Economics & Strategy All eyes on Bank Negara's monetary policy moves Technical View A daily close above 420 to confirm 385 as major support This weekly report is contributed by contact capitalcorp	ECONOMICS & STRATEGY (for the week of 3-7 August 1998) All eyes on Bank Negara's monetary policy moves The KL market shed 16 points to 403 last week, closing above the psychological mark after dipping as low as 385. The market remained focused on details of the NEAC blueprint, as well as yet another central bank measure to ease monetary policy. More corporates continue to seek court protection for debt restructuring, with Taiping Consolidated and Promet being the latest additions. Changes to KLCI component stocks: The stock exchange has again changed the composition of KLCI components by adding three newcomers effective Oct 1: semiconductor maker Malaysian Pacific Industries, rice concessionaire PadiBeras Nasional (Bernas) and Johor Port. Out will be Hong Leong Industries, Kuala Lumpur Industries and Nam Fatt Corp. The NEAC blue-print: The NEAC has released its Plan for Action aimed at resuscitating the economy. The initial actions todate has centred on the relaxing of hire-purchase financing for the motor industry, where sales have plunged by more than 60% year-on-year. Banks are now encouraged to give up to 85% financing, with repayment period stretched over seven years. We think consumption spendings may not necessarily see the intended effects for a few reasons: growing unemployment, reduced wages and falling asset prices will add up to cautious cutback in expenditure. Motor vehicles remain a luxury, while servicing house mortgages a priority, in a period of uncertainties. At best, a "delayed effect" could still take place, as consumers weigh their finances and options. Monetary policy: Bank Negara took another cautious step in easing monetary policy last week. The central bank will intervene in the Klibor market at 10.5%, vs 11% previously, for 3-month money. The lending rate to banks was eased to lower the cost of funds and encourage credit growth to spur the economy. The 50-bp cut means there will be further room to bring the base lending rates below 12% by next month. July 98's weighted 3-month Klibor was set at 10.97%, which will result in a ceiling BLR of 12.04%. That is a slight reduction from recent high of 12.09% following the recent 2% points cut in SRR. Under the current scenario, banks are in a fix. They will be persuaded to turn on the liquidity tap again, perhaps in the most trying times amidst rising defaults and non-performing loans. Exchange rate at risk? There are some valid reasons why the central bank is confident the ringgit would not be compromised under its easier monetary policy. Bank Negara is clearly privy to its latest current account position (rising on strong trade surplus) and key indicators in foreign direct investments. Two recent examples: Shell RM1 billion capex commitment and British Telecoms' recent purchase of a 33% stake in Binariang. The ringgit may just hold its own this week. Renong-UEM restructure: With more than 15 companies or groups under court protection from creditors, the investing community could still be overwhelmed with pessimism. Taiping Consolidated, one of the early casualties, sought court protection under Section 176 of the Companies Act last week. The fact that it has been unable to conclude an asset disposal at this stage reflects the sluggish state of the commercial property market. Taiping was the earliest to initiate asset sale - it owns prized trophies in Lot 10, JW Marriott hotel and Starhill shopping complex. With a slew of big corporates vigorously rescheduling debts, the market could get a lift this week from the Renong-UEM group. Their creditors look set to approve an attempt to repackage their debts into long-dated government-guaranteed bonds. Download Full Report To view these reports in their original form, please ensure that you have the Adobe Acrobat Reader plug-in.
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