Balancing growth with inflation concerns


  • Business
  • Saturday, 24 Jun 2006

The CEO Survey H1 2006 

EVERY year, British American Tobacco looks to the budget to see how taxes on tobacco would be. This year, managing director Bart Alkemade hopes for a moderate increase that would prevent another jump in illicit tobacco trade. 

Carlsberg managing director Mogens Joenck is fairly positive of consumer confidence and spending which he expects will improve with the implementation of government projects under the Ninth Malaysia Plan. 

Simon Soon, managing director of Choo Bee Metal group, sees three main trends developing in favour of its core businesses. He views future prospects as being quite exciting. 

BART ALKEMADE Managing Director British American Tobacco (M) Bhd 

IMPACT of rising interest rates on your company 

BAT Malaysia’s current borrowings are at a fixed rate, so there is no impact in terms of borrowings unless there is a need to tap into the commercial paper market.  

However, the rising interest rate is likely to impact consumer spending, which could, in turn, create a knock-on effect on the tobacco industry if consumers switch from premium cigarette brands to cheaper alternatives of value-for-money brands, or even illegal cigarettes.  

Impact of appreciating ringgit on your company 

Since the de-pegging of the ringgit against the dollar in July 2005, the ringgit has strengthened from 3.75 to the dollar in January to about 3.66 currently, an appreciation of 2%. 

In general, being a net importer, BAT Malaysia will benefit marginally from a stronger ringgit. 

Issues and challenges facing the world economy this year 

The key challenge for economic policymakers is how to deal with the prospect of increasing inflation. Policymakers have to balance growth with inflation concerns. There is a risk that an over-tightening of monetary policy could restrict economic growth. 

How do you see the Malaysian economy performing this year? 

Increases in electricity tariffs and fuel costs may fuel inflation in Malaysia. This, combined with rising interest rates, has already led to a significant weakening in consumer confidence – currently at the lowest levels recorded since 2000. 

For fast-moving consumer goods companies like ours, we are concerned that consumers may be tempted to purchase illegal cigarettes selling at exceptionally cheap prices if the price of legitimate cigarettes is seen as unaffordable.  

In addition, it might put pressure on wages in a time where cost control is needed.  

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

The biggest challenge for BAT Malaysia and the legitimate tobacco industry in the country is the rapid growth in the market for illegal cigarettes, which has been mainly fuelled by significant excise-driven price increases in the last two years, coupled with a recent drop in consumer spending power.  

Cigarettes in Malaysia are now the most expensive in the region after Singapore. 

A recent survey commissioned by the Confederation of the Malaysian Tobacco Manufacturers discovered that the market share for illegal contraband cigarettes has resurged to 19% in 2005.  

Meanwhile, the demand for legal duty paid cigarettes has declined by 8% in 2005. 

We are, however, encouraged to note the significant increased efforts of the enforcement authorities, particularly the Royal Malaysian Customs in the fight against the trade in illegal cigarettes. Without strong enforcement, illicit trade would show a rampant rise.  

Another worrying trend is the emergence of the “under-declared” segment in the cigarette market that features products sold at unfeasibly low prices. They are slightly above the amount of excise duty and sales tax levied per pack, but clearly cannot cover the unit costs of raw materials, manufacture and distribution. 

Going forward, it is our fervent hope that when formulating Budget 2007, the Government will consider implementing a moderate increase in tobacco taxation that would prevent another jump in illicit tobacco trade. 

MOGENS JOENCK Managing Director Carlsberg Brewery Malaysia Bhd IMPACT of rising interest rates on your company 

The rising interest rates would be beneficial to our company as our group is in a surplus funds position and our surplus funds are mainly invested in deposits with approved financial institutions. 

Impact of appreciating ringgit on your company 

The appreciating ringgit will have a positive impact on our imports of raw materials and spares. It would mean lower costs. 

On the other hand, the appreciating ringgit would result in lower ringgit revenue, as our export pricing is foreign currency denominated. Fortunately, we have taken steps to hedge our foreign currency income stream, which mitigates the impact, at least for a while. 

Issues and challenges facing the world economy this year 

The challenge facing the world economy this year is rising costs in an environment where global margin squeeze continues. Rising oil prices have an overall impact on costs.  

The challenge is how to absorb the cost escalation without affecting pricing, which means efficiency and productivity will have to be improved constantly. 

How do you see the Malaysian economy performing this year? 

The Malaysian economy will be resilient and the government’s GDP growth expectations will be achieved. The current high prices of commodities and oil will augur well for the nation.  

Consumer confidence and spending in an environment with lower petrol subsidies and higher utility costs will recover and improve with the implementation of government projects and the Ninth Malaysian Plan. 

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

Carlsberg, being the market leader in the Malaysian brewery industry, will continue to invest in the Carlsberg brand and ensure that the quality of its products is maintained at the highest level.  

The company has also addressed the rising costs with the rollout of its “Production Excellence” and “Commercial Excellence” programmes.  

The company is also investing in training its staff to cope with the fast changing environment and consumer expectations. 

The investments and programmes have been developed to address both the short- and long-term trends, which the company will experience. 

SIMON SOON Managing Director Choo Bee Metal Group 

IMPACT of rising interest rates on your company 

The increase in interest rates at a rate higher than those in neighbouring countries will erode the competitiveness of steel players in Malaysia. 

However, for Choo Bee, our preference for minimal gearing will strengthen our position. 

Presently, we have cash reserves of about RM22mil, which should be sufficient to finance our working capital for expansion and even further capital expenditure without significant impact from the interest rates. 

Impact of appreciating ringgit on your company 

A strengthening ringgit will mean cheaper imports of machinery and raw materials for Choo Bee. The main export destination has been Singapore and the ringgit has not gained significantly on the Singapore dollar.  

So, the present currency trends will not have a negative impact on Choo Bee.  

Issues and challenges facing the world economy this year 

China continues to play an important role in its influence on the world economy. There is strong growth in Japan and some European countries too.  

However, the overhanging threat of inflation in the US may lead to higher interest rates and, together with high oil prices, will have the effect of dampening growth.  

Other negative issues would be the waning confidence in the US economy due to the costs of the Iraq war and debt and the threat of terrorism, disease and adverse weather patterns which will dampen economic growth. 

How do you see the Malaysian economy performing this year? 

Compared with last year, the Malaysian economy should fare better. The determination of our government to effectively implement the 9MP is encouraging. We are confident that Malaysia would achieve the GDP growth targets that it has set. 

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

We can see three main trends developing in favour of Choo Bee’s core business of producing steel pipes - the emphasis in the 9MP on the water sector, the increase in oil and gas activity driven by the high oil prices, and the development of the market for structural hollow sections in the construction industry.  

Trends of higher energy costs and the tight iron ore supply situation developing in the global steel industry also seem to augur well for stabilisation in the steel industry.  

Taken together, we view the future business prospects and environment in which Choo Bee operates to be quite exciting. 

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