Sunday, September 9, 2012

Market commentary - Week of September 03

Two free fall bars on Sept 5 and 6 wiped out more than 50 points from KLCI. A free fall like that usually will drop between 80 to 100 points before it can rebound. If it was not the Global Mega rally due to ECB pulling out the Bazooka we would have seen the third leg down.

Most people explained that S&P threatened to cut our rating if Malaysia failed to deliver but I think it is more than that.Fitch rating actually already delivered the same warning at the beginning of August but nobody was paying attention.

Many headwinds against us actually
  • The last 4 quarters of GDP growth was driven by public sector linked and NOT private consumption!.
  • Slowing export. Malaysia posted slowest trade surplus in a decade in July. Might post the first deficit since 1997 by end of this year.
  • Petronas reported weaker profit, almost 30% declined YoY, putting more pressure on funding government expenses and subsidies.
  • Almost 50% of FMB-KLCI components are below 200-MA. 
The Malaysia Insider

KUALA LUMPUR, Sept 6 — Malaysia’s sovereign credit rating may be cut if the government does not deliver promised reforms to cut spending to reduce its fiscal deficits, Standard and Poor’s (S&P) has said in its latest report on the country, joining other global ratings agencies in warnings about the strains on the country’s credit profile.

S&P said reforms the government should look at include the introduction of a goods and services tax (GST) and subsidy cuts.

“We may raise the sovereign credit ratings if stronger growth and the government’s effort to reduce spending result in lower-than-expected deficits, as indicated in the 10th Malaysia Plan. With lower deficits, a significant reduction in government debt is possible.

File photo of people shopping in Putrajaya. S&P has said the government should look at introducing a goods and services tax and cutting subsidies. — Reuters pic
“We may lower the ratings if the government can’t deliver the reform measures to reduce its fiscal deficits and increase the country’s growth prospects. These reforms may include, but are not limited to, the GST and subsidy reforms on the fiscal side, and private investment and economic diversification reforms on the economic growth agenda,” said the ratings agency. Last month Fitch Ratings said in a separate report that Malaysia had yet to present a convincing plan to tackle the twin fiscal threats of its federal budget deficit and federal debt.
Fitch also said that data clearly showed public sector-linked activity had been a key driver of GDP growth for the last four quarters alongside robust private sector activity.

It said that the ratio of federal government debt to GDP reached 51.8 per cent at end-2011 despite strong GDP growth but barring a further deterioration in the global economy, the Malaysian government should be able to meet its 2012 deficit target of 4.7 per cent of GDP.

Fitch added that improving the nation’s fiscal position would be challenging without significant reform to address the cost of fuel subsidies, broaden the fiscal revenue base, or reduce dependence on energy-linked revenues.

S&P’s latest Malaysia report appeared to echo some of those views.
The country’s moderately weak fiscal and government debt profile for the rating category constrains the sovereign rating, it said.

Putrajaya had made some moves towards cutting subsidies last year, but political pressure in the run-up to elections have relegated some of these reforms to the back of the line.
Plans to introduce GST have also been shelved because of fears that it would cost votes for the ruling Barisan Nasional (BN) government.

S&P said it believed Malaysia’s slow fiscal consolidation stems from high subsidies and the relatively weak revenue structure.

“Malaysia depends largely on petroleum-related revenues. The government has been planning to reform the subsidy system and introduce a goods and services tax.

“However, given the political sensitivities, we expect significant implementation, if any, would only be after the general election,” it said.

The agency added that for more than a decade, Malaysia’s economic growth was partially brought about by large public investments — sometimes exceeding that of the private sector — and this had adversely affected the government’s fiscal position.

“However, this pattern might be changing. For example, foreign direct investments (FDI) seem to have bottomed out. Besides, the recent rebound of private sector investments was partially due to the government’s initiatives for the Economic Transformation Programme. If the trend continues, the Malaysian economy could regain its vitality.”

While the Najib administration’s efforts to help tide the country over a rocky global economic environment with a longer term goal of transforming the country to a high-income nation by spending more on salary hikes and kick-starting large infrastructure projects has helped boost GDP growth, analysts have noted that its debt has outgrown revenue since 2007.

Figures from the Federal Treasury’s Economic Reports show that the federal government’s domestic debt almost doubled in the space of less than five years — from RM247 billion in 2007 to an estimated RM421 billion in 2011 — far outpacing its revenues which only grew 31 per cent, or from RM140 billion to RM183 billion, during the same period.

While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is increasing worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure has already risen to about 65 per cent of GDP last year.


THE WSJ
KUALA LUMPUR--Malaysia's exports contracted in July, squeezing the trade surplus to its smallest in more than a decade, in the latest sign that weaker demand in China and Europe is chipping away at the growth prospects of Southeast Asia's trade-reliant economies.

Malaysia's trade surplus stood at 3.61 billion ringgit ($1.16 billion) in July, according to figures released Friday by the Ministry of International Trade and Industry. That was the lowest level since April 2002 when it was MYR2.03 billion, and a sharp decline from MYR9.20 billion in June.

The narrower trade surplus was driven by a 1.9% drop in exports, much worse than a rise of 3.7% predicted by private-sector economists and compared with a 5.4% increase in June. In addition, imports increased by 9.5% in July, outstripping a 5.1% gain forecast by economists and accelerating from June's 3.6% pace.

The latest data underscore the weak demand facing Asian economies, which are dependent on exports to power their economic growth. South Korean exports--considered a bellwether for the region's trade--dropped 6.2% from a year earlier in August, the second month of contraction. Indonesia's exports fell 7.27% in July from a year earlier.

The soft reading in Malaysian exports indicates it is starting to feel the pinch from weak external conditions, but the robust import growth in July suggests domestic demand is still holding firm, which could help cushion a sharp downturn in external demand.

"The strong import growth is the silver lining in July trade...which suggests construction and transportation sectors are holding up," and that would prevent the central bank from cutting rates immediately, said Rahul Bajoria, a Singapore-based economist at Barclays.

Bank Negara Malaysia Thursday held the policy rate steady at 3.0% for the eighth successive time.
Analysts expect exports to remain weak through the remaining months of 2012 and that could mean Malaysia posting a trade deficit toward the end of the year or start of next year. Malaysia hasn't posted a monthly trade deficit since the 1997-98 Asian Financial Crisis.

Exports have been volatile–contracting for two months through April and then sharply expanding by 6.7% in May–tracking wavering overseas appetite for its key electronics and electrical shipments.
Exports of electrical and electronics products, which account for about a third of total exports, declined 4.8% from a year earlier in July to MYR19.63 billion, mainly due to lower demand from China, the ministry said. Overall exports to China fell 13.1% from a year earlier to MYR7.03 billion.
Imports were driven by growth in consumption goods as well as a rise in capital goods, which suggests Malaysian companies continued to take deliveries of heavy equipment for construction activity.

The Star.
KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) said the outlook for the rest of its financial year 2012 (FY12) will be challenging amid geopolitical problems in Sudan where it has presence and the unfavourable economic situation in the eurozone economies and the United States.

Petronas' net profit for the second quarter ended June 30 dived 29.9% year-on-year to RM15.22bil from RM21.71bil while second quarter revenue fell at a slower pace of 3% to RM70.7bil from RM72.94bil.

President and chief executive officer Tan Sri Shamsul Azhar Abbas said the renewed economic crisis in Europe and possibly the United States could put downward pressure on oil prices.

“We are now in the third quarter, it is going to be worse off. Why? It is very simple, lower profits will be due to (issues) in Sudan.

“Now in the South (Sudan) we are seeing zero production. It is reflected in the second quarter and the worse is going to happen in the third and fourth quarters,” he said at a briefing.

“For the next six months, we expect zero production out of Sudan and what is the impact on our bottomline? It is about US$1bil (RM3.11bil) a year. We are also impacted by gas production in Turkmenistan,” he said.

Locally, Shamsul said oil production in Malaysia “will remain a challenge” until 2014 mainly because of depletion of reserves.

“It is only from 2014 onwards, with the completion of new oilfields that (comes) onstream (such as) the Gemusut Kakap. For the next couple of years until 2014, please expect production in Malaysia to remain challenging as far as Petronas is concerned,” he said.

Executive vice-president (finance) Datuk George Ratilal said the price of oil for the second quarter fell compared to an uptrend in the first quarter of financial year 2012.

“The price of oil for the relevant quarter from April to June 12 basically took a dive from US$134 to US$103 per barrel for the Tapis (type). For Dated Brent, (it dropped) down from US$125 to about US$94 per barrel but in between that period it also came down to as low as US$88,” he said.
George said Petronas' healthy financials highlighted that it would need to spend on capital expenditure (capex) moving forward although it had been able to sustain this with internal funds.
“Going forward, the caution is that (internal) operations' cash may not be enough to sustain capex and dividends.

“Cash, while it is healthy here, it will be needed to sustain any deficits in (internal) operations cash you will see a decline in cash, moving forward,” George said in his presentation.

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