Short position


Ringgit tailwinds

THURSDAY’S announcement by Bank Negara that policymakers may consider reviewing the current degree of monetary accommodation gave a boost to the ringgit, which climbed to a near two-month high against the US dollar.

The wording of the monetary policy statement is good reason to believe that the central bank will start to raise the benchmark overnight policy rate (OPR) as early as January when policymakers next meet.

The expectation of a rate hike, possibly even two rate hikes next year, has had an electrifying effect on the ringgit. The US dollar’s weakening trend has accelerated and the strength of the ringgit is now more convincing than before.

Sometime in the next week or two, the ringgit will hit the psychological four to the US dollar level. Should the momentum be maintained, then the old 3.80 peg is even achievable. A currency’s strength is a reflection of the economy’s fundamentals and judging from the Malaysian economy’s performance in the first half, there is reason to believe that growth is sustainable.

Indicators are showing that growth could come in above 6% year-on-year for the third quarter after the 5.6% rise in the first quarter and the 5.8% achieved in the second quarter, building on both exports and domestic economic activity.

Surging exports are not only good for the international reserves of Bank Negara, but will also have a spillover effect on the rest of the economy, particularly for the vast services sector that drives the economy. With stronger fundamentals, investor confidence should rise, which will, in turn, be good for Malaysian assets.

Besides signaling that economic growth is strong and stable enough to absorb higher interest rates, the hike will also narrow the interest rate differentials at a time when major central banks are raising interest rates. The US Federal Reserve’s (Fed) determination to normalise interest rates means that there will be more rate hikes to come, and Bank Negara’s tightening monetary policy stance could help ease pressure on the ringgit.

To put things in perspective, the Fed has raised interest rates twice, the Bank of England once and the European Central Bank has announced that it will cut back on its quantitative easing programme, which will effectively see interest rates rising.

At the ground level, a rise in the OPR will see commercial banks adjusting not just their lending rates but also their deposit rates, which will help ordinary Malaysians somewhat, as their savings have eroded due to high inflation this year, which does not look like abating anytime soon because of higher energy prices.

A strengthening ringgit will also help with consumer sentiment, which has been below the Malaysian Institute of Economic Research’s 100-level threshold, indicating lower confidence since mid-2014. It will also help ease the price pressures from imports.

 

No more easy jobs

MASS Rapid Transit Corp Sdn Bhd’s (MRT Corp) notice outlining the framework for the construction of the Mass Rapid Transit line 3 (MRT3) has caused some consternation among local contractors.

Unlike the first two MRT lines, which were financed by the government, the private sector has to fund MRT3.

MRT Corp has opened tenders for the lead contractor to work on a turnkey basis and be responsible for the engineering, procurement, construction, testing and commissioning of the 40-km rail project. That’s not all.

The turnkey contractor has to come up with a financing package of up to 90% of the total MRT3 cost and it is to have a minimum 30-year repayment period. The party has to have experience in having carried out civil works of either two urban metro projects worth at least RM5bil.

It is quite obvious that MRT Corp only wants serious players to undertake the project. Even the bond to tender is priced at RM5mil and is to be retained for six months.

The notice stated explicitly that the financing can be in the form of foreign denominations, meaning that the government is open to foreign companies forking out the construction cost.

Should local contractors be worried? The good ones should not be.

Government finances are already stretched. So far, the government has financed all public transport systems and it is something that cannot be sustained.

So for MRT3, the government is opening up the financing and construction work to the private sector. Not many local companies have the financial strength to undertake projects of this nature.

It is a work only for the big boys. And they have to team up with the foreign names for the financing. In return, a substantial portion of the jobs will go to foreign contractors.

Since it is market-driven, only the most efficient of contractors would land jobs in MRT3, unlike the previous two lines where 30% of the jobs were allocated to contractors that were majority owned by bumiputras.

 

Can new entrant help CME?

AMID an uncertain future, a new major shareholder has emerged in CME Group Bhd .

This will probably give a much-needed new lease of life for the loss-making fire-fighting equipment maker.

The new single-largest shareholder in CME is an investment holding company called Best Birdsnest Sdn Bhd, led by individuals by the name of Lee Siah Sian@Lee Hay Hian and Liew Kuo Yaw.

The company now owns a 16.61% stake in CME after buying the block of shares from CME executive director Tunku Nizamuddin Tunku Shahabuddin.

Tunku Nizamuddin, who had held the stake through Ikram Mulia Holdings Sdn Bhd, has since ceased to be a substantial shareholder in CME.

Business has been challenging for CME in the last 10 years.

Earnings have been volatile, and the company has been raking in losses since 2014.

While the group claims to have ongoing contracts exceeding RM48.8mil for supplying fire-fighting vehicles and maintenance services that could boost its bottom line, stiff competition, rising production cost and other economic uncertainties such as a weak consumer sentiment will continue to cloud its outlook.

Already, its net loss has widened to RM3mil in the six months ended June 30, 2017, from RM1.77mil in the corresponding period last year. This is despite the group raking in a significantly higher revenue of RM24.3mil, compared with RM10mil previously.

CME attributed its higher revenue to the completion and recognisation of fire-fighting vehicles as contributions from its trading segment. But earnings were dragged down by losses incurred in the retail segment and further provisions made for the forbearance deed by a foreign subsidiary company.

So, the weight of responsibility is on the new shareholder of CME to restore confidence in the company. And unless a new strategy is found, CME will probably continue to be on a volatile path.