Issues  |  DECEMBER 30, 2015 12:00AM

Watch list for 2016

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Much to do about integrating Asean

By Stephanie Jacob

There now exists an official Asean Economic Community but there is much to do in the journey towards holistic economic integration. The AEC might have been officially declared but Asean nations still have hard work to do.

On Nov 22, 2015, the leaders of the 10 Asean nations declared the official formation of the Asean Economic Community (AEC) at the 27th Asean Summit in Kuala Lumpur.

It has been eight years in the making since the AEC goal was set in the AEC Blueprint 2007. Collectively the AEC represents 3.3% of the world’s gross domestic product, has a population of 622 million people and is the seventh largest market in the world.

The declaration marked a milestone for the 10 nations and for an association which was originally created in an attempt to ensure peace and stability in a region of newly formed nations. With the establishment of an economic community, Asean has also transformed into a significant power house.

The economic importance of Asean and the prospects of the AEC were perhaps best measured by the number of non-Asean leaders who attended the summit. It was a who’s who of world leaders including the president of the US and the prime ministers of India, Japan, Russia and China. Each came to strengthen their country’s bond and offer a hand of partnership with a region growing in economic and geopolitical importance.

During the Asean Business and Investment Summit (ABIS) held in conjunction with the Asean Summit, Japan’s Shinzo Abe outlined how Asean countries could benefit from leveraging on Japan’s expertise in engineering and infrastructure development, while India’s Narendra Modi encouraged the Asean business community to consider investing in his country’s economy.

Barack Obama

Barack Obama

Barack Obama stumped hard for the Trans-Pacific Partnership (TPP) that some Asean nations are a part of, and suggested that the other members not currently part of the deal should also consider joining. The trade deal is one of the president’s key measures in his pivot to Asia strategy.

And it is not just the the political leaders who like the idea of the AEC. In its 2015 Apec CEO report, PricewaterhouseCoopers found that 35% of the chief executive officers surveyed believed that the AEC would offer the most opportunities for their businesses. This is in comparison with the 24% which chose the TPP and the 13% which chose the Regional Comprehensive Economic Partnership.

But how much of the AEC goals have the Asean nations actually met? Even as political leaders were getting ready to sign the declaration, they were also admitting that there was still some crucial work to be done.

Reiterating this were the many captains of industry who were eager to highlight the numerous areas where there is still much work to do to achieve the AEC’s goals. In fact, at events like ABIS, much of the discussion centred around the “unfinished business” of the AEC.

Of course, the AEC was never meant to be the only plan for economic integration. Realistically it would have been near impossible for every single goal to have been met entirely. This is why there is the Asean 2025 plan in place which is meant to build on the AEC.

Nonetheless, it must be emphasised that the goals of AEC should be reached before attention is turned entirely to Asean 2025.

So what has been achieved and what is still outstanding? Since the AEC Blueprint 2007 was set, the Asean nations have been most successful in improving the trade of goods. In many countries, the majority of duties have been removed and there is the Asean free-trade agreement in place.

They have been much less successful in removing the barriers in the trade of services, eliminating non-tariff barriers (NTBs), getting member states to implement the promises they have made and communicating the benefits of the AEC to their people.

In his opening remarks at ABIS, chairman of the Asean-Business Advisory Council Munir Majid said that there had been good progress in meeting the goals of the AEC. However, he also pointed out that there was a gap with what the governments were saying had been achieved and what the reality on the ground was.

There is a disparity between what is officially recorded as having been achieved in fulfilment of the AEC and what the private sector reports as their experience in the conduct of business across the many boundaries of Asean.

North Port Port Klang Exports generic“Trade in goods across Asean is largely tariff-free – and there is the Asean Free Trade Area – but there are significant NTBs and measures which hinder their seamless flow. There is not similar progress in trade in services, in free flow of investment and capital, and freer movement of skilled labour – although there are promising pockets and signs of advancement,” he said.

So now that the AEC exists, the key things which must be dealt with quickly going forward are the removal of the NTBs, getting countries to work on implementing agreements made and increasing the awareness of Asean businesses so they can take advantage of the AEC.

On the issue of NTBs, while import duties are near zero, there are still a raft of barriers or measures which hinder progress towards a truly level playing field. Asean leaders plan to work on this further over the next 10 years as we head to Asean 2025. But the sooner it happens the better it will be for everyone involved.

In many places these NTBs are the cause of inefficiency and a lack of competitiveness. Take for example the Malaysian automotive industry. Cars imported from the Asean region are duty free, but they are charged with high excise duties because of the lack of local content.

This means that they are significantly more expensive than locally produced cars. The lack of competitiveness has not helped the local car industry to grow and mature, while Malaysians have been saddled with paying more than their neighbours if they choose to buy foreign cars or have to settle for a poorer quality car.

NTBs are also a barrier to attracting foreign direct investment, because companies do not want to compete in a place where some are given an unfair advantage.

The Asean nations must also be more effective in carrying out the promises they have made to their partners. In too many instances nationalistic politics and countries wanting to protect certain industries have led to the agreements not being effectively executed in the individual countries.

For example under the AEC, one of the aims is for a freer flow of skilled labour across borders. But while the Asean nations have agreed to the idea on a regional level, at the national level there is still a significant lack of standardisation between them.

To deal with this issue, Asean nations are developing mutual recognition agreements (MRAs) for professional qualifications. The idea of these MRAs is that professional qualifications which are granted in one country will be recognised in other Asean nations.

While this is progress, there unfortunately remains a slew of local regulations which stand in the way. There is a lot more which must be done in this and other areas.

Finally, governments must do a much better job in communicating the idea of Asean to their people. In a brutally honest answer during an Asean ministerial panel during ABIS, the Cambodian minister of commerce Sun Chanthol minister gave himself an “F” grade when asked how well the benefits of the AEC have been communicated to local Cambodian businesses.

The other panel members were less hard on themselves but agreed that awareness of the benefits of Asean must be significantly improved, so that it is not just the big companies and those from outside the region which take advantage and benefit from Asean’s economic prospects but also the many micro, small and medium enterprises which are the backbone of the region’s economy.

So yes, the recent declaration of the AEC gave the Asean governments a chance to pat themselves on the back for the progress made so far. But now it is time to get back to work, and in 2016 the efforts for real and holistic economic integration must be continued and intensified.


Bleak outlook for oil

By G. Sharmila

Analysts have mixed views when it comes to forecasting crude oil prices for 2016. However, the general outlook seems to be pretty bleak.

For more than a year now, crude oil prices have been on a downtrend, some experts say ever since the Organisation of the Petroleum Exporting Countries (Opec) chose to keep production high to maintain their market dominance as oil producers and to protect themselves from non-members such as the US and Russia.

The result has been an oversupply of oil and persistently low oil prices. In November alone, Brent crude oil prices lost about 10% and the US Energy Information Administration (EIA), in a report published in mid-November last year, forecasts that the benchmark Brent crude oil prices will average US$54 per barrel in 2015 and US$56 per barrel in 2016. (See Figure 1 for a look at the historical movement of oil prices.)

Figure 1 - Historical crude oil front month futures prices 021215 01Analysts KINIBIZ spoke to were even less optimistic than the EIA on the direction crude oil prices will take. “Our view is that the Brent will average between US$45-US$46/bbl for the rest of the year and US$50/bbl for 2016,” said an analyst with a local bank-backed research house.

According to RHB Research oil and gas analyst Wan Mohd Zahidi Wan Zakwan, the house forecast for next year for Brent crude oil prices is an average US$50/bbl and they are expecting oil to trade in a range of US$45-US$60/bbl for the whole of next year.

“There is still a lot of uncertainty in the market with expectations of global demand tapering as well as new supply coming on line from the middle east especially Iran,” he told KINIBIZ via email.

According to the EIA, its crude oil price forecast remains subject to significant uncertainties as the oil market moves towards balance. “During this period of price discovery, oil prices could continue to experience periods of heightened volatility. The oil market faces many uncertainties heading into 2016, including the pace and volume at which Iranian oil re-enters the market, the strength of oil consumption growth, and the responsiveness of non-Opec production to low oil prices,” it said in the report.

A determined yet fragmented Opec

The analyst from the local bank-backed research house highlighted that the oil industry is a political industry, with Opec producers maintaining the oversupply although it is starting to hurt them. “Saudi Arabia is running out of money and has needed to tap the bond market, while Brunei is coming out of a recession due to its dependency on oil,” he pointed out. “My thoughts are that the Opec is trying to create market dominance – that is the primary factor on their mind,” he added.

He does not think that the non-Opec producing countries will fare well, either. “There are two sets of oil-producing countries, the Opec ones and the others, such as China, Europe, the US and Malaysia. The oil prices affect them more than how it affects the Opec; they will feel the pinch more from low oil prices, while the Opec is not overly concerned with depressed oil prices,” he opined.

RHB’s Wan Mohd Zahidi said, “Opec as a cartel does not work anymore, they are supposed to have a production output that they are supposed to adhere to but no one is doing that. Opec as a collective is supposed to produce 30 million barrels per day (mbpd); however, they haven’t been following the quota for the past few quarters and have been exceeding it.

“The nation participants in Opec have their own agenda and have been producing more than they should. To get back to being a feared cartel in the oil market, they have to stick to a production quota and they are just not following that at the moment. They run the risk of being irrelevant. To control prices again, some nations need to take the painful pill and cut production. They are still a relevant force but too fragmented at this point to make any firm impact at the moment.”

Demand will be muted, oil prices depressed

Mexican oil Mexico oilAnalysts KINIBIZ spoke to were mixed on demand coming from China, which global experts say influences crude oil prices. RHB’s Wan Mohd Zahid was optimistic.

“Although there is talk of China slowing down, we need to keep in mind that 6% growth is still huge. China is building up their storage as well as refinery capability and we expect this to have an impact on the global demand side of crude oil. Our house view is that demand from China will still be positive next year although the quantum of the demand might taper down a bit,” he said.

The analyst from the local bank-backed research house said that his view is that at the end of 2016, going into 2017, prices will start going up, but only in the 50s range. “I think it will be more demand driven, due to overpopulation growth and global economic growth,” he said. “Demand will still come from the US, Europe and China. The growth of demand is in question. Right now we’re seeing very minimal growth and it is unlikely to pick up,” he cautioned.

He also feels that Iran could depress oil prices even further if it reaches its full production capacity. “Right now Iran is producing 1.1mbpd. Assuming they reach their capacity of 2.2mbpd, global oil prices will be depressed even further, maybe even slide to below US$40 a barrel,” he said.

Wan Mohd Zahidi meanwhile holds a different view on the direction oil prices will take. “Our house view is that Brent crude price will average at US$60/bbl a mild recovery from 2015. The current environment where everyone is cutting capital expenditure will only result in slowdown in production. This will inevitably decrease supply into the market which will increase prices again,” he said.

“We are following the developments in Iran very closely. We understand that in order for the economic sanctions to be lifted Iran has to comply with the International Atomic Energy Agency (IAEA). The IAEA is due to produce a report on Iran’s nuclear compliance sometime in December. Only if they comply will the economic sanctions be lifted.

“We understand that Iran will be able to add another 1mbpd into the market if the sanctions are lifted, which will further dampen prices. Our US$50/bbl for 2016 has not taken into account Iran’s 1mpbd. Having said that, there will be a surge from Iran as they sell all their stockpile but after that it might taper off a bit as their infrastructure is old – keep in mind foreign investment has left the country since 1970s,” he said.


Economists: It’s going to be challenging

By G. Sharmila

Economic growth is expected to be fairly resilient next year; however, this may be muted by several domestic and external headwinds impacting the economy, experts seem to think.

While economists predict that economic growth will range between 4.4% and 5% next year, some think that next year will be a challenging one for the Malaysian economy due to various factors.

“Like most emerging economies, Malaysia is bracing for a tough and challenging economic environment in 2016. Our view is that the toughest period would be in 1H16 before it gradually recovers in 2H16,” an economist with a local investment bank told KINIBIZ.

 Lee Heng Guie

Lee Heng Guie

Independent economist Lee Heng Guie was also cautious on next year’s economic growth when KINIBIZ spoke to him. Lee, who is projecting a gross domestic product (GDP) growth of between 4% and 4.5% next year, said exports are likely to be moderate and drag down next year’s growth, as will weak commodity prices.

Others appeared more optimistic. “Malaysian GDP growth is forecast to remain resilient in 2016, growing by 4.4%. The growth outlook is expected to be supported by continued firm expansion in domestic demand, with the recent 2016 Budget having announced significant new infrastructure spending on a wide range of transport-related projects as well as key industrial development and affordable housing initiatives,” Rajiv Biswas, Asia-Pacific chief economist for IHS Global Insight told KINIBIZ.

Domestic and external headwinds to persist

Economists that KINIBIZ spoke to were concerned about the headwinds coming our way next year, particularly the external ones. Lee cited global trade growth projections (2.9% for next year) as a concern. “The Organisation for Economic Cooperation and Development warns that this is dangerously close to a level associated with a global recession. This will also impact our exports,” he told KINIBIZ.

Since 2011, he said, Malaysia’s exports have only grown about 3.2% per annum. Although well supported by domestic demand, the latter has slowed down over the last few quarters. “The rate of domestic demand will still be moderate,” he said, also pointing out that consumption growth fell sharply in the third quarter of this year. The slowdown was quite steep, he said, because of the goods and services tax (GST) and higher cost of living.

Lee forecasts a consumer spending growth of 5.6% this year, from around 6% this year. “We’re likely to see a more sustainable pace of consumer demand going forward,” he said, adding that there also have been some worries over job security over the last three quarters.

Furthermore, he said, sustained household deleveraging has capped the growth in consumer spending, along with the shrinking value of the ringgit.

Lee forecasts private investment growth of 6% next year, from 6.6% this year. “This will be tempered by domestic issues, rising business costs and the impact of the falling ringgit,” he said, adding that he doesn’t think that private investment will fall sharply as its long-term catalysts still remain, which include expansion in manufacturing, telecommunications and services, as well as the public infrastructure spending.

The China effect

beijing chinaChina also remains a possible headwind, it seems. The Malaysian economy will face headwinds in 2016 from the transmission effects of China’s economic slowdown, which has already been a drag on exports of many East Asian economies, Rajiv said.

“However, the depreciation of the ringgit against the US dollar has acted as a shock absorber for Malaysian manufacturing exports, which have grown strongly in 2015 in ringgit terms. The impact of GST has been a crucial reform to reduce the vulnerability of Malaysian fiscal finances to oil price fluctuations, but has acted as a brake on consumer spending growth since it was introduced in April,” he told KINIBIZ.

Lee also expressed concern about the external economic environment and its effects on Malaysia. Not only is an upshot expected from the US growth, it is advancing more than Europe and Japan, which are still fragile.

Added to this, he said, is the fact that sources of growth in most emerging markets are weakening, such as in China, which has seen falling commodity demand and the unwinding of past excesses in the rapid credit growth of real estate. India on the other hand looks quite good and is coming out of a slowdown, he said.

“I see a mixed pattern of growth in advanced economies and emerging economies. With the external environment remaining uneven, this will have an impact on Malaysian exports,” he said.

However, Lee did not appear overly concerned about China’s impact on the Malaysian economy. “The new normal for China is 6%-6.5% GDP growth; it is coming to a level I think is good for its economy in the long term. Hopefully there will be no major surprises coming from China. Commodity prices have adjusted due to slowing China demand, so another shock from China will create a knock-on effect that will be significant,” he said.

Lee also pointed out that the fact that the renminbi has been accorded a status in the International Monetary Fund’s Special Drawing Rights basket will enhance it as a global reserve currency. “China has to show commitment that it is more market driven – some expect the government to allow the renminbi to weaken, some to strengthen. Any significant movement of the renminbi will affect the movement of emerging market currencies,” he noted.

Inflation expected to increase

Economists are expecting inflation to increase to as high as 3% next year. “Inflationary pressure is envisaged to show a moderate increase to 3% next year, from the 2.3% projected for 2015. Although we neither expect second-round GST effects to be prevalent nor any significant change in average crude oil prices, the anticipated weakness of the ringgit and thus lingering imported inflationary pressures – via intermediate goods as inputs for production and imported consumer goods – will elevate prices in 2016,” RAM Rating Services Bhd said in its report in mid-November.

Rajiv Biswas

Rajiv Biswas

IHS Global’s Rajiv, on the other hand, said Malaysian headline consumer price index (CPI) inflation rate is expected to remain constrained in 2016. Although the impact of lower oil prices will drop out of the inflation index, so will the inflation spike caused by the GST implementation, which will drop out of the inflation index from April 2016, he said.

“According to IHS Global Insight forecasts, Malaysian CPI inflation is expected to be 2.4% year-on-year in 4Q16, similar to the 2.5% year-on-year rate estimated for 4Q15. While the pace of private consumption growth is expected to continue to moderate further in 2016 as GDP growth eases, this will be mitigated by some improvement in investment growth, helped by the significant infrastructure spending plans announced in the Budget for 2016,” he said.

Ringgit, oil price weakness to continue

Rajiv believes that the ringgit will remain in its current trading range against the US dollar in 2016, as the US Federal Reserve (the Fed) is expected to gradually raise policy rates, supporting further strength in the US dollar against most emerging markets currencies, including the ringgit.

According to RAM Ratings, exchange-rate volatility is expected to continue next year, with persistent downward pressure on the RM/USD rate. This will happen amid the projected moderation in growth, the narrowing of the current account surplus, greater inflationary pressures and the Fed’s vacillation on its monetary policy.

“Against this backdrop, we expect the RM/USD exchange rate to average RM4-RM4.50 in 2016. Given our expectations on growth and inflation for 2016, there is little incentive for Bank Negara Malaysia to adjust the overnight policy rate (OPR) next year, without risking more volatility in the RM/USD exchange rate. As such, we expect the OPR to be kept at the current level of 3.25%, barring any significant downside risk to growth sustainability,” RAM Ratings said.

Rajiv believes that world oil prices are expected to remain weak in 2016, with Iran expected to ramp up oil exports following the lifting of economic sanctions on Iran in the first half of 2016. “However, as world oil exploration and development is being sharply cut back in response to low oil prices, some rebalancing of global oil supply and demand is expected over the medium term,” he opined.

Risks to Malaysia’s growth outlook

According to Rajiv, risks to the Malaysian growth outlook in 2016 include a further slowdown in Chinese economic growth, weak growth in Japan, a protracted slump in world oil prices and an emerging markets crisis.

“The commodity fallout remains a major theme and a credible future threat for the globe. And like most commodity-exporting countries, Malaysia is still reeling from its adverse impact which continues to weaken global crude oil and gas prices as well as palm oil and rubber.

“With China’s economy slowing and Iran’s crude supply soon to flood the global market, we expect crude prices to remain low. Hence, Brent crude is projected to remain below US$50/barrel in 2016. This has weakened Malaysia’s resolve to consolidate its fiscal balance sheet as oil and gas once constitute a large portion of the total fiscal revenue (30%-40% share). The government expects it to contribute just short of 15% share of fiscal revenue in 2016,” the economist from the local investment bank said.

“But we think that Malaysia still has room to manoeuvre given that its domestic demand is still chugging along, public debt is still manageable, the larger-than-expected GST collection, the removal of fuel subsidy, and a dwindling but still a surplus in the current account,” he added.

The economist from the local investment bank noted that the Fed will soon embark on a slow moving, but sustained, tightening campaign. “However, we think that the pace of its rate normalisation to end its six-year zero-lower-bound policy would be gradual given that the Fed would not want to jeopardise the growth momentum of the US economy. In general, we expect most emerging market central banks will cut rates further next year.”

Inside story image KL city 030315 03He added that an increasing probability that Malaysia’s economy would slow further in 1H16 and a relatively less volatile foreign exchange market in the coming quarters could prompt Bank Negara to opt for a rate cut to support flagging growth.

“Nonetheless we would hold that thought for now as we project the economy would still expand albeit slightly by 5.1% in 2016. This is primarily backed by our expectation of a sustainable domestic demand, improving growth outlook in the advanced economy and China’s economic resilience,” he said.

Lee was also hopeful of a gradual rate move by the Fed. “The market is waiting for a Fed decision. Hopefully that will bring some certainty to emerging markets. I expect them to boost it gradually, but if it is bigger than what the market expects, it will create volatility in emerging markets and affect capital flows and currency,” he cautioned.

He added that in the case of Malaysia, it is still too early to confirm if the ringgit has hit the bottom due to the still ongoing interplay of external and internal variables. He noted that a gradual move by the Fed will ease the pressure on the ringgit.

Commenting on oil prices, he noted that it is still quite a big contributor to federal government revenue and that if oil prices go further down, the government may have to relook its budget for next year.

“Investors are focusing on macro conditions and growth outlook, to see if the government achieves what it targeted and the fiscal target for next year. Second is the ongoing issue with 1Malaysia Development Bhd – hopefully it will come to a closure and ease investors’ concerns. There’s still a lot of uncertainty, I hope it eases off going into next year,” Lee said.


Templeton’s take on the global economy

By Michael Hasenstab, Templeton Global Macro

At the start of 2016, we are encouraged by the vast set of fundamentally attractive valuations across the global bond and currency markets. We expect continued depreciation of the euro and yen, rising US Treasury yields, and currency appreciation in select emerging markets.

We expect rising interest rates from the Fed and additional quantitative easing from the BOJ and ECB

Overall, we remain confident in the economic outlook for the US and continue to expect rising interest rates from the US Federal Reserve (Fed). Labour conditions in the US have been strong while wages and earnings have increased, which we believe will continue to drive consumption. In our assessment, global financial markets are poised to benefit from the US economic expansion and substantial quantitative easing (QE) from the Bank of Japan (BOJ) and European Central Bank (ECB).

Federal Reserve BuildingWe anticipate significant divergences in monetary policies around the world in 2016; we expect the Fed to tighten policy while the BOJ and ECB continue to expand monetary accommodation through QE.

The BOJ has indicated that its QE expansion will likely continue into 2017, and the ECB has indicated it will likely continue QE through March 2017. In our assessment, both the BOJ and ECB need to continue these current expansionary policies, which should continue to depreciate the yen and euro against the US dollar.

In the eurozone, QE has been driving the euro weaker to stimulate export-driven economic growth and lift inflation toward the ECB’s target; in Japan, QE has become explicit debt financing for the government and a cornerstone of “Abenomics”.

Global growth remains on trend and deflation risks remain low

Despite downward revisions to 2016 global growth projections by the International Monetary Fund, we do not anticipate a global recession or global deflation. Global growth remains on trend while the major economies remain relatively healthy; our growth projections for 2016 are 2%–3% for the US, above 1% for the eurozone, around 1% for Japan and between 6% and 7% for China.

We believe that fears of global deflation are unwarranted. Markets have, in our view, overestimated the extent to which lower headline inflation reflects structurally weaker global demand. We believe that supply factors are the main driver behind falling energy and commodity prices, which in turn have pushed headline inflation lower.

These are short-term effects, and their disinflationary impact should wane as commodity prices stabilise. The belief that inflation has become structurally lower has made some investors complacent on taking interest-rate risk, in what we believe is a dangerous part of the yield cycle.

When commodity price base effects on inflation roll off in the first half of 2016, we expect US inflation to get back to the Fed’s target. Underlying inflation in the US has not been adequately priced into bond yields in recent months, in our assessment, and we are wary of the lack of inflation being priced into bond yields across the globe.

Although headline inflation has declined globally, underlying core inflation trends have remained resilient. While we do not necessarily expect sharp inflation increases in the US, we could see inflation at or above the Fed’s stated target as the oil-price impact falls away. Any normalisation of inflation pricing in global bond yields and in US Treasuries would drive yields higher.

China’s economy remains resilient despite its moderation in growth

During 2015, concerns over China triggered massive volatility and a broad selling of risk assets. We think that was an overreaction and continue to believe that China’s economy is not headed for a hard landing. China’s economy has continued to expand at 6.5%–7.0%, benefiting from growth in consumption and the private sector that has largely offset contractions in the industrial and manufacturing sectors.

To be sure, parts of China’s industrial sector suffer from severe overcapacity and are contracting. The real estate sector has also been in recession for a couple of years but appears to be reaching a bottom as real estate prices have recently turned positive in first tier cities, on policy initiatives to lower mortgage downpayments. Additionally, local governments have had their sources of funding cut off, restricting their ability to spend, which has led to growth contractions.

Shanghai Financial DistrictHowever, those sectors are only part of China’s economy – the old economy. The service sector has been expanding rapidly, fuelling wage growth and supporting consumption.

Additionally, the growth of the service sector is absorbing labour that is being shed from the traditional heavy industry and manufacturing sectors. As the overall labour force growth slows, the service sector expansion can suffice to maintain full employment.

In short, China’s economy is rebalancing. Some of the traditional engines of growth, in manufacturing, real estate and local government spending, have stalled or contracted; new engines, however, have taken over: the service sector and a new generation of private sector companies. We continue to view the recent moderation of growth in China as an inevitable normalisation for an economy of its size and expect growth in China to remain within range of its current expansionary pace in 2016.

We don’t expect solvency issues in many emerging markets

Emerging markets were often regarded as being in near-crisis condition during the second half of 2015. We believe concerns of a systemic crisis have been exaggerated, as there are significant differences across the asset class. Most commodity exporters, and emerging markets with poor macro fundamentals, remain vulnerable.

Other emerging countries, however, have solid policies and better underlying fundamentals that have not been recognised by market valuations. We believe investors should not view the emerging-markets asset class as a whole but should instead selectively distinguish between individual economies.  

Over the last decade, several emerging-market countries have increased their external reserve cushions, brought their current accounts into surplus or close to balance, improved their fiscal accounts and reduced US-dollar liabilities – for example, today, countries like Malaysia and Mexico rely primarily on domestic sources of financing. Thus currency depreciations have not triggered solvency crises as in the past.

In fact, depreciations have reduced vulnerabilities by boosting export competitiveness and supporting growth. Additionally, some countries have more external assets than liabilities, so currency depreciation actually lowers their debt-to-GDP (gross domestic product) ratio. In our assessment, several specific emerging market currencies are fundamentally undervalued and are poised to appreciate over the medium to longer term.

Rising rates may magnify the differences across emerging-market economies

A strengthening US economy, along with the likelihood of higher US interest rates, may increasingly magnify the fundamental differences between healthy and vulnerable economies. We anticipate that countries with relatively stronger fundamentals, such as Mexico, will likely be in a better position to raise interest rates either in conjunction with US interest-rate hikes or shortly thereafter. However, countries with relatively weaker fundamentals, such as Turkey and South Africa, are likely to be negatively impacted by US interest-rate hikes.

We selectively added to our strongest convictions in emerging markets during the recent periods of volatility and believe that global market fundamentals will eventually re-assert themselves.

As the Fed hikes rates and market interest rates go up, we expect markets to be better positioned to normalise. In our view, apprehensions about risks in places like Mexico, South Korea and Malaysia are likely to abate as these countries prove their resilience to Fed rate hikes.

An unconstrained strategy has a broad set of options for a rising-rate environment

We continue to believe that an unconstrained global strategy is the most effective way to position for a rising-rate environment because it provides access to the full global opportunity set. Unconstrained strategies can adjust duration to any suitable level for prevailing interest-rate risks; this includes driving overall portfolio duration down to near zero while taking negative duration exposure to US Treasuries.

We are also able to selectively add suitable duration exposures from specific emerging markets with relatively higher yields.

Additionally, the unconstrained nature of our strategies provides flexibility to directionally position (long positions and short positions) across currency markets, which present a wide range of valuation opportunities. We have used shorts of the euro and yen to guard against broad-based strengthening of the US dollar, while taking long positions in select emerging-market currencies with attractive longer-term valuations.

We are positioned for rising US Treasury yields and currency appreciation in select emerging markets

On the whole, we have continued to position our strategies for rising rates by maintaining low portfolio duration and aiming at a negative correlation with US Treasury returns. We have continued to actively seek select duration exposures that can offer positive real yields without taking undue interest-rate risk, favouring countries that have solid underlying fundamentals and prudent fiscal, monetary and financial policies.

When investing globally, several investment opportunities may take time to materialise, which may require weathering short-term volatility as the longer-term investing theses develop.

us-dollar-100-billDuring 2015, we shifted out of markets that we were previously contrarian on (that were once distressed but have now recovered and become consensus) in order to re-allocate to positions that have fundamentally attractive valuations for the medium-term ahead.

We also maintained our exposures to several of our strongest investment convictions and added to those types of positions as prices became cheaper during the periods of heightened volatility.

At the start of 2016, we are encouraged by the vast set of fundamentally attractive valuations across the global bond and currency markets. Currently we favour currencies in countries where inflation is picking up and growth remains healthy, yet the local currency remains fundamentally undervalued. Looking ahead, we expect continued depreciation of the euro and yen, rising US Treasury yields, and currency appreciation in select emerging markets.

What are the risks?

All investments involve risks, including possible loss of principal. Currency rates may fluctuate significantly over short periods of time, and can reduce returns. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio which may result in significant volatility and cause it to participate in losses (as well as enable gains) on an amount that exceeds its initial investment.

A portfolio may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as promised. The markets for particular securities or types of securities are or may become relatively illiquid. Reduced liquidity will have an adverse impact on the security’s value and on the ability to sell such securities in response to a specific market event. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties.

Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in lower-rated bonds include higher risk of default and loss of principal.

Bond prices generally move in the opposite direction of interest rates. As the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value.


KLCI turnaround remains out of sight

By Sherilyn Goh

Lacklustre company earnings, continued weakness in the ringgit, weak oil prices that have yet to rebound to its pre-crisis normal, and sluggish commodity prices are seen to cloud the market outlook in 2016. What are the re-rating catalysts that could give a substantial boost to the local equities market?

A year full of headwinds, the Kuala Lumpur Composite Index (KLCI) has experienced a relatively flat year in 2015, starting the year at 1,752 on Jan 2 to 1,683 as of Nov 27.

This is while company earnings reported one washout quarter after another, amid the backdrop of slumping commodity prices and a weaker ringgit. In fact, most analysts that KINIBIZ spoke to are of the view that the headwinds have not blown over, and are pessimistic about the Malaysian equities market in 2016.

Asian stock markets 4Q average returnThe FTSE Bursa Malaysia KLCI, also known as the FBM KLCI, performed relatively dull compared to other indices around the world. In the fourth quarter where Asian equity markets historically performed well, with an Asia ex-Japan average return of 4%, the KLCI has merely delivered a 3% return as of Oct 22, according to Standard Chartered (StanChart).

China, it said, is the best performer, with an average return of 9%, with India coming in second with an average return of 7%.

“From a valuation point of view, on Asia ex-Japan basis, we are underweight on the KLCI. What it means is if we were to put money within the Asian market, the KLCI is not one that we would suggest, at least for the beginning of 2016.

“The KLCI index at this point in time is not far from where we were at the beginning of the year, maybe about 4% to 5% higher than what it is right now,” said StanChart’s head of managed investments and product management, Danny Chang.

Bursa Malaysia generic 01 211114While China has earlier cut its interest rate, the concern over its slower economic growth remains. In addition, China has also allowed its currency to depreciate, dampening global export outlook and commodities demand.

The anticipation of the US Federal Reserve (US Fed) increasing interest rate has also caused global equity markets to undergo substantial corrections during the first half of this year.

The domestic market, on the other hand, has been haunted by aggressive foreign outflow and a weakened ringgit. As of end-August 2015, a total accumulated RM15.5 billion nett selling in foreign equity position was recorded, substantially surpassing last year’s total foreign outflow of RM7.4 billion in the local equity market.

Eastspring Investments Bhd’s general manager of investment services Yvonne Tan said: “In USD terms, the KLCI declined 21% year-to-date (YTD) Nov 24, reflecting the foreign outflows the country faced, that were partly attributable to external factors such as the expectations of a US rate hike, the consistently weak oil prices and the implied negative impact on Malaysia – and the political uncertainty did not help.”

In USD terms, Indonesia’s Jakarta Stock Exchange Composite Index (JCI) is down 22.7% YTD, whereas Singapore’s Straits Times Index is down 19.1% YTD.

In local currency terms, the KLCI is down 5.3% YTD, not as weak as some of its regional peers like Singapore’s STI which is down 14.4% YTD, Indonesia’s JCI which is down 13.7% YTD, and the Stock Exchange of Thailand (SET) which is down 11% YTD.

“In local currency terms, the KLCI has performed decently given the domestic issues we were facing, reflecting the fairly resilient nature of the Malaysian equity market given the abundance of local institutional liquidity, decent economic growth, decent reserves and improving fiscal conditions,” she said.

Chang agreed that the performance of the KLCI over the past year has been relatively good considering the headwinds that the economy is facing, due largely to the domestic pool of money from pension funds.

For the same reason, Chang said, the KLCI is more expensive than other stock markets in the region, which could only make sense when company earnings are strong. Such is however not the case. He therefore foresees the current headwinds to persist for at least the next three to six months into 2016, with a lack of re-rating catalysts dampening outlook for the stock market.

“Earnings for Malaysian companies are at very pedestrian growth rates – we are talking about approximately 5% growth, so from a market point of view, where you have headwinds against currency, Asia as a region, and commodities, all of these impact Malaysian equities.

“The banking sector which drives 30% to 40% of the KLCI earnings is growing at a slower rate. It’s hard to see at this juncture where that positive delta change is going to come from.

valuecap thumb“From a foreign investor’s point of view, if the market is flat, and the ringgit is weak, you are losing money anyway. It’s therefore hard to see why anybody would prescribe a higher price-earnings for Malaysia than where it is right now, or for the beginning of the year, which is about 17.5 times price-earnings ratio,” he explained.

On Sept 14, Prime Minister Najib Abdul Razak announced a RM20 billion injection into equity fund ValueCap to boost underperforming shares and stabilise the financial market.

When asked if the move will provide support to the equity market, Chang said: “The last two or three times when the government injected funds into the stock market, the good news doesn’t come immediately after that, but rather two to three years later.”

“We expect the RM20 billion ValueCap fund to provide some downside protection. Historically, the market only rallied months after major ValueCap announcements due to the time needed to mobilise funds. Thus, we believe the positive impacts will be felt in 2016,” said Tan.

She added that the strong re-rating catalysts to the local equity market include recommitment to the reform agenda by the government, corporate earnings surprises on the upside, and a rebound in oil prices amid a more positive outlook.

RHB Research Institute’s head of research Lim Chee Sing told KINIBIZ that the ValueCap announcement should be seen as more of a stabiliser rather than a booster, and that it needs actual participation in the market before its objectives can be achieved.

Re-rating catalysts, he said, include the reversal of corporate earnings trend which have been mundane in the past four consecutive years, and for the ringgit to regain its strength, which will then see capital flow returning to the country.

He also cited addressing governance concerns surrounding debt-ridden 1Malaysia Development Bhd and for the state-owned investment arm to restructure its generation of cash flow as catalysts to improve market sentiment.

Do political reasons play into outlook?

Chang, however, disagreed that political factors play into the outlook, the reason being that the outflow of funds is a bigger trend observed across emerging markets.

“The interest into investments overseas, be it equities, bonds, or funds – the outflow that you see – pretty much reflects international portfolio managers. From a local retail fund perspective, I would say that the trend of investing offshore has started long ago, ever since the liberalisation 10 years back.

“And from our point of view, notwithstanding the ringgit weakness which started in the second quarter this year, people are already diversifying offshore. It has a lot to do with local equities not performing as well as the rest of Asia, at least in the last year or two,” said Chang.

StanChart’s chief investment strategist of wealth management Steve Brice also said that local reasons are almost always never the case, particularly against the backdrop in which capitals are leaving emerging markets worldwide, in Asia and the Middle East.

“The reality is we need a tide turn in emerging market sentiment,” said Brice.

Regional free-trade agreements also don’t play into outlook, as they are too long term in their structure to be taken into account, answered Brice when asked on how the Trans-Pacific Partnership – expected to come into force by 2018 – will affect investor sentiments.

He however cautioned that how China and the US are going to co-exist in the region may turn out to be a bigger geopolitical concern over the longer term.

Ringgit weakness to persist

A potential re-rating catalyst to the dampening stock market, the ringgit is expected to weaken further in the medium term, by 3% to 5% against the US dollar in the next three to six months, due to poor fundamentals and the lack of positive catalysts to the currency, according to Brice.

The muted outlook for commodity prices, weaker overall balance of payment position, continual capital outflow from the debt market, and forex reserves that barely cover short-term external debts were cited as factors that continue to exert downward pressure on the ringgit.

north dakota oil 2From an oil market perspective, Brice said the market is still in excess supply, and expects further downside in oil prices to persist at least in the next three months, against a backdrop that is clearly negative for the ringgit. The excess supply in the oil market however is expected to be gradually eroded over the course of the next 12 months.

“Demand as it picks up with gross domestic product growth should close the demand-supply gap. We should see recovery picking up by the second half of next year, and that could be a positive news for the ringgit,” said Brice.

Maybank IB’s head of research Wong Chew Hann takes a slightly different view. “We expect limited weakness in the ringgit in 2016, after it has fallen by about 25% against the US dollar since August 2014. This is due to a combination of drivers, among which is relative stability in crude oil prices, compared to the rapid declines between 2014 and 2015.

“After taking into consideration US Fed’s fund rate normalisation which would induce a stronger US dollar, we are now looking at the ringgit to average 4.11 against the US dollar in 2016.

“This means that the exports sector will continue to do well in earnings. As for crude oil prices, our economics team forecasts US$53 per barrel (Brent) average in 2016, which is similar to 2015 YTD,” she told KINIBIZ in an email interview.

Malaysia’s trade balance has edged significantly lower over the past year following the collapse in commodity prices. Commodities account for approximately 20% of Malaysia’s total exports.

While net portfolio outflows from Malaysia is observed for a considerable period of time, as foreigners continue to reduce their holdings of Malaysian debt, Brice said it is not clear as to what will positively change the situation today.

The StanChart executive said it is only when oil prices start to pick up that investors will be more bullish on Asia.

“We are seemingly a little away from that point right now,” he said. He further noted that while foreign exchange reserves are sufficient relative to imports, they barely cover short-term external debt.

Ringgit extremely undervalued

MYR real effective exchange rate (REER) and 10-year averageWhat comes as a big positive for the ringgit though, Brice said, is that the currency has been extremely undervalued, estimated to be by between 10% and 15%, with the ringgit’s real effective exchange rate (REER) significantly below its 10-year average.

While capitals have been leaving emerging markets including Malaysia, Brice acknowledged that the fundamentals are, however, less volatile than the ringgit.

“This means the currency is getting more competitive, and it should help exports outside of the oil sector. It also means that currency investors will be excited about the currency once the fundamentals start improving and sentiments turn in favour of the ringgit.

“When sentiments generally favour the region and emerging markets, then I think the ringgit will rally, probably stronger than a lot of currencies,” said Brice. “We are still looking for the catalysts as we remain bearish on commodities.”

The case for further US dollar strength, according to Brice, is also intact for the moment. “We do expect dollar strength to continue but nothing like what we’ve seen for the past two years. And it will be more selective in terms of which currencies it appreciates against,” said Brice.

He said that the euro is also expected to hit new lows within the next three to six months, as further easing in monetary policy is expected to rid deflationary concerns and lend support to the economy.

From Malaysia’s perspective, according to Brice, valuations are currently not compelling. He said it is only when oil prices pick up and when the ringgit regains its strength that investors are likely to be more bullish on Malaysia.

RHB Research Institute’s head of research Lim Chee Sing advises investors to go for stocks with cheap valuations, identify companies with good earnings and are able to bring valuations to more attractive levels.

For 2016, Lim is overweight on sectors including healthcare, utilities, and the manufacturing of furniture, semiconductor and plastic packagings, due to such sectors being the beneficiaries of a weak ringgit. He however cautioned that the scenario can change primarily on factors including currency and earnings growth.

“Our preferred sectors according to current market conditions are the construction sector due to government spending on major infrastructure projects, and the exports sector with a focus on technology and manufacturing. These are likely to benefit from the weakening ringgit and demand overseas.

“Our strategy is to focus on stock picking, and we view any market correction as an opportunity to accumulate fundamentally strong stocks,” said Tan.

Inside story KL city generic 150415 05Maybank IB’s Wong is overweight on construction due to significant job awards in 2016 relating to various rail projects, highways and transit-oriented development. She is also positive on the gaming and semiconductor sector, the latter attributed to both demand growth and the ringgit factor.

“For the near term, we continue to advocate a defensive strategy. Into 2016, we think the external headwinds will revolve around US’ monetary policy normalisation, China’s structural slowdown, and the impact to emerging markets.

“Any weakness in equities represents an opportunity to accumulate for the longer term. In addition, Malaysia Syariah stocks will continue to do well due to rising preference for Syariah investing,” said Wong.

Chang, on the other hand, is advising investors to diversify their portfolio. He recommended 55% into equities, split into global equities, Asia and other emerging markets. Chang is overweight on Europe and Japan, which he said he would recommend 40% of total client portfolio, while being neutral on Asia in general.

Until the ringgit stabilises, or the valuation of Malaysian stocks get attractive as company earnings growth improves, a turnaround for the KLCI may as yet remain out of sight, said Chang.


FGV’s latest questionable purchase

By Xavier Kong

Ever since FGV’s listing, it has made a number of purchases that have drawn questioning gazes towards it. Its latest questionable deal is its plan to purchase PT Eagle High Plantations from Indonesian tycoon Peter Sondakh’s Rajawali Group. How will this deal fare in 2016?

The deal

In the course of 2015, Felda Global Ventures Holdings Bhd (FGV) has stirred up its own brand of controversy and outrage, in the form of its proposal to acquire a 37% stake in an Indonesian plantations firm, PT Eagle High Plantations (EHP), for a rather outrageous price of US$680 million, which converted to a price tag of RM2.55 billion when the deal was proposed in June 2015.

Peter Sondakh

Peter Sondakh

EHP is a subsidiary of the Rajawali Group, itself founded and run by Indonesian tycoon Peter Sondakh, who was allegedly Prime Minister Najib Abdul Razak’s informal advisor on matters related to Indonesia. This by itself was already stirring up controversy by virtue of Sondakh being even remotely connected to the prime minister, who was then already under scrutiny.

The deal would be for Rajawali to sell 56.4% of its 65.5% stake in EHP to FGV, which would leave Rajawali with 28.5%, making FGV the single largest shareholder in EHP.

What might have arguably made things worse was that, for FGV to even be considered for the deal, they had to pay a deposit. According to the announcement on Bursa Malaysia, FGV and Rajawali entered a deposit payment agreement, where FGV would, upon the conditional sale and purchase agreement becoming unconditional, pay US$174.5 million, or about RM653.6 million, as a deposit to Rajawali.

Yet another matter that did not go over well with shareholders and analysts alike was the fact that, even though FGV has to fork out so much to be the largest shareholder of EHP, FGV would still not be in control of that company. This is one of the conditions set forth by the Rajawali Group during the negotiation of the deal, that Rajawali be able to keep the authority to make the calls for EHP, despite FGV being the largest shareholder of the company should the deal proceed.

Is it any wonder why this deal has been termed by many to be FGV’s most questionable and controversial to date?

The reaction

Analysts were generally negative on the deal, with most leaning on the point that the price being paid is too much, even if it is for FGV to be the largest shareholder in EHP, and especially so if the stake to be purchased does not come with the power to have a say in the future of the company whose shares were being acquired.

Another hangup that analysts had was that part of the consideration to be paid for that stake in EHP was to be in FGV shares. Essentially, FGV was trading part of itself for the non-controlling stake in EHP, and there were concerns that this would cause a vulnerability in FGV.

This proposal, of course, drew the ire of shareholders as well, reflected by the drop in FGV’s share prices by 11% within two trading days from RM1.86 on June 11, 2015 to RM1.65 on June 15, 2015. FGV’s share price would continue its downward trend to hit a support of RM1.19 on Aug 26, 2015.

However, drawing closer to the end of the year, FGV’s share prices saw an uptrend, on the back of investors feeling more confident about the stock due to the upswing in crude palm oil prices. This upswing brought FGV’s share price to RM2 on Nov 6, 2015, before stabilising to RM1.79 as of Nov 17, 2015.

Investor sentiment was also boosted following the completion of the disposal of the group’s loss-making Canadian operations for RM567 million. FGV’s Canadian operations started when FGV acquired Twin Rivers Technologies Holdings Entreprises De Transformation De Graines Oléagineuses Du Québec Inc (TRT-ETGO) in October 2007.

“The divestment is in line with FGV’s transformation plan of revenue enhancement, cost optimisation and operational excellence in order to transform for the longer-term benefit of its stakeholders and shareholders,” FGV had said in a statement. TRT-ETGO was entirely sold to Viterra, a Canadian leading grain and oilseeds marketer and handler, with the deal completed on Nov 3, 2015.

Mohd Emir Mavani Abdullah, group president and chief executive officer of FGV, defended the EHP deal, noting that it was “still just a proposal”, and that “it is still subject to shareholder approval”.

Mohd Emir Mavani Abdullah

Mohd Emir Mavani Abdullah

“I believe that if the numbers speak for themselves and the returns are there, shareholders will approve it,” said Emir Mavani, adding that the young age profile of EHP’s planted land bank and its value accretion potential to FGV are major plus points.

He then noted that the figure offered for the acquisition represents a fair valuation of EHP’s assets, and that the total consideration implies a cost of US$17,400 per planted ha for EHP’s land bank.

“We find that this figure is fair. Remember that this is just for the planted area. There is also access to the rest of the land bank,” said Emir Mavani.

What next?

FGV has requested a discount in the price for acquiring the stake in EHP. The rationale behind this particular request is the fact that EHP’s shares had more than halved its value. When the proposal was made in June 2015, EHP’s shares were going for 450 rupiah per share. However, as of Nov 9, 2015, those same EHP shares had fallen in value to 220 rupiah apiece.

Considering the original offer price from FGV was 775 rupiah per share, there stands to be solid reasoning that FGV be given a discounted price, as the new valuation matrix has to be used due to the lower price per share of EHP.

FGV had even hinted that they may abort the deal, should it be clear that the deal is not in FGV’s best interests.

At the end of November 2015, FGV followed through with the remark, and announced that they will abort the current proposal. However, the plantations player also announced that they are looking to negotiate a new deal in the first quarter of 2016. The renegotiation was attributed to the weakening of the ringgit, as well as bearish crude palm oil prices. Those had “forced us to renegotiate the deal” according to Emir Mavani, who maintained that Indonesia remains very important to FGV.

According to the group’s announcement on Bursa, FGV and Rajawali “are currently in discussion for a possible different mode of investment in EHP. In this regard, the parties agreed that the deadline to enter into the conditional sale and purchase agreements will no longer be applicable”.

palm-oil-generic-4FGV and EHP both remain keen to pursue a deal, and the renegotiation will cover issues such as the size of the stake, pricing and the partnership in areas such as research and development, according to Emir Mavani, though the group president did not go into specifics.

“Both parties may restart discussions in the first quarter when ‘there is more certainty’ on market conditions,” he noted.

Moving forward, this may be the chance for FGV to renegotiate the deal for better terms for itself. FGV could very well take control of EHP, should negotiations really go their way. However, the timing of the deal would then be a matter of debate, as FGV could very well be acquiring a stake in a palm oil player during a time of high palm oil prices.

Another factor to consider is the future of the ringgit. Should the ringgit strengthen against the US dollar, FGV could be in a very good place with regard to the deal. However, the reverse is also true should the ringgit further weaken instead, which would bring FGV’s ability to raise the required funds into question.

Whatever happens, this will definitely be one of the things to look out for in 2016, especially for those investors who own stocks in FGV, or have an interest in the local plantations sector.

FGV was incorporated in 2007 as a private limited company as the commercial arm of the Federal Land Development Authority (Felda), and is acclaimed as the third largest plantations player in the world by planted acreage, but the operations of the group have not borne the scrutiny of shareholders and analysts well ever since the group listed on the main market of Bursa Malaysia, back on June 28, 2012, with the group’s share price having been on a downward trend since the group listed.


Can Malaysia Airlines finally get it right?

By Stephanie Jacob

After taking the so-called “low-hanging fruit” measures of cutting jobs and rationalising routes to cut costs, the process of reviving the ailing carrier in 2016 will have to switch to optimising yield and fixing Malaysia Airlines’ image problem – factors which will determine if this RM6 billion turnaround finally works.

After the tumultuous year that was 2014 which saw the airline endure two tragedies in the form of MH370 and MH17 and struggle under the weight of significant financial woes, the national carrier is in the midst of being rebuilt. With a new name and a new man at the helm, 2015 has been a year of change for Malaysia Airlines Bhd.

The year 2015 marked the beginning of what will very likely be the last attempt to save Malaysia Airlines after several failed attempts amounting to almost RM17 billion since the Asian Financial Crisis of 1997/1998. Whether or not this latest RM6 billion attempt succeeds will depend on whether the airline’s management, led by new chief executive officer (CEO) Christoph Mueller, can diagnose and address the right issues which blight Malaysia Airlines in 2016.

Christoph Mueller

Christoph Mueller

The turnaround plan is already in motion, and as expected Malaysia Airlines rationalised its employee headcount by cutting 6,000 jobs. Mueller and his team have also discontinued or reduced frequency of routes on its expansive network. These steps were seen as the “low-hanging fruit” that Mueller could tackle quickly to reduce some of the costs.

So Malaysia Airlines is now a leaner organisation both in terms of network and in headcount. But these steps alone are far from being enough to save the airline. In 2016, Mueller and his team will have to deal with two issues – the Malaysia Airlines brand and product, and the airline’s yield issues.

The Malaysia Airlines brand comes with plenty of home loyalty, but it is struggling to shake off the negative perception which has been cast over it in the wake of MH370 and MH17. While support for the beleaguered airline grew in Malaysia, it has fallen to such a low point in places like China and Australia that it is not even the last resort choice.

This means that there are people who would rather not fly than board a Malaysia Airlines flight, and this needs to be fixed fast. Prior to 2014, the carrier had one of the best safety records in the aviation world. And while arguably neither tragedy was Malaysia Airlines’ fault, it will take time for them to regain confidence. This must be aided by a strong and well-conceptualised marketing strategy, which should avoid silly mistakes like the “bucket list” promotion in the wake of MH370’s disappearance.

The bigger question will be whether more drastic action is needed to be taken. Mueller has suggested that rebranding the entire airline should be given some thought, but has held back from doing this. Given that the Malaysia Airlines brand is a much-loved national icon, significant changes might be unpopular because of the emotional connection – nonetheless, it might be necessary to do. This is a decision that the management, the government and the people of Malaysia will have to make in 2016.

According to Skytrak, the airline is one of a select group of airlines which have the distinction of being rated as a five-star airline, and it has held the honour continuously since 2006. Although that ranking is now under review, it is hard to deny that Malaysia Airlines is among the best airlines in the world and has been so for some time.

Nonetheless, the fact is that even before the tragedies of 2014, the carrier was losing money. Malaysia Airlines has to some extent been living on past glories and as a result has seen its market share eroded by cheaper and superior products. Along with fixing the brand, Malaysia Airlines has to work on fixing its products.

Mueller has spoken about improving the first- and business-class options, refurbishing its lounges around the world and updating its catering menus. All this will be important to pull customers back especially from the Middle Eastern carriers, which have newer and more up-to-date aircraft and accompanying products. The challenge will be on how to upgrade the service while keeping the cost manageable. It will be interesting to see how Mueller manages this.

The second crucial step will be to get its yield right. Under the past management, Malaysia Airlines attempted a “load active, yield passive” strategy similar to the model used by low-cost carriers. The model basically meant that the airline dropped its fares in order to fill up its planes, in the hope that the larger number of passengers would make up for the loss in fares.

By heavily cutting its fares to the point where at times it was offering cheaper flights than its low-cost competitors AirAsia and AirAsia X, the airline did successfully manage to fill up its planes. However, for the strategy to be effective, Malaysia Airlines’ costs also had to be very low. But as a full-service carrier, and a five-star one at that, it ended up charging too little and could not cover its costs, which led to the strategy failing badly.

That being said, while Malaysia Airlines’ costs were too high for this particular strategy, the airline is actually at a cost advantage when compared to its regional full-service carriers. As can be seen in Graphic 1, the peer average for the airlines’ unit cost or cost per available seat kilometre (CASK) is about 22.2 sen, while Malaysia Airlines’ unit cost is 21.4 sen, making it the lowest among its regional competitors.

However, this slight cost edge is nullified by the more significant revenue disadvantage the airline has to those others, as its yield is also lower than that of the other airlines. The peer average is about 22.7 sen while Malaysia Airlines’ is 20 sen, which is 13.5% lower than the average.

This is a significant issue which Mueller will have to address. Former CEO Ahmad Jauhari Yahya might have prioritised load over yield, but he himself said in early 2013 that a single sen increase in yield translated into a RM500 million increase in revenue.

So the 1.3 sen difference between Malaysia Airlines’ yield and the peer average is setting it back almost RM650 million in revenue.

It is worth noting that a focus on yield management has been effective for Malaysia Airlines in the past.

When Idris Jala took the helm of Malaysia Airlines, he focused on yield management. Jala was appointed by the government in late 2005 to rescue the airline after it posted a RM1.3 billion loss in the first nine months of that year.

As can be seen in Graphic 2, yields grew sharply under his charge and by 2006 Malaysia Airlines’ yields were in tandem with some of its regional peers like Cathay Pacific and Thai Airways. The impact of the increasing yields on Malaysia Airlines’ bottom line was quick, and in 2006 losses were reduced to RM100 million.

In 2007, Malaysia Airlines’ yields surpassed that of Cathay and Thai Airways, and this helped contribute to a RM900 million nett profit. The airline remained in the black in 2008, recording a profit of RM200 million as yields continued to grow and at one point even surpassed that of Singapore Airlines.

The Global Financial Crisis (GFC) began in 2008 and continued into 2009, and during this period Malaysia Airlines’ yield fell significantly in tandem with that of its regional peers. But unlike its competitors, its yields did not recover post-GFC (see Graphic 2).

In 2011, with yield lagging behind its peers, the airline fell back deep into the red with a RM2.5 billion loss.

Mueller must get its revenue management right, and that depends largely on yield. If his predecessor was correct and 1 sen of yield translates into RM500 million in revenue, then even a small improvement in Malaysia Airlines’ yield will go a long way in getting the airline back into the black.

Considering that Malaysia Airlines remains among the best airlines in the world, albeit a very unprofitable one, it is all the more important to leverage on its service and reliability to improve its fares and hence its yields.

A five-star airline should be able to charge five-star prices and not be competing with low-cost airlines to fill up their seats. Something is rather wrong with Malaysia Airlines’ yield management and its positioning. Unless it gets that right, expect more losses.


GST revenue must not be wasted

By Stephanie Jacob

In 2016, GST will garner RM39 billion in revenue for the government. That is RM21 billion more than the government would have collected under the old SST. With each sen coming from the people, the government must show that it is being spent effectively.

Most were expecting the government to reduce its expenditure in Budget 2016 in line with its falling revenue as a result of the plunge in the oil and commodities prices. So when Prime Minister Najib Abdul Razak annouced a marginally expansionary budget, many were surprised.

What saved the day was a significantly better collection from the goods and services tax (GST). The government had initially projected that it would collect RM21 billion for the nine months of collection in 2015; it now expects to net RM27 billion instead.

The GST not only succeeded in making up the oil-related revenue shortfall, it totally mitigated it. The government forecasts that it will collect RM39 billion for 2016.

Comparing GST to the old sales and services tax (SST), Najib said if Malaysia were to still use that tax regime in 2016 the government would see a revenue shortfall of RM21 billion.

Inside story image generic picture GST 310315 12This is because the collection from SST in 2016 would have only been RM18 billion versus RM39 billion expected from GST. And this would have resulted in a rise in the country’s fiscal deficit to be 4.8% instead of a drop to 3.1% as is now being forecasted.

Najib was keen to use GST as an example of the government’s prudent and responsible management of the economy. He said (if the fiscal deficit were to rise so substantially): “If this were to happen, the government would have been forced to borrow, including to pay civil servants’ salaries; the nation’s credit rating would be downgraded; and all borrowing costs, including personal loans, business loans and housing loans would definitely be higher.”

With the GST in its eighth month of implementation, it is time that the conversation moved on from whether the GST is necessary to what the government plans to do with the revenue, and also what can be done to improve the system to be more efficient especially in terms of returning input tax credits and providing clarity of processes and rulings.

Unsurprisingly, in the wake of its implementation there was a significant amount of confusion about the tax treatment on some types of goods and services under the GST. Most notable was the back and forth on prepaid mobile charges and the difference between GST and the service charge imposed by restaurants.

While the latter was quickly settled, the issue of GST treatment on prepaid top-ups is still evolving.

At first the debate was on how to charge the GST on prepaid. Say a person purchases a RM10 prepaid card – should GST be charged on top of the RM10? Or should it be part of the RM10 which meant that a customer would get RM9.40 of top-up credit?

The government wanted the latter but the telcos had calibrated their systems to implement the RM10 plus 6% GST. The telcos asked for six months to adjust their systems, which the government agreed to.

Telco Rate 150115 06However, the government in October said the telcos must stop charging GST on prepaid cards, although it does not appear clear if prepaid top-ups are on either the zero-rated list or exempt supply, or whether the telcos will need to absorb the GST cost.

Going into 2016, the hope is that incidents such as this will be as minimal as possible. Hopefully most of the implementation issues which have unexpectedly cropped up have been ironed out over the past months and special cases that have cropped up have been dealt with.

Any big changes going forward are more likely to come from the government deciding to add or remove things from the list. This should not be done often because it causes confusion for consumers and increases the cost of the businesses involved because they have to change their systems to reflect the new decision.

Although people still do not like it, most have got issued to the system as it is. Ad hoc chopping and changing will only inconvenience people further and should be avoided as much as possible.

But the biggest concern with GST going into 2016 is how the revenue collected will be used. Yes, GST saved the day for the government, so it did not technically have to tighten its belt. But that does not mean it should not have done so anyway.

Like before, the biggest operating expenditure in 2016 will be for emoluments, which is basically for civil service salaries, and this is set to rise by 2% to RM70.4 billion. Perhaps there is nothing much which can be done in this area; however, it raises the question of whether or not the government’s decision to freeze the creation of new government departments and positions is still in force.

The biggest concern however is that the allocation for supplies and services fell less than 1% from RM36.6 billion to RM36.3 billion. Since Najib’s first budget in 2010, the allocation for this area has risen by 74.2% from around RM20 billion.

And it is this area that most commonly sees wastage as is often detailed in the auditor-general’s annual report. The fact is that the government could stand to cut its allocation for this area in order to force more efficient spending.

Where the government’s priorities lie when it comes to allocating its revenue is also worrying.

In the Budget 2016, the Higher Education Ministry’s budget was cut to RM13.3 billion from RM15.7 billion but the Prime Minister’s Department (PMD) allocation was increased to RM20 billion from RM19 billion.

The PMD has 10 ministers and numerous commissions and agencies which could very easily be integrated into existing ministries. The government found a way to fund each of them, but was unable to do the same for a ministry which plays a direct role in developing Malaysia’s greatest asset, which is its youth.

Next year, the government will have RM21 billion more in revenue as a result of implementing GST, and each and every sen would have come from the pockets of the people. Making ends meet is tough for a lot of Malaysians these days and the last thing the people will want to see is wastage and bailouts.

In 2016, there must be a clear, effective and transparent use of the GST collected. That is the very least the government should commit to.


Will properties be cheaper?

By Khairul Khalid

The property market is still struggling as cooling policies by the government and negative sentiment on the economy crimp demand. Could this lead to cheaper property prices in 2016?

Can homebuyers look forward to lower house prices in 2016? Some may argue that the continuing slump in the property market should lead to lower prices of residential units, but analysts say this is highly unlikely.

Thong Mun Wai

Thong Mun Wai

“The sector will remain plagued by the lingering issue of affordability of residential properties. We do not expect any widespread decline in property prices,” said Thong Mun Wai, Head, Agribusiness, Real Estate and Construction from RAM Ratings Agency to KINIBIZ.

Affordable housing is a perennial hot-button issue. A recent report by Khazanah Nasional called ‘State of Households Study’ found that local house prices are not affordable, standing at 5.1 times the median annual household incomes.

Despite various government programmes and policies to tackle the problem, a solution does not seem to be in sight. A dampened property market for the past two years has not helped genuine homebuyers either.

Negative sentiment on Malaysia’s economic outlook – fuelled by a battered ringgit, the oil price crash, as well as the 1MDB saga – further depressed an already weak property market this year. Many feel that the slump will carry over into 2016.

“The residential property sector will largely remain lacklustre in 2016,” said Thong. “Factors that have weighed on the sector this year such as the higher cost of living, less robust macroeconomics amid low crude-oil prices, strict mortgage lending criteria and the weak ringgit are unlikely to ease much, thus still casting a pall over buying sentiment.”

The analyst believes that subdued buying sentiment will be the major challenge for sales of property in 2016.

“While some developers may be able to rely on robust unbilled sales that had been chalked up during the earlier boom, this will be gradually depleted, especially since some developers have revised their sales targets downwards this year,” said Thong.

Thong also said that developers that launch new projects to build up their unbilled sales may not achieve healthy take-up rates amid the soft market, thus pushing up inventory levels and working-capital requirements.

“The challenging operating landscape may also necessitate more promotional activities, which will then compress margins,” said Thong.

More stringent regulations on launches of apartment units will increase the pressure on developers’ costs. A prime example is the implementation of the Housing Development (Control and Licensing) Act 2012, the Strata Titles (Amendment) Act 2013 and the Strata Management Act 2013 that took effect last June.

“This (Act) will increase compliance costs for developers and affect the timing of property launches as they adjust to the new regulations.

“For instance, developers will now have to fulfil certain prerequisites, including filing a schedule of parcels – which shows the proposed share units of each parcel and the total share units of all parcels – prior to commencing any sale, thus restricting them from making any unilateral changes for later launches in a phased development,” said Thong.

Previously, it was a raft of government policies implemented since 2013 to rein in escalating house prices that dampened demand. This included Bank Negara’s tightening of mortgage loans, an increase in real property gains tax, a higher floor price for foreign buyers and a ban on the controversial developer interest-bearing scheme (DIBS).

uem sunrise sefinaAs a result, property launches have not sold out as quickly as before. Even established property brands such as UEM Sunrise and SP Setia have had to revise their sales forecasts due to the sluggish market.

Recently, developers have requested a loosening of some of the government’s cooling policies. For example, some have asked for a lifting of the DIBS ban for first-time homebuyers.

Nevertheless, apart from some additional allocations and programmes for affordable housing, the announcement of Budget 2016 last October saw the status quo maintained for property policies.

“Apart from a slower economy, there has been no relaxation of cooling measures in the recently unveiled Budget 2016, with the focus on affordable housing programmes by different agencies instead.

“As it is, residential property transactions slipped 3% in the first half of 2015, with a steeper contraction in primary market transactions. Given the lower base, we expect residential property transactions to stay relatively flat in 2016,” said Thong.

From the developers’ perspectives, the slump may just be seen as a temporary or cyclical one.

Property companies are still launching new units, albeit not as aggressively. Takeup rates are slower. Some developers have been accused of shifting their focus to higher-end properties with bigger profit margins to make up for the shortfall in sales.

Other than residential properties, the bearish sentiment on the property market will also weigh on office and retail property space in Kuala Lumpur and Selangor.

“Meanwhile, owners and operators of offices and retail malls in Kuala Lumpur and Selangor may face downward pressure on their occupancy and rental rates amid the tough operating environment,” said Thong.

According to the analyst, those with new or upcoming office and retail assets may experience difficulty in populating their buildings and may be compelled to offer rebates and discounts to attract and retain tenants.

The weaker economy and low crude-oil prices will continue to affect the prospects of the oil and gas as well as banking sectors, traditionally the key take-out sources of office space.

“As it stands, some companies in both sectors have already started trimming their capital expenditure and workforces amid the challenging operating environment. Meanwhile, slower economic growth and weaker retail sales and buying sentiment due to the heightened cost of living will affect demand for retail space.

All these factors may exert pressure on the occupancy and rental rates for the office and retail property sectors in Kuala Lumpur and Selangor,” said Thong.


Will Malaysia sign the TPP agreement?

By Stephanie Jacob

Now that the negotiations have concluded and the text has been released to the public, the TPP saga will enter its final phase when it is debated in Parliament in January or February of 2016. It promises to be a robust debate to determine if Malaysia becomes a partner in this comprehensive trade deal.

On Oct 5, 2015, after five years of negotiating, the 12 countries negotiating the Trans-Pacific Partnership (TPP) reached an agreement. A month later on Nov 5, the countries released the full text to the public and this was the first look many got at an agreement which had been conducted in secret.

At 30 chapters long, the agreement is voluminous and filled with trade and legal jargon. Anyone without a legal or economic background in international trade would likely struggle to make heads or tails about it. And even those with such backgrounds would have unlikely been able to get through the whole document in one reading.

Upon gaining access to the text, opposition member of parliament (MP) Wong Chen, who is a lawyer himself, put out a call to other lawyers and experts who would be willing to lend their time to read, analyse and summarise the details of the text.

With the text publicly available, Malaysia’s Parliament will have a chance to engage in a historic debate in January or February of 2016, on whether or not Malaysia should become a signatory to the TPP.

Mustapa Mohamed

Mustapa Mohamed

According to the Minister of International Trade and Industry Mustapa Mohamed, this debate will determine whether or not Malaysia joins what is poised to become the largest and most comprehensive trade deal to date. The debate is historic because trade deals are not usually debated in Parliament as the federal government has the authority to enter into such deals without parliamentary approval.

Nonetheless, given the controversy that TPP has generated, Mustapa has agreed to present the deal to Parliament for debate and discussion. He has emphasised “that whether or not Malaysia becomes a party to the TPP agreement will be a collective decision. Once the complete and official text of the agreement is prepared, it will be in the public domain and presented to Parliament for debate”.

But with the full text being difficult to digest, there are concerns that a holistic and well-informed debate will be impossible. Critics of the deal have called on the government to give everyone enough time to digest the agreement before it is debated.

Importantly, the government has commissioned two cost-benefit analyses from PricewaterhouseCoopers and the Institute of Strategic and International Studies, and it will be necessary for these to be released to the public in a timely fashion so as to give the MPs and all stakeholders access to independent and professional analysis.

The criticism of the TPP varies from one country to the next. In Malaysia many are worried that the TPP will affect the privileged position of bumiputera companies, state-owned enterprises and small and medium enterprises (SMEs). There are also concerns that medicine prices will increase as a result of longer intellectual property exclusivity periods and that Malaysia’s sovereignty will be threatened by the investor-state dispute settlement mechanism.

Initial assessments of the deal appear to have placated some of the concerns such as for bumiputera affirmative action policies. For example, the Malay Businessmen and Industrialists Association of Malaysia (Perdasama) recently released a statement in praise of the negotiating team for getting Malaysia a good deal in regard to this area.

Its president Moehamad Izat Emir said the released text was “proof of the spectacular success achieved by Malaysia’s negotiating team in upholding the rights of the bumiputera and the nation’s sovereignty… Perdasama congratulates the Malaysian TPP team for the significant achievement”.

Moehamad noted that 30% of government contracts will still be reserved for bumiputera contractors, while state-owned enterprises can continue to prefer SMEs and bumiputera companies for up to 40% of their procurement budget.

Other concerns such as the price of medicine as a result of longer intellectual property periods still remain hotly debated among politicians, as does the issue of whether Malaysia will cede its sovereignty as a result of the investor-state dispute settlement mechanism. There are also concerns that the agreement erodes workers rights and does not do enough to protect the environment.

On the other hand, there are clear market access benefits for Malaysia. Out of the 11 countries Malaysia had been negotiating with, four of them did not have bilateral free-trade agreements (FTAs) with Malaysia – the US, Canada, Peru and Mexico. The TPP will establish those FTAs and lead to a substantial decrease in tariff lines and import duties.

TPPAUpon entry into force of the agreement, the US will eliminate almost 90%, Canada about 95%, Mexico 77% and Peru almost 81% of import duties on a variety of products. This includes electrical and electronics, chemical products, palm oil products, rubber products, wood products, textiles and automotive parts and components.

Japan has also agreed to offer preferential access to Malaysian plywood and plywood product exporters under the TPP agreement. This area was not originally offered under the Malaysia-Japan Economic Partnership Agreement FTA and the Asean-Japan FTA.

Mustapa always emphasises that the TPP is a negotiation and has said that in any negotiation there will be winners and losers. The important question is whether on balance we win more than we lose. Come early next year Malaysia will need to make this call. It is important that all stakeholders keep an open mind and that the debate is an honest attempt to dissect the deal versus an attempt to score quick political points.

If after a robust debate we find that on balance and in the long term Malaysia benefits from this deal, then let us be bold enough to sign on and ride out the near-term bumps. Similarly if we find we are giving up too much, let us not be afraid to walk away.


iflix Malaysia, the TV disruptor

By G. Sharmila

Former AirAsia X Bhd CEO Azran Osman-Rani joined iflix Malaysia in April this year and since its launch in May, iflix has fast been gaining recognition among TV viewers in Malaysia. KINIBIZ takes a look at the iflix phenomenon and why it will be a force to reckon with in 2016.

Imagine not having to fork out a thousand ringgit or more a year just so you can watch your favourite TV shows and movies legally, instead paying a tenth of that price a year. Imagine being able to watch them for that price on up to five devices and not just your TV.

Until May this year, all these were merely the stuff of dreams for TV viewers in Malaysia. Those dreams became a reality when iflix, an on-demand video-streaming service, began offering its service in Malaysia the same month. iflix is popularly viewed as the Asian equivalent of US-based Netflix, which has yet to come to Asia.

iflix’ sales pitch is that a subscription is cheaper than a cup of Starbucks – a monthly subscription costs just RM10 a month and a yearly subscription around RM100. Incumbent pay-TV operator Astro Malaysia Holdings Bhd (Astro) has a basic package costing just under RM43 a month, which makes iflix a really good deal for the price-conscious consumer.

In late November, iflix launched its download and view offline feature in Malaysia, which allows iflix subscribers to download and watch TV shows and movies offline. The programmes auto-delete after seven days, which protects the digital rights of the content owners, as well as caters to subscribers who may not have consistent Internet access. iflix Malaysia chief executive officer (CEO) Azran Osman-Rani said during the Malaysian launch that, based on a survey iflix did, more than 60% of users are likely to pay for the download and watch offline service than just pure streaming over the Internet.

Azran Osman-Rani

Azran Osman-Rani

Azran has been quoted by media reports saying that he believes that the price point needs to be much lower, because in emerging markets the whole point of consumption is very strong price elasticity to discretionary spending such as entertainment.

Azran has also said that while Hollywood content sells, local dubbing and subtitles in multiple languages are needed in this part of the world because of the need to cater to the local market. He told The Bangkok Post in an interview in October that iflix believes it needs a ratio of 60% of Hollywood products versus 40% local and regional content.

Payment is a stumbling block in Asia, where credit-card penetration is low, hence iflix has forged partnerships with mobile phone operators where the customer’s mobile account is billed. In Malaysia, iflix subscribers have the option of using online banking, paying via mobile account (only for DiGi customers currently) and using credit or debit card.

iflix’ attractive pricing and growing stable of content has caught on. Azran told KINIBIZ in late October that iflix had over 500,000 registered accounts across the three countries and during a recent press conference said they are aiming at 50 to 100 million customers in 50 to 100 countries, without specifying a timeline. (According to media reports, as of late November, iflix has some 850,000 subscribers across the three markets it is currently in.)

Securing 50 to 100 million subscribers may be a huge task for a company which has yet to gain a foothold in the region and in Malaysia is up against established pay-TV operators such as Astro and HyppTV (owned by Telekom Malaysia Bhd). Plus it faces the threat of Netflix, which has announced plans to enter the Singapore market.

iflixYet, despite its relatively unknown status, iflix raised US$30 million in April this year. iflix itself is a partnership between Hollywood’s Evolution Media Capital (the investment and advisory arm of the Creative Artists Agency) and Malaysian-based the Catcha Group, which has in the past backed the iproperty Group and Asean network of automotive portals called iCarAsia, both of which are listed in Australia.

In the Bangkok Post interview, it was mentioned that iflix is looking to raise more funds in the months ahead with parent company Catcha Group likely to participate in the next US$100 million funding round.

That’s not the only ambitious goal the iflix Group has, it seems. In February this year, Catcha Group’s Patrick Grove told CNBC Asia in an interview that the company plans to float iflix on the Nasdaq within the next 12 to 24 months.

Australian-based newspaper The Australian said in an article in mid-November, citing sources, that iflix is looking at a raising from private investors that could be worth up to AUD$150 million over two tranches to help fund its expansion into Indonesia, the Middle East and Africa. The newspaper also said that iflix eventually wants to generate AUD$1 billion of sales.

According to the newspaper, a number of US media companies have expressed interest in backing the initial public offering (IPO) after the iflix Group secured Hollywood movie giant MGM as a cornerstone investor earlier this year. Predictably, iflix Group CEO Mark Britt declined to comment on the details of the IPO when asked by The Australian newspaper.

Impossible though its goals may seem, note that iflix has already made its presence felt in Malaysia, Thailand and the Philippines with 850,000 subscribers. Breaking even is just a matter of time for the bold and disruptive company, which appears set to continue disrupting the local and regional TV landscapes well into 2016.


Disruptive innovators take on taxi system

By Xavier Kong

Ride-sharing has been in Malaysia since 2014 with the advent of Uber, followed by GrabCar, courtesy of local startup MyTeksi. However, the topic of ride-sharing has recently become a sore spot for local taxi drivers. With the battle lines drawn, how will this pan out in 2016?

2015 has been a rather interesting year for the taxi service of Malaysia as it has been facing one of the few things it had definitely never expected would hit it – change. This change came in the form of the rising popularity in ride-sharing applications Uber and GrabCar, which has led to taxi drivers and taxi driver associations to metaphorically raise pitchforks and torches, and literally raise banners and fists.

 Anthony Tan

Anthony Tan

While the change from disruptive technologies started last year, it should be noted that part of the story had begun even earlier, back in 2012, when local startup MyTeksi, co-founded by former Tan Chong Motors’ head of marketing Anthony Tan (who also happens to be Tan Chong Motors’ co-founder Tan Yuet Foh’s grandson), was founded.

MyTeksi, which aims to improve the taxi service in Malaysia along with the lives of the taxi drivers under their banner, started their taxi-booking application and service with the aim of providing a way to prevent price-gouging by the unscrupulous among taxi drivers, as well as hoping to solve the problem of getting a cab being a thing of random chance.

Then Uber, which soft-launched UberBlack in October 2013, launched its UberX product in the Klang Valley in August 2014, and the use of Uber began to rise in popularity due to the lower fares offered by the ride-sharing service provider, as well as the well-maintained conditions of its vehicles. The better attitude of its drivers went a long way as well.

However, the popularity of ride-sharing in the Klang Valley started to peak towards the start of 2015, which led to responses, some of which were unlawful, from the different factions involved.

The ‘betrayal’

Of course, the rise in popularity of Uber drew the ire of taxi drivers and their associations, who saw this new player taking market share away from them on what they perceived as the market they owned. However, what really drove taxi drivers and their associations up in arms was the betrayal they felt from MyTeksi, who began to offer their GrabCar service in May 2014 as a competitor to Uber.

This was seen as a knife in the back by taxi drivers, especially those who have signed up with MyTeksi. This led to questions on the aims of MyTeksi, about whether or not they had really intended to aid Malaysian taxi drivers, and whether the company really treasured the efforts of the taxi drivers who had helped them to build their brand name while driving under their banner.

MyTeksi’s response to the allegations remained that they were indeed aiming to help better the lives of taxi drivers in Malaysia, and that GrabCar is a service they hoped would complement MyTeksi rather than compete with it. This statement was, however, met with suspicion on the part of the taxi drivers and their associations, who continue to see this as a betrayal.

Spad’s reaction

The Land Public Transport Commission (Spad) had initially been undecided on the matter, due to the equally loud voices of the taxi drivers crying foul, as well as that of the public speaking in endorsement of ride-sharing services. This had led to the regulatory board being unsure about a decision.

Syed Hamid Albar

Syed Hamid Albar

Following that, taxi drivers had brought to Spad’s attention that there were Uber drivers without the requisite Public Service Vehicle (PSV) licences, which are needed to show the vehicle is sanctioned by the commission to provide a passenger transport service. This had in turn led to Spad announcing operations to remove those drivers, which Spad chairman Syed Hamid Albar had termed “kereta sapu”, a colloquial term for illegal taxis.

As a result, within the period between October 2014 and July 2015, Spad had impounded 80 vehicles, with 52 of the vehicle owners having their ownership of their vehicles revoked, according to Spad enforcement general manager Che Hasni Che Ahmad.

The regulatory commission has since been conducting operations to detain and impound illegal taxis as well as those drivers for ride-sharing services that do not have the required papers. This culminated into a ban on private and “hire-and-drive” vehicles being used as taxis. However, there remain drivers that continue to provide the UberX service, noting that they had PSV licences and were driving cars for a company.

Responses from taxi drivers

However, even having the impounded vehicles in the yard was not enough to quell the wrath of taxi drivers, who continue to champion the perspective that Spad is not doing enough. Taxi drivers continued to feel threatened by ride-sharing services, and responded in a number of ways that range between diplomatic and almost barbaric.

The most diplomatic of means employed by the taxi drivers was the delivering of memorandums to the authorities, which in turn ranged from Spad to Prime Minister Najib Abdul Razak himself.

The memoranda themselves, however, called for one thing: action against ride-sharing services. As patience wore thin among the taxi drivers, the requests of the memoranda started to become more extreme. Initial memorandums had called for Uber and GrabCar drivers to be placed under the same restrictions as themselves, namely the need to be able to present PSV licences, as well as show proof of proper insurance. However, this has escalated to calling for Spad chairman Syed Hamid Albar to be discharged from his post for failing to act, and for the government to take action to ban Uber and GrabCar.

Along with the memoranda, taxi drivers and their associations also staged protests, with locations ranging from MyTeksi’s office to Parliament House. The protests also included strikes by the taxi drivers, who obstructed roads and refused service in the hopes that their complaints would be heard.

Towards the end of 2015, however, there were taxi drivers who had taken matters into their own hands and began conducting their own brand of vigilante justice through sting operations. The taxi drivers would call for an Uber or a GrabCar, which they would ambush on arrival, either dragging the said driver to a police station or dealing physical and material harm to the driver. Another scenario would be where they staked out drop-off/pick-up points at malls and ambushed drivers as well as riders arriving or leaving.

They would then post their victories to social media, with one particular video capturing a taxi driver warning those watching to not support Uber or GrabCar, or face the consequences. These forms of vigilante justice have faced severe criticism, calling the drivers who participated fear-mongers and thugs due to the methods they employed.

Threats were also employed, with the most recent case being taxi drivers threatening to block off major roadways should Uber and GrabCar remain unbanned.

Ride-sharer reactions

Of course, the response from ride-sharing services Uber and GrabCar has been disappointment and condemnation of the vigilantism of the taxi drivers. Both services have also indicated that they remain unintimidated and would not be pulling their drivers off the streets.

Leon Foong

Leon Foong

“We strongly condemn the use of intimidation and violence against our driver partners, including holding our driver partners to ransom by assaulting them and damaging their cars and even intimidating and threatening riders,” said Leon Foong, general manager of Uber Malaysia.

Both services have also appealed to the authorities to treat these cases as they should, namely as cases of harassment, vandalism and assault. Uber has also set up an emergency helpline where a security team would be dispatched to the driver’s location should a call be placed.

However, when it came to the question of obtaining legitimacy, questions have met vague responses.

In the case of Uber, Foong had initially mentioned that there was full cooperation between Uber and Spad, and that there was a timeline in place that would integrate Uber into the local transport system. However, this timeline that was mentioned appears to have fallen off the radar with no comment or mention in recent times.

With there being no sign of any confirmation on whether or not legalisation is coming, some quarters feel that this will be left as it is, with the current status quo to stay for the foreseeable future. With matters heating up as they are, 2016 will be a year that may decide, with finality, the war between taxis and ride-sharers.


Changing of guard at Battersea

By Khairie Hisyam

The year 2015 had been a watershed year for the high-profile Battersea Power Station redevelopment project. As the project grapples with an uncertain outlook for the London property market, it had also seen its own chairman, Liew Kee Sin, embroiled in a direct conflict of interest months before finally vacating his position.

As the guard changes at Battersea, topmost on its stakeholders’ (which indirectly include millions of Malaysians via 20% shareholder Employees Provident Fund) minds will be the burning question on whether the momentum thus far can be sustained.

It is by any measure an immense undertaking. The estimated gross development value (GDV) stands at GBP8 billion (over RM53 billion) and this may rise further to as high as GBP10 billion by the end of its expected 15-year development timeline.

Of special significance to Londoners is the fact that the former power station, an iconic London landmark listed as a Grade II* listed building on UK’s Statutory List of Buildings of Special Architectural or Historic Interest, has long been subject to numerous failed revival attempts.

This significance was evident when it was launched in July 2013, with both the Malaysian and UK prime ministers present alongside the London mayor. A host of guests were also flown from Malaysia for the event by the shareholders, who are SP Setia, Sime Darby and EPF.

The momentum out of the gates, indeed, had been strong, though there may be tell-tale indications of that dissipating. The first two of seven phases spectacularly saw near full take-up rate. The third phase saw two-thirds of units taken up as of October this year.

Liew Kee Sin

Liew Kee Sin

In turn much of the initial enthusiasm towards the project is seen as a direct consequence of having charismatic property man Liew Kee Sin at the helm, a legacy of his near two decades leading SP Setia, a 40% shareholder, up to the initial years of the project.

However, he left SP Setia in end-April 2014 amid heightened questions on potential conflict of interest involving fast-emerging Eco World Development Group, led by his son – whose stake in a related takeover Liew paid for – and his close associates.

While Battersea shareholders retained Liew as chairman, with emerging arguments that the potential conflict does not extend to Battersea, direct conflict did come to Battersea in January this year.

In early January Reuters reported Liew as having signed a joint-venture agreement with Irish developer Ballymore Group to undertake three residential property developments in London, via his personal investment vehicle Eco World Investment. At this time he was still Battersea redevelopment project chairman.

According to Eco World’s promotional material, one of the three projects is called Embassy Gardens and is located a stone’s throw away from Battersea, removing any doubt that Liew has a foot in two direct competitors in the same neighbourhood.

Liew admitted to facing this conflict on at least two separate occasions this year, however arguing that he had been upfront about the conflict to shareholders and said the onus is on shareholders to decide if he should leave because of it.

He remained chairman until the end of his three-year term on Sept 30, 2015. Taking his place as chairman of the Battersea Project Holding Company Ltd Board is Johan Ariffin.

In any case, despite the hanging cloud of conflicts, the loss of Liew also raises concern, considering his charismatic leadership and marketing prowess, often acknowledged by market insiders as a contributing factor to the strong early momentum seen with Battersea, is now gone.

This gnawing concern adds to uncertainty in light of an uncertain outlook on the London property market. As a whole, the London luxury property market seems to be slowing down, although it remains to be seen whether Battersea’s competitive edge will suffice to hold its position in the market.

According to property consultancy Knight Frank LLP earlier this year, the Nine Elms district in which Battersea redevelopment project is located will likely remain a hotspot going into 2016 despite already robust price growths in the past several years.

However, the Nine Elms district in itself may face a tricky challenge with a presently ongoing large-scale regeneration drive – phasing the delivery of the sheer number of properties being built in order to avoid a glut.

Bloomberg reported in September that there are about 18,000 homes being planned in the district alone at the moment with some 4,000 coming from Battersea.

sp setia batterseaCoupled with the consideration that a good chunk of Battersea buyers so far had been foreigners, there is cause for concern given the strengthening pound which in turn increases costs for overseas investors to come into the London property market in general.

Specifically on Battersea, the substantial interest from overseas had been evident – a third of the first phase units were taken up by Malaysians, for example, although overall Battersea stated to KINIBIZ that 60% of its units so far had been taken up by UK-based buyers. The company further stated optimism for its prospects going forward.

However, many existing buyers in Nine Elms are likely speculators, said real estate data provider Lonres to Bloomberg in September. Some 30% of new properties in the district had remained unsold for over a year amid price reductions for nearly half of under-construction or newly completed properties in the district before they were sold this year, according to Lonres.

Against this backdrop question marks loom large over Battersea, not least of which is the question of why a self-admitted conflict of interest had not proven sufficient to spur shareholders in asking ex-chairman Liew to resign earlier.

With Liew now leading the charge of a direct competitor in earnest, the immediate concern would be whether the project may suffer down the road from a combination of losing Liew and being in a turbulent market. An uncertain road lies ahead and makes this project well worth watching closely in 2016.








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