Economics & Strategy

Regional currency market is focal point for equity direction

Corporate Development

Mitrajaya Holdings: Corporate exercise is approved


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(for the week of 23-27 February 1998)

A respite from regional uncertainty as Indonesia suspends currency board plan

This week appears to be a respite from uncertainty as Indonesia has suspended its programme to implement a currency. With the G-7 Nations adopting a no-intervention policy, regional currencies will become a focal point for market direction. In the absence of very negative developments, we see the market continuing its uptrend in the short term.

Banking development: The consummation of the RHB-BoC bank merger as early as this week could be a significant market catalyst, depending on the terms so far undisclosed. The cash-cum-share offer for Bank of Commerce by RHB Capital revives merger talks that collapsed bitterly between the two groups a week ago. The "improved" offer gives Commerce Asset-Holding a 20% equity participation in the enlarged banking group under RHB Capital - with a cash offer available should it decide to give up banking for good. This possibility cannot be discounted because the proposed offer of a 20% stake in RHB Capital is a minority role that could easily be diluted in future.

The central bank recently simulated a worst-case scenario (based on undisclosed assumptions) for the banking industry and gave it positive assessment that, not unexpectedly, ruled out any crisis. Non-performing loans, according to Bank Negara, would not be anywhere near the 30%-plus ratio last seen in banking shakeout of the 1980s. Even if new measures are contemplated to rein in bad loans, we do not expect this to be dampening to the market. On the contrary, we think this will be viewed positively as a move to enhance much-needed banking prudency.

Vehicle sales for January nosedived: Vehicle sales plunged 64% in Jan 1998 with total only 12,182 units sold vs 33,421 in Jan 1997. Against Dec 97 sales, Jan 98's statistics also declined sharply by 40%. Worst hit are commercial vehicles, as sales dropped 76% to 1,583 units. Sales of passenger cars and 4WDs also con-tracted by 62% (9,773 units) and 44% (826 units), respectively. Prospects for the motor industry remain poor, with both austerity measures and higher financing cost dampening demand in the months ahead. By the same token, we view the prospects for autopart makers to be equally depressing.

Daim speaks: In an interview with the Far Eastern Economic Review, economic adviser Daim Zainuddin admitted to many tycoons in financial casualties. More significantly, Daim looks set to prescribe bitter medi-cine to this situation - the rich (foreigners and Chinese businessmen included) will be allowed the flexibility to take over troubled enterprises. Such a drastic action would seem to be compromising on some of the ideals of the affirmative National Development Policy that political resentment within the ruling coalition members can be expected. Daim, as executive director of newly-formed National Economic Action Council, is known for no-nonsense dispensation of economic solutions; when he was Finance Minister, he also abandoned some of the tenets of pro-bumiputra policies to attract foreign investments that jump started the economy. Although strong and cash-rich companies like Genting/Resorts World and YTL Corporation could face some "shareholders' risks," we expect investors to view such developments as a denial of bailout for troubled companies and tycoons.

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