Monday, August 15, 2011
Understanding Toilet Paper Leadership
Written by Rozhan Othman, Professor in Management BruneiTuesday, 04 August 2009 12:23
Leadership books usually discuss about characteristics of good leadership. So, today I'll talk about bad leaders. People in position of leadership usually think of themselves as good leaders. In reality, there are good leaders, just so, so leaders and bad leaders. Specifically, I'll talk about a particular category of bad leaders, i.e. nasty leaders.
Nasty leaders subscribe to what I term as toilet paper leadership. The essence of toilet paper leadership is that people should be treated as toilet paper because they are to be used to either make the leader look good or to clean their *##@#. To understand toilet paper leadership I'll contrast them with good leaders. I'll refer to good leaders as passionate gardener leaders.
Toilet paper leaders are typically self-centered. They are opportunists and are mainly concerned with their own interest. They will use terms such as "common goals" and "mission" to disguise their intentions.
They rely on impression management to impress their superiors. But their subordinates usually can see that these leaders are not concerned about the organization. Passionate gardener leaders see themselves as servant leaders.
It is not that they are not concerned about personal gain. Like a good gardener, these leaders are concerned with the beauty of the garden.
These leaders see their goals as something to be attained by honestly working for the organization. They create winners out of everyone just like the gardener ensuring each tree turns into a beauty because they believe this is the only way to make the organization win and attain their own personal goals.
Passionate gardener leaders know that when the contribution of their subordinates is recognized, the credit will also naturally come to them. No need haggle over it.
To toilet paper leaders working smart is about taking advantage of people. When something good is done by their subordinates they will step in front to take the credit. When something bad happens they will put the subordinates on the firing line, especially when the bad things happened as a consequence of the leader's action.
For passionate gardener leaders, they will create opportunities for their subordinates to shine. Like a good gardener, they are not concerned with putting their names on the trees that they plant. Instead, they put the names of the trees on the plants.
And when a problem appears, passionate gardener leaders will step in front to shield their subordinates from being harassed because of the failure. This way the followers can stay focused on doing a better job.
Toilet paper leaders will avoid work under the guise of "delegation". They are too busy in their own political games and pursuing their own personal interest to be bothered with actual work.
Their "delegation" is in reality abdication. Passionate gardener leaders, however, knows that they must carefully organize the work of others under their charge to create a beautiful garden.
They recognize that a beautiful garden is not created by abdicating leadership and simply hoping that the random effort of others will somehow create a beautiful garden.
Toilet paper leaders are generally insecure about themselves. They are nervous of smart and capable people. Toilet paper leaders will try to avoid exposing their deficiencies by making decisions without consulting with smarter people. These leaders are nervous of having their ideas scrutinized by others.
When these leaders call for meetings it is usually held to brief others of the decisions they have made. Passionate gardener leaders are confident and see having their ideas scrutinized as a learning opportunity for themselves and their subordinates.
They are confident of themselves and do not shun having to defend and improve on their ideas. Toilet paper leaders, however, cannot tolerate smart followers who speak their own mind and will marginalize them or flush them out of the way.
Toilet paper leaders see information as something to be manipulated for their own purposes. They do this by restricting information flow or altering it to serve their own purposes.
Passionate gardener leaders see information as a resource for action. They use it like the gardeners use fertilizers. Information is shared to create critical debates to enhance the quality of decisions and create a shared purpose.
Toilet paper leaders prefer to circle themselves with weak, timid and pliable people. They prefer followers who always tell them what they want to hear. These followers are usually themselves incompetent opportunists.
These are the kind of followers that are usually rewarded by toilet paper leaders. Passionate gardener leaders prefer to have strong and capable followers. They prefer followers who have the courage and honesty to tell them of the situation as it is.
Toilet paper leaders tend to create a climate of distrust and low morale. Good people tend to leave and the bad ones remain. But toilet paper leaders are not concerned with this as long as they are in power and continue to reap personal benefit from their leadership.
Passionate gardener leaders know too well that they need a team of good gardeners to keep a garden beautiful. Passionate gardener leaders don't always have money and wealth to reward everyone. Instead, they keep good people by nurturing a climate of trust and fairness.
It is easy to start looking around to identify who are the toilet paper leaders and who are the passionate gardener leaders around us. Well, let me suggest that we begin by asking ourselves which leadership style we ourselves resemble.
Do we see a lot of toilet paper strewn around us or a beautiful garden in our midst? But then, toilet paper leaders are too self-absorbed and conceited to notice all those toilet paper strewn around them, duh.
Doctoral dreams
Doctoral dreams
TALES 2 TELL
By ROSLINA ABDUL LATIFF
Pursuing a PhD is a long and arduous task, one that is best undertaken when you are absolutely ready.
OF ALL the questions my colleagues and friends ask regarding my doctoral studies, most of them are a variation of “How do you do it?” and “How do you cope?”
Pursuing a PhD would be a challenge for any other person, but with kids taking important exams, teaching final year students, handling final year projects and going for my doctoral classes at night, would be a pretty tall order for anyone.
It wasn’t an easy decision to make. When I tried to start my doctoral studies sometime last year, it was a bit hard to cope while holding two administrative positions as associate dean of the faculty and head of the Mass Communications Department at a private university in the Klang Valley, on top of teaching three final-year subjects every semester.
But I guess there is always that someone who “nags” you to start your doctoral studies. For me, it was my previous boss who gave me the nudge and support. It made sense — in the education field, a doctorate degree gives you an edge in the organisation you work, as well as leverage in the subjects you teach.
But most importantly, you need to do it for yourself. You need to be prepared mentally to start and finish as it is a huge commitment.
You also have to set your momentum because you are very much on your own.
For me, it started when I was “ordered” by the human resources group manager to go on leave, as my leave days had accumulated to more than a month. The truth was I really needed to rest, refresh and revitalise before diving into the New Year and the new semester. I felt so drained, deflated and depleted.
I took the leave as a good opportunity to get away from everyone and everything that constitutes work. It also gave me an opportunity to re-evaluate the important things in my life. The first priority was of course my children who were taking their SPM, PMR and UPSR exams in 2010.
So when I officially stepped down in December 2009, I started re-writing my PhD proposal. I researched, read and re-wrote my half-baked proposal with the hope that I would be accepted as a doctoral student.
When I was about to submit my application, I told my mother and she asked me again if I was sure. Mum was very worried if I was capable of taking in more stress and challenges given the difficult year I went through.
Although I wasn’t sure I could handle it, I knew it was something I had to do for myself.
The other unacademic reason for going back to school was also to find a neutral ground I could call “home” again — an unbiased place I could be like any other student, going through the rigors of night classes, searching the lonely aisles of the library to find books that are a prerequisite for any dissertation and treading the unfamiliar doctoral path with my trusted laptop.
So in between ferrying the kids for tuition classes on different nights of the week, preparing them for the upcoming exams and preparing for the classes that I teach, I go for my doctoral class on Thursday nights, find time to do my assignments and do lots and lots of reading for my doctoral, my classes and for pleasure.
How do I cope? The simple answer is “one day at a time”.
I don’t really think of it so thoroughly, neither do I dissect it in detail nor psycho-analyse it — I just do it.
But having said that, there are a few things that would actually help to ease anyone into a doctoral dissertation (or thesis, depending on where you study).
The first and most important is to have a productive supervisor-student relationship. There are great expectations on both sides.
Having gone through a Master’s thesis will give you a rough idea of what it’s like, but this time on a much bigger scale and with much more at stake.
Supervisor-student relationship
There needs to be shared expectations between your supervisor and yourself. The important question for you is: what qualities are you looking for in your supervisor?
For me, a supervisor who is supportive, accessible, professional, experienced in the research field, gives freedom to me to express my ideas, cooperatively listens and compassionate rigor is what I hope for.
I consider myself lucky as my supervisor, Assoc Prof Dr Faridah Ibrahim, or Dr Dah as she is affectionately called, has all these qualities. Since our industry background is journalism, hers being print and mine broadcast, we have hit the ground running as the platform for the discussion is solid.
We bounce ideas back and forth, and discuss what theories or models would work. She’s very frank and direct with her comments on my work. But best of all, she has treated me as an equal although I’m still a struggling doctoral student with a lot more to learn.
Your supervisor also needs to know what your expectations are, so take the time to chat about these fundamental things.
While you’re at it, ask your supervisor what they are expecting from you as a PhD student. When I asked Dr Dah, this was her reply: perseverance, critical questioning (which is required of any PhD candidate), organised, rigorous, willing to learn, a good communicator and open mindedness.
If by any chance your shared expectations are not the same, then you need to re-negotiate and come to a compromise on what is best. Resolving these issues and clarifying any misunderstandings should be done from the very beginning, before you take that giant bungee jump!
You also need to be proactive. Know your rights and responsibilities. Work out together, who is responsible for calling meetings.
For us, it’s simple — communication via email on simple and quick questions, text messaging for delivery of proposals or chapters and meeting for discussions after the reading process. This is where we identify problems and weaknesses plus find solutions and elucidate the research.
Set agendas for meetings if there is a need to; if not, just plunge into the discussion head first.
Keeping your supervisor informed about your progress is also an excellent idea as they will worry when you go AWOL on them. But most importantly, be assertive.
The other thing that I did when I embarked on my PhD was to have a peer support group. This group comprises colleagues in the same boat, who meet once a month over lunch or coffee and discuss ideas and progress.
Although all of us are from different fields and doing research in diverse areas, the intellectual discourse is great.
I believe in some universities, these peer support groups also include supervisors with all their supervisees. If everybody had a common time to meet, this kind of group would be good, but if not, something like what I have would be sufficient. Just a bunch of friends mulling over coffee, pouring out discontentment and suffering and sometimes, it’s not even about the PhD!
On some days, when you get back your chapters full of markings and corrections, you can feel disconnected from the rest of the world.
I’m not sure how smooth or rocky my journey will be in the next couple of years but since I started off with a 4.0 average, I’m hoping to continue fruitfully.
I have also pledged to my supervisor I would complete my thesis in the designated time and let her retire in peace without her going on contract because of me. And that is a promise I intend to keep to Dr Dah and to myself.
If I emerge from this experience still unscathed, intact and sane, I would be able to share those experiences with many who are still pondering on the question: “A doctoral study... to do or not to do?”
My answer is “just do”, but only when you are absolutely sure.
■ Roslina Abdul Latiff is a Broadcast and Journalism senior lecturer, mother of four and PhD scholar.
Monday, June 21, 2010
'Leaders create better future'
'Leaders create better future'
By June Ramlee
june@nstp.com.my
2010/06/22
LEADERS of sustainable-growth companies have a strong foundation of personal leadership, mastery of one-on-one relationships and exceptional ability to mobilise the commitment of an entire organisation for excellent performance.
"Leadership affects companies' performance in the marketplace," International Centre for Leadership in Finance (ICLIF) chief executive officer Rajeev Peshawaria said, adding that it is the art of harnessing human energy to create a better future.
Rajeev pointed out the two sources of limitless personal energy - purpose and values - and said that they had to be individually discovered.
"You know that you have done a great job as a leader when your employees continue to work the same way even when you're not around to supervise," he told Business Times after presenting a talk on "Too Many Bosses, Too Few Leaders" in Kuala Lumpur yesterday.
He is of the view that there is a talented group of people in the country who can be groomed to become good leaders.
"There is huge potential to churn out good leaders in local companies, with the onus on their superiors to pick them out and nurture their skills."
Rajeev cited AirAsia Bhd as a company to emulate for excellent leadership.
Under the stewardship of its founder and group chief executive officer Datuk Seri Tony Fernandes, AirAsia has become a renowned brand with a proven track record in profitability, he said.
"Leaders create a better future while bosses cling to the past and cope with the present."
Rajeev also noted the importance of constant dialogues with subordinates on their roles.
"Good bosses will get feedback from employees on how they feel about the working environment and how it can be improved."
Employees are also encouraged to think about their contribution to the company and where they see themselves in the next five to 10 years.
A common misconception about leadership is that leaders are born and not made, Rajeev added.
"Employees were made to believe that leadership is about personality traits. It can be taught through competency models, role play and formulas, and that leadership comes from a position of power," he said, adding that such perception was not entirely true.
Rajeev also observed that employees are sometimes swamped with strategies and plans by the company which they may not even understand.
"It's pointless to have a thick book of strategies which no one understands."
The best way to get maximum results is to simplify all these strategies in one chart with four questions answered as to the "What, Who, Why and How" to increase profits and have an ideal workplace, he said.
By June Ramlee
june@nstp.com.my
2010/06/22
LEADERS of sustainable-growth companies have a strong foundation of personal leadership, mastery of one-on-one relationships and exceptional ability to mobilise the commitment of an entire organisation for excellent performance.
"Leadership affects companies' performance in the marketplace," International Centre for Leadership in Finance (ICLIF) chief executive officer Rajeev Peshawaria said, adding that it is the art of harnessing human energy to create a better future.
Rajeev pointed out the two sources of limitless personal energy - purpose and values - and said that they had to be individually discovered.
"You know that you have done a great job as a leader when your employees continue to work the same way even when you're not around to supervise," he told Business Times after presenting a talk on "Too Many Bosses, Too Few Leaders" in Kuala Lumpur yesterday.
He is of the view that there is a talented group of people in the country who can be groomed to become good leaders.
"There is huge potential to churn out good leaders in local companies, with the onus on their superiors to pick them out and nurture their skills."
Rajeev cited AirAsia Bhd as a company to emulate for excellent leadership.
Under the stewardship of its founder and group chief executive officer Datuk Seri Tony Fernandes, AirAsia has become a renowned brand with a proven track record in profitability, he said.
"Leaders create a better future while bosses cling to the past and cope with the present."
Rajeev also noted the importance of constant dialogues with subordinates on their roles.
"Good bosses will get feedback from employees on how they feel about the working environment and how it can be improved."
Employees are also encouraged to think about their contribution to the company and where they see themselves in the next five to 10 years.
A common misconception about leadership is that leaders are born and not made, Rajeev added.
"Employees were made to believe that leadership is about personality traits. It can be taught through competency models, role play and formulas, and that leadership comes from a position of power," he said, adding that such perception was not entirely true.
Rajeev also observed that employees are sometimes swamped with strategies and plans by the company which they may not even understand.
"It's pointless to have a thick book of strategies which no one understands."
The best way to get maximum results is to simplify all these strategies in one chart with four questions answered as to the "What, Who, Why and How" to increase profits and have an ideal workplace, he said.
Saturday, April 24, 2010
RM Rising
Ringgit rising
By CECILIA KOK
cecilia_kok@thestar.com.my
The ringgit has been strengthening against most of the world’s major currencies since early this year. But will this trend sustain?
ZAINAL Azhar has been shopping for the best rates to swap ringgit for euros for his upcoming business trip to Germany. The 40-year-old businessman from Kuala Lumpur says he has been buying euros in phases in preparation for the visit next month.
His friends, Susan Lee and Albert John, are also watching how the ringgit is faring against other currencies. Lee, a financial analyst in her 30s, has been waiting for months to score a “cheaper” vacation to the United States, while sixtysomething John is sending his youngest son to Britain for further studies.
The trio are hoping to get the most bang for their bucks when they exchange their ringgit for other currencies.
So, the recent rise of the ringgit bodes well for individuals like them – not to mention for those who like to shop online for overseas products. Since early this year, the ringgit has been strengthening against most of the world’s major currencies.
On nominal terms, the ringgit has appreciated about 6.7% year-to-date against the US dollar. The ringgit is now hovering at a two-year high against the greenback at 3.19, compared with 3.42 at the start of the year, and last year’s peak of 3.72 recorded in March.
Against the British pounds, the ringgit has strengthened from 5.5 early this year to around 4.9 currently. The ringgit has also risen against the euro from 4.88 early this year to about 4.28 currently.
Against the yuan, the ringgit has reached almost a two-year high over the week to 46.79 sen from 50.15 sen early this year, while against the yen, the ringgit has appreciated 6.9% year-to-date and 8.6% year-on-year to hover around 3.749 per 100 yen.
Other regional currencies are also trending similarly, including the Singapore dollar (which has just been revalued by the country’s government) and the Indonesian ruppiah.
Driving factors
Compared with other regional currencies, the ringgit has nominally gained the most against the US dollar since the start of the year.
Says Affin Investment Bank chief economist Alan Tan: “The ringgit is playing catch-up in the first half of this year as it lagged for most of the second half of 2009. Other regional currencies started gaining strength then.”
As most economists see it, the recent strengthening of the ringgit – and most Asian currencies for that matter – is mainly due to three factors: strong economic recovery and growth prospects for the Asian region, wide interest rate differentials between the US and Asia as some countries in the region have started to normalise their monetary policies and the widespread expectation that China’s lawmakers will allow the yuan to appreciate.
Amid the mounting pressure on China, there are growing expectations that the country will let its yuan appreciate against the US dollar in the second half of the year.
The correlation between the Chinese currency and regional currencies is strong – a rallying yuan will usually lift the regional currencies.
For example, the lifting of the ringgit peg to the US dollar in July 2005. This took place shortlty after China’s central bank revalued its yuan and shifted to a managed float.
(The yuan was pegged at 8.27 per US dollar from 1995 until mid-2005, when it was revalued upwards to 8.11 per US dollar and allowed to float against a basket of currencies, including the US dollar, euro and yen. In July 2008, the yuan appreciated 21% against the US dollar, and its value has since been pegged at around 6.83 per US dollar to this day.)
“The dollar will flow into high-growth regions, driving their currencies to appreciate,” OSK-DMG economist Enrico Tanuwidjaja tells StarBizWeek.
The World Bank expects developing East Asia (which includes Malaysia, China and Indonesia) to register 8.7% growth in gross domestic product (GDP) in 2010.
The Asian Development Bank’s projection is slightly lower at 7.5%.. Malaysia’s GDP growth forecast ranges from 5% to 7%. “The expectations of good growth rates are a major boost to investor sentiment,” says Alan.
More to gain or lose?
A recent CIMB Investment Bank report says that “the interplay of currency revaluation expectations and interest rate differentials will trigger more speculative inflows into the region.”
Malaysia’s move in raising interest rates since early this year has attracted some foreign fund inflows. This has led to the strengthening of the ringgit against major world currencies.
In March, Bank Negara raised the overnight policy rate (OPR) from a record low of 2% to 2.25%. The central bank is expected to raise the OPR again in the months ahead as part of the rate normalisation process.
This will widen the interest rate differentials between Malaysia and other developed nations, especially the US, that have been keeping and intend to keep their rates low for a longer period.
Economists say the widening interest rate differentials will continue to attract private funds to Malaysia as investors seek higher returns.
According to CIMB Investment Bank, the Malaysian equity market could “get a leg up from further OPR hikes.”
Foreign investors are seen to be taking a bet on asset reflation caused by a strengthening ringgit. Market analysts believe that in such instances, the most likely beneficiaries are blue chips such as banking and plantation stocks, among others.
ECM Libra Investment Bank says companies that derive their income mainly from the domestic or regional markets but have input costs or liabilities denominated in G3 (the US, Japan, and euro) currencies will gain.
Those in this category include Tenaga Nasional Bhd, UMW Holdings Bhd, AirAsia Bhd, Malaysia Airlines Bhd, Tan Chong Motor Holdings Bhd, QL Resources Bhd and KFC Holdings (M) Bhd.
Conversely, the strengthening of the ringgit will not bode well for exporters or companies that earn their income mainly in G3 currencies, and have input costs or liabilities denominated in the local currency. Fitting into this category, as analysts point out, are rubber glove and semiconductor companies.
From the international trade perspective, a stronger ringgit tends to make the country’s exports of goods and services costlier for overseas customers. In theory, this would inadvertently lead to lower demand for Malaysia’s products.
But economist Prof Datuk Dr Mohamed Ariff opines that the current appreciation of the ringgit will not significantly impact Malaysia’s export competitiveness because other regional currencies are also rising at the same time.
Says Tanuwidjaja: “Current external demand is driven mainly by intra-regional trade, while demand from developed nations remain relatively weak. The country will benefit more from the lower costs of imports and capital expenditure with a stronger currency.”
Bracing for volatility
Malaysian exports generally have high import content, and this could help mitigate the effects of a stronger ringgit on exporters.
It is estimated that for every RM1 of exports, 70% are intermediate goods imported from overseas. So, a stronger ringgit will help reduce production costs and help exporters maintain price competitiveness.
Will the ringgit’s uptrend continue? Based on current economic indicators, most economists say the trend is unlikely to continue.
They believe the ringgit is already near the tail end of an appreciating trend. They say the upside potential for the ringgit is somewhat limited and that some form of weakness will likely arise in the second half of the year.
Analysts believe the market should brace for volatility ahead as the ringgit’s appreciation is still vulnerable to the movements of international short-term capital.
“The outlook for the first half of the year is clearly an appreciating trend for the ringgit but uncertainties will set in by the second half of the year. Hence, the belief that the strengthening of the ringgit, and other Asian currencies for that matter, will not be sustainable in the latter part of 2010,” says Tanuwidjaja.
Economists believe the growth of Asian economies will be less vibrant in the second half, compared with the first half.
In addition, there is the possibility of policy change by developed nations, particularly the US, as the recovery of their economies gathers pace in the second half of the year.
It is widely speculated that the second half of 2010 will mark the end of the “extended period” for record low interest rates for the US.
Interest rate differentials between the US and other Asian economies will likely be narrower then. This will result in funds flowing back into the country, and the US dollar is likely to react favourably and regain its strength against other currencies.
Taking into account the possibility of this scenario, several local research houses have ascribed a year-end target for the ringgit against the US dollar at between 3.20 and 3.30.
Then again, what about the possible revaluation of the yuan?
Says Alan of Affin: “The market has already priced in such possibility, and even if there’s really a change in the yuan policy, we believe it will be gradual and moderate. We don’t think there will be any sharp or surprise movement in the yuan, so as to minimise the impact on China’s export competitiveness.”
Significantly undervalued?
It is generally perceived that several Asian currencies, including the ringgit and the yuan, are significantly undervalued against the US dollar.
Foreign studies claim that the exchange rate misalignment, in terms of undervaluation against the US dollar at the end of last year, for the yuan was as much as 40.7%.
For the ringgit, it was around 30.5%, while the Hong Kong dollar and the Singapore dollar were misaligned by as much as 32.2% and 24.7%, respectively.
While many Asian currencies have strengthened against the US dollar, their recent appreciation were merely nominal gains. Measured in real terms, that is, after adjusting for inflation, the gains of Asian currencies were only marginal.
The ringgit, in real effective exchange rate, has only strengthened by a mere 1% against the US dollar year-to-date, and less than 3% from mid-2005, when its peg to the US dollar was lifted.
Hence, some quarters argue that there is scope for the ringgit to strengthen further against the US dollar.
But Bank Negara has previously stressed that the value of the ringgit is determined by market forces and that its present value is already reflective of the country’s economic fundamentals.
“To be a domestic and consumption-based economy, a strong ringgit is needed. But let’s be realistic here. Many industries in Malaysia are still export-driven, and a strong ringgit over the short term will definitely hurt them,” says Alan.
He says the ringgit has already appreciated to a level where some manufacturers are beginning to feel a bit uneasy and anxious over the possible loss of competitiveness.
Economists argue that any form of intervention by the central bank in the ringgit exchange should be focused on smoothing out the sharp volatilities that could cause instability in the financial markets, instead of managing the ringgit’s value against other currencies.
Otherwise, says Ariff, “any attempt by the monetary authorities to rein in the ringgit, except under exceptional circumstances, would cause serious price distortions and contribute to inefficient allocation of resources.”
Towards high income
Having a strong currency is in line with any nation’s ambition to be a high-income economy.
“Strong” currency in this sense refers to one that is well demanded and has a stable value, with its exchange rate driven by economic fundamentals.
There are compelling benefits for Malaysia to aim for a stronger ringgit in line with its ambition to be a high-income nation.
For one, a stronger ringgit will make travelling abroad more affordable for Malaysians, hence enhancing their scope for leisure.
A stronger ringgit will also encourage the import of capital goods, which contributes to the innovation and automation of industries in the country.
Above all, a stronger ringgit will help improve the living standards of the people by increasing their purchasing power through cheaper imports and lower inflationary pressure.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says that unless profiteering activities are thwarted, a stronger ringgit may not necessarily lead to cheaper imported goods for Malaysians.
The benefits aside, “a stronger ringgit per se should not be the over-riding objective,” says Prof Dr Tan Eu Chye of University Malaya’s Faculty of Economics and Administration.
“A stronger ringgit must be consistent with the fundamentals of the country’s economy. If fundamentals dictate that the ringgit should strengthen, then it should be allowed to appreciate,” he says.
For the ringgit’s advancement to sustain over the longer term, the implementation and execution of Malaysia’s New Economic Model (NEM) is critical, says Maybank Investment Bank.
Although the first part of the NEM has already been unveiled, many are waiting for more clarification and details of the plan to gain a clearer picture of the changing fundamentals of the Malaysian economy.
The consensus view is that there isn’t any material change in the key economic fundamentals of Malaysia yet. Hence, the unveiling of the second part of the NEM will be critical.
The World Bank says that as long as a stronger ringgit is justified by improved fundamentals, it can help the country gain mileage towards becoming a high-income nation.
“Otherwise, complacency may set in and we may not be able to sustain the high-income status eventually,” says Eu Chye.
Stronger currency, stronger stock market?
By TEE LIN SAY
linsay@thestar.com.my
WHAT does a strengthening ringgit do to our stock market? TA Securities senior technical analyst Stephen Soo says a firm ringgit is a boost to the stock market as it encourages fund inflows.
Although he sees bonds as the main beneficiary of a stronger ringgit, with equities next, he is more bullish on equities for the second half of the year, on the back of the tabling of the 10th Malaysian Plan and the release of more details on the New Economic Model.
“In the last two years, Malaysia has experienced a net outflow of foreign direct investments (FDIs). As the ringgit strengthens, this will at least stop some of the outflows and support liquidity flows. This liquidity will need to go somewhere and stocks will benefit,” says Soo.
Bank Negara data points to an FDI reversal in 2007, with net outflows of direct investments of RM9.14bil. This increased to RM26.06bil in 2008 and to RM14.62bil in the first nine months of last year.
Portfolio investments in Malaysia booked a net inflow of RM8.8bil in the third quarter of 2009 after four quarters of significant outflows.
JF Apex Securities Bhd chief operating officer Lim Teck Seng feels that the recent inflow of funds have not had much impact on the stock market as most of the foreign inflows were for fixed income and not equities.
“A strong currency may not favour stock markets as theoretically, Malaysian stocks have become more expensive. For the moment, foreign funds prefer to enjoy yields rather than the riskier returns from equities,” he says.
Private equity banker Sherilyn Foong says portfolio inflows seem to be faster and nimbler than FDIs. “We’re coming from a low base on the bonds front. My main concern would be if it is, to a significant extent, hot money,” she says.
MCIS Zurich Insurance Bhd head of fixed income Michael Chang shares Lim’s views. “Buying government bonds is probably one of the easiest ways if I am expecting the country’s currency to rise,” he says.
“The risk is deemed moderate and bonds are also fairly liquid investments. Offshore investors can buy into the Malaysian Government Securities (MGS) as it is as good as buying the Malaysian currency,” says Chang.
Long-term hazard
While most people are of the view that a rising currency signals more investments flowing into the country, and therefore contributing to a rising stock market, this is a mere correlation and not a direct impact.
Past studies by ABN Amro Bank and the London Business School have shown that strong currencies do not lead to generous profits from the equity markets.
According to the research, countries with weak currencies saw greater stock returns than ones with strengthening currencies.
A broker from a local house says that a strong currency only offers short term benefit for the market. “Over the longer term, it is not good for an exporting economy and for the stock market,” he says.
Investing in stocks can be viewed as risky compared with other assets. When the central bank raises interest rates, government securities such as the MGS are often regarded as the safest investments and will usually experience a corresponding increase in interest rates.
In other words, the risk-free rate of return goes up, making these investments more desirable and a lot safer than stocks. With stocks, one has to factor in the risk premium as well.
The ringgit has strengthened some 7% to 3.2015 against the US dollar since the beginning of this year. This will impact the earnings of Malaysian exporters and various other sectors of the economy.
Over the short term, exporters such as those in the rubber glove, technology, and electrical and electronics sectors may suffer setbacks.
Says OSK Research director and research head Chris Eng: “A stronger ringgit is better for the country as long as it strengthens gradually. Lately, the ringgit has strengthened rather quickly and this may not give exporters time to pass on (additional) costs to their customers.”
Winners and losers
Rubber glove stocks have come under selling pressure of late as investors worry about a repeat of the share price collapse in 2008, when investors assumed that record latex prices, high energy prices and a weakening US dollar would dampen glovemakers’ earnings significantly.
Those who remain bullish about the industry contend that the demand for rubber gloves is resilient and that the listed manufacturers, because they are market leaders, will be able to hike selling prices to absorb cost increases.
A stronger ringgit means imports tend to cost less. Manufacturers that rely significantly on imported raw materials stand to benefit and will likely see their margins improve, provided their output is largely sold in the domestic market.
With the US dollar weakening against the ringgit, commodities such as oil and gold, which are bought and sold in US dollars, will be cheaper for purchasers in Malaysia.
Eng says in this context, the local airlines are beneficiaries, as fuel is denominated in US dollars while sales are mostly in ringgit.
“In Malaysia Airlines Bhd’s case, their revenue is mostly derived in Australian and Asian currencies. So they benefit from the strengthening ringgit,” he says.
Others gaining from the surging ringgit include automotive and food-based companies that import products in US dollars but sell them to Malaysian buyers. Companies that have large foreign debts – Tenaga Nasional Bhd for example – will also benefit. On the flip side, MISC Bhd, whose revenue is mostly in US dollars, may be at a disadvantage.
Profit impact
Eng says a stronger ringgit helps control inflation, hence strengthening domestic consumption.
One line of argument is that a strong currency also means that imported raw materials are cheaper, thus lowering inventory cost. This leads to lower borrowing obligations and hence less interest to pay.
Says a senior analyst: “The price of the finished good also goes down and this leads to a lower cost of living. The strength of a currency is an indicator of economic health.”
According to the Big Mac index, the ringgit is 40% below its fair-value benchmark with the US dollar as at March 16 (at 3.3245 per US dollar).
The Big Mac index is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries.
“Based on a trade-weighted index, the ringgit should be fairly valued at 3.23 per US dollar, which is almost close to the current level,” says AmResearch senior economist Manokaran Mottain.
He is forecasting exports to grow by some 7% to 8% and Malaysia’s gross domestic product to hit 5% this year.
Says Chang: “While some exporters lament the stronger currency, a lot of them are importers too and their costs of production have fallen. The most substantial profits are often made in finished goods, not in raw materials.
“Profits made from finished goods are more sustainable as it gives better margins on a longer-term basis. It allow us to move up the value chain.”
An observer says that while raw materials may be cheaper due to the strengthening ringgit, Malaysian exporters will still be in the losing end when selling finished goods to the global market as their products will be denominated in US dollars.
Rising ringgit draws foreign investors
By DALJIT DHESI
daljit@thestar.com.my
THE strengthening of the ringgit against the greenback and other currencies has whetted foreign investors’ appetite for domestic assets, including bonds – at least for the short term.
These investors’ prefer to put their money in Malaysian Government Securities (MGS), which have a lower credit risk compared with corporate bonds.
Malaysian Rating Corp Bhd (MARC) chief executive officer Mohd Razlan Mohamed says the appreciation of the ringgit has triggered an increase in foreign buying of MGS.
“Foreign investors see currency gains as one of the components of investment returns. The larger purchases of MGS relative to corporate bonds are quite understandable considering the extremely low credit risk in this asset class.
“This also translates to lower liquidity risk in MGS in the event investors wish to liquidate their holdings for any specific reason. MGS are also less volatile compared with equities, which should also improve the portfolio returns on a risk-adjusted basis,” he tells StarbizWeek.
Assuming the ringgit continues its bullish run in the coming months, the likelihood of foreign holdings in MGS surpassing its previous peak of 25% is very high, he says.
RAM Holdings Bhd group chief economist Yeah Kim Leng believes there will be an increase in foreign demand for local currency bonds as currency gains will boost the upside potential of investment in ringgit assets.
Bond Pricing Agency Malaysia CEO Meor Amri Meor Ayob says that in the short term, foreign investors will find the MGS market attractive due to foreseeable earnings in the yield differential as well as foreign exchange capital gains.
He says that at the moment, the 10-year US-ringgit sovereign bond yield differential was around 33 basis points (the 10-year US yield is 3.75%, while the 10-year MGS yield is 4.08%).
He believes the confidence among foreign investors in corporate bonds will be boosted but to a lesser extent compared with the stronger credit-backing MGS.
According to HSBC Bank Malaysia Bhd treasurer Piyush Kaul, the inflow of foreign investments will help push yields lower, resulting in lower borrowing costs for the Malaysian Government and corporates.
Hor Kwok Wai, Royal Bank of Scotland Bhd’s head of local markets trading, says the primary driver of foreign interest in Malaysian bonds is the exchange rate gains from a stronger ringgit.
He says interest is usually concentrated in the purchase of Bank Negara bills, but in recent weeks, there has been strong buying in the MGS, especially those with tenures from one to three years. Hor says there could potentially be some reversal if the US dollar/ringgit moves a lot lower moving forward and profit taking emerges.
OCBC Bank (M) Bhd head of global treasury Gan Kok Kim believes that some destabilisation of the bond market can happen should there be any sudden reversals or capital flight due to risk aversion.
Regardless of the rising ringgit, Maybank Investment Bank Bhd managing director and head of debt markets John Chong expects companies will continue to tap the local bond market for financing due to the attractiveness of the bond market.
He says the Malaysian bond market is the third largest in Asia, benchmarked by gross domestic product. The success of the local bond market, Chong says, is facilitated by a sound regulatory and legal framework, robust bond market infrastructure and government support.
On the likelihood of foreign investors shifting focus to private debt securities (PDS), Razlan of MARC says at this point, it is unlikely given the minimum rating threshold of institutional investors.
He says despite more signs of sustainable economic recovery, primary activity in the PDS market remains lethargic with issuance of RM3.8bil in the first quarter of this year compared with RM6.4bil in the first quarter of 2009.
According to Razlan, foreign investors normally stick to well-known institutions such as Petroliam Nasional Bhd (Petronas), Telekom Malaysia Bhd and Sime Darby Bhd, which are rated AAA domestically and whose papers are more liquid for active portfolio management.
However, MARC’s estimates show that new issuances from this highest rating category stood relatively low at RM870mil in the first quarter of 2010 against RM2.8bil in the same quarter last year.
Will the surging ringgit see more companies tapping the local bond market for financing? Not necessarily, according to industry observers.
From an issuer’s perspective, Yeah of RAM feels the rising ringgit will not have any direct impact since the repayment is in local currency.
For Malaysian issuers, Razlan says the movement of the local currency does not have an impact on the decision to tap the ringgit debt market unless they have the option of tapping the non-ringgit market. He says only large institutions such as Petronas have that kind of flexibility.
The local bond market’s volume is driven more by the function of credit quality, credit appetite, liquidity and interest rates, he says .
Meor Amri concurs with Razlan. He says the appreciation of the ringgit bodes well only for corporates that have US dollar-denominated bonds or that intend to issue such papers.
A rising ringgit, Razlan says, also makes it less attractive for foreign issuers to tap the local bond market due to the higher financing cost.
Another question: Is it good or bad for the Ringgit to keep rising this way? And can the uptrend be sustained?
Your politically correct question has not come at a more appropriate time. I like you!
What I'm trying to say is that the weather is very hot these days, and the scorching heat might have burned some brain cells. When tension is high, it is not a bad idea to calm down and look into the more pertinent financial problems.
Talking about the Ringgit, the local unit has risen to a high of 3.19 over the past two days, and has become the fastest appreciating currency in the region over the last three months.
The Ringgit finally has its day!
In March, Bank Negara governor Zeti was always seen with a smiling face. Behind the smiling face we could see the Ringgit fluttering upward.
There are a number of reasons for this, it has been moving alongside the regional big brother: Chinese Renminbi.
Recently, Renminbi comes under mounting pressure from the States. US secretary of the treasury Timothy Geithner made a surprise visit to Beijing lately, but he was not in the Chinese capital for a tea rendezvous with president Hu Jintao.
Even as Beijing said it would remain firm in its position soon after Geithner left, the Chinese currency has started to show signs of easing up.
Yes, with the Renminbi inching up, can the Ringgit stay put?
2. Malaysia's economic data have been pretty impressive of late, and this year's GDP growth, earlier predicted to be in the region of 5%, may look forward to even 6 or 7% according to some foreign bankers.
The first quarter growth has breached the 7% mark, and with exports going robust, we can easily see why Taiwanese investors are complaining of labour crunch.
With economy back on the growth track, interest rates rising in tandem, and foreign funds flooding in to grab the local currency, there aren't reasons for the Ringgit not to rise.
3. The New Economic Model unveiled by the prime minister has set the priority to make Malaysia a high-income country.
In a country where its currency is undervalued, the people's income couldn't go a lot higher. The appreciating Ringgit will be instantly reflected on the per capita income.
As for whether it is good to have a strong Ringgit, a strengthening currency will inevitably perk up export costs, eroding our export competitiveness.
But, if all regional currencies appreciate at the same rate, especially with Renminbi taking the lead, then Malaysia will not be disadvantaged.
At the same time, an appreciating Ringgit will make imported products cheaper, which will benefit businesses who need to acquire imported raw materials, machinery as well as consumer products.
A stronger Ringgit should also be good for those with children studying abroad.
In general, currency appreciation is a good thing for most Malaysians, and should have a catalytic effect on the government's effort to increase the national income and enhance the competitiveness of local businesses.
The facts that Bank Negara has not stepped in to check the rising exchange rate and that Zeti is recently seen with a brilliant smile should serve to reassure all that the latest spike is not just momentary but can be sustained for some time. (By TAY TIAN YAN/Translated by DOMINIC LOH/Sin Chew Daily)
________________________________________
By CECILIA KOK
cecilia_kok@thestar.com.my
The ringgit has been strengthening against most of the world’s major currencies since early this year. But will this trend sustain?
ZAINAL Azhar has been shopping for the best rates to swap ringgit for euros for his upcoming business trip to Germany. The 40-year-old businessman from Kuala Lumpur says he has been buying euros in phases in preparation for the visit next month.
His friends, Susan Lee and Albert John, are also watching how the ringgit is faring against other currencies. Lee, a financial analyst in her 30s, has been waiting for months to score a “cheaper” vacation to the United States, while sixtysomething John is sending his youngest son to Britain for further studies.
The trio are hoping to get the most bang for their bucks when they exchange their ringgit for other currencies.
So, the recent rise of the ringgit bodes well for individuals like them – not to mention for those who like to shop online for overseas products. Since early this year, the ringgit has been strengthening against most of the world’s major currencies.
On nominal terms, the ringgit has appreciated about 6.7% year-to-date against the US dollar. The ringgit is now hovering at a two-year high against the greenback at 3.19, compared with 3.42 at the start of the year, and last year’s peak of 3.72 recorded in March.
Against the British pounds, the ringgit has strengthened from 5.5 early this year to around 4.9 currently. The ringgit has also risen against the euro from 4.88 early this year to about 4.28 currently.
Against the yuan, the ringgit has reached almost a two-year high over the week to 46.79 sen from 50.15 sen early this year, while against the yen, the ringgit has appreciated 6.9% year-to-date and 8.6% year-on-year to hover around 3.749 per 100 yen.
Other regional currencies are also trending similarly, including the Singapore dollar (which has just been revalued by the country’s government) and the Indonesian ruppiah.
Driving factors
Compared with other regional currencies, the ringgit has nominally gained the most against the US dollar since the start of the year.
Says Affin Investment Bank chief economist Alan Tan: “The ringgit is playing catch-up in the first half of this year as it lagged for most of the second half of 2009. Other regional currencies started gaining strength then.”
As most economists see it, the recent strengthening of the ringgit – and most Asian currencies for that matter – is mainly due to three factors: strong economic recovery and growth prospects for the Asian region, wide interest rate differentials between the US and Asia as some countries in the region have started to normalise their monetary policies and the widespread expectation that China’s lawmakers will allow the yuan to appreciate.
Amid the mounting pressure on China, there are growing expectations that the country will let its yuan appreciate against the US dollar in the second half of the year.
The correlation between the Chinese currency and regional currencies is strong – a rallying yuan will usually lift the regional currencies.
For example, the lifting of the ringgit peg to the US dollar in July 2005. This took place shortlty after China’s central bank revalued its yuan and shifted to a managed float.
(The yuan was pegged at 8.27 per US dollar from 1995 until mid-2005, when it was revalued upwards to 8.11 per US dollar and allowed to float against a basket of currencies, including the US dollar, euro and yen. In July 2008, the yuan appreciated 21% against the US dollar, and its value has since been pegged at around 6.83 per US dollar to this day.)
“The dollar will flow into high-growth regions, driving their currencies to appreciate,” OSK-DMG economist Enrico Tanuwidjaja tells StarBizWeek.
The World Bank expects developing East Asia (which includes Malaysia, China and Indonesia) to register 8.7% growth in gross domestic product (GDP) in 2010.
The Asian Development Bank’s projection is slightly lower at 7.5%.. Malaysia’s GDP growth forecast ranges from 5% to 7%. “The expectations of good growth rates are a major boost to investor sentiment,” says Alan.
More to gain or lose?
A recent CIMB Investment Bank report says that “the interplay of currency revaluation expectations and interest rate differentials will trigger more speculative inflows into the region.”
Malaysia’s move in raising interest rates since early this year has attracted some foreign fund inflows. This has led to the strengthening of the ringgit against major world currencies.
In March, Bank Negara raised the overnight policy rate (OPR) from a record low of 2% to 2.25%. The central bank is expected to raise the OPR again in the months ahead as part of the rate normalisation process.
This will widen the interest rate differentials between Malaysia and other developed nations, especially the US, that have been keeping and intend to keep their rates low for a longer period.
Economists say the widening interest rate differentials will continue to attract private funds to Malaysia as investors seek higher returns.
According to CIMB Investment Bank, the Malaysian equity market could “get a leg up from further OPR hikes.”
Foreign investors are seen to be taking a bet on asset reflation caused by a strengthening ringgit. Market analysts believe that in such instances, the most likely beneficiaries are blue chips such as banking and plantation stocks, among others.
ECM Libra Investment Bank says companies that derive their income mainly from the domestic or regional markets but have input costs or liabilities denominated in G3 (the US, Japan, and euro) currencies will gain.
Those in this category include Tenaga Nasional Bhd, UMW Holdings Bhd, AirAsia Bhd, Malaysia Airlines Bhd, Tan Chong Motor Holdings Bhd, QL Resources Bhd and KFC Holdings (M) Bhd.
Conversely, the strengthening of the ringgit will not bode well for exporters or companies that earn their income mainly in G3 currencies, and have input costs or liabilities denominated in the local currency. Fitting into this category, as analysts point out, are rubber glove and semiconductor companies.
From the international trade perspective, a stronger ringgit tends to make the country’s exports of goods and services costlier for overseas customers. In theory, this would inadvertently lead to lower demand for Malaysia’s products.
But economist Prof Datuk Dr Mohamed Ariff opines that the current appreciation of the ringgit will not significantly impact Malaysia’s export competitiveness because other regional currencies are also rising at the same time.
Says Tanuwidjaja: “Current external demand is driven mainly by intra-regional trade, while demand from developed nations remain relatively weak. The country will benefit more from the lower costs of imports and capital expenditure with a stronger currency.”
Bracing for volatility
Malaysian exports generally have high import content, and this could help mitigate the effects of a stronger ringgit on exporters.
It is estimated that for every RM1 of exports, 70% are intermediate goods imported from overseas. So, a stronger ringgit will help reduce production costs and help exporters maintain price competitiveness.
Will the ringgit’s uptrend continue? Based on current economic indicators, most economists say the trend is unlikely to continue.
They believe the ringgit is already near the tail end of an appreciating trend. They say the upside potential for the ringgit is somewhat limited and that some form of weakness will likely arise in the second half of the year.
Analysts believe the market should brace for volatility ahead as the ringgit’s appreciation is still vulnerable to the movements of international short-term capital.
“The outlook for the first half of the year is clearly an appreciating trend for the ringgit but uncertainties will set in by the second half of the year. Hence, the belief that the strengthening of the ringgit, and other Asian currencies for that matter, will not be sustainable in the latter part of 2010,” says Tanuwidjaja.
Economists believe the growth of Asian economies will be less vibrant in the second half, compared with the first half.
In addition, there is the possibility of policy change by developed nations, particularly the US, as the recovery of their economies gathers pace in the second half of the year.
It is widely speculated that the second half of 2010 will mark the end of the “extended period” for record low interest rates for the US.
Interest rate differentials between the US and other Asian economies will likely be narrower then. This will result in funds flowing back into the country, and the US dollar is likely to react favourably and regain its strength against other currencies.
Taking into account the possibility of this scenario, several local research houses have ascribed a year-end target for the ringgit against the US dollar at between 3.20 and 3.30.
Then again, what about the possible revaluation of the yuan?
Says Alan of Affin: “The market has already priced in such possibility, and even if there’s really a change in the yuan policy, we believe it will be gradual and moderate. We don’t think there will be any sharp or surprise movement in the yuan, so as to minimise the impact on China’s export competitiveness.”
Significantly undervalued?
It is generally perceived that several Asian currencies, including the ringgit and the yuan, are significantly undervalued against the US dollar.
Foreign studies claim that the exchange rate misalignment, in terms of undervaluation against the US dollar at the end of last year, for the yuan was as much as 40.7%.
For the ringgit, it was around 30.5%, while the Hong Kong dollar and the Singapore dollar were misaligned by as much as 32.2% and 24.7%, respectively.
While many Asian currencies have strengthened against the US dollar, their recent appreciation were merely nominal gains. Measured in real terms, that is, after adjusting for inflation, the gains of Asian currencies were only marginal.
The ringgit, in real effective exchange rate, has only strengthened by a mere 1% against the US dollar year-to-date, and less than 3% from mid-2005, when its peg to the US dollar was lifted.
Hence, some quarters argue that there is scope for the ringgit to strengthen further against the US dollar.
But Bank Negara has previously stressed that the value of the ringgit is determined by market forces and that its present value is already reflective of the country’s economic fundamentals.
“To be a domestic and consumption-based economy, a strong ringgit is needed. But let’s be realistic here. Many industries in Malaysia are still export-driven, and a strong ringgit over the short term will definitely hurt them,” says Alan.
He says the ringgit has already appreciated to a level where some manufacturers are beginning to feel a bit uneasy and anxious over the possible loss of competitiveness.
Economists argue that any form of intervention by the central bank in the ringgit exchange should be focused on smoothing out the sharp volatilities that could cause instability in the financial markets, instead of managing the ringgit’s value against other currencies.
Otherwise, says Ariff, “any attempt by the monetary authorities to rein in the ringgit, except under exceptional circumstances, would cause serious price distortions and contribute to inefficient allocation of resources.”
Towards high income
Having a strong currency is in line with any nation’s ambition to be a high-income economy.
“Strong” currency in this sense refers to one that is well demanded and has a stable value, with its exchange rate driven by economic fundamentals.
There are compelling benefits for Malaysia to aim for a stronger ringgit in line with its ambition to be a high-income nation.
For one, a stronger ringgit will make travelling abroad more affordable for Malaysians, hence enhancing their scope for leisure.
A stronger ringgit will also encourage the import of capital goods, which contributes to the innovation and automation of industries in the country.
Above all, a stronger ringgit will help improve the living standards of the people by increasing their purchasing power through cheaper imports and lower inflationary pressure.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says that unless profiteering activities are thwarted, a stronger ringgit may not necessarily lead to cheaper imported goods for Malaysians.
The benefits aside, “a stronger ringgit per se should not be the over-riding objective,” says Prof Dr Tan Eu Chye of University Malaya’s Faculty of Economics and Administration.
“A stronger ringgit must be consistent with the fundamentals of the country’s economy. If fundamentals dictate that the ringgit should strengthen, then it should be allowed to appreciate,” he says.
For the ringgit’s advancement to sustain over the longer term, the implementation and execution of Malaysia’s New Economic Model (NEM) is critical, says Maybank Investment Bank.
Although the first part of the NEM has already been unveiled, many are waiting for more clarification and details of the plan to gain a clearer picture of the changing fundamentals of the Malaysian economy.
The consensus view is that there isn’t any material change in the key economic fundamentals of Malaysia yet. Hence, the unveiling of the second part of the NEM will be critical.
The World Bank says that as long as a stronger ringgit is justified by improved fundamentals, it can help the country gain mileage towards becoming a high-income nation.
“Otherwise, complacency may set in and we may not be able to sustain the high-income status eventually,” says Eu Chye.
Stronger currency, stronger stock market?
By TEE LIN SAY
linsay@thestar.com.my
WHAT does a strengthening ringgit do to our stock market? TA Securities senior technical analyst Stephen Soo says a firm ringgit is a boost to the stock market as it encourages fund inflows.
Although he sees bonds as the main beneficiary of a stronger ringgit, with equities next, he is more bullish on equities for the second half of the year, on the back of the tabling of the 10th Malaysian Plan and the release of more details on the New Economic Model.
“In the last two years, Malaysia has experienced a net outflow of foreign direct investments (FDIs). As the ringgit strengthens, this will at least stop some of the outflows and support liquidity flows. This liquidity will need to go somewhere and stocks will benefit,” says Soo.
Bank Negara data points to an FDI reversal in 2007, with net outflows of direct investments of RM9.14bil. This increased to RM26.06bil in 2008 and to RM14.62bil in the first nine months of last year.
Portfolio investments in Malaysia booked a net inflow of RM8.8bil in the third quarter of 2009 after four quarters of significant outflows.
JF Apex Securities Bhd chief operating officer Lim Teck Seng feels that the recent inflow of funds have not had much impact on the stock market as most of the foreign inflows were for fixed income and not equities.
“A strong currency may not favour stock markets as theoretically, Malaysian stocks have become more expensive. For the moment, foreign funds prefer to enjoy yields rather than the riskier returns from equities,” he says.
Private equity banker Sherilyn Foong says portfolio inflows seem to be faster and nimbler than FDIs. “We’re coming from a low base on the bonds front. My main concern would be if it is, to a significant extent, hot money,” she says.
MCIS Zurich Insurance Bhd head of fixed income Michael Chang shares Lim’s views. “Buying government bonds is probably one of the easiest ways if I am expecting the country’s currency to rise,” he says.
“The risk is deemed moderate and bonds are also fairly liquid investments. Offshore investors can buy into the Malaysian Government Securities (MGS) as it is as good as buying the Malaysian currency,” says Chang.
Long-term hazard
While most people are of the view that a rising currency signals more investments flowing into the country, and therefore contributing to a rising stock market, this is a mere correlation and not a direct impact.
Past studies by ABN Amro Bank and the London Business School have shown that strong currencies do not lead to generous profits from the equity markets.
According to the research, countries with weak currencies saw greater stock returns than ones with strengthening currencies.
A broker from a local house says that a strong currency only offers short term benefit for the market. “Over the longer term, it is not good for an exporting economy and for the stock market,” he says.
Investing in stocks can be viewed as risky compared with other assets. When the central bank raises interest rates, government securities such as the MGS are often regarded as the safest investments and will usually experience a corresponding increase in interest rates.
In other words, the risk-free rate of return goes up, making these investments more desirable and a lot safer than stocks. With stocks, one has to factor in the risk premium as well.
The ringgit has strengthened some 7% to 3.2015 against the US dollar since the beginning of this year. This will impact the earnings of Malaysian exporters and various other sectors of the economy.
Over the short term, exporters such as those in the rubber glove, technology, and electrical and electronics sectors may suffer setbacks.
Says OSK Research director and research head Chris Eng: “A stronger ringgit is better for the country as long as it strengthens gradually. Lately, the ringgit has strengthened rather quickly and this may not give exporters time to pass on (additional) costs to their customers.”
Winners and losers
Rubber glove stocks have come under selling pressure of late as investors worry about a repeat of the share price collapse in 2008, when investors assumed that record latex prices, high energy prices and a weakening US dollar would dampen glovemakers’ earnings significantly.
Those who remain bullish about the industry contend that the demand for rubber gloves is resilient and that the listed manufacturers, because they are market leaders, will be able to hike selling prices to absorb cost increases.
A stronger ringgit means imports tend to cost less. Manufacturers that rely significantly on imported raw materials stand to benefit and will likely see their margins improve, provided their output is largely sold in the domestic market.
With the US dollar weakening against the ringgit, commodities such as oil and gold, which are bought and sold in US dollars, will be cheaper for purchasers in Malaysia.
Eng says in this context, the local airlines are beneficiaries, as fuel is denominated in US dollars while sales are mostly in ringgit.
“In Malaysia Airlines Bhd’s case, their revenue is mostly derived in Australian and Asian currencies. So they benefit from the strengthening ringgit,” he says.
Others gaining from the surging ringgit include automotive and food-based companies that import products in US dollars but sell them to Malaysian buyers. Companies that have large foreign debts – Tenaga Nasional Bhd for example – will also benefit. On the flip side, MISC Bhd, whose revenue is mostly in US dollars, may be at a disadvantage.
Profit impact
Eng says a stronger ringgit helps control inflation, hence strengthening domestic consumption.
One line of argument is that a strong currency also means that imported raw materials are cheaper, thus lowering inventory cost. This leads to lower borrowing obligations and hence less interest to pay.
Says a senior analyst: “The price of the finished good also goes down and this leads to a lower cost of living. The strength of a currency is an indicator of economic health.”
According to the Big Mac index, the ringgit is 40% below its fair-value benchmark with the US dollar as at March 16 (at 3.3245 per US dollar).
The Big Mac index is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries.
“Based on a trade-weighted index, the ringgit should be fairly valued at 3.23 per US dollar, which is almost close to the current level,” says AmResearch senior economist Manokaran Mottain.
He is forecasting exports to grow by some 7% to 8% and Malaysia’s gross domestic product to hit 5% this year.
Says Chang: “While some exporters lament the stronger currency, a lot of them are importers too and their costs of production have fallen. The most substantial profits are often made in finished goods, not in raw materials.
“Profits made from finished goods are more sustainable as it gives better margins on a longer-term basis. It allow us to move up the value chain.”
An observer says that while raw materials may be cheaper due to the strengthening ringgit, Malaysian exporters will still be in the losing end when selling finished goods to the global market as their products will be denominated in US dollars.
Rising ringgit draws foreign investors
By DALJIT DHESI
daljit@thestar.com.my
THE strengthening of the ringgit against the greenback and other currencies has whetted foreign investors’ appetite for domestic assets, including bonds – at least for the short term.
These investors’ prefer to put their money in Malaysian Government Securities (MGS), which have a lower credit risk compared with corporate bonds.
Malaysian Rating Corp Bhd (MARC) chief executive officer Mohd Razlan Mohamed says the appreciation of the ringgit has triggered an increase in foreign buying of MGS.
“Foreign investors see currency gains as one of the components of investment returns. The larger purchases of MGS relative to corporate bonds are quite understandable considering the extremely low credit risk in this asset class.
“This also translates to lower liquidity risk in MGS in the event investors wish to liquidate their holdings for any specific reason. MGS are also less volatile compared with equities, which should also improve the portfolio returns on a risk-adjusted basis,” he tells StarbizWeek.
Assuming the ringgit continues its bullish run in the coming months, the likelihood of foreign holdings in MGS surpassing its previous peak of 25% is very high, he says.
RAM Holdings Bhd group chief economist Yeah Kim Leng believes there will be an increase in foreign demand for local currency bonds as currency gains will boost the upside potential of investment in ringgit assets.
Bond Pricing Agency Malaysia CEO Meor Amri Meor Ayob says that in the short term, foreign investors will find the MGS market attractive due to foreseeable earnings in the yield differential as well as foreign exchange capital gains.
He says that at the moment, the 10-year US-ringgit sovereign bond yield differential was around 33 basis points (the 10-year US yield is 3.75%, while the 10-year MGS yield is 4.08%).
He believes the confidence among foreign investors in corporate bonds will be boosted but to a lesser extent compared with the stronger credit-backing MGS.
According to HSBC Bank Malaysia Bhd treasurer Piyush Kaul, the inflow of foreign investments will help push yields lower, resulting in lower borrowing costs for the Malaysian Government and corporates.
Hor Kwok Wai, Royal Bank of Scotland Bhd’s head of local markets trading, says the primary driver of foreign interest in Malaysian bonds is the exchange rate gains from a stronger ringgit.
He says interest is usually concentrated in the purchase of Bank Negara bills, but in recent weeks, there has been strong buying in the MGS, especially those with tenures from one to three years. Hor says there could potentially be some reversal if the US dollar/ringgit moves a lot lower moving forward and profit taking emerges.
OCBC Bank (M) Bhd head of global treasury Gan Kok Kim believes that some destabilisation of the bond market can happen should there be any sudden reversals or capital flight due to risk aversion.
Regardless of the rising ringgit, Maybank Investment Bank Bhd managing director and head of debt markets John Chong expects companies will continue to tap the local bond market for financing due to the attractiveness of the bond market.
He says the Malaysian bond market is the third largest in Asia, benchmarked by gross domestic product. The success of the local bond market, Chong says, is facilitated by a sound regulatory and legal framework, robust bond market infrastructure and government support.
On the likelihood of foreign investors shifting focus to private debt securities (PDS), Razlan of MARC says at this point, it is unlikely given the minimum rating threshold of institutional investors.
He says despite more signs of sustainable economic recovery, primary activity in the PDS market remains lethargic with issuance of RM3.8bil in the first quarter of this year compared with RM6.4bil in the first quarter of 2009.
According to Razlan, foreign investors normally stick to well-known institutions such as Petroliam Nasional Bhd (Petronas), Telekom Malaysia Bhd and Sime Darby Bhd, which are rated AAA domestically and whose papers are more liquid for active portfolio management.
However, MARC’s estimates show that new issuances from this highest rating category stood relatively low at RM870mil in the first quarter of 2010 against RM2.8bil in the same quarter last year.
Will the surging ringgit see more companies tapping the local bond market for financing? Not necessarily, according to industry observers.
From an issuer’s perspective, Yeah of RAM feels the rising ringgit will not have any direct impact since the repayment is in local currency.
For Malaysian issuers, Razlan says the movement of the local currency does not have an impact on the decision to tap the ringgit debt market unless they have the option of tapping the non-ringgit market. He says only large institutions such as Petronas have that kind of flexibility.
The local bond market’s volume is driven more by the function of credit quality, credit appetite, liquidity and interest rates, he says .
Meor Amri concurs with Razlan. He says the appreciation of the ringgit bodes well only for corporates that have US dollar-denominated bonds or that intend to issue such papers.
A rising ringgit, Razlan says, also makes it less attractive for foreign issuers to tap the local bond market due to the higher financing cost.
Another question: Is it good or bad for the Ringgit to keep rising this way? And can the uptrend be sustained?
Your politically correct question has not come at a more appropriate time. I like you!
What I'm trying to say is that the weather is very hot these days, and the scorching heat might have burned some brain cells. When tension is high, it is not a bad idea to calm down and look into the more pertinent financial problems.
Talking about the Ringgit, the local unit has risen to a high of 3.19 over the past two days, and has become the fastest appreciating currency in the region over the last three months.
The Ringgit finally has its day!
In March, Bank Negara governor Zeti was always seen with a smiling face. Behind the smiling face we could see the Ringgit fluttering upward.
There are a number of reasons for this, it has been moving alongside the regional big brother: Chinese Renminbi.
Recently, Renminbi comes under mounting pressure from the States. US secretary of the treasury Timothy Geithner made a surprise visit to Beijing lately, but he was not in the Chinese capital for a tea rendezvous with president Hu Jintao.
Even as Beijing said it would remain firm in its position soon after Geithner left, the Chinese currency has started to show signs of easing up.
Yes, with the Renminbi inching up, can the Ringgit stay put?
2. Malaysia's economic data have been pretty impressive of late, and this year's GDP growth, earlier predicted to be in the region of 5%, may look forward to even 6 or 7% according to some foreign bankers.
The first quarter growth has breached the 7% mark, and with exports going robust, we can easily see why Taiwanese investors are complaining of labour crunch.
With economy back on the growth track, interest rates rising in tandem, and foreign funds flooding in to grab the local currency, there aren't reasons for the Ringgit not to rise.
3. The New Economic Model unveiled by the prime minister has set the priority to make Malaysia a high-income country.
In a country where its currency is undervalued, the people's income couldn't go a lot higher. The appreciating Ringgit will be instantly reflected on the per capita income.
As for whether it is good to have a strong Ringgit, a strengthening currency will inevitably perk up export costs, eroding our export competitiveness.
But, if all regional currencies appreciate at the same rate, especially with Renminbi taking the lead, then Malaysia will not be disadvantaged.
At the same time, an appreciating Ringgit will make imported products cheaper, which will benefit businesses who need to acquire imported raw materials, machinery as well as consumer products.
A stronger Ringgit should also be good for those with children studying abroad.
In general, currency appreciation is a good thing for most Malaysians, and should have a catalytic effect on the government's effort to increase the national income and enhance the competitiveness of local businesses.
The facts that Bank Negara has not stepped in to check the rising exchange rate and that Zeti is recently seen with a brilliant smile should serve to reassure all that the latest spike is not just momentary but can be sustained for some time. (By TAY TIAN YAN/Translated by DOMINIC LOH/Sin Chew Daily)
________________________________________
Tuesday, February 9, 2010
GST
Saturday, January 16, 2010
GST
What you should know about GST
Because the new tax is complex and broad-based, we have a lot to learn ahead of its introduction. As a start, StarBizWeek has asked some experts to each highlight five key points.
Pauline Lum
Director, BDO Tax Services Sdn Bhd
•GST is a consumption tax on imported goods, and on supplies of goods and services in Malaysia other than those exempted or zero-rated. It is mainly borne by the end-user/consumer, and therefore, is not intended to add cost to businesses.
•GST is applied at each level of the value chain. This tax will be applicable whenever value is added to goods or a service.
•Businesses are required to register for GST if their annual turnover exceeds RM500,000. They can claim the input taxes paid on purchases of intermediate goods or services, against the GST charged on the final goods or services that they sell.
•Preparations can include the setting up of a GST committee, staff training for all departments, and manuals/systems to ensure compliance. Businesses that do not have internal expertise should consider engaging external advisors.
l As co-head of the tax authority of France, Maurice Laure created the GST system in 1954, when he introduced the TVA (the French abbreviation for value added tax).
Dr Veerinderjeet Singh
President, Chartered Tax Institute of Malaysia
•GST is not a new tax for Malaysia. It is intended to replace the existing sales tax and service tax.
•It has built-in control mechanisms that help minimise tax evasion by traders.
•GST requires good and proper record-keeping by businesses that need to be registered. This can lead to improvements in the maintenance of proper accounts and financial records.
•The tax will not lead to inflationary pressures, that is, a persistent increase in prices.
•Once GST is effectively implemented for some time, there is the possibility of decreases in corporate and personal tax rates.
Ronnie Lim
Country tax leader, Deloitte Malaysia
•Exemption is bad for GST. Businesses should not ask for their output to be exempted as this will create more costs for them, arising from restricted input tax credit. Instead – and perhaps strangely – one should seek to be a taxable person with either zero-rated or standard-rated output.
•GST implementation is not as easy as merely activating an accounting software’s GST module. That system has to be tailored to the profile of the business and the Malaysian GST law.
•Most companies leave tax implications to the tax, accounting or finance departments. GST should be viewed differently as it has enterprise-wide effects.
The sales department has to revise selling prices exclusive of GST. The procurement unit must re-negotiate purchase prices. The legal team need to review long-term contracts. Therefore, the whole company must understand this tax.
•Much more administrative and documentation requirements arise from the introduction of GST. Compliance costs are bound to increase. Often, adverse situations arise when documentation is inadequate.
•GST can potentially reduce tax leakages, such as smuggling, as there could be checks before unusual credit claims are processed. Leakages will be further minimised if the Customs and the Inland Revenue Board are unified to create a powerhouse, as seen in Britain.
Dr Arjunan Subramaniam
Adjunct professor, Universiti Utara Malaysia
•GST is due when a person makes a taxable supply in the course of business. As a taxable person, you must charge GST to your customer when you supply to the customer. This supply is output and your charge to the customer is output tax.
•GST charged to you for your business purchases is called input tax.
•You must pay to the Customs the amount of your output tax minus your input tax. If the input tax is greater than the output tax, the difference is claimed from the department. So keep accurate records of all your sales and purchases.
•GST is a consumption tax. It is your customer who bears the burden of tax.
•Imports are subject to GST, while exports are exempt.
Khoo Chuan Keat
Tax leader and senior executive director, PricewaterhouseCoopers Taxation Services Sdn Bhd
•GST is a fiscal policy feature in over 140 countries. Many developing and emerging economies have been transforming their tax revenue bases by progressively moving from direct taxation to consumption taxes such as GST in recent years. Malaysia is in the minority segment.
•GST affects all functional areas of a business and is not just a finance issue. The GST implementation is not only about reconfiguring the computer system in order to charge output tax. In fact, businesses should re-assess their entire business processes, including supply chains, so as to optimise input tax recoveries. Otherwise, they may suffer input tax leakages, thus hurting their competitiveness and profitability.
•Consumers can expect to see a drop in prices of certain goods and services. Without realising it, the consumers are already paying sales tax and service tax embedded in the supply chain. Anti-profiteering measures should be implemented and strictly enforced to deter traders from taking advantage of GST to raise prices and increase profits.
•The GST input tax incurred by businesses is claimable as a credit if they make taxable supplies. This avoids the cascading tax effect of the current single-stage sales tax and service tax regime, which results in higher prices.
•Recognising the wide-ranging impact of GST, the Government has proposed an initial low rate of 4%, coupled with zero-rating and exemption of essential goods and services. Anti-profiteering legislation and other measures for qualifying persons in the lower-income groups may be introduced to alleviate the adverse impact of GST on consumers.
Dr Jeyapalan Kasipillai
Professor, Monash University Sunway campus
•GST is a multi-stage tax but is a cost only to the final consumer.
•The GST system is transparent, with a built-in mechanism to track down defaulters.
•The new tax will give the Government an opportunity to reduce corporate and individual tax rates.
•It will also enable the Government to subsidise essential controlled items for the poor and to improve healthcare for taxpayers.
•GST can be a good source of government revenue and will help shrink the deficit.
Nicholas Crist
Executive director, KPMG Tax Services Sdn Bhd
•GST and value added tax (VAT) are the same conceptually. Over 100 countries have GST/VAT as part of their tax systems.
•Malaysia’s proposed GST rate of 4% is among the lowest rates in the world. The highest rate currently is 25%.
•Basic necessities, such as food, are proposed to be zero-rated (0%). However, processed food, such as canned food, will be charged at the standard rate. Classification can lead to interpretational issues. For example, in Britain, the courts had to determine whether a Jaffa Cake, a biscuit-like cake, was a biscuit (standard-rated) or a cake (zero-rated).
•GST/VAT can be used as a tool to manage the economy. For example, Britain reduced its VAT standard rate from 17.5% to 15% in December 2008 to boost consumer demand during the financial crisis.
•The Government has indicated that the GST would provide an opportunity to reduce income tax rates. This has happened in other countries, such as Singapore.
Chas Roy-Chowdhury
Head of tax, Association of Chartered Certified Accountants
•In Europe, GST is known as VAT. Most of the rest of the world uses the term GST.
•GST rates may start off low, but in the global context, they have always risen. In the European Union (EU), the rates have increased considerably from the introduction of the tax. The rate in Britain, for instance, was once 10%. It is 17.5% today.
•When Britain introduced VAT in 1973 as a prerequisite to joining the EU, it was seen as a simple tax. Now, it is one of the most complex of taxes. Therefore, serious effort is needed to stop complexity from creeping into the system.
•Because most intra-EU goods are not subject to VAT, there is an opportunity for various types of tax fraud. It is thought that the amount involved could be as high as 100 billion euros.
•There is a debate in the United States over whether to introduce VAT, mainly as a way to address the country’s huge budget deficit.
Bhupinder Singh
Partner, Ernst & Young Tax Consultants Sdn Bhd
•GST will not burden the rakyat. For those currently consuming goods and services that are subject to sales/service tax, the impact of GST should be neutral if the rate is 4%. In fact, consumers should benefit if the suppliers pass on the savings from their ability to claim back input tax on their purchases.
Consumers should also be better off because some essential goods will be zero-rated, while certain items are exempted from GST.
•A business can claim an input tax credit on purchases irrespective of whether it has paid the suppliers, as long as the suppliers have issued tax invoices to the business.
There should be no adverse GST impact on a business that makes taxable supplies. In the long run, the cost of doing business will go down because the business will have the ability to claim input tax on the purchase of goods and services, which they cannot do under the sales/service tax regime.
•Businesses will experience a cash flow impact. They have to charge GST on sales and if the customers are late in paying, the businesses will have to pay the tax first.
•It is important to educate businesses, especially the small players, on the cost savings and potential cash flow savings aspects of GST. It is equally important to educate consumers so that they understand that the goods and services they buy may not necessarily be subject to a price increase because of GST.
•GST works on the affordability concept. As a consumer, you decide which goods and services to buy, and if these are subject to GST, you then have to pay it. This is no different under the current sales/service tax regime except that these taxes are embedded in the price of the goods and services, and the consumer may not realise that they, in fact, bear the taxes.
Posted by Nana at 4:51 PM 0 comments
GST
What you should know about GST
Because the new tax is complex and broad-based, we have a lot to learn ahead of its introduction. As a start, StarBizWeek has asked some experts to each highlight five key points.
Pauline Lum
Director, BDO Tax Services Sdn Bhd
•GST is a consumption tax on imported goods, and on supplies of goods and services in Malaysia other than those exempted or zero-rated. It is mainly borne by the end-user/consumer, and therefore, is not intended to add cost to businesses.
•GST is applied at each level of the value chain. This tax will be applicable whenever value is added to goods or a service.
•Businesses are required to register for GST if their annual turnover exceeds RM500,000. They can claim the input taxes paid on purchases of intermediate goods or services, against the GST charged on the final goods or services that they sell.
•Preparations can include the setting up of a GST committee, staff training for all departments, and manuals/systems to ensure compliance. Businesses that do not have internal expertise should consider engaging external advisors.
l As co-head of the tax authority of France, Maurice Laure created the GST system in 1954, when he introduced the TVA (the French abbreviation for value added tax).
Dr Veerinderjeet Singh
President, Chartered Tax Institute of Malaysia
•GST is not a new tax for Malaysia. It is intended to replace the existing sales tax and service tax.
•It has built-in control mechanisms that help minimise tax evasion by traders.
•GST requires good and proper record-keeping by businesses that need to be registered. This can lead to improvements in the maintenance of proper accounts and financial records.
•The tax will not lead to inflationary pressures, that is, a persistent increase in prices.
•Once GST is effectively implemented for some time, there is the possibility of decreases in corporate and personal tax rates.
Ronnie Lim
Country tax leader, Deloitte Malaysia
•Exemption is bad for GST. Businesses should not ask for their output to be exempted as this will create more costs for them, arising from restricted input tax credit. Instead – and perhaps strangely – one should seek to be a taxable person with either zero-rated or standard-rated output.
•GST implementation is not as easy as merely activating an accounting software’s GST module. That system has to be tailored to the profile of the business and the Malaysian GST law.
•Most companies leave tax implications to the tax, accounting or finance departments. GST should be viewed differently as it has enterprise-wide effects.
The sales department has to revise selling prices exclusive of GST. The procurement unit must re-negotiate purchase prices. The legal team need to review long-term contracts. Therefore, the whole company must understand this tax.
•Much more administrative and documentation requirements arise from the introduction of GST. Compliance costs are bound to increase. Often, adverse situations arise when documentation is inadequate.
•GST can potentially reduce tax leakages, such as smuggling, as there could be checks before unusual credit claims are processed. Leakages will be further minimised if the Customs and the Inland Revenue Board are unified to create a powerhouse, as seen in Britain.
Dr Arjunan Subramaniam
Adjunct professor, Universiti Utara Malaysia
•GST is due when a person makes a taxable supply in the course of business. As a taxable person, you must charge GST to your customer when you supply to the customer. This supply is output and your charge to the customer is output tax.
•GST charged to you for your business purchases is called input tax.
•You must pay to the Customs the amount of your output tax minus your input tax. If the input tax is greater than the output tax, the difference is claimed from the department. So keep accurate records of all your sales and purchases.
•GST is a consumption tax. It is your customer who bears the burden of tax.
•Imports are subject to GST, while exports are exempt.
Khoo Chuan Keat
Tax leader and senior executive director, PricewaterhouseCoopers Taxation Services Sdn Bhd
•GST is a fiscal policy feature in over 140 countries. Many developing and emerging economies have been transforming their tax revenue bases by progressively moving from direct taxation to consumption taxes such as GST in recent years. Malaysia is in the minority segment.
•GST affects all functional areas of a business and is not just a finance issue. The GST implementation is not only about reconfiguring the computer system in order to charge output tax. In fact, businesses should re-assess their entire business processes, including supply chains, so as to optimise input tax recoveries. Otherwise, they may suffer input tax leakages, thus hurting their competitiveness and profitability.
•Consumers can expect to see a drop in prices of certain goods and services. Without realising it, the consumers are already paying sales tax and service tax embedded in the supply chain. Anti-profiteering measures should be implemented and strictly enforced to deter traders from taking advantage of GST to raise prices and increase profits.
•The GST input tax incurred by businesses is claimable as a credit if they make taxable supplies. This avoids the cascading tax effect of the current single-stage sales tax and service tax regime, which results in higher prices.
•Recognising the wide-ranging impact of GST, the Government has proposed an initial low rate of 4%, coupled with zero-rating and exemption of essential goods and services. Anti-profiteering legislation and other measures for qualifying persons in the lower-income groups may be introduced to alleviate the adverse impact of GST on consumers.
Dr Jeyapalan Kasipillai
Professor, Monash University Sunway campus
•GST is a multi-stage tax but is a cost only to the final consumer.
•The GST system is transparent, with a built-in mechanism to track down defaulters.
•The new tax will give the Government an opportunity to reduce corporate and individual tax rates.
•It will also enable the Government to subsidise essential controlled items for the poor and to improve healthcare for taxpayers.
•GST can be a good source of government revenue and will help shrink the deficit.
Nicholas Crist
Executive director, KPMG Tax Services Sdn Bhd
•GST and value added tax (VAT) are the same conceptually. Over 100 countries have GST/VAT as part of their tax systems.
•Malaysia’s proposed GST rate of 4% is among the lowest rates in the world. The highest rate currently is 25%.
•Basic necessities, such as food, are proposed to be zero-rated (0%). However, processed food, such as canned food, will be charged at the standard rate. Classification can lead to interpretational issues. For example, in Britain, the courts had to determine whether a Jaffa Cake, a biscuit-like cake, was a biscuit (standard-rated) or a cake (zero-rated).
•GST/VAT can be used as a tool to manage the economy. For example, Britain reduced its VAT standard rate from 17.5% to 15% in December 2008 to boost consumer demand during the financial crisis.
•The Government has indicated that the GST would provide an opportunity to reduce income tax rates. This has happened in other countries, such as Singapore.
Chas Roy-Chowdhury
Head of tax, Association of Chartered Certified Accountants
•In Europe, GST is known as VAT. Most of the rest of the world uses the term GST.
•GST rates may start off low, but in the global context, they have always risen. In the European Union (EU), the rates have increased considerably from the introduction of the tax. The rate in Britain, for instance, was once 10%. It is 17.5% today.
•When Britain introduced VAT in 1973 as a prerequisite to joining the EU, it was seen as a simple tax. Now, it is one of the most complex of taxes. Therefore, serious effort is needed to stop complexity from creeping into the system.
•Because most intra-EU goods are not subject to VAT, there is an opportunity for various types of tax fraud. It is thought that the amount involved could be as high as 100 billion euros.
•There is a debate in the United States over whether to introduce VAT, mainly as a way to address the country’s huge budget deficit.
Bhupinder Singh
Partner, Ernst & Young Tax Consultants Sdn Bhd
•GST will not burden the rakyat. For those currently consuming goods and services that are subject to sales/service tax, the impact of GST should be neutral if the rate is 4%. In fact, consumers should benefit if the suppliers pass on the savings from their ability to claim back input tax on their purchases.
Consumers should also be better off because some essential goods will be zero-rated, while certain items are exempted from GST.
•A business can claim an input tax credit on purchases irrespective of whether it has paid the suppliers, as long as the suppliers have issued tax invoices to the business.
There should be no adverse GST impact on a business that makes taxable supplies. In the long run, the cost of doing business will go down because the business will have the ability to claim input tax on the purchase of goods and services, which they cannot do under the sales/service tax regime.
•Businesses will experience a cash flow impact. They have to charge GST on sales and if the customers are late in paying, the businesses will have to pay the tax first.
•It is important to educate businesses, especially the small players, on the cost savings and potential cash flow savings aspects of GST. It is equally important to educate consumers so that they understand that the goods and services they buy may not necessarily be subject to a price increase because of GST.
•GST works on the affordability concept. As a consumer, you decide which goods and services to buy, and if these are subject to GST, you then have to pay it. This is no different under the current sales/service tax regime except that these taxes are embedded in the price of the goods and services, and the consumer may not realise that they, in fact, bear the taxes.
Posted by Nana at 4:51 PM 0 comments
Wednesday, February 3, 2010
Be wary of hype on global recovery thestar
Monday February 1, 2010
Be wary of hype on global recovery
Global Trends by MARTIN KHOR
Three eminent economic experts last week warned developing countries to be cautious of the current talk of a global recovery and instead, to prepare policy options to face crises.
DEVELOPING countries should be cautious about the current hype about a global economic recovery and instead, prepare policy options in a world where they have to rely less on exports for future growth.
This sombre assessment came from three eminent economic experts who warned that the world economy is not out of the woods yet.
More than a hundred developing countries have not begun to share in the recovery proclaimed by the media.
Dr Yilmaz Akyuz, special economic adviser of the South Centre, Dr Supachai Panitchpakdi, Secre-tary-General of the UN Conference on Trade and Development (Unctad) and Prof Deepak Nayyar, former vice-chancellor of Dehli University, were speaking at a workshop organised by the South Centre last Thursday.
Held at the United Nations building in Geneva, the workshop brought together over a hundred diplomats and researchers from developing countries and international organisations.
The event was chaired by the former president of Tanzania, Benjamin Mkapa, who now chairs the South Centre.
Dr Yilmaz, who is also a former chief economist at the Unctad, said there is consensus that recovery has started, with positive growth expected in all major economies this year. But there are problems ahead.
The crisis intervention policies in developed countries, based on increased government spending and monetary expansion, are creating another bubble, with financial institutions out of touch with the real economy again.
As policy makers recognise the risks of the new bubble, there are signs of an “early exit” from the stimulus plans, such as the end of interest rate cuts and the phasing out of additional spending.
As the effects of the stimulus packages fade away, economic activity may either lose momentum or even turn down, warned Dr Yilmaz. And if the stimulus policy is reversed too soon, there could be a new and deep economic dip.
With the United States running trade deficits, it now needs to adjust, with a shift away from relying on consumer spending to export-led growth.
The US President’s target of doubling exports in five years (in his State of the Union address last week) is in line with this.
The consequences of the US adjustment can have adverse effects on developing countries, predicted Dr Yilmaz. Interest rates are likely to go up, thus increasing the cost of financing and the burden of debt repayment, while a possibly strong dollar would weaken commodity prices.
Can China replace the US as the locomotive for world growth? Dr Yilmaz said there is expectation that China would increase its domestic consumption as its exports will face sluggish markets.
Developing countries that are export-dependent may thus hope that their exports to China will be maintained at least, and thus offset their loss of exports to the US.
However, according to Dr Yilmaz, much of the imports entering China have been inputs used to produce Chinese exports.
Even if China maintains its high growth by switching from exports to local consumption, this will not help developing countries as much, because there is little import content in the goods that the Chinese produce for their local consumption.
“Thus China is not a good substitute for the US or Europe as a market for other developing countries’ exports, even if it were to maintain over 10% growth based on domestic demand,” concluded Dr Yilmaz.
The other two major economies, Germany and Japan, are also not likely to boost their economies and increase their imports. Thus, there will be sluggish and erratic global growth, and instability in capital flows and exchange rates.
Dr Yilmaz also predicted a rise in protectionism and a backlash against globalisation, both in the developed countries. Developing countries will thus have to prepare for testing times ahead.
Dr Supachai warned the developing countries not to be misled by talk about an “early recovery”. In his estimate, more than 100 developing countries are still in recession.
The stimulus plans of developed countries cannot be sustained because they cannot raise more of the huge funds already used.
The Unctad chief added that the recovery is only partial, taking place in some sectors (the stock market and real estate), and there is still to be the unwinding and de-leveraging from household and corporate debt.
After a recession, it takes three to five years for the unwinding, but as this is a great recession, the time needed would be five to seven years, he predicted.
Unctad data showed a 39% drop in foreign direct investment last year, with more than a 50% drop in some developing countries. There is no robust FDI rebound anticipated this year.
Dr Supachai also painted a bleak picture on trade, whose volume fell by 15% last year and is expected to rebound by only 5% this year.
The data show that we are in a delicate period, which he called a “post cardiac arrest” situation.
“We have not been successful in getting the global economy out of recession yet, and we should not fall into a business as usual mode which is being promoted by big bankers and those they try to influence,” he said.
Dr Supachai proposed an expansion of South-South cooperation, with developing countries increasing trade among one another and pooling their financial resources, including new regional monetary funds.
The fluctuations in commodity prices should be addressed, and global economic governance should be reformed.
The financial system should also be changed, so that banks be confined to doing narrow banking business (collecting savings to lend out) and not anything more fanciful.
Prof Deepak agreed with Dr Yilmaz that China could not be expected to take up the slack caused by US adjustment. The economic prospects of developing nations depend on recovery in the developed countries, especially the US, but even so, the recession could still become a depression.
The crisis should induce a rethinking of development, said Prof Deepak. There should be a reform in orthodox macro-economic policy thinking which should not focus only on inflation control, and there should be caution in financial liberalisation.
Developing countries should also re-think their relative reliance on external and internal markets and financial resources. Domestic markets are critical and external markets cannot be substitutes.
It is also time to recognise the pro-active role of a developmental state, including in implementing industrial and technology policy. At the international level, there must be coordination of policies of countries.
Fortunately, developing countries are becoming more important in output, trade and the holding of foreign reserves. They can thus have a greater say, but if they organise themselves better.
The conclusion from the workshop speakers was that developing countries should draw their own lessons from the global crisis, not to be complacent about the “recovery”, and re-think development strategies and policy options, as well as be advocates of international financial reform.
As Dr Supachai said, the chance to reform the financial system after the Asian crisis in 1997-98 was missed and another bigger crisis has now hit the world. We may miss the boat again, unless something is done now.
Be wary of hype on global recovery
Global Trends by MARTIN KHOR
Three eminent economic experts last week warned developing countries to be cautious of the current talk of a global recovery and instead, to prepare policy options to face crises.
DEVELOPING countries should be cautious about the current hype about a global economic recovery and instead, prepare policy options in a world where they have to rely less on exports for future growth.
This sombre assessment came from three eminent economic experts who warned that the world economy is not out of the woods yet.
More than a hundred developing countries have not begun to share in the recovery proclaimed by the media.
Dr Yilmaz Akyuz, special economic adviser of the South Centre, Dr Supachai Panitchpakdi, Secre-tary-General of the UN Conference on Trade and Development (Unctad) and Prof Deepak Nayyar, former vice-chancellor of Dehli University, were speaking at a workshop organised by the South Centre last Thursday.
Held at the United Nations building in Geneva, the workshop brought together over a hundred diplomats and researchers from developing countries and international organisations.
The event was chaired by the former president of Tanzania, Benjamin Mkapa, who now chairs the South Centre.
Dr Yilmaz, who is also a former chief economist at the Unctad, said there is consensus that recovery has started, with positive growth expected in all major economies this year. But there are problems ahead.
The crisis intervention policies in developed countries, based on increased government spending and monetary expansion, are creating another bubble, with financial institutions out of touch with the real economy again.
As policy makers recognise the risks of the new bubble, there are signs of an “early exit” from the stimulus plans, such as the end of interest rate cuts and the phasing out of additional spending.
As the effects of the stimulus packages fade away, economic activity may either lose momentum or even turn down, warned Dr Yilmaz. And if the stimulus policy is reversed too soon, there could be a new and deep economic dip.
With the United States running trade deficits, it now needs to adjust, with a shift away from relying on consumer spending to export-led growth.
The US President’s target of doubling exports in five years (in his State of the Union address last week) is in line with this.
The consequences of the US adjustment can have adverse effects on developing countries, predicted Dr Yilmaz. Interest rates are likely to go up, thus increasing the cost of financing and the burden of debt repayment, while a possibly strong dollar would weaken commodity prices.
Can China replace the US as the locomotive for world growth? Dr Yilmaz said there is expectation that China would increase its domestic consumption as its exports will face sluggish markets.
Developing countries that are export-dependent may thus hope that their exports to China will be maintained at least, and thus offset their loss of exports to the US.
However, according to Dr Yilmaz, much of the imports entering China have been inputs used to produce Chinese exports.
Even if China maintains its high growth by switching from exports to local consumption, this will not help developing countries as much, because there is little import content in the goods that the Chinese produce for their local consumption.
“Thus China is not a good substitute for the US or Europe as a market for other developing countries’ exports, even if it were to maintain over 10% growth based on domestic demand,” concluded Dr Yilmaz.
The other two major economies, Germany and Japan, are also not likely to boost their economies and increase their imports. Thus, there will be sluggish and erratic global growth, and instability in capital flows and exchange rates.
Dr Yilmaz also predicted a rise in protectionism and a backlash against globalisation, both in the developed countries. Developing countries will thus have to prepare for testing times ahead.
Dr Supachai warned the developing countries not to be misled by talk about an “early recovery”. In his estimate, more than 100 developing countries are still in recession.
The stimulus plans of developed countries cannot be sustained because they cannot raise more of the huge funds already used.
The Unctad chief added that the recovery is only partial, taking place in some sectors (the stock market and real estate), and there is still to be the unwinding and de-leveraging from household and corporate debt.
After a recession, it takes three to five years for the unwinding, but as this is a great recession, the time needed would be five to seven years, he predicted.
Unctad data showed a 39% drop in foreign direct investment last year, with more than a 50% drop in some developing countries. There is no robust FDI rebound anticipated this year.
Dr Supachai also painted a bleak picture on trade, whose volume fell by 15% last year and is expected to rebound by only 5% this year.
The data show that we are in a delicate period, which he called a “post cardiac arrest” situation.
“We have not been successful in getting the global economy out of recession yet, and we should not fall into a business as usual mode which is being promoted by big bankers and those they try to influence,” he said.
Dr Supachai proposed an expansion of South-South cooperation, with developing countries increasing trade among one another and pooling their financial resources, including new regional monetary funds.
The fluctuations in commodity prices should be addressed, and global economic governance should be reformed.
The financial system should also be changed, so that banks be confined to doing narrow banking business (collecting savings to lend out) and not anything more fanciful.
Prof Deepak agreed with Dr Yilmaz that China could not be expected to take up the slack caused by US adjustment. The economic prospects of developing nations depend on recovery in the developed countries, especially the US, but even so, the recession could still become a depression.
The crisis should induce a rethinking of development, said Prof Deepak. There should be a reform in orthodox macro-economic policy thinking which should not focus only on inflation control, and there should be caution in financial liberalisation.
Developing countries should also re-think their relative reliance on external and internal markets and financial resources. Domestic markets are critical and external markets cannot be substitutes.
It is also time to recognise the pro-active role of a developmental state, including in implementing industrial and technology policy. At the international level, there must be coordination of policies of countries.
Fortunately, developing countries are becoming more important in output, trade and the holding of foreign reserves. They can thus have a greater say, but if they organise themselves better.
The conclusion from the workshop speakers was that developing countries should draw their own lessons from the global crisis, not to be complacent about the “recovery”, and re-think development strategies and policy options, as well as be advocates of international financial reform.
As Dr Supachai said, the chance to reform the financial system after the Asian crisis in 1997-98 was missed and another bigger crisis has now hit the world. We may miss the boat again, unless something is done now.
Tuesday, February 2, 2010
Information governance
Wednesday February 3, 2010
Information governance key to new performance agenda
Business Matters - By Susanna Lim
IN November 2009, Ernst & Young released its report, Lessons from change, which provides insights from an extensive global research programme into what companies are doing to respond to current challenges and drive performance improvement.
Based on our conversations, a new agenda for success is beginning to emerge. The global economy may be stabilising but that does not mean companies expect a return to the “normal” conditions of the previous decade.
Many respondents expect a tougher future economy, and consequently, a changed business agenda.
In Lessons from change, eight performance goals were identified for companies to prepare for the rebound and to succeed in the new era.
These eight goals are interlinked and make up the “performance wheel”.
In this article, we will focus on two of these goals:
Optimise the flexibility of your operations: Increase business responsiveness through greater flexibility and resource management.
Revitalise the way you manage risk: Understand the business’ risk complexity and depth to align a strong control framework.
Our study showed that nearly 60% of respondents sought greater efficiency through (i) increased alliances and business relationships; (ii) cost reduction programmes; and (iii) use of technology (and service providers).
Correspondingly, we will illustrate the performance goal of establishing a broader governance, risk and control framework.
We will also consider the often neglected areas of information and outsourcing risks which are gaining more prominence in the new performance agenda.
Governance and risk management
Business is fundamentally about taking risk and risk management is about ensuring risks are appropriately measured and controlled.
In our recent study, Future of risk, respondents cited increase in the following risks: financial, strategic, compliance and operational risks.
Earlier research on Fortune 1000 companies indicated that on average, 4% of revenue is spent on risk management.
Getting the right risk balance is a challenge as governance and risk frameworks are not always robust, nor comprehensively executed.
The scope may be too narrow, overly-concerned with regulatory compliance and may exclude information risks and third party risks.
In addition to infrequent assessments, there have been cases where risk management focused on internal operations rather than external operations, which is where most risks arise, including supply chain and outsourced functions such as back-office, information systems or e-commerce.
Management has grown cognisant of this, with over 80% of respondents now incorporating risk management into strategic decision-making.
Reputational risk, information risk, fraud risk and third party risk have also received a higher degree of attention.
Businesses are also paying more attention to information governance, security and outsourcing risks.
We have seen a shift in the sourcing and deployment of technology to support business flow of information.
Information and systems are now accessed by business partners, customers and service providers, leading to a rise in both internal and external threats.
Ernst & Young’s recent 12th Annual Global Information Security Survey identified improving information risk management as the top IT priority.
Out of over 1,900 respondents, 89% plan to spend more or at least the same amount on risk management in the current financial year.
Correspondingly, the effort to comply with greater complexity and the number of regulations has increased. Malaysian companies, as with other countries, need to revisit their data management and security practices to meet the introduction of data protection and privacy regulations.
The survey also identified a growing concern with reprisals from recently separated employees as well as increased external attacks on websites and networks.
A robust information governance or risk framework, including the monitoring of external information and outsourcing risks, is a straightforward yet comprehensive way to assess and mitigate information security, integrity and availability risks.
However, companies may face challenges to obtain adequate skilled resources and budget to manage information risks in the current era.
In order to revitalise information risk management effectively and efficiently, organisations need to consider leading practices, including:
i. an integrated information-centric business risk framework, which:
aligns processes (internal and external) with information flows
has more in depth assessments to identify and manage systems, data, risks and controls
enforces comprehensive IT policies across the organisation, service providers and business partners
ii. enhanced information security responsiveness through:
a risk-based security strategy to help prioritise initiatives
identification of regulations, compliance and validation of controls
leveraging on technology and co-sourced security resources to address gaps, if any
Information governance must be revitalised to support your business and will take on a new importance in the performance agenda to help organisations across the globe thrive in the new market.
Susanna Lim is a partner with Ernst & Young Advisory Services Sdn Bhd
Information governance key to new performance agenda
Business Matters - By Susanna Lim
IN November 2009, Ernst & Young released its report, Lessons from change, which provides insights from an extensive global research programme into what companies are doing to respond to current challenges and drive performance improvement.
Based on our conversations, a new agenda for success is beginning to emerge. The global economy may be stabilising but that does not mean companies expect a return to the “normal” conditions of the previous decade.
Many respondents expect a tougher future economy, and consequently, a changed business agenda.
In Lessons from change, eight performance goals were identified for companies to prepare for the rebound and to succeed in the new era.
These eight goals are interlinked and make up the “performance wheel”.
In this article, we will focus on two of these goals:
Optimise the flexibility of your operations: Increase business responsiveness through greater flexibility and resource management.
Revitalise the way you manage risk: Understand the business’ risk complexity and depth to align a strong control framework.
Our study showed that nearly 60% of respondents sought greater efficiency through (i) increased alliances and business relationships; (ii) cost reduction programmes; and (iii) use of technology (and service providers).
Correspondingly, we will illustrate the performance goal of establishing a broader governance, risk and control framework.
We will also consider the often neglected areas of information and outsourcing risks which are gaining more prominence in the new performance agenda.
Governance and risk management
Business is fundamentally about taking risk and risk management is about ensuring risks are appropriately measured and controlled.
In our recent study, Future of risk, respondents cited increase in the following risks: financial, strategic, compliance and operational risks.
Earlier research on Fortune 1000 companies indicated that on average, 4% of revenue is spent on risk management.
Getting the right risk balance is a challenge as governance and risk frameworks are not always robust, nor comprehensively executed.
The scope may be too narrow, overly-concerned with regulatory compliance and may exclude information risks and third party risks.
In addition to infrequent assessments, there have been cases where risk management focused on internal operations rather than external operations, which is where most risks arise, including supply chain and outsourced functions such as back-office, information systems or e-commerce.
Management has grown cognisant of this, with over 80% of respondents now incorporating risk management into strategic decision-making.
Reputational risk, information risk, fraud risk and third party risk have also received a higher degree of attention.
Businesses are also paying more attention to information governance, security and outsourcing risks.
We have seen a shift in the sourcing and deployment of technology to support business flow of information.
Information and systems are now accessed by business partners, customers and service providers, leading to a rise in both internal and external threats.
Ernst & Young’s recent 12th Annual Global Information Security Survey identified improving information risk management as the top IT priority.
Out of over 1,900 respondents, 89% plan to spend more or at least the same amount on risk management in the current financial year.
Correspondingly, the effort to comply with greater complexity and the number of regulations has increased. Malaysian companies, as with other countries, need to revisit their data management and security practices to meet the introduction of data protection and privacy regulations.
The survey also identified a growing concern with reprisals from recently separated employees as well as increased external attacks on websites and networks.
A robust information governance or risk framework, including the monitoring of external information and outsourcing risks, is a straightforward yet comprehensive way to assess and mitigate information security, integrity and availability risks.
However, companies may face challenges to obtain adequate skilled resources and budget to manage information risks in the current era.
In order to revitalise information risk management effectively and efficiently, organisations need to consider leading practices, including:
i. an integrated information-centric business risk framework, which:
aligns processes (internal and external) with information flows
has more in depth assessments to identify and manage systems, data, risks and controls
enforces comprehensive IT policies across the organisation, service providers and business partners
ii. enhanced information security responsiveness through:
a risk-based security strategy to help prioritise initiatives
identification of regulations, compliance and validation of controls
leveraging on technology and co-sourced security resources to address gaps, if any
Information governance must be revitalised to support your business and will take on a new importance in the performance agenda to help organisations across the globe thrive in the new market.
Susanna Lim is a partner with Ernst & Young Advisory Services Sdn Bhd
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