Adapting to changing economic scenario


  • Business
  • Wednesday, 21 Jun 2006

Rising oil prices pose problems for many companies. For Malaysia Airlines managing director Idris Jala, it is a constant challenge to review all avenues available to improve finances. 

At Golden Hope, group chief executive Datuk Sabri Ahmad is looking to expand the company's activities and contribute to the Northern Corridor development. This will be through agriculture and agro-based projects that have been identified. 

Rising interest rates will impact Kurnia Asia on two counts, says managing director and CEO Datuk Adrian Loh. It may impact demand for new and second-hand vehicles, and at the same time, result in higher fixed deposit rates

IDRIS JALA 

Idris Jala

Managing director/CEO  

Malaysia Airlines 

 

STARBIZ: Impact of rising interest rates on your company 

Generally, every company is impacted by rising interest rates such as financing and leasing costs, and Malaysia Airlines (MAS) is no exception.  

In our case, rising interest rates would dampen the economy and public sentiment, and this could reduce discretionary travel in general.  

However, with our award-winning service and competitive pricing, we believe we can offer compelling products that will help us mitigate any changes in travel patterns. 

 

Impact of appreciating ringgit on your company 

An appreciating ringgit will have an impact on our revenue as well as costs. As a significant amount of our costs are denominated in dollars (such as fuel, lease costs and spare parts), a stronger ringgit would reduce our costs proportionately.  

Conversely, there would be some impact on our revenue since a significant portion of our revenue is also denominated in currencies such as the euro, sterling, Australian dollar and yen. Overall, the net effect of a stronger ringgit is not expected to be substantial. 

What would be the issues and challenges facing the world economy this year? 

Escalating oil prices and interest rates will have an impact on worldwide demand and dampen global economic growth.  

The weakening of the dollar and threats of further interest rate hikes to curb inflation could also result in a reduction on US demand, which could affect the global economy.  

From our standpoint, escalating oil prices would pose the biggest challenge as it would have a direct impact on our costs. However, at MAS, we have been aggressively exploring various options to mitigate this risk and also other controllable costs.  

These initiatives include initiating fuel hedging policies, imposing fuel surcharges, more careful adherence to the imposition of excess baggage charges and streamlining processes for greater efficiency.  

We are, in many ways, going back to basics by reviewing every aspect of how we run our business, to get us on the right track towards profitability. 

 

How do you see the Malaysian economy performing this year? 

The Malaysian economy should be relatively strong this year, and we subscribe to market expectations that the economy will grow 6% this year.  

We are cautiously optimistic, given that high oil prices and the threat of an avian flu outbreak could have an impact on the overall sentiment. Having said that, we continue to see good demand from Malaysians for travel, to both domestic and international destinations.  

In fact, our recent MAS Travel Fair generated a whopping RM157mil in revenue for us. We believe the overwhelming response to the fair is a very strong indication of the consumers’ continued strong demand for air travel, and confidence in our superior product and service offerings. 

 

How is your company coping with the trends in the world and local economies?  

There is still good demand from Malaysians to travel to both domestic and international destinations

We are a global business, which means that we have to constantly monitor global trends that may impact our business. In line with our expectations of a stronger domestic economy, we believe that MAS would be the prime beneficiary of domestic growth, as we compete for an even higher proportion of the population's travel dollar.  

Nevertheless, we are in a global industry that is becoming increasingly challenging.  

We have rolled out and commenced implementation of our Business Turnaround Plan, which outlines the steps that we will take to return us to profitability and set in place a working culture in MAS that will ensure that we are able to weather any adverse economic conditions in the future.  

We will continue to be proactive in managing the factors that affect our business such as fuel prices, interest rates and currency movements. 

DATUK ADRIAN LOH 

Managing director/CEO 

Kurnia Asia Bhd 

 

IMPACT of rising interest rates on your company 

As Malaysia plays catch-up in raising interest rates with the rest of the world, Kurnia is not isolated from the impact of higher lending rates. We are basically impacted on two counts. First, the higher rates will to a certain extent impact the purchase of new and second-hand motor vehicles through higher financing costs and hence consumer demand may decelerate.  

On that basis, as the economy slows, our premiums written may be lowered due to lower total vehicle sales. Nevertheless, as consumers begin to adapt to the changing landscape, we believe that vehicle demand is set to return to the growth path and, hence the impact on our motor premiums will likely be positive. 

Also, the higher domestic interest rates mean that Malaysia’s current fixed deposit rates as well as bond yields are set to rise. This is positive for us as we hold approximately 37% of our investment portfolio in fixed deposits.  

As for our bond portfolio, the impact is that the higher yields (and hence lower market prices) will result in the value of our bond portfolio being affected, especially for bonds that are classified as non-core. On the other hand, as we are deemed to be not ideally weighted in the fixed income portfolio, the higher market yield allows us to ride on the upward rate cycle and enhance our investment returns. 

 

Impact of appreciating ringgit on your company 

The appreciating ringgit has no impact on our business model as we are primarily domestic oriented with both our cost and revenue in local currency. 

 

Issues and challenges facing the world economy this year 

After the unprecedented growth the world had achieved over the past few years, it is indeed natural for the economy to cool off a bit before regaining its momentum.  

Indeed, with higher commodity prices, namely oil and base metals, the world economy is adapting to the new realities. Hence, the world over is now experiencing pressure in terms of higher inflation, which leads to higher interest rates and slowing global growth.  

The challenge indeed is for central banks around the world to orchestrate a managed slowdown rather than an abrupt end to the strength of the world economies. In doing so, the central banks must ensure that monetary and fiscal policies are rightly adapted to changes in the economic landscape. 

 

How do you see the Malaysian economy performing this year? 

For Malaysia, after registering a 5.3% GDP growth for Q1, the Government is positive on growth expectations for the rest of the year. However, as consumers begin to feel the pinch in terms of lower disposable income as a result of higher interest rates and energy costs, we believe that a slowdown is a natural result from the painful, but necessary measures taken by the Government since the start of the year. 

As consumer spending eases, we believe that the Government will be the key driver of economic activities, especially from some of the Ninth Malaysia Plan initiatives. Overall, we see a growth of between 5% and 5.5% for the Malaysian economy this year, relatively unchanged from last year. 

 

How is your company coping with the trends in the world and local economies? 

Kurnia, being a conservative company but dynamic to changes, is adapting well to the changing economic landscape. We are always mindful of the “ground feel” and adapt to changes as quickly as we can to ensure that our long-term growth strategies are not unduly affected.  

As mentioned earlier, while our business growth may be affected by the slowing consumer demand, we will likely see better returns from our investments as interest rates move higher. Another area of concern is mitigating our costs and some of the internal measures taken are expected to result in positive savings for the company. These include savings on better claims management and operating costs. 

DATUK SABRI AHMAD 

Group chief executive 

Golden Hope Plantations Bhd 

 

Datuk Sabri Ahmad

IMPACT of rising interest rates on your company 

We do not see any significant impact on Golden Hope group as total overall borrowings are still manageable apart from the group enjoying good rates.  

Additionally, although higher interest rates have a negative impact on the property sector by reducing demand, our exposure to this sector is somewhat limited following the disposal of a major portion of our property business under the rationalisation scheme with Island & Peninsular Bhd, which was completed in October 2004.  

Operationally, there is some impact, for example, on the higher cost of borrowing. However, for Golden Hope, we have low gearing so the effect is not very pronounced. For some of our subsidiary companies that buy raw materials, such as refineries, we have to make some arrangements to get better overall rates. 

 

Impact of appreciating ringgit on your company 

The ringgit has strengthened between 5% and 6% against the dollar since the de-pegging. 

Generally, imported items like fertilisers and machinery will be cheaper, which will of course be beneficial to the group as these form part of our purchase items yearly.  

Although theoretically, exports like palm oil and rubber will receive less with the strengthening of the ringgit, prices of these commodities have continued to remain firm largely because of the strong global demand, especially for alternative uses like biofuel, etc. This will mitigate the effect of the strengthening ringgit. 

 

On purchases 

Golden Hope’s big-ticket purchases are fertilisers (RM150mil annually) and other imported chemical compounds. With the appreciating ringgit, we were getting a slight improvement in prices.  

However, since the base material for fertilisers is mostly petroleum-based, the high crude oil prices these days practically negate any potential savings from a stronger ringgit. 

 

On sales and exports 

For refined products, the export prices are denominated in dollars, therefore, there is some impact from a stronger ringgit. To mitigate this, we are hedging on a contract-by-contract basis although there is always a risk due to the timing.  

 

What would be the issues and challenges facing the world economy this year? 

Within the Asian economies, high energy and commodity prices, rising inflation and increase in interest rates remain the issues and challenges in sustaining regional growth thus far.  

Globally, the further escalation of oil prices hinges on the peaceful resolution of the Iran nuclear episode, stabilisation of the situation in Iraq and the mitigation of threats to oil production in Nigeria.  

The major economies are facing similar issues with regard to rising inflation and interest rates that, if left unchecked, will have cascading effect in this region. 

 

How do you see the Malaysian economy performing this year? 

With the 5.3% GDP growth registered for the first quarter of 2006 (4Q 2005: 5.2%), the continued sustained domestic demand led by the private sector, growing exports, and growth in the global and regional economies, the Malaysian economy looks resilient enough to sustain its positive growth for the rest of the year. 

One of the key concerns, however, is the need to keep inflation from escalating further. The Consumer Price Index in Q1 2006 averaged 3.7% (4Q 2005: 3.4%) and the outlook for the full year ranges between 3.5% and 4%. We hope the increase in interest rates, fuel and energy cost will not dampen consumer sentiment too much, and affect the consumers’ consumption and spending behaviour. 

 

How is your company coping with the trends in the world and local economies? 

In Malaysia, as a player in the agricultural sector, the Government’s drive to make agriculture the third pillar of the economy as targeted in the Ninth Malaysia Plan presents numerous opportunities for growth.  

Golden Hope is looking to expand and contribute to the Northern Corridor Development through our activities in agriculture and agro-based projects that we have identified. 

Globally, with the current high petroleum crude oil prices, Golden Hope has positioned itself to capitalise on the current global trend towards renewable and sustainable sources of fuel and energy through our biodiesel projects. Our first biodiesel plant in Banting will be operational by the middle of next month. 

The opportunity for biodiesel is not limited only to vehicle use, but also for power generation. In Europe, the governments there are targeting 20% of total power generation from clean and renewable sources like biomass, and solar and wind energy.  

Even Malaysia has announced recently that it would look at renewable alternatives such as hydropower for future power generation plants. Biodiesel can play a major role as a clean, sustainable and renewable energy source. 

Tuesday's report

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