Weathering a financial storm

The Star - 12 Oct. 2008
In the context of a global financial meltdown and fears of a recession, the guiding principle for now should be capital preservation - how do I protect what I have? IT is said that when America sneezes, the rest of the world will catch a cold. Now, America is sick and the rest of the world “could end up in the intensive care unit (ICU) if no steroid injection is given urgently”. Expressing his concern, Datuk Seri Dr Fong Chan Onn, MCA economic policy bureau chairman, says that “Like it or not, America is the bedrock, the ground zero - the world’s financial institutions evolved from Wall Street and the Federal Reserve.” He believes that the current economic turmoil had its beginning in the aftermath of Sept 11, 2001, and that we are heading for choppy times because the severity of a global financial meltdown has not been fully played out yet. Despite announcements of government intervention across the US and Europe and bailouts amounting to trillions of US dollars, the world saw stock markets tumbling down and falling for seven consecutive days in anticipation of a global recession. The message is the same everywhere: investors do not think the end of the problem is in sight yet and what is plaguing the markets is a “loss of confidence”.

The question Malaysians are asking is not whether the financial tsunami will hit us but when and how badly. Are our deposits in our banks safe, what about our jobs and our businesses, and our investments in the stock market? Last week, it was reported that the US lost 160,000 jobs.
“This is another indication that the economy is in stress. If the economic downturn is severe, consumption will be reduced and the US will import less from Asia,” says Dr Fong in an interview. The former Human Resources Minister and dean of Universiti Malaya’s Faculty of Economics and Administration adds that Malaysia exports a high volume of electrical items and other goods to the US. When America tightens its belt, investments to other countries will slow down. Although Malaysia has diversified its investment sources to other countries, the Middle East, for instance, America and Europe remain the major markets for world production.
“We cannot underestimate their effect on us,” says Dr Fong.
Dr Fong: 'Malaysian banks too should offer 100% guarantee'
“Unfortunately, the Government and the public have not taken cognisance of how severe this economic tsunami can be,” says Dr Fong. “In 1997-1998, investors lost confidence in the Asian currency but we had the US and China to support us through. “Now, it is the apex, the rock of Gibraltar, that is in trouble. The epicentre in New York is spreading to Europe and other markets have also tumbled. “It is also going to affect China because China has US$520bil locked in US treasury bills. So do Japan (US$600bil); Hong Kong (US$60bil) and even Thailand (US$32bil). “For a massive loan mortgage of US$2.5tril, more than a few banks will be involved. Unless all declare their bad loans, we will not know the extent of the problem.
“In the Lehman bankruptcy filing, for example, it was disclosed that Citibank owed US$1.5bil. Another example: HSBC headquarters in London has an outstanding obligation of US$20bil within six months. “My personal feeling is we are heading for choppy times because the severity has not been fully played out yet. “It will take a much longer time to recover. Our exports would slow down, orders may reduce, and factories may have to reduce staff, freeze new employment...”
Everyone agrees that the good that came from the 1997 crisis is that the Government imposed a lot of instruments and regulations on our financial institutions. They need to be locally incorporated; are compelled to abide by guidelines on the amount of investment they can make overseas;have to get Bank Negara clearance for investment overseas; and are generally limited to 10% of their deposit.
“On the whole, our financial institutions are not that adversely affected. However, many individuals are affected by this turmoil because they have invested in shares and many other financial products offered by these financial institutions,” says Dr Fong.

In this region, Malaysia’s coverage per depositor per bank is one of the most comprehensive, eclipsing that of even Singapore (US$13,808) and Hong Kong (US$12,872).One way around this RM60,000 insurance limit for the man on the street is to spread his deposits around the 36 member banks or set up a range of joint accounts in a bank or several banks. “But banks also should make it a point to tell customers that their deposits are guaranteed up to RM60,000 only, to allow depositors to make appropriate decisions to safeguard their capital. Ireland offers 100% guarantee and Germany has pledged to do the same. Malaysia should also look at doing that,” says Dr Fong. If our deposits are relatively safe, how do we nevertheless prepare for the hard times ahead? Says Dr Fong: “The guiding principle for now should be capital preservation. This is the time for folks to think ‘what steps should I take to preserve what I have?’ It is definitely not the time to think of how much profit one can make.“This is not the time to be foolhardy and enter the stock market, this is my opinion. Do not use borrowed money hoping to go in and making a killing within a year.“We still do not know and understand fully the exact nature of damages from this mega crisis.“It is too risky to venture into the unknown. Even the smartest professional investors can make mistakes, what more individual investors with their hard-earned money.”He cites the example of the Government of Singapore Investment Corp, which bought a slice of UBS for 10bil francs in December only to find a few months later, that it was holding on to merely half its value.“It has the financial strength to hold on to the shares but many individual investors do not,” he says.“If one really wants to pick up stocks, look at the dividend yield. At the present price, if it gives a dividend yield of 10%, which is higher than for fixed deposits, one can consider. Also, make sure the stocks are recession-proof, such as counters in health, education and food.“As for properties, well, if you need a home, you need to buy. But in any economic situation, people will look at locality. Properties in good locations can easily be resold or rented out. You can look around but again, the principle should be capital preservation.”Good foundations: The Malaysian banking sector is expected to be stable in 2008 despite the global financial crisis as the old-style model of conservative banking is now holding us in good stead.