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Unfavourable developments on corporate, interest rates, currencies and external economies

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ECONOMICS & STRATEGY
(for the week of 6-10 April 1998)


Unfavourable developments on corporate, interest rates, currencies and external economies

After a 61-point plunge last week, we see the market setting on another bear trend. The technical indicators have turned negative - the CI closed Friday below all major moving averages - which could now test the support all the way to 600 points. We advise a SELL this week as negative publicity could overwhelm the market into pessimism, for the fact that (1) corporate and high-profile personal bankruptcies could grab major headlines, (2) exorbitant interest expense is already choking local businesses, (3) further downgrading of local banking groups and (4) unfavourable external developments, especially in Japan.

Corporate bankruptcies: The fear of rising corporate insolvency took a turn for the worse, triggered by the receivership of Wembley Industries - the first such case in recent years. Wembley's fate is more peculiar than trend-setting because of the personalities involved; the protagonist an ambitious man building ties to the powers of the future, and the antagonist a man that epitomises the "boleh" phenomenon so favoured by the current leadership. One can argue that Wembley is a bad apple anyway, so shedding some proverbial bloodbath on the street can hardly make any difference to the market. Whether PhileoAllied Bank's action would open a floodgate of corporate bankruptcies is debatable. Right now, the market is driven southwards by escalating "who's next" on corporate bankruptcies. Not surprisingly, yet another list of candidates is making its round; our view is to sell the market, even if this trend is unlikely to develop into a full-blown crisis.

Interest rates are firming: After weeks of marginal fluctuations, the 3-month Klibor perked to 11.02% from 10.98% on Friday. With Maybank raising BLR to 11.9% and Public Bank 12.2%, the cost of doing business is already at exorbitant levels by Malaysian history. Already, interest expenses are slicing growth and profitability of most listed companies; it is the government's dilemma in balancing the tough act of tight monetary policy (hence high interest rate environment) and the need to resuscitate viable local operating companies. Even modestly-geared companies could be working for bankers under such prolonged scenario. The interest rate movements could provide insights into the government's behaviour (or dilemma) in balancing the impact of the local cost of doing business and maintaining the strength of the the ringgit. The local currency dipped some 20 sen to the dollar at RM3.780 Friday, after holding its own fort for weeks and looks set for further weakness due to regional sentiments.

Yen's weakness will lower debt liability: The ringgit has climbed roughly 10% against the yen in the year-to-date period. The outlook for yen is currently rather dim and if the ringgit can regain ground against the currency, the impact on the country's external position would be beneficial indeed - 12.6% of the country's exports go to Japan but the bulk (21.9%) of imports is sourced from the economic powerhouse. In addition, 15% of the country's estimated RM126.5b external debt is denominated in yen.

But the immediate implications of the yen's weakness against the US, now at six-and-a-half year low, is one of confidence. Moody's latest downgrade of Japan's sovereign rating (from stable to negative) serves a blow to market hopes that the financial reforms (easing of foreign exchange rules) would work. On a wider scale, it brought down expectations that Japan could live up to its "locomotive" role to Asia's economic recovery. As it is, yen's weakness is dragging the rest of the Asian currencies down, with the Taiwanese feeling the brunt of pressure last week. If the ringgit could "decouple" itself from the forces pushing down the yen,then the country is in good stead to recover some of the RM7b increase in yen-denominated debt following the depreciation of ringgit last year.

Feb 98's RM2.5b trade surplus augurs well for recovery: February's surplus of RM2.5b means that the country has registered four consecutive months of trade surplus. Strong growth in export (50% annually for the Jan-Feb cumulative period), brought about by higher revenue in ringgit term, has outstripped growth in imports (34%) as lumpy imports began to dwindle in number.

Three particular classes of commodity, namely electrical and electronics, palm oil and liquid natural gas, are the main export revenue earners. Strong performance in the external sector is crucial in the government's forecast of 2-3% GDP growth this year, given that the domestic economy is expected to remain sluggish. At the rate the external sector is performing, there appears to be a strong basis to expect that the government's growth forecast could be met.

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