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Positive turnarounds are just trickling in

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ECONOMICS & STRATEGY
(for the week of 4-6 February 1998)


Positive turnarounds are just trickling in

The much-maligned Southeast Asian regional bourses had their best-performing market day at the initiation of the Year of Tiger - major equities markets soared on strengthening currencies against the US dollar. Malaysia had its best and memorable outing, with the benchmark Composite Index surged an unprecedented 23% or 132 points to hit 701 points on Tuesday Feb 3. A record 200 counters hit limit-ups convincingly as the market recouped RM72b in capitalisation in one day.

Like it or not, foreign funds did have something to do with it. Merrill Lynch upped its weighting in Thailand by 2% (though still underweight). And possibly the biggest vote of confidence in months came from Morgan Stanley's strategist Barton Biggs, who ploughed some money into regional bourses, including Malaysia, in the preceding week. That is a welcome change of climate and views, after a spate of high-profile downgrades by major rating agencies worldwide on the region's banking and insurance institutions.

Although Indonesia still remains a political and economic hotbed, investors appear to have shrugged off much uncertainty there. Most regional currencies, including the won and rupiah, are recovering from their record lows. Of most significant turnaround is the situation in South Korea, where the IMF and the state government have declared "victory" of sorts - interest rates should be gradually eased to normalcy hereon with the smooth implementation of a financial bailout package.

We would put some perspective into such euphoric display of buying activities: Malaysia's interest rates are still in ascendancy, the country's international reserves dropped substantially in the first two weeks of 1998 and financial institutions are still expected to make front-page headlines for the wrong reasons. All these developments should provide a check and balance to any unbridled optimism.

Interest rates are still advancing: The 3-month Klibor rose sharply to 10.1% in late January (a spike from 9.4% a week earlier), with cost of funds edging closer to 18% per annum. This trend is unlikely to subside soon, given the official statements that interest rate hike would still be an option to rein in currency volatility.

Bank Negara's reserves depleted by unsuccessful market intervention: The central bank's reported a RM2.5b decline in its international reserves in the first two weeks of Jan 1998 - in what was imprudently deployed in its forex foray when the ringgit was quickly pummelled to RM4.50 per US dollar. Currency in circulation rose RM2.4b during the same period, suggesting that the central bank printed money into the system. Liquidity also rose significantly by RM4.2b (RM2.8b placed with financial institutions and RM1.4b given out in loans and advances), as the central bank unlocked some RM5.5b its statutory deposits into the financial system. Such state of easy liquidity would ensure that the banking system is readily safeguarded from any possible shocks. More importantly, Bank Negara makes evident its strong will to insulate the banks from any kind of crisis that could prick already fragile confidence in the financial system.

Watch PNB-AMMB deal: If this deal pans out as reported, we believe Malaysia would send a clear signal that it will not allow any of its beleaguered financial institutions to fail. That Arab Malaysian Corporation was willing to shed a substantial portion of its jewel - a 43.5% stake in AMMB - does not mean the latter is unsound; on the contrary, it does say something about the former's financial health. If talked to conclusion, the significance of this PNB-AMMB lies in the seemingly proactive role assumed by the invest-ment body in initiating banking mergers bigger than what has been witnessed thus far. Permodalan Nasional Bhd is a major owner of two large banking groups in the country.

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