A Malaysian Stock Market Caution
by Harun Rashid
Oct 4, 2001
Conservative investors have three primary interests, safety of capital, safety of capital, and safety of capital. Venturesome investors are interested in the rate of return and skill of management. Some investors are merely socially acceptable gamblers with little interest in fundamentals, totally indifferent to the intrinsic value of the business they are entering, focused mainly on the short term prospects for a capital gain.
Governments are not investors, or should not be. Money raise (and spent) by governments is for the purpose of paying for essential functions of government. It is not for the government to use the public's funds with an eye to profit from interest income or capital gains, though excess funds collected from the people in the form of taxes and fees by a prudent government may be placed temporarily at interest. Most governments are borrowers, not lenders.
Public utilities are generally closely held and regulated by governments in the interests of dependable service and minimum rates. Roads, water, sewage, electricity and public transportation are proper concerns of government. Because the capital requirements of such large civil systems are great, it is generally necessary to raise money through long term bonds that are guaranteed by the government. Since it is the public which must repay the bonds, the question of the planned project is put before the public for a vote. If there are serious concerns about the feasibility or prudence of the project, the funding is denied.
Governments tend not to be efficient in operating the public utilities they develop, and in the absence of managerial talent will opt for disposing of the problem through the process of privatisation. When care and planning are exercised in the privatisation process, the management of public utilities can be improved. If there is incompetence or corruption in either the transfer or new management, the privatisation can be a very expensive disaster for the public.
Naturally the government does not wish to admit failure, and the managers chosen will not reveal the true reasons why the project collapsed. Thus the public is left with little for satisfaction but rage and hate for both the personalities of government they hold responsible and the individuals who have failed to perform. Often there is a malodorous whiff of cronyism and nepotism in the covering up of large losses. The public, in the form of their government representatives, must pick up the pieces, and attempt to restore functionality. It is generally a very expensive operation, especially when left in the hands of the same government and administrators who created the mess in the first place.
The de-privatisation process involves the return of the remaining assets of the utility. This process is usually tantamount to a bankruptcy, where the operators receive little if anything from their failed attempt to operate a public utility successfully. Their original capital, if any, is forfeit. This is the risk associated with buying the new shares of a newly privatised corporation with questionable experience and management expertise.
In Malaysia the process is different. The privatising parties are handsomely rewarded, receiving their money back, and allowed to keep any money that might have been funneled off. The debts are absorbed by the government, and nothing further is said. Only the debts and burdensome interest payments remain.
Much of the business activity of Malaysia centers around international trade and tourism. International trade is a reasonable guide to the annual GDP, and this has been flat for the first eight months of the year (see Figure 1).
Malaysia's External Trade (Imports plus exports)
The events of September 11 have had a serious effect on airline travel, and there is a large decline in the amount of tourism. The slowdown in trade can now be expected to decline further. Employment is suffering, with a predictable depressing effect on consumer confidence and spending.
The one bright spot is the Malaysian stock exchange, as mirrored by the KLCI. Malaysia, to judge by the resilience in the stock market, is immune to the pressures of massive indebtedness and a slowdown in basic economic activity. The official response to any question is always optimistic, projecting not only a level of growth for 2001, but full recovery to previous levels in 2002.
There are new strategies planned with a new budget. New deficit spending is planned to provide stimulus. The question is whether this, or anything, can be done to put the decidedly difficult dilemma in drydock, allowing repairs to be made. Much mitigates against a salvage. The defaults continue to be troublesome, and though these are said to be private, the true ownership is in the hands of the government, through the various enterprises and funds owned and controlled by the Finance Ministry.
Thus, any funds earmarked for stimulating activity will immediately be siphoned away to satisfy the creditors of the enormous loans assumed by the government in its de-privatisation activities. To compound the problem, new loans are being made every day, in the form of new bond issues and private placements. It is difficult to see how these funds can ever be repaid. It is a time for prudence, as government involvement in the publicly traded shares masks the true risk.
There is a limit to the allowable chicanery any market can endure and continue to exist as a viable entity. In Malaysia that limit has been broached.
NB: This is the 200th column in the Worldview series, and if there is a theme to mark it, perhaps it is the most serious.