Published July 10, 2009

M'sia studies concerns over N Korean funds

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(KUALA LUMPUR) Malaysia is assessing US concerns that banks in the South-east Asian nation might be used to process financial transactions by North Korean entities developing nuclear arms and missiles.

A US delegation this week returned from Malaysia and China after seeking cooperation to prevent such transactions, which are prohibited under United Nations Security Council resolutions. There are concerns that countries including 'Malaysia can be used for these activities', a senior State Department official told reporters on Wednesday in Washington on condition of anonymity.

'We are looking at the details of it,' Malaysian Prime Minister Najib Razak said yesterday. 'We don't want Malaysia and our banking system to be used for those purposes. We don't want to be accused of doing anything against UN resolutions or international norms.' - Bloomberg

Published July 10, 2009

WEF report puts M'sia one notch up in economy

Declines in business environment, border administration cited

By PAULINE NG
IN KUALA LUMPUR

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MALAYSIA turned in a mixed performance in the Global Trade Enabling Report 2009, making strides in the area of market access but falling behind in business environment and border administration.

Climbing up: The 'Global Trade Enabling Report 2009' notes improvements in Malaysia's domestic and foreign market access, upgrading its rank from 68 to 32

According to the report by the World Economic Forum (WEF), the country was rated the 28th most conducive economy out of 121, one notch better than last year.

As a top exporting nation, Malaysia has stepped up efforts in recent years to maintain its attractiveness to investors and businesses in the face of increasing competition. The report noted improvements in domestic and foreign market access. The rank was upgraded from 68 to 32.

Even so, the report indicated declines in border administration which led Malaysia's ranking in the category to fall to 33 from 24 previously. Despite coming in at the top in the area of cost to export and second best after Singapore in cost to import, its average came down due to issues with transparency, time and documentation.

An executive who heads an industry group observed the service at the Customs tended to depend on 'who you appoint as agent and how big you are'.

'My company hasn't had too many problems but we do get complaints - especially from members of smaller firms - that the Customs can be bureaucratic when it comes to approvals. Speed should apply to all regardless of size.'

Crime was also an issue. Reflecting the overall public view that the police have not been effective in stemming crime, the report gave Malaysia a poorer score in the area of physical security. It was ranked 34 in the sub-category of reliability of police services and 66 in business costs of crime and violence.

The report, however, noted a slight improvement in the regulatory environment.

Still, climbing up the rankings has not proved easy. Businessmen say the government machinery is too large and inefficient and that corruption has yet to be significantly reduced.

This was underscored in the WEF Global Competitiveness Report 2008-2009 released in May which cited inefficient government bureaucracy as the most problematic factor for doing business.

Corruption was next, followed by crime and theft, and inflation. Government instability or coups were ranked as least problematic. Businessmen said officers who work hard ought to be rewarded in the form of wage increases so that they are motivated and also less likely to be corrupt.

Many are looking to Pemudah - the special task force comprising of private and public sector executives established in 2007 to facilitate business by reducing red tape - to expand its scope and to help simplify procedures elsewhere after it claimed success in immigration, licensing, land administration, registration of property, company filings and e-payment facilities.

Published July 10, 2009

Fall in M'sia's industrial production slows in May

Figures boost optimism that worst of manufacturing slowdown is over

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(SINGAPORE) Malaysia's industrial production fell the least in six months in May, boosting optimism that the worst of the manufacturing slowdown may be over for South-east Asia's third- biggest economy.

Production at factories, utilities and mines dropped 11.1 per cent from a year earlier, after declining a revised 11.7 per cent the previous month, the Putrajaya- based Statistics Department said yesterday. That compares with the median forecast for an 11 per cent fall in a Bloomberg survey of 21 economists.

Malaysia's economy is expected to improve in the coming months after contracting in the first half of the year, central bank governor Zeti Akhtar Aziz said this week. Prime Minister Najib Razak is easing investment rules to attract funds into the country as he seeks to revive an economy forecast by the government to shrink as much as 5 per cent in 2009.

'Overall production output has turned after hitting the trough in February, and should continue to grind northward in the months ahead,' said Irvin Seah, an economist at DBS Bank Ltd in Singapore.

Malaysia's manufacturing output shrank 15.2 per cent in May, yesterday's report showed. Mining dropped 3 per cent, while electricity production fell 2.1 per cent. Industrial production tumbled 13.2 per cent in the first five months from a year earlier.

Gross domestic product (GDP) contracted 6.2 per cent in the first three months of the year. The economy probably performed 'very much the same' in the second quarter, Bank Negara Malaysia's Ms Zeti told reporters on Wednesday. Overseas shipments have dropped for eight consecutive months, with the most recent data showing a 29.7 per cent decline in May from a year earlier.

The Malaysian ringgit fell to the lowest in more than two months yesterday on concern that the economy slid into a recession in the second quarter amid declining exports. The currency declined 0.4 per cent to 3.5775 per US dollar as at 1.07 pm in Kuala Lumpur.

'In the short term, we see volatility in our exchange rate, just like we see volatility in the major currencies,' Ms Zeti said on Wednesday. 'As our underlying fundamentals are expected to improve, the currency can also be expected to strengthen gradually over time.' - Bloomberg

Published July 10, 2009

Nomura still cautious on Singapore property stocks

By UMA SHANKARI

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WHEN it comes to Asian property stocks, buy in China, take profit in Singapore and be selective in Hong Kong and India, Nomura Research is advising investors.

Too high: The recent rally in the shares of Singapore developers is simply 'too far, too fast ahead of supporting fundamentals', according to a Nomura analyst

The strength of Asian property stocks was one of the big surprises in the first half of 2009, analysts said at the Nomura Asia Equity Forum yesterday.

'Asian property stocks have risen 55 per cent year to date and rebounded 131 per cent from the 2008-2009 trough, but remain 48 per cent below their 2007-2008 peaks,' Nomura said in a report.

But the fundamentals vary from market to market, the firm said. For Singapore, the recent rally in the shares of developers is simply 'too far, too fast ahead of supporting fundamentals', said analyst Tony Darwell.

'Broader issues of rising inventory, weak residential leasing demand and markedly lower rents will likely weigh on underlying asset prices,' he said.

Right now, investors have priced a 20 per cent-plus rise in home prices over the next 12-18 months into developers' shares, he said. These expectations are 'premature'.

Nomura remains bearish on Singapore developers, with 'reduce' calls on CapitaLand, City Developments and Keppel Land.

But it has a 'buy' call on CapitaLand's office trust CapitaCommercial Trust (CCT), despite its overall bearish view on Singapore's office market. This is because CCT's management has shown it is able to contain the trust's portfolio vacancy - which was a low 2.3 per cent at end-April after a difficult Q1 leasing market, Nomura said.

It also said Asian markets that have done better than expected include China residential, Hong Kong residential and Singapore mass residential.

Segments that have performed worse than expected include Hong Kong office vacancy, Singapore housing rents, Singapore offices and Singapore industrial.

Published July 10, 2009

When quality matters more than quantity

By R SIVANITHY

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IT IS tempting to call for increased regulation in the aftermath of the collapse of the structured products segment. For sure, more needs to be done to protect the public interest and to ensure investment scandals are minimised. But when it comes to financial instruments and investment recommendations, is more regulation really the answer, or would public interest be better served if regulatory focus is more targeted?

In other words, assuming that the disclosure-based model is to be retained, is the way forward a greater quantity of regulations or just better quality regulation?

The problem with the disclosure model in practice today is not that it is flawed or has to be buttressed with more rules, but that financial intermediaries, brokers and their agents have been allowed to hide behind the 'caveat emptor' maxim and profit from a natural human tendency to read only the headlines and maybe the first few paragraphs of various publications, whether they are research reports, newspapers, prospectuses or advertising brochures.

One of the best (or worst, depending on your point of view) examples of this is the prospectus for Lehman's failed Minibonds. All relevant information relating to the true nature of the product was actually presented within its voluminous tome - that it was, in essence, an insurance policy taken out by Lehman on its US mortgage instrument portfolio, that the attractive annual 5 per cent interest that investors received was, in reality, Lehman's insurance premium and that if any one of the related parties failed during the instrument's life span, all investment money could be lost.

There was even a section deep inside the prospectus which warned that the more banks or financial institutions there were connected to the Minibonds, the greater the risk of loss. Despite all this, investors were cleverly led to believe they were buying a bond-like instrument (which, because of the word 'bond' in the headline, implied some degree of safety) and that the more institutions there were, the greater the diversification benefits and thus the lower the risk.

This was because the cover or first page did not contain any of the investment-critical information about the substantive nature of the instrument. In fact, nowhere was this the case - the instrument's substance could only be deduced by reading various sections which were not juxtaposed together.

If the first page had described in simple terms what exactly everyone was buying into, things would surely had been very different.

This practice of placing the most critical investment information anywhere in the disclosure document but on the first page extends to many other financial market-related areas, such as stockbroking reports.

For example, in a 'buy' on a well-known technology stock listed here, a foreign broker based its recommendation on a long-term forecasting model that peered 18 years into the future. While it is conceivable that there are people today who possess sufficient precognitive powers to be able to foretell what the world would be like in 2027, most reasonable investors would take such claims with plenty of scepticism. No matter though, in a market governed by 'caveat emptor', it should be up to readers to make up their own minds whether to bet their money on such recommendations - provided, of course, all the information is made readily available.

Like the Minibond example, the operative word, of course, is 'readily'. In this case, the long time horizon was only given on the fourth page of the report, while no details of what inputs and assumptions that went into the model were disclosed. In other words, the information was there - but only the bare minimum was presented and even this was not upfront.

This practice of burying important assumptions or data in the inside pages is common in research reports. However, if the authorities are serious about enhancing investors' interests, they should make it compulsory for all investment-critical information to be disclosed on cover sheets in simple, straightforward English. It is a relatively easy idea to grasp and doesn't require much new regulation - simply make investment product sellers state upfront in uncomplicated language what they are peddling and if they don't, make it such that severe sanctions could follow.

This way, quibbling over whether there was mis-selling or misrepresentation would be minimised and sellers (whether they are brokers, underwriters or investment banks) will be forced to cut to the chase and remove superfluous literature that their marketing/legal departments had devised to divert attention away from important risks.

While they're at it, the authorities should also put a stop to the distasteful practice of presenting legal disclaimers and important information in fine, eye-straining print. They should even go so far as to specify minimum font sizes for investment-critical information - admittedly an extreme suggestion but one that's wholly necessary given just how much relevant information sellers tend to hide in minuscule text.

Whatever the steps chosen, the important point to note is that the disclosure-based approach to governance has actually not failed. It has, however, been bypassed or marginalised by clever marketing that relied and capitalised on people not reading beyond the headlines or first page. Since it is difficult to alter human nature and people's reading habits, a much better approach would be to change the rules to suit those habits.

Published July 10, 2009

COMMENTARY
Making sense of the property gains tax amendment

More clarity needed on proposed refinement and about the tax itself

By VIKRAM KHANNA
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THE Ministry of Finance (MOF) has sought public feedback on certain proposed amendments to the Income Tax Act. One of these, which has received much publicity over the last few days, relates to a proposed 'refinement' to the policy on taxation of gains and losses from property sales.

Under the current tax regime, gains from property sales 'may' be taxed, either as trading gains or as 'gains or profits of an income nature'.

The proposed amendment seeks to add some clarity to this. Under the current regime, it is not clear who will be taxable or when. But under the amendment, anyone who sells only one property within any four-year period will not be taxable. However, if the person sells another property within four years of the first sale, the gains from the second sale 'may' be taxable. If passed, the amendment will take effect from next year.

News of the proposed amendment has set off jitters among people in the property business and the investment community.

A common (mis)interpretation is that a form of capital gains tax on property transactions is about to be introduced, and rigorously enforced.

Thus, after the news of the proposed amendment was publicised, one broking house put out a report which said: 'We find this news adversely affecting sentiment, especially in the upper-mid to high-end . . . We see developers with large unsold inventory in the high-end as potential losers from this news.'



The MOF subsequently clarified that the proposed amendment 'involves no tightening of the current income tax policy for individuals who sell their properties'. It is only aimed at 'giving certainty of non-taxation to individuals who do not sell properties frequently'.

But the heart of the matter is that even under the amendment, the provision for a property gains tax remains on the books.

The fact that it was already there is news to some people, especially as it has apparently been very sparingly enforced: over the years, hundreds of speculators have flipped properties for a profit, and then done it again within days of the first flip, without being hit by the taxman. Investors everywhere have come to presume that Singapore has no property gains tax.

But it is there, on the books. And now, there is a proposal for it to be 'refined'. What should one make of this?

What's the rationale?

The first question is, what is the rationale for having such a tax? One possible rationale is to curb speculation, which is fair enough.

But the government maintains that the proposed change is not an anti-speculation measure. Another rationale is to prevent people from passing off income gains as property gains. This could well be the reason why the provision to tax property gains exists. But if so, it needs to be clarified that the tax would only be enforced when this happens and at no other time.

But then, why the proposed four-year interval before property transactions are deemed to be free of tax? What happens to those who dress up income as property gains every five years?

The rationale apart, another problem with the tax is its apparent lack of fairness. It might be levied on some people, but not on others who do the same thing, and nobody except the taxman knows why.

A third problem is unpredictability - despite the greater element of certainty that the proposed amendment seeks to introduce. You definitely won't be taxed if you sell two properties more than four years apart. But if you do so within four years, you might be taxed. Or you might not.

At a minimum, we need a lot more clarity, not just about the proposed amendment to the property gains tax, but also about the tax itself.

The fact that some other countries have it too is not an adequate reason for keeping it, or for assuming that it is flawless. And if it isn't, then the government should consider another option: sometimes, the best way to refine a flawed policy is to abolish it.

Published July 10, 2009

Mega deal puts Rotary Engineering in big league

US$745m contract will reinforce its Mid-East presence

By VEN SREENIVASAN

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(SINGAPORE) In a development that elevates it to the big league, mainboard-listed Rotary Engineering has won a whopping US$745 million contract to build a tank farm at the giant Jubail oil terminal in Saudi Arabia.

After weeks of market speculation, the company confirmed last night that its Saudi subsidiary Petrol Steel Co has won a contract from Saudi Aramco Total Refining and Petrochemical Company (Satorp) - a joint venture between Saudi Aramco and multinational oil giant Total - to build 62 atmospheric storage tanks and eight 'bullet' tanks with a total capacity of some one million cubic metres at Jubail.

When completed, the 400,000 barrels per day export refinery will be the one of the world's most advanced.

Petrol Steel is 51 per cent owned by Rotary. The other 49 per cent is held by Saudi Arabia's Rafid Group.

More than 76 per cent of revenue from the tank farm project - some US$568 million - will accrue directly to Rotary. This includes the entire US$384 million for pre-fabrication work done in Singapore. Rotary will then get 51 per cent of the remaining US$361 million for installation and construction work carried out in Saudi Arabia.

Work on the project starts next month and completion is due at end-2012. The facility will start commercial operations in March 2013.

The tank farm is one of 13 projects awarded by Satorp to global players who, besides Rotary, include Japan's Chiyoda group and South Korea's Samsung Engineering.

Rumours that Rotary had clinched the project surfaced two weeks ago when Satorp announced the names of some of the winning bidders. The companies themselves were barred from giving details until the deal was officially signed this week.

Nevertheless, some local investment houses projected a major re-rating of Rotary's stock if it sealed the deal.

Chia Kim Piow, Rotary's chairman and executive director, said that the job was clinched through patience and perseverance. 'We are thrilled to have secured this contract,' he said. 'As in any new market, our experience in the Middle East has been fraught with challenges. Still, we have been making inroads slowly but surely.

'This win propels us to another level and will help reinforce our presence in the Middle East. We see tremendous potential and huge opportunities there.'

Market insiders said that the contract will fatten Rotary's earnin+gs. The company typically enjoys a gross margin of 18-20 per cent on such projects, which translates to an earnings boost of some $165 million for the next three years.

More importantly, the project makes Rotary a key player in the oil-rich Middle East - and Saudi Arabia in particular.

Rotary has had a presence in the region since 2006. In 2007, it invested $22 million in a fabrication and maintenance facility at Jubail Industrial City, affirming its commitment to a permanent presence there. The move seems to have paid off.

Last year, it secured an $11 million ethylene plant contract from SHARQ Eastern Petroleum at Jubail. Then came a US$62 million Saudi Kayan Petrochemical Co deal to build 24 tanks. And now, its single biggest contract to date - and a massive boost for a company which last year posted a $51 million profit on revenue of $520 million.

The Satorp deal quadruples Rotary's order book to almost $1.5 billion. Other major projects in hand include Rotary's $130 million Oiltanking Odfjell Terminal contracts and its $38 million deal to build Neste's bio-fuel plant at Tuas.

Published July 10, 2009

Govt clears air over tax on property gains

Ministry says proposed change aimed at giving certainty and is not a move against property speculation

By EMILYN YAP

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(SINGAPORE) Has the market worked up a storm in a teacup over a suggested change to income tax laws on gains from property sales? Keen to quell rumours about an anti-speculation drive, the Ministry of Finance (MOF) clarified yesterday that the proposal is unlikely to lead to more individuals being taxed.

Still, some industry watchers believe that the potential change is enough to worry property investors - many of whom have returned to the market only recently.

Currently, property sellers do not pay tax on gains unless the Inland Revenue Authority of Singapore (IRAS) sees them as traders and treats the gains as income. The IRAS makes its decision on a case-by-case basis, considering factors such as why the properties were sold, how long the sellers owned them and how frequently the sellers transacted properties in the past.

These factors are derived from case law and are not clear-cut. According to MOF's statement, just 'a small number of individuals' have been taxed on gains from property sales in the past.

There are individuals who want greater clarity on whether their gains will be taxed, MOF said. Responding to feedback, it proposed last month a condition that would guarantee no tax: An individual who sells a property on or after Jan 1, 2010 will not be taxed on the gains if he has not sold any other property in the previous four years.

This is actually 'a relaxation of income tax treatment aimed at giving certainty of non-taxation to individuals who do not sell properties frequently', MOF explained.

The proposal does not mean that those who sold more than one property within a four-year period will definitely be taxed on the gains. In line with existing arrangements, IRAS will still assess these cases individually. 'There is no change to the current and long-standing income tax treatment in this regard,' MOF pointed out.

MOF did not reveal the exact number of individuals who have been taxed on gains from property sales. But it said in an email to BT: 'If the proposed change is implemented, MOF does not expect the number of cases to increase. This is because the change does not involve a tightening of the rules.'

In fact, 'the number of cases may fall if all things remain constant' after the change, it says.

Rumours that the government was trying to curb speculation in the property market gained ground after news of the potential change got round. Property sales have been buoyant since February this year, and selling prices in some projects are said to have risen by a few per cent. Some market watchers attributed the improvement in part to the return of speculators.

In its statement, MOF emphasised that the proposed change is not an anti-speculation measure. It also reiterated that Singapore does not have a capital gains tax.

MOF's clarification has soothed the market somewhat. On Wednesday, fear that investors could exit the property market and perhaps confusion over the proposal had pushed prices of several property counters down. The selling pressure eased notably yesterday. City Developments, for instance, gained 43 cents to close at $8.31, while CapitaLand rose 12 cents to $3.50.

Despite the official reassurance, there are still nagging worries that the potential change to income tax laws could hurt investor sentiment, particularly in the prime property sectors.

'Demand for mass-market homes should hold, backed by HDB upgraders, while mid to high-end segments may experience slower take-ups from reduced speculative interest,' said AmFraser Securities analyst Lau Wei Chong in a note yesterday.

There are also industry watchers who stand by the anti-speculation theory. 'We remain believers of the idea that the government may be sending out a signal through this proposal to cool property transactions, especially in the high-end,' said CIMB analyst Donald Chua in a note.

To curb speculation in the property market in 1996, the government had imposed income tax on gains which individuals made from selling properties within three years of purchase. It lifted the rule in 2001.

Published July 9, 2009

M'sian palm oil stock up 4.6% in June: poll

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(KUALA LUMPUR) Malaysia's June palm oil stocks have risen 4.6 per cent to a four-month high as production comfortably outpaced shipments of the vegetable oil which appear to have stalled, a Reuters poll showed yesterday.

Inventories in the world's No 2 palm oil producer after Indonesia rose to 1.43 million tonnes, the highest since February and the second consecutive monthly build-up that is now above the minimum 1.4 million tonnes needed for the processing industry.

Output probably rose 6.1 per cent to 1.48 million tonnes as a good mix of hot and wet weather a year ago has encouraged more oil-rich female palm flowers to bloom, a poll of five plantation houses showed.

'The current weather mix has also been very beneficial with dry weather in the morning that makes harvesting easier and rains in the afternoon to encourage better yields some months down the line,' said one poll respondent.

Oil palms have also recovered from a bout of biological tree stress that settled in after record harvests last year, although some planters fear that a brewing El Nino episode could prevent a full recovery.

'There is El Nino to think about, but that will be a factor later on. The weather issue should have spiked up prices now but the gloomy economic outlook is spoiling things,' he said.

Palm oil markets yesterday shrugged off a report by Australia's Bureau of Meteorology, which noted the development of El Nino was increasing and could lead to a medium-strength event, instead focusing on fears of weaker global demand.

El Nino brings hotter weather that can sap palm oil yields 12-18 months later but it also may impede India's developing June-Sept monsoon, which traders say could hamper oilseed crop production and lead to more imports of palm oil.

'Demand from India is hard to predict. Stocks at ports are high but the monsoon is shakey and the festival months are starting with Ramadan in August,' said another poll contributor, referring to the Muslim holy month where fasting in the day is followed by elaborate feasts.

So far, signs of China, India and Pakistan stocking for a slew of festivals that will end in October were few in June, with exports seen up 0.8 per cent at 1.23 million tonnes.

Cargo surveyor Societe Generale de Surveillance showed that China in June bought 16.1 per cent more palm cargoes from Malaysia at 349,352 tonnes while India and Pakistan saw a marked decline. -- Reuters

Published July 9, 2009

KL ending teaching of maths, science in English

Opposition parties back move to revert to using Bahasa Malaysia from 2012

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(PUTRAJAYA, Malaysia) Malaysia is to abandon teaching maths and science in English, saying that far too many children from poor rural areas were being failed by the programme.

The decision to start phasing out English medium teaching from 2012 has been backed by the government and Malaysia's main opposition parties, despite concerns that using the national language, Bahasa Malaysia, will undermine competitiveness.

Malaysia has said recently that it wants to attract more high-value investment in areas such as banking and finance, industries that are global and typically demand good English.

Instead of teaching maths and science in English, a policy started in 2003, the government will double the time spent on English lessons for primary children and increase that for secondary school children by half.

It said that it would hire an additional 14,000 teachers to teach English as a language.

'I would not say it (English language instruction) was a complete failure, but it did not achieve what it was supposed to achieve,' Education Minister Muhyiddin Yassin told a news conference yesterday.

English was once the medium of instruction in most schools in Malaysia, a former British colony. Nationalist leaders switched to Malay less than two decades after independence in 1957.

In 2003, realising that poor English skills hurt graduates competing for work against people from other countries, especially neighbouring Singapore, ex-Prime Minister Mahathir Mohamad launched a programme to resume teaching maths and science in English. Nearly every other subject is still taught in Malay.

A recent report from Morgan Stanley showed that Malaysia's tertiary enrolment and completion ratios were six and seven percentage points behind the average countries with a similar level of income per capita.

That leaves it at a disadvantage as it seeks to tap into foreign investment which is increasingly using countries such as China and Vietnam which have larger domestic markets and bigger reservoirs of cheap labour.

Critics said that the change to use Bahasa Malaysia would not achieve the desired effect of enfranchising the rural poor or of boosting English language skills, and said that the move was largely political, aimed at appeasing the Malay majority.

'What has not occurred to the authorities is that the education system requires very competent teachers,' said Khoo Kay Kim, emeritus professor at the University of Malaya's history department, adding that politicians were driving the change due to their personal agenda.

Malaysian Prime Minister Najib Razak was educated in an English-medium school in Kuala Lumpur and later in a private school in England, while opposition leader Anwar Ibrahim, was educated at the elite English-speaking Malay College.

Prof Khoo also warned that the move could increase divisions along racial lines in this country of 27 million people where 55 per cent are ethnic Malays and there are sizeable ethnic Chinese and Indian minorities. -- Reuters, AP