benchmark overnight lending rates near zero and renewed its vow to keep them low for an extended period.

While inventories will still contribute to first quarter growth, it will be far less than the 3.8 per centage points of US growth it accounted for in the fourth quarter.

Excluding inventories, the economy is expected to have expanded at a 2.1 per cent rate, up from 1.7 per cent in the fourth quarter.

Boding well for the recovery is business spending on software and equipment, which is expected to have continued its upward trend in the January-March period.

“If they are spending on equipment already, it shows a lot of confidence for the future hiring which supports consumer spending. If we continue to have employment growth, we will have a good year,” said Swiss Re’s Karl.

Last month the economy enjoyed the strongest jobs growth in three years as private employers stepped up hiring.

Investment in new homes, which showed some hesitancy early this month, is expected to be a drag on growth in the first quarter — after two quarters of gains. Spending on structures likely subtracted from GDP for a seventh straight quarter.

With some of the rise in domestic demand being met through imports, a wider trade deficit will chip at growth in the first quarter."

The Customer is no longer King

I took this news article from the online STAR this morning. I think it is worthy of reading and I have pasted it here.

Whose business is it anyway? - by John Zenkin

The Goldman Sachs fiasco should remind businesses the purpose of their existence

 

I was going to write about the rather dry subject of risk assessment this week until I watched the Goldman Sachs congressional testimony on Tuesday night and linked it in my mind with an article in The Economist of April 24 entitled “Shareholders vs Stakehol-ders: A New Idolatry” which deals with the old conundrum of where to focus in good governance: on shareholders, customers or employees.

The reason I changed my mind was that I was shocked to listen to three Goldman Sachs traders being unable or unwilling to answer a simple “Yes” or “No” question from Senator McCaskill of Missouri.

Her question was simple and to the point: did they have a fiduciary duty to their clients, which means looking after their clients’ interest first?

Only one of the panel of four said “Yes”.


The other three hedged their answers to the increasing anger of the senator as she repeated her question.

From the testimony it appeared that all that mattered was that Goldman Sachs made money at the expense of the clients it was supposed to serve, even going to the extent of shorting trades that they had sold to their clients as being good investments, even though internal memos described the assets involved as “shi**y”.

Whether their behaviour was illegal is the subject for the courts, though it certainly appeared that the senators believed strongly that what the traders had been doing was unethical.

As I watched, fascinated by the drama, it seemed to me Goldman Sachs had forgotten the first rule of business stated by the late Peter Drucker in 1946 in his book The Concept of the Corporation that “the purpose of business is to create and maintain satisfied customers”.

What is more, this rule of business was Goldman’s own rule as long as they were a partnership because they recognised that the long-term interests of the partners were to avoid alienating their customers in return for a short-term profit.

What seems to have happened since Goldman Sachs went public is that its employees have been able to look after their own interests at the expense of both customers and shareholders.

This is because the money they were playing with was no longer theirs, but that of other people – their investors and their shareholders.

This suggests that there are limits to how much a company can look after the interests of its employees, especially when they are paid enormous bonuses, apparently regardless of how much pain the shareholders are experiencing (as we have seen in the case of AIG or Merrill Lynch).

It is even more the case when the payout comes from the taxpayer in the form of bailouts.

It seems to me therefore that if there is an excessive focus on protecting shareholder or employee interests at the expense of the client or the customer, the company could put itself at unnecessary risk as far as its reputation and license to operate are concerned.

How soon Goldman Sachs will recover from the damage to its brand shown in the following quote from April 28’s Washington Post is anybody’s guess:

“There was a time when issuers would pay a premium to have Goldman Sachs underwrite their securities, just as there was a time when investors would pay a premium to buy into a Goldman-sponsored offering. Today, Goldman has fully monetised the value of its reputation, and anyone who pays such a premium is a fool.”

I was also struck by the fact that their style of defence bore similarities to those of Exxon in the Valdez case, Shell in the Brent Spar case and recently Toyota when it was found wanting on quality. When customers get upset or when NGOs go after companies, their argument is emotional – designed to be fought in the court of public opinion rather than in a court of law. Legal niceties, technical subtleties do not go down well with people who are looking for memorable soundbites.

What ordinary people want to see is someone who shows emotion and empathy, says he/she is sorry and that he/she will try to do better next time and then there can be closure. Lawyers, with their eye on court cases and damages, advise clients to never say sorry and to prevaricate and obfuscate. This merely increases the anger and frustration of the offended parties.

I have, however, yet to see a company suffer because it has focused too much on serving its clients or delighting its customers.

Perhaps a more correct approach in today’s world is that of the new boss of Unilever, quoted in The Economist article referred to earlier, where he says:

“I do not work for the shareholder, to be honest; I work for the consumer, the customer … I’m not driven and I don’t drive this business model by driving shareholder value.”

Well said!

Malaysia: Hot Rush Hour

I took this from an article by Yow Hong Chieh in The Malaysian Insider as it will give you viewpoints of this current hot issue.

"Kuala Lumpur, April 30-

Any attempt by Malaysia to impose capital controls to stem the current inflow of hot capital will be viewed negatively by the market, say analysts and economists.

Their warning came after the possibility of hot money pouring into the country as a fiscal crisis grips several Western countries including Greece which is unable to resolve its problems, even with European Union and International Monetary Fund support.

In the last few days, Greece Spain and Portugal have all been downgraded by Standard & Poor’s, the credit ratings agency.

Maybank Investment’s Suhaimi Ilias said any capital controls would be “counter-productive” although governments and central banks in the region want a more balanced flow of capital between short-and long-term investments.

“I would be surprised if there was any form of capital controls emerging,” he told The Malaysian Insider.

“There’s a concern about hot money essentially and how to manage this to make sure that our economy, while growing, won’t create inflation risk.”

He said the main concern was most likely due to the glut of “cheap money” externally due to the low interest rates in more developed economies like the US.

Suhaimi also identified the anticipated yuan exchange policy change as a reason for increased proxy investments in regional assets.

“There might [also] be some outflow from Thailand looking for more defensive markets. I think Malaysia is benefitting from that.”

However, he warned that capital controls would make Malaysian assets less attractive to foreign investors.

“In an environment where it’s already very competitive to get capital, to adopt such a policy, as far as investment is concerned, [represents] a negative aspect.”

Suhaimi added that there were better options available to achieve “sustained rather than punctuated” capital inflows, citing market-based instruments.

“When you apply market-based instruments it can also contribute to the development of the financial market. There are a lot of benefits that come with it.”

He said the ringgit position as the best regional performing currency has not been seen for a long time, and cited this as an example of “letting the market do its work”.

Another economist, who did not want to be named, said he believed most Asian governments would not introduce strict capital controls.

“Based on our past experience from the Asian financial crisis, we know that capital controls... can be viewed as negative even in the long run,” he said.

“My personal view is that the problem is very similar to the early ‘90s where we saw a huge influx of hot money flowing into the emerging economies.

“I guess the risk [is that] the major industrialised countries will start to increase their interest rate… and then we’ll see outflow.”

While he viewed the recommendations issued by Standard Chartered on Monday to “adopt greater currency flexibility and broaden and deepen capital markets” positively, he said such changes could not take place overnight.

The report said that many emerging market economies, having recovered faster than the West, are on the receiving end of a surge in capital and liquidity that include bank lending, direct and portfolio investment and hot money.

“It takes time to develop... One cannot just transform the economy and the capital market in such a short span of time.”

Economist Zainal Aznam Yusof downplayed the issue of capital inflows and said it was “a manageable kind of situation”.

He explained that such movement of capital always happens when there are signs of recovery.

“We should not be excessively worried about that... We have to allow the exchange rate in Malaysia to react.”

He added that he expected the exchange rate to strengthen some more.

“The question is by how much.”

Zainal said instability in Thailand was probably a minor source of hot capital flowing into the country, reasoning that investors were already familiar with the country’s political landscape.

“The Thailand [political situation] has been persisting for a long time so we shouldn’t exaggerate the Thai factor.”

Lee Heng Guie, of CIMB Investment Bank, said that while it was a challenge for Asia to deal with the flood of cheap liquidity into the region, he believed that Malaysia was not experiencing such an influx.

“I don’t think we see this surging of this hot money into Malaysia at the moment.”

He added that Malaysia had a diversified asset class to absorb the current level of capital inflows, which were not big enough to warrant controls.

However, Lee warned that countries that are unable to stem the tide of short-term capital flows may experience some instability when the flow reverses.

“The IMF even suggested that some countries may think of selective capital controls to deal with these inflows of hot money.”