Economics & Strategy

Watch the ringgit behaviour, Tenaga
Nasional's results dampener

Technical View

Short-term technical stability is found,
but still no reason to be bullish on rebound


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(for the week of 18-22 May 1998)

Watch the ringgit behaviour, Tenaga Nasional's results dampener

The strong ringgit phenomenon: Political and economic turmoil in Indonesia could have provided an excuse for possible attack on the regional currencies. But the ringgit remained resilient last week, as a result of busy offshore swap activities. That appears to have lent tremendous boost to the ringgit's strength. Demand for ringgit was visibly strong in the reflection of offshore swap rates as high as 30 to 40% last week, giving an equally crucial support to the equity market. In our view, this could have been triggered by short-coverings by hedge funds over the failed attack on the Malaysian currency some two weeks ago. This phenomenon is expected to be temporal. But should it linger, it will have the unfavourable effect of drawing onshore ringgit away to the detriment of local liquidity.

Tenaga Nasional interim results: There is still no silver lining in Tenaga Nasional's operations. It has just released worse than expected results for the six months to Feb 28, 1998. The latest interims crystallised the impact of currency crisis to another height: at a closing exchange rate of RM3.64/US dollar, forex loss hit RM2.47b, comprising RM2.18b in translation loss and RM296m in transaction loss. The benefits of full 8.3% tariff hike from May 1997 was reflected in a 22% rise in turnover to RM5.7b, but failed to filter into higher operating gains because of (1) higher interest expense and (2) increased IPP payments. Interest expense rose more than two-fold from RM273m to RM644m, while IPP purchases amounted to RM1.74b vs RM1.56b in previous corresponding interims. Note that payment to the IPPs was for 32% of the 26,476 GWh generated by the industry, while RM1.94b was paid for 68% of the units bought from its generation subsidiary.

Net interim loss amounted to RM2.1b (loss per share 68 sen) already surpassed the RM1.5b expected by the industry, based on latest consensus estimates. With total loan book now at RM20.7b (vs RM15.1b end Feb 97) and 42% denominated in US dollar, higher forex and interest expense will continue to drag results for at least another six months. SELL.

Crisis in Indonesia subsiding: With President Suharto back in charge, tension in Jakarta has subsided over the weekend as prices of fuel and other essential items were cut sharply to pacify the angry population. While this conciliatory move may not jeopardise its IMF fundings, foreign creditors will generally be worse off. More debts will have to be written off, which means accepting 30-40 cents for every dollar lent. But Jakarta's economic problem is well-documented now. The risk, however, lies in the failure of its political system - this is still possible with the disunity within the ruling Golkar party and the vocal opposition groups.

The market remains precarious despite last week's rebound. Unless there is a clear fundamental improvement in the market, this week's outlook will hinge on the prospect of continued stability of the ringgit and political development in the region. Sell on strength.

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