Economic slowdown likely to be moderate

  • Business
  • Friday, 08 Jul 2005

The economy in Malaysia may slow slightly in the second half of the year, but there are sectors that will continue to do well, or even excite. This is the view of fund managers at the roundtable discussion on theeconomy and stock market. The fund managers are ASM Asset Management Sdn Bhd chief investment officer ZALINAH A. HAMID, Kumpulan Sentiasa Cemerlang Sdn Bhd research director CHOONG KHUAT HOCK, Capital Dynamics Sdn Bhd managing director TAN TENG BOO, and TAN KOK KHENG who resigned as UOB-OSK Asset Management Sdn Bhd CEO last month and is now setting up his own asset management company.StarBiz associate editor C.S. TAN and reporter YEOW POOI LING moderated the discussion. 

StarBiz: How do you see the economy in the second half of the year? 

Zalinah: GDP growth is likely to slow down but it will still be commendable. The internal demand is still OK but we are more cautious on external factors.  

Rising oil prices will impact other countries' economies that are net importers of oil. For Malaysia, although it is a net oil exporter, that will however be offset by cost-push inflation because of production costs going up. We expect the manufacturing and services sectors to lead in the second half of the year.  


StarBiz: Manufacturing did poorly in the first half. 

Zalinah: I still think it will lead because even though the E&E (electrical & electronics industry) is slowing down, the petroleum-related industry will offset it.  

Panel speakers of the stockmarket roundtable from left: Tan Kok Kheng, Choong Khuat Hock, Zalinah A. Hamid and Tan Teng Boo sharing a lightmoment


StarBiz: Teng Boo, is that your view as well, a slightly slower second half? 

Teng Boo: Unfortunately, yes. We made a forecast of 5% to 6% for the entire year. At this point in time, we're not changing that forecast, probably instead of hitting the higher end of the range at 6%, it'll gravitate towards the lower end of that range. 

But I think one should have a bit of perspective in the sense that the 1999 and 2000 recovery was very sharp, and then the slowdown was also very sharp.  

The current environment and the recovery that started in 2003 and 2004 have been more moderate and I think that is healthier although you hear people complaining that there is no feel-good atmosphere. I reckon the implication of a gradual recovery would be that the slowdown would be rather moderate. And if you are in the right sector, you probably won't even feel it.  

A slowdown in the Malaysian construction sector pushed contractors into the export sector.

The second half of 2005, there is no real reason to panic (in the market) unless in the next one or two months, oil prices shoot to say, US$75 a barrel.  


StarBiz: Is that the consensus view? 

Choong: Generally, the consensus is for a slowdown in the second half due to the high oil prices and inflationary fears. But I don't foresee the global economy or the Malaysian economy going into a tailspin.  

One factor that will keep Asian economies performing relatively well is that we have a high savings rate. There is scope for consumption to pick up some of the slack from lower exports.  

In India and China, the consumption is very strong. So instead of saving so much and buying cheap paper in the form of US treasuries, which may or may not be worth that much in the long term, it's better for the US to perhaps save more and Asians to spend more.  


StarBiz: In this economic slowdown, do you think the corporate profits will move in tandem with that? In the US, the growth has not been very high in percentage terms but their corporate profits have been high. Do you see any difference here?  

Choong: On the corporate side, you see a lot of competition, like the banks, they have been cutting mortgage rates, while the cellular phones and tobacco companies are having a price war.  

There is a lot of competitive pressure in the industries. The economy may grow but the earnings of certain sectors, due to competition, may be affected.  


StarBiz: It's good for the consumer.  

Petra Perdana group supports oil and gas industry with supply vessels.

Kok Kheng: I agree with Tan that certain industries will do very well, like the oil and gas sector and there are new players coming on-stream in support industries.  

The others that are dependent on petroleum, gas and crude oil, will be affected quite badly.  

You see, the general economy figures will come out quite nicely but the real economy, if you ask the SMEs (small and medium-sized enterprises) they are not doing very well.  


StarBiz: As reflected in the performance of Second Board companies.  

Kok Kheng: Our country is a lot based on SMEs, which are not doing as well as you think they are. The likes of oil and gas, plantations, commodities, are doing pretty well but if you go beyond that, it is very difficult to see many businesses that are doing well.  


Teng Boo: The US GDP growth has been moderate and yet it could generate very robust corporate earnings, the reason you don't see this in Malaysia is the problem of productivity and efficiency.  

Productivity growth in the US has been sustained at a very healthy rate. The situation that is faced by Malaysian companies and US companies is basically the same.  

It's the situation where at the producer prices level, they've all gone up but at the final product prices level, there is severe competition.  

So you find that, on the one hand your cost of production has gone up but you can't raise the selling prices because of competition and over capacity in many industries.  

In the case of Malaysian companies, the only way for any company to overcome that kind of scenario is to improve to be able to improve your productivity and efficiency, which has happened in the US economy and that 's why with 3.5, 3.8% (GDP) growth, you see very robust growth in corporate earnings.  


StarBiz: Besides oil, it seems that raw materials prices have also affected costs like packaging costs. Will this worsen?  

Choong: The prices of commodities are cyclical. If prices remain high, new production capacity will come on stream, and higher prices will impact demand, so it's a question of when they taper off.  

It's a self-correcting mechanism. High prices will lead to high inflation, it leads to high interest rates and eventually to lower consumption. Hopefully, towards the end of the year, by then, there will be some tapering off of commodity prices.  


Kok Kheng: I would think that this cycle of commodity prices would continue to last a bit longer. If you look at the number of cars manufactured in India and China.  


StarBiz: Is there any light towards better growth next year? 

Teng Boo: The economic growth in recent quarters was basically domestic driven, not so much the export side.  

If you look at the GDP growth over the next six months, one reason the slowdown is coming in is because consumers are getting a bit worried whether local interest rates will be getting higher and they feel the impact of higher prices for diesel.  

Consumer spending will probably slow down and therefore it would slow down to some extent the domestic-oriented industries. 


StarBiz: Do you think expansion into the Afta region will add another dimension of growth? 

Teng Boo: Yes and No. In a way, Malaysian companies have not prepared themselves well. They have focused on competition and threats but not on the opportunities that are being opened. 

The auto parts sector is such example. There are only a few them that have gone beyond the shores of Malaysia. And here you have a very big auto market.  

Indonesian auto sales are going to exceed Malaysia's and sales in Thailand have already exceeded Malaysia's but many of them have not even moved beyond these shores. Unfortunately the mindset of Malaysian-owned companies, unlike MNCs, taking Nestle, for example, they have already restructured their manufacturing operations. 

I'm not sure why Malaysian companies, as a whole, have been rather reluctant to do so. But it's still not too late.  


StarBiz: The current push has really been by the GLCs (government-linked companies). The funds are looking at the pros and cons of it. On the one hand, they like the GLCs going out, while on the other hand, they think it's quite high risk, high cost and it may depress earnings for one or two year. How do you see this?  

Zalinah: Maybe after the first year, you'd see a lot of improvement in the GLCs but we don't look at just one year. After the restructuring, what else can they offer in the second, third year?  

Investors would look at GLCs all the time to lead because most of the GLCs are big. If they fail, it might have an impact on the rest.  

Kok Kheng: Isn't it easier for private enterprises to go overseas than GLCs? Entrepreneurship comes from private enterprises and only a handful has been successful in penetrating into overseas market. The government has a done a good job in dong a lot of roadshows, promotions and trade fairs.  

But generally the lead has been coming from the private sector when they are in a desperate situation. Look at the construction sector. They have no choice, when it's dry here, they have to go overseas.  

So the push factor is very important. Certain ones have survived and done very well, but some cannot.  

When you go outside of Malaysia, you need to add value. You are competing with the international boys. Only a couple of industries and companies have proven track record. But I think the trend will continue and GLCs are moving ahead also.  

The easiest way for GLCs to move overseas is to start on government-to-government level. For example, Malaysia and Singapore.  

The Singaporean government, Temasek, GSIC has invested in 5% of Telekom, bought into banks, and got involved in properties.  

But you don’t see many of our Khazanah group of companies going into Singapore.  

I would not be surprised that some of our GLCs are able to move reciprocally with another government that has invested here, the Singaporean government.  

So, I wouldn’t be surprised that some of our GLCs could do something with the Singapore government, maybe within the Asean region.  


Choong: It's a philosophical debate whether GLCs should play a bigger role in the economy. You look at Singapore, most of their companies are controlled by GLCs.  

They can grow to a certain level but after that they kind of stagnate. If you compare that with Taiwan or the US, where most companies are privately-owned, they do a lot better and are more efficient.  

Since we have a GLC sector in Malaysia, it is good that Khazanah (Nasional Bhd) is trying to make them more efficient. That is very important for the Malaysian economy.  


StarBiz: Do you think the oil and gas support industry will develop?  

Choong: The oil and gas sector is developing. A lot of Malaysian companies are making acquisition overseas, like MISC (Malaysia International Shipping Corp) is the biggest energy carrier in the whole world now.  

As to whether this is reflected in the stock market is another thing but the reality is that with high oil prices and we have a lot of private sector companies involved in this industry, I think we will have a strong oil and gas sector that will be the strongest in the region.  


Kok Kheng: I agree. The oil and gas industry has a lot of potential. If you look at our oil and gas stocks listed on the exchange; there are not many compared to companies listed on the Singapore stock exchange. The oil and gas sector in Singapore has performed extremely well.  

That is why many foreign fund managers ask me why our oil and gas sector is not moving when global oil and gas stocks have been doing really well? Maybe we don’t understand the sector, as it is still relatively new for local fund managers. Foreign boys are not aware of them, maybe because these companies are too small with the exception of MISC and Petroliam Nasional Bhd (Petronas).  

The oil and gas stocks in Singapore have made money for investors but we have not gone to that level. 


Zalinah: I think when the Sabah oil discoveries start operations sometime in 2007, there will be more robust growth for the oil and gas industry. People will believe that there will be more discoveries after this and with the increase of oil prices, the sector will definitely benefit.  


Teng Boo: Why the Singapore oil and gas sector is doing better than the Malaysian oil and gas sector, if you look at it fundamentally, you have two very different mindsets.  

You have one case where the Keppels, Sembawangs, have been around for a long time and they have always looked beyond the shores of Singapore.  

You have your oil and gas companies in Malaysia that have just come about one or two years ago and these companies have focused on Murphy's discoveries, Kikeh's discoveries. How exciting can you be when you are just focusing on the shores of Malaysia? 

The underlying problem lies in the addiction to government projects. There is no will to go beyond the shores and reduce reliance on government-related projects.  

To get overseas contracts from export markets can be tough. The environment and the mindset between Malaysia and Singapore are totally different.  


Kok Kheng: You have to look at going into oil and gas like the model in Singapore. Singapore has the muscle.  

Oil and gas is not like other industries, as the capital outlay is just humongous. You are talking about ships and tankers, that are huge. Most Malaysian companies do not have the financial muscle. 

You need the government to come in, like the Singapore government, they came in to help Keppel and Sembawang.  


Teng Boo: I think we need to segmentise the sector. You are talking about exploration. Oil and gas has so many different levels. You are talking about building a refinery.  

Fair enough. You can't afford to build a US$2bil refinery. But in oil and gas, you have IT-related, you have services-related and supporting services; the field is large enough.  

If you just want to rely on just government to government, then that will be a very sad day for the Malaysian oil and gas sector.  

Our issue is that we are not able to leverage. Here, we have oil and gas industry over the last 30 to 40 years; we had vast opportunities to establish ourselves to build the capability and financial resources. MISC, before Petronas came in, was still sitting on the same number of LNG carriers.  

Nobody was interested in the company until Petronas came in and laid out a long-term plan and did a phase-to-phase restructuring. If Petronas hadn't bought into AET (an international energy carrier), MISC might still be trading around RM8 to RM9 per share.  

The push and the mindset to go overseas cannot just come from government-to-government (G-to-G) relations or else, all other sectors would want to do the same.  

The Singaporean government has realised that G-to-G approach has its own limitations, which is why Lee Kuan Yew asked why is it Singapore couldn’t have a Lee Ka Shing.  

There are severe limitations in this approach. In the case of Malaysia, the oil and gas sector is in the backyard for 30 to 40 years, yet we haven’t accomplished much; something must have gone wrong somewhere.  


Choong: I do agree that a mindset shift is very important for us. We like companies that have a global presence, that have proven that they could do well not just in Malaysia but also globally. 

If they can do well both globally and in Malaysia, it shows that they are globally competitive.  

There are quite a few of such sectors like the rubber glove, plantation and oleochemical industries.  


l Part two of the roundtable discussion will be published tomorrow. 

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