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HR: A Malaysian Stock Market Caution
By Harun Rashid
5/10/2001 2:12 am Fri
by Harun Rashid
Oct 4, 2001
Conservative investors have three primary interests, safety of
capital, safety of capital, and safety of capital. Venturesome
investors are interested in the rate of return and skill of
management. Some investors are merely socially acceptable
gamblers with little interest in fundamentals, totally indifferent to
the intrinsic value of the business they are entering, focused
mainly on the short term prospects for a capital gain.
Governments are not investors, or should not be. Money raise
(and spent) by governments is for the purpose of paying for
essential functions of government. It is not for the government
to use the public's funds with an eye to profit from interest
income or capital gains, though excess funds collected from the
people in the form of taxes and fees by a prudent government
may be placed temporarily at interest. Most governments are
borrowers, not lenders.
Public utilities are generally closely held and regulated by
governments in the interests of dependable service and minimum
rates. Roads, water, sewage, electricity and public
transportation are proper concerns of government. Because the
capital requirements of such large civil systems are great, it is
generally necessary to raise money through long term bonds that
are guaranteed by the government. Since it is the public which
must repay the bonds, the question of the planned project is put
before the public for a vote. If there are serious concerns about
the feasibility or prudence of the project, the funding is denied.
Governments tend not to be efficient in operating the public
utilities they develop, and in the absence of managerial talent will
opt for disposing of the problem through the process of
privatisation. When care and planning are exercised in the
privatisation process, the management of public utilities can be
improved. If there is incompetence or corruption in either the
transfer or new management, the privatisation can be a very
expensive disaster for the public.
Naturally the government does not wish to admit failure, and the
managers chosen will not reveal the true reasons why the
project collapsed. Thus the public is left with little for satisfaction
but rage and hate for both the personalities of government they
hold responsible and the individuals who have failed to perform.
Often there is a malodorous whiff of cronyism and nepotism in
the covering up of large losses. The public, in the form of their
government representatives, must pick up the pieces, and
attempt to restore functionality. It is generally a very expensive
operation, especially when left in the hands of the same
government and administrators who created the mess in the first
The de-privatisation process involves the return of the remaining
assets of the utility. This process is usually tantamount to a
bankruptcy, where the operators receive little if anything from
their failed attempt to operate a public utility successfully. Their
original capital, if any, is forfeit. This is the risk associated with
buying the new shares of a newly privatised corporation with
questionable experience and management expertise.
In Malaysia the process is different. The privatising parties are
handsomely rewarded, receiving their money back, and allowed
to keep any money that might have been funneled off. The debts
are absorbed by the government, and nothing further is said.
Only the debts and burdensome interest payments remain.
Much of the business activity of Malaysia centers around
international trade and tourism. International trade is a
reasonable guide to the annual GDP, and this has been flat for the
first eight months of the year (see Figure 1).
The events of September 11 have had a serious effect on airline
travel, and there is a large decline in the amount of tourism. The
slowdown in trade can now be expected to decline further.
Employment is suffering, with a predictable depressing effect on
consumer confidence and spending.
The one bright spot is the Malaysian stock exchange, as mirrored
by the KLCI. Malaysia, to judge by the resilience in the stock
market, is immune to the pressures of massive indebtedness and
a slowdown in basic economic activity. The official response to
any question is always optimistic, projecting not only a level of
growth for 2001, but full recovery to previous levels in 2002.
There are new strategies planned with a new budget. New deficit
spending is planned to provide stimulus. The question is whether
this, or anything, can be done to put the decidedly difficult
dilemma in drydock, allowing repairs to be made. Much mitigates
against a salvage. The defaults continue to be troublesome, and
though these are said to be private, the true ownership is in the
hands of the government, through the various enterprises and
funds owned and controlled by the Finance Ministry.
Thus, any funds earmarked for stimulating activity will
immediately be siphoned away to satisfy the creditors of the
enormous loans assumed by the government in its
de-privatisation activities. To compound the problem, new loans
are being made every day, in the form of new bond issues and
private placements. It is difficult to see how these funds can
ever be repaid. It is a time for prudence, as government
involvement in the publicly traded shares masks the true risk.
There is a limit to the allowable chicanery any market can endure
and continue to exist as a viable entity. In Malaysia that limit has
NB: This is the 200th column in the Worldview series, and if there is a theme to mark it, perhaps it is the most serious.
Link Reference : HR Worldview: A Malaysian Stock Market Caution