No chicken feed issue
FOOD inflation has now breached a decade high while overall inflation is starting to creep up with some economists expecting the cost of goods to push on more forcefully in the months ahead.
Yes, the price of commodities have started to ease and off the 52-week highs and that may offer some respite to the pressure inflation has put on the people.
But the key commodity that has most politicians here in Malaysia worried is the price of food.
If you ask economists, they will point to core inflation being relatively benign.
Unfortunately, overall inflation is the key for politicians as the voter base will have to eat to survive and pump petrol in their vehicles.
There is nothing that screams at the predicament politicians and the vote-base is at when it comes to the price of chicken.
The humble bird that finds its way onto the dining tables of Malaysians have a special place in the social makeup. It is because of the amount we consume as a country and directly, how much out of the pay packets we will eventually spend with what some will consider to be the cheapest cost of protein.
The government has indicated that the price of chicken would not be floated from July but did a few days ago, concede that the price per kg of chicken would have to be higher than the old price ceiling.
At RM8.90 a kg, that is likely going to be below the cost of production. Even with import permits of chicken now abolished, and companies will be free to import chicken, it will be hard pressed to find sources of chicken that will be willing to sell to Malaysia as the current selling price of a kg of chicken is above RM11 in countries in the region.
It is more than RM14 a kg in the Philippines and it is nearly RM29 a kg in Singapore.
So the price of chicken will have to rise but when Malaysia is one of the largest consumers of chicken on a per capita basis in the world – higher than just about any Western country, then it is understandable why the cost of the “cheapest” source of protein will need to be kept in check.
The cost to keep the price of chicken low will mean that the government will continue to incur a large subsidy bill to maintain the price of goods and try to keep a lid on inflation.
With the cost of subsidies reportedly going to hit RM71bil, this is really an unsustainable strain on the finances of the government.
As it is the debt service coverage is slightly more than 18% and just a whisker from the 20% level where a breach will set of alarm bells among investors.
The government is said to be comfortable at having a subsidy bill of RM30bil a year.
With the ever growing cost of keeping the economy going and in the pursuit of funding choices to keep the economy chugging getting narrower, the government knows that the goods and services tax (GST) will need to be introduced in the years ahead.
The loss of revenue from a GST has meant that paying for the essential things, to help the B40 and keep inflation low, has put a strain on other areas.
It is fortunate that Malaysia is a net exporter of oil and gas but with the cost of keeping inflation low and the benefit the B40 and M40, Malaysia maintains one of the cheapest cost of petrol in the world.
If the the petrol subsidy is lifted, that extra savings can help pay for other essentials and not keep pressuring the fiscal deficit which needs to come down eventually.
Deal-making in uncertain times
SOME reports are suggesting that global deal-making is taking a back seat due to rising inflation and the stock market rout.
Indeed data from Dealogic shows that the value of deals that have been announced has dropped by 26% in the second quarter of this year, compared with the same period last year.
One reason apparently is that companies are taking a step back as they want to deal with how an impending recession will impact their business.
Another reason is that parties are shying away from deals as they reckon that the current market is suppressing their valuations.
Then there is the issue of the rising cost of debt as interest rates rise. But then not all deals are debt-funded.
Companies could use their cash or stock, although the latter presents the issue of depressed and or volatile valuations.
Cross-border deals are said to be even more complicated. With so much uncertainty in various markets and countries, how does one do a deal with a comfort level that these executives are used to? But not everyone is holding back.
In Malaysia, a list of recently announced major mergers and acquisitions (M&As) does give one the impression that such activity is on the rise.
Here are a few examples:
In March, IHH Healthcare Bhd
proposed to acquire a 100% equity in Ramsay Sime Darby Health Care Sdn Bhd for an indicative enterprise value of RM5.67bil.
If the deal goes through IHH Healthcare will become the biggest private hospital operator in the Klang Valley.
About a month ago, Petronas Chemicals Group Bhd announced it was acquiring Swedish specialty chemicals maker Perstorp Holding AB from a European private equity firm for 1.54bil (RM7.13bil).
The deal is the petrochemical giant’s biggest acquisition thus far and would enable the group to strengthen its petrochemicals portfolio as well as diversify into derivatives and specialty chemicals.
Elsewhere, CTOS Digital Bhd plans to increase its stake in RAM Holdings Bhd, a move that could create new opportunities for the former in the bond rating space and enhance client offerings.
Companies like Telekom Malaysia Bhd and Duopharma Biotech Bhd have said that they are seeking M&As to grow. Clearly, the uncertain times do present Malaysian companies with interesting M&A opportunities.
The question is, how well are the deals studied in light of the slowdowns, depressed valuations and other macroeconomic conditions taking place globally?
Already a subscriber? Log in
Get 20% OFF The Star Digital Access
Cancel anytime. Ad-free. Unlimited access with perks.
