EI Consulting news selection

Malaysia's FDI rise by 53 percent in 2006

admin — Sun, 21 Oct 2007 22:36:59 -0400

Malaysia surpassed Indonesia to come in seventh among top economies in the South, East and Southeast Asian region to draw foreign direct investment (FDI) last year.

FDI into Malaysia surged by 52.8 percent to reach US$6.1 billion (RM20.6 billion) last year, compared to US$3.97 billion in 2005, according to the United Nations Conference on Trade and Development (Unctad) World Investment Report 2007.

Meanwhile, Malaysia's FDI outflow more than doubled to US$6.04 billion (RM20.56 billion) as corporations secured strategic investments abroad, it said.

It said the soaring FDI outflows may be attributed to acquisitions of strategic assets abroad and represent created wealth or overseas expansion activities by Malaysian corporations and banks positioning to become global players.

The report also revealed that national oil company Petronas is second among non-financial transnational corporations in the region in terms of foreign assets, totalling US$61.6 billion (RM207.9 billion).

Malaysia's FDI stocks rose to US$53.6 billion in 2006 from US$47.5 billion to reflect investment activities by transnational corporations to own foreign affiliates, it said.

Regionally, the report said, FDI inflows to the South, East and Southeast Asia maintained their upward trend in 2006, rising by 19 percent to reach a new high of US$200 billion while outflows surged by 60 percent to US$103 billion.

China and Hong Kong retained their positions as the largest FDI recipients in the region, followed by Singapore and India.

It said FDIs in the primary and services sectors were significantly higher while in extractive industries, the value of cross border mergers & acquisitions rose nearly fivefold to US$1.7 billion.

It said inflows of FDI into China increased to US$72 billion.

Non-financial FDI alone into China was US$60 billion, registering a slight decline, while flows into financial services rose to US$12 billion, driven by large investments in Chinese banks, it explained.

The report said Hong Kong and Singapore retained their positions as the second- and third-largest recipients in the region, attracting FDI of US$36 billion and US$20 billion, respectively.

It said the region is increasingly attracting "high-quality" FDI aimed at high value-added and knowledge-intensive activities.

Intel is expanding its assembly and testing facilities in China and Malaysia and plans to invest US$300 million in Vietnam to build the country's first semiconductor factory,, it noted.

In China, FDI in the manufacturing sector has been shifting towards more advanced technologies. Airbus, for instance, plans to build an A320 assembly line in China.

The report said with continued high economic growth, the region has become more attractive to market-seeking FDI.

Furthermore, it has become a hot spot for transnational corporation (TNC) investments in financial services and high technology industries.

Asia's newly industrialising economies - Hong Kong, South Korea, Singapore and Taiwan - remained the main sources of FDI from developing countries, despite a significant decline in their total outflows in 2005.

It said the rise in China's foreign currency reserves stimulated rapid growth in outward FDI from the country, helping to reshape the pattern of flows from Asia.

Outward FDI from South, East, and Southeast Asia still focuses on services, but a growing share of capital outflows from the region has been targeting manufacturing and natural resources.

Asian energy companies, in particular those from China and India, have intensified their efforts to acquire oil assets, the report noted.

China National Petroleum Corp (CNPC) acquired PetroKazakhstan for US$4.2 billion in August 2005, by far the largest deal in the oil and gas industry by companies from developing countries and transition economies, it said.

The report noted that rapid economic growth in South, East, and Southeast Asia shows few signs of slowing, and a further expansion of FDI into and from the region is expected.

FDI inflows to India have been gaining momentum in recent years, and the country's prospects for attracting FDI are promising, it said.

FDI is also likely to continue its upward trend in Southeast Asia, especially in relatively low-cost countries.

With a strengthening of government support and some large mergers and acquisition (M&A) deals expected, the surge in outward FDI from China is likely to continue, it said.

Across the globe, the report said, FDI inflows amounted to US$1,306 billion in 2006, rising by more than 38 percent and finishing close to the record level of 2000.

According to the report, the rise in global FDI flows and in international production was a result of strong economic performance around the world, partly driven by increasing corporate profits and resulting higher stock prices that raised the value of cross border M&As.

On the outlook for this year, Unctad said global cross border M&As had risen by 58 percent in the first half of 2007 compared to the corresponding period last year, which indicates that FDI should continue to grow in 2007.

Ringgit strongest in 10 years

admin — Wed, 17 Oct 2007 00:05:44 -0400

The ringgit rose to the strongest in almost a decade as gains in stocks worldwide boosted the appetite for emerging market securities.

The currency extended a four-week gain after minutes from the Federal Reserve’s Sept 18 meeting published Tuesday allayed concerns over a housing slump in the US, Malaysia’s biggest export destination. Global funds turned net buyers of Malaysia’s stocks in the first half of the year, from net sales in the same period in 2006.

“The US outlook has given the stock market some confidence and we should see a stronger ringgit on fund inflows,” said Awaluddin Shariff, a currency dealer at EON Bank Bhd.

The currency gained 0.7% to 3.3740 against the US dollar as at 5.22pm, according to data compiled by Bloomberg.

The increase was the biggest in three weeks, taking the currency to the highest since November 1997.

Malaysia’s benchmark stock index advanced to an 11-week high after US stock indices rallied to records.

The Fed minutes showed policy makers avoided language that may have suggested the US economy would contract. St Louis Fed president William Poole said in a speech Tuesday that the financial markets were showing signs of stability.

Overseas investors bought a net RM23.2bil of stocks in the first half of this year, versus net sales of RM4.1bil in the six months to June 2006, according to central bank data released Sept 28.

They held RM72.2bil of Malaysian debt in July, the most since records began in 1991.

BNM to further relax foreign exchange admin rules

admin — Wed, 03 Oct 2007 23:11:10 -0400

KUALA LUMPUR: Bank Negara Malaysia (BNM) is further liberalising the foreign exchange administration rules by abolishing certain requirements that will take effect from Oct 1, as part of its efforts to reduce the cost of doing business in Malaysia.

According to its circular to the chief executive officers of licensed onshore banks, the central bank said that it would abolish five registration requirements and one reporting requirement, while granting greater flexibility for Islamic funds managed onshore, and for hedging of ringgit exposure by non-residents.

The abolition of the five registration requirements involves:

• Forward foreign exchange contracts by residents – The registration requirement on forward foreign exchange contracts exceeding RM50 million equivalent per contract for permitted capital account transactions and anticipatory current account transactions is abolished.

• Ringgit-denominated loans to non-residents for purchase or construction of immovable properties in Malaysia – The registration requirement on ringgit-denominated loans exceeding RM50 million extended by a resident to a non-resident to finance or refinance the purchase or construction of residential and commercial properties in Malaysia is abolished.

• Investment in foreign currency assets by residents – The registration requirement on investment in foreign currency assets exceeding RM50 million equivalent by a resident (individual or company on corporate group basis) without domestic ringgit borrowing is abolished.

• Foreign currency borrowing by residents

- The registration requirement on foreign currency borrowing in aggregate between RM50,000,001 and up to RM100 million equivalent by a resident company on corporate group basis from licensed onshore banks and non-residents is abolished.

- The registration requirement on foreign currency borrowing exceeding RM50 million equivalent by an Approved Operational Headquarters from licensed onshore banks and non-residents to finance its own operation is abolished.

- The registration requirement on foreign currency borrowing exceeding RM50 million equivalent by a resident company from another resident company within the same corporate group using proceeds from an initial public offering on foreign stock exchanges is abolished.

• Prepayment or repayment of foreign currency borrowing by residents – The registration requirement on prepayment exceeding RM50 million equivalent on permitted foreign currency borrowing from a non-resident lender is abolished. Repayment of foreign currency borrowing with no fixed tenure or repayment schedule is deemed to be a prepayment, and therefore, registration requirement is also abolished.

However, BNM said while the five registration requirements would be abolished, the approval requirements on these rules would remain unchanged.

It added that the requirement for the registration of financial guarantees issued by a resident to, or on behalf of, a non-resident, or a financial guarantee obtained by a resident from a non-resident, would continue to be applicable.

Meanwhile, the requirement on licensed onshore banks to submit a monthly report on the balances of foreign currency accounts of residents is also abolished with immediate effect.

To promote Malaysia as an Islamic financial centre and a centre for origination of syariah-compliant investment instruments, BNM will abolish the thresholds (50% of the net asset value (NAV) for unit trust companies and total funds attributable to residents with domestic ringgit borrowing for fund management companies) on investments of Islamic funds in foreign currency assets.

However, the investment in foreign currency assets by conventional funds managed by the unit trust and fund management companies continues to be subject to the existing thresholds of 50% of the NAV and the total funds attributable to resident clients with domestic ringgit borrowing.

To provide greater flexibility to non-resident investors in managing their ringgit exposure, the requirement for a non-resident to reinvest within seven working days, the proceeds arising from the sale of ringgit assets prior to the maturity of the forward foreign exchange contract in order to continue with the existing forward foreign exchange contract, is abolished.

With the abolition, a non-resident is allowed to continue with the existing forward foreign exchange contract entered with a licensed onshore bank for proceeds arising from the sale of ringgit assets sold prior to the maturity of the forward foreign exchange contract, as well as for income from the ringgit assets.

This is provided that the total amount of forward foreign exchange contract of the non-resident shall not exceed the total amount of ringgit assets held, including balances in his external account. The forward foreign exchange contract must be unwound or cancelled if the proceeds from the sale of ringgit assets are converted into foreign currency.

It is also provided that the maturity date of the forward foreign exchange contract shall not exceed the maturity date of the ringgit assets, where such assets have a defined maturity date.

Malaysia Corporate Tax - 25% in 2009

Wed, 19 Sep 2007 03:05:53 -0400

The private sector in Malaysia can now look forward to enjoy a lower corporate tax of 25% in 2009, another one percentage point reduction from the 26% in 2008 and 27% in 2007.

The move announced by the Prime Minister Datuk Seri Abdullah Ahmad Badawi during his speech on Budget 2008, in Parliament, yesterday, would further enhance Malaysia’s attributes as a viable investment location and raise Malaysia’s competitiveness globally.

A single-tier tax system will be introduced from Year of Assessment 2008, whereby profits are taxed at the company level and dividends received by shareholders will be exempted, facilitating the distribution of dividends. A transition period of 6 years will be provided to ensure smooth implementation of the single-tier system.

The new simplified tax system would reduce the cost of compliance and administration experienced under the current system to keep track of taxes paid at each stage. It is also expected to encourage long term investments in equities especially in companies, which declare good dividends.

Malaysian Institute of Taxation (MIT) President, Dr Veerinderjeet Singh in welcoming the new tax system said it would simplify the tax system and was in line with the trend in countries like Singapore and Hong Kong.

As part of the Government’s efforts to encourage public listed companies in Malaysia to become global players, the stamp duty exemption for merger and acquisitions (M&As), which would have expired end of this year would be extended until 31 December 2010. These M&As approved by the Securities Commission must be completed by 31 December 2011.

The exemption which was introduced in 2006 has seen more companies taking up M&A, where in 2006 some RM102 million (US$29 billion) in acquisition deals were done in the country. M&A activities are expected to reach a record high this year with some RM88 billion (US$25 billion) recorded in the first six months of the year, according to Bloomberg.

Chairman of the Federation of Malaysian Manufacturers (FMM), Tan Sri P.K. Yong welcomed the further reduction of corporate tax as well as the single-tier tax system that would simplify the distribution of dividends.

New small and medium enterprises (SMEs) will also stand to benefit from the Budget 2008 proposal, which allow them the flexibility to pay corporate tax at the end of the financial year instead of monthly as currently done where the tax estimates have to be submitted within three months of starting operations.

As the move is to assist SMEs that may face cash flow problem at the initial stages of operations, the flexibility will be for a period of two years from the date of commencement of business.

SMI Association of Malaysia National President, Chua Tiam Wee, in welcoming the new initiative said SMEs would stand to benefit from cost savings and improvement in their cash flow.BrandLaureate Chief Executive Officer, Dr K.K. Johan said the Asia Pacific Brands Foundation was pleased with the assistance to the SMEs as these companies can now utilize their cash flow for expansion instead of relying on bank loans.

Meanwhile, expatriates working for International Procurement Centre (IPC) and Regional Distribution Centre (RDC) can look forward to be taxed only on that portion of employment income attributable to the number of days they work in the country, similar to those working for Operational Headquarters (OHQs) and Regional Offices (ROs). Currently, these expatriates are taxed on the full income received in Malaysia even though they are frequently out of the country in the course of their work

Asia & the vicious cycle of bank bailouts

admin — Sat, 11 Aug 2007 22:24:45 -0400

In the past few days, a number of European banks have announced substantial losses on the US subprime and related sectors, which combined with a suspension of redemptions by various funds, caused temporary panic in money markets. Both the European Central Bank and the Fed responded by injecting liquidity into the system, but market confidence had been shaken so badly by then that dislocation in credit and equity markets became unavoidable.

The scale of losses has increased after Thursday's beating in the stock markets that saw US stocks lose over 3%, followed by similar declines across Asia on Friday. There is a lot of refinancing that will hit the interbank market next week, usual for any mid-month, which given this week's dislocation points to further volatility. At some point, both the Fed and the ECB will need to intervene directly (moral hazard) to avoid further panic.

Every time markets anywhere tumble, media speculation inevitably focuses on the identity of the biggest losers. In particular, the likelihood of losses being sustained by highly visible, famous or simply obscenely rich people is greeted with more than its due share of glee.

However, this article will not focus on who lost what and when, but rather will focus on the more important question of why.

What banks do

Banking is such a simple business that governments around the world feel the need to erect entry barriers, while bankers themselves adopt unnecessarily arcane jargon to give themselves an air of intellectual superiority to go with their generally good fortunes. After government bureaucrats, bankers command the highest ratio of social respect to intellectual capability. In other words, for a bunch of fairly simple if not dumb people, bankers sure are well treated by society at large.

The function of a bank is simply to collect savings from individuals, for which it pays a minimal interest rate, called the savings rate, that increases relative to the time that the funds are locked in. The funds thus collected are used by banks to lend money to companies and to purchase securities issued by governments and other borrowers, earning interest on such lending. Banks pocket the difference - or margin, to use the jargon - between the savings and lending rates, from which they deduct staff expenses and losses.

Now, that doesn't sound too complicated, does it? It's not, but there are always other factors at work that help to determine exactly how much banks can make. For example, central banks may prevent local banks from lending money abroad or, more pertinently in Asia, foreign banks from lending money locally. In some countries, there are rules about how much banks need to lend to the local government, controls on both savings and lending rates and the like.

The reason for that simplistic explanation of banking given above is not to insult the intelligence of Asia Times Online readers but rather to show how even with simple business models, people can rack up billions in losses in a matter of months. I am always intrigued by the specter of losses running into billions. A simple example would suffice - if one were physically to burn US$100 bills at the rate of one every 10 seconds (six every minute), it would take more than three years to get through a billion dollars - yet banks casually and routinely make such announcements all the time. They either must have some really large furnaces to burn all the money in, or be experts at making investment losses. Of the two, I rather suspect the latter, if only because the former still involves too much physical work that bankers are unlikely ever to pursue in their lives.

New market realities

In the comfortable existence of global bankers, this decade marked a seismic shift for reasons that are entirely outside their sphere of influence. The reference is of course to Asian central banks, which merrily started accumulating American and European bonds at a faster clip than at any other time in history. In so doing, these central banks removed the comfortable spread between borrowing rates and lending rates, because bond yields dramatically declined as a result of their buying.

Thus when central banks around the world tried to fight inflationary pressures by increasing interest rates from 2005 onward, banks found themselves in the unenviable position of having investments that yielded less than what they had to pay on savings accounts. That was the most extreme case, for some European banks, but for most banks the new reality was at least a rapidly declining margin. Because of this decline in margins, banks around the world were forced to increase their own leverage - so instead of borrowing $100 from investors and lending $100 to companies, they now had to lend $200 to make the same amount of money.

This they did by borrowing $100 from other investors, for example Asian central banks, which thought this attractive, as they received higher interest rates from banks than from governments for similar levels of risk. The rapid acceleration of reserve accumulation by Asian central banks this decade increased the pressure on lenders to borrow more money to make the same or higher net profits.

Banking on globalization

As if one external source of change wasn't enough, there was also a second factor that played an increasingly dominant role over this decade. That was demographics - the aging of populations in both Europe and the United States. While the latter managed to make do with higher immigration that helped to compensate for its population graying away, European countries remained obdurate on immigration.

As populations age, they also tend to save more than they spend. This was another source of excess savings that helped to increase the overall borrowing costs of banks in North America and Europe (remember the minimum savings rates mentioned above), while simultaneously reducing the number of customers willing to borrow (as old people tend not to borrow).

Looking for ways to manage this train wreck, these banks aggressively expanded their loans to exotic customers, the type that would have been denied banking barely a generation ago. For the US banks, the easy choice was to lend more money to immigrants, while for European banks; it was to lend more money to either US banks or to the securitized products marketed by such banks. I wrote in a previous article about Asian central banks suffering collateral damage from all this. [1]

This is globalization, after all. A saver in Sichuan or Salzburg doesn't lend money in Chengdu or Austria; because of a paucity of local opportunities, it is more than likely that they both lend to a Mexican immigrant in San Jose, California. That is the commercial extension of what I called imperialism [2] in a recent article.

Bailouts and haircuts

It is generally a feature of any market crisis over the past 20 years that a well-known European bank would announce staggering losses, and then be bailed out by its government. True to form, this week we saw announcements from Germany and France about large losses of banks there on the US subprime crisis. Authorities immediately convened rescue groups for stricken banks, helping to avoid any further fallout. For their part, American bankers have been nervous about the fate of a largish investment bank, although any speculation about a failure is being pooh-poohed vehemently.

The process of taking losses on investment losses is euphemistically referred to as "haircuts" by bankers, even if the scale of losses absorbed would argue for more colorful phrases reminiscent of the Queen of Hearts. [3] While not every haircut needs a bailout, someone eventually pays. The most common form of a bailout is a direct rescue that is arranged through the good offices of a state-owned bank.

The more indirect route to a bailout is through interest-rate policies. Former US Federal Reserve chairman Alan Greenspan notoriously invoked the option to cut interest rates on many occasions, helping to thwart banking crises in the US, but creating in its place the asset bubble that now threatens the global financial system. Today's central bankers appear to be more focused on avoiding inflationary pressures, but they haven't been severely tested with a crisis yet.

In particular, I find the social aspects of the US subprime crisis a matter of interest. It is not often in a democracy that a large and visible minority suffer the indignity of bankruptcies and losing their homes without repercussions on government. In the current situation, the preponderance of losses among younger families of a minority background mean that the chances of political intervention are simply too high.

In so doing, though, Western governments threaten to unleash another mountain of fiat money on the world, in turn reducing real returns further. While the initial moves such as cutting interest rates or providing credit relief to beleaguered individuals unable to meet their mortgage obligations may help to stem the current crisis, the longer-term impact on government credibility as well as currency values will necessarily be negative.

There is no reason for Asia to participate in this bailout; indeed, it is within its interest to exact the highest possible political costs on the US and Europe when they go about rescuing their banks or individual borrowers. This can be done only by a sensible policy of removing the automatic link between reserve accumulation and current-account surpluses. Asian central banks must reduce their holdings of US dollars and euros now, thereby pushing up borrowing costs for the US and Europe. That increase in borrowing costs will more than offset any central-bank accommodation in those countries, and help Asia to gain the upper hand in negotiations over trade, intellectual property, global warming and other issues.

Detritus, Samson and Delilah

Credit-market losses are like detritus suspended in an aquarium, mildly irritating at first but eventually toxic for all inhabitants in the system. The biblical figure of Samson was felled by Delilah; in much the same way, global banks have to endure "haircuts" on their investment portfolios that eventually will force central banks to cut rates. By blithely accumulating government bonds in the US and Europe, Asian central banks have unwittingly played the role of Delilah.

Rate cuts in the US and Europe would help generate accounting profits for Asian central banks in the near term, but the policy also sows the seeds for future crises in the US and Europe. The only way to break this vicious cycle is for Asian savers to cut their overall allocations to the US and European asset markets, focusing instead on markets around the region. The additional benefit of this approach would be immediate results on difficult negotiations involving protectionism, global warming, and intellectual property.

Notes
1. Robbery of the century, Asia Times Online, July 14, 2007.
2. New imperialism, ATol, July 21, 2007.
3. Alice's Adventures in Wonderland by Lewis Carroll.

Malaysia’s economy on the rise

admin — Sat, 09 Jun 2007 21:38:33 -0400

Merrill Lynch, an international merchant bank, has commended Malaysia on its economic performance, revising the forecast gross domestic product (GDP) growth upwards to 5.7% for 2007 and 6.3% for 2008 from the earlier 5.2% and 5.8% respectively.

Malaysia’s economic growth prospects in the coming years is positive, given that the country is undergoing long-term structural upturn.

Global investors have also renewed their interests in the country, following the recent implementation of a number of economic reforms, which include the restructuring of government-linked companies, liberalisation of foreign exchange and improved foreign relations, besides the reduction of fuel subsidies as well as the withdrawal of non-essential projects.

Merrill Lynch has also credited the performance and brighter prospects for the Malaysian economy to three other factors which are generally overlooked. These were Malaysia’s relatively weak exchange rate, the positive external shocks resulting in higher export prices for commodities and a change in the political regime.

All these factors, according to the bank, are currently working in unison, and this augurs well for Malaysia.

Profit as We Know It Could Be Lost

admin — Mon, 28 May 2007 22:56:53 -0400

In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.

It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.

Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.

The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.

The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting -- from clerks to chief executives -- to relearn how to compile and analyze information that shows what is happening in a business.

This is likely to come as a shock, even if many investors and executives acknowledge that net income has flaws. "If there was no bottom line, I'd want to have a sense of what other indicators I ought to be looking at to get a sense of the comprehensive health of the company," says Katrina Presti, a part-time independent health-care contractor and stay-at-home mom who is part of a 12-woman investment club in Pueblo, Colo. "Net income might be a false indicator, but what would I look at if it goes away?"

The effort to redo financial statements reflects changes in who uses them and for what purposes. Financial statements were originally crafted with bankers and lenders in mind. Their biggest question: Is the business solvent and what's left if it fails? Stock investors care more about a business's current and future profits, so the net-income line takes on added significance for them.

Indeed, that single profit number, particularly when it is divided by the number of shares outstanding, provides the most popular measure of a company's valuation: the price-to-earnings ratio. A company that trades at $10 a share, and which has net profit of $1 a share, has a P/E of 10.

But giving that much power to one number has long been a recipe for fraud and stock-market excesses. Many major accounting scandals earlier this decade centered on manipulation of net income. The stock-market bubble of the 1990s was largely based on investors' assumption that net profit for stocks would grow rapidly for years to come. And the game of beating a quarterly earnings number became a distraction or worse for companies' managers and investors. Obviously it isn't known whether the new format would cut down on attempts to game the numbers, but companies would have to give a more detailed breakdown of what is going on.

The goal of the accounting-rule makers is to better reflect how businesses are actually run and divert attention from the one number. "I know the world likes single bottom-line numbers and all of that, but complicated businesses are hard to translate into just one number," says Robert Herz, chairman of the Financial Accounting Standards Board, the U.S. rule-making body that is one of several groups working on the changes.

At the same time, public companies today are more global than local, and as likely to be involved in services or lines of business that involve intellectual property such as software rather than the plants and equipment that defined the manufacturing age. "The income statement today looks a lot like it did when I started out in this profession," says William Parrett, the retiring CEO of accounting firm Deloitte Touche Tohmatsu, who started as a junior accountant in 1967. "But the kind of information that goes into it is completely different."

Along the way, figures such as net income have become muddied. That is in part because more and more of the items used to calculate net profit are based on management estimates, such as the value of items that don't trade in active markets and the direction of interest rates. Also, over the years rule makers agreed to corporate demands to account for some things, such as day-to-day changes in the value of pension plans or financial instruments used to protect against changes in interest rates, in ways that keep them from causing swings in net income.

Rule makers hope reformatting financial statements will address some of these issues, while giving investors more information about what is happening in different parts of a business to better assess its value. The project is being managed jointly by the FASB in the U.S. and the London-based International Accounting Standards Board, and involves accounting bodies in Japan, other parts of Asia and individual European nations.

The entire process of adopting the revised approach could take a few years to play out, so much could yet change. Plus, once rule makers adopt the changes, they would have to be ratified by regulatory authorities, such as the Securities and Exchange Commission in the U.S. and the European Commission in Europe, before public companies would be required to follow them.

As a first step, rule makers expect later this year to publish a document outlining their preliminary views on what new form financial statements might take. But already they have given hints of what's in store. In March, the FASB provided draft, new financial statements at the end of a 32-page handout for members of an advisory group. (See an example.)

Although likely to change, this preview showed an income statement that has separate segments for the company's operating business, its financing activities, investing activities and tax payments. Each area has an income subtotal for that particular segment.

There is also a "total comprehensive income" category that is wider ranging than net profit as it is known today, and so wouldn't be directly comparable. That is because this total would likely include gains and losses now kept in other parts of the financial statements. These include some currency fluctuations and changes in the value of financial instruments used to hedge against other items.

Comprehensive income could also eventually include short-term changes in the value of corporate pension plans, which currently are smoothed out over a number of years. As a result, comprehensive income could be a lot more difficult to predict and could be volatile from quarter to quarter or year to year.

As for the balance sheet, the new version would group assets and liabilities together according to similar categories of operating, investing and financing activities, although it does provide a section for shareholders equity. Currently, a balance sheet is broken down between assets and liabilities, rather than by operating categories.

Such drastic change isn't likely to happen without a fight. Efforts to bring now-excluded figures into the income statement could prompt battles with companies that fear their profit will be subject to big swings. Companies may also balk at the expense involved.

"The cost of this change could be monumental," says Gary John Previts, an accounting professor at Case Western Reserve University in Cleveland. "All the textbooks are going to have to change, every contract and every bank arrangement will have to change." Investors in Europe and Asia, meanwhile, have opposed the idea of dropping net profit as it appears today, David Tweedie, the IASB's chairman, said in an interview earlier this year.

Analysts in the London office of UBS AG recently published a report arguing this very point -- that even if net income is a "simplistic measure," that doesn't mean it isn't a valid "starting point in valuation" and that "its widespread use is justification enough for its retention."

Such opposition doesn't surprise many accounting experts. Net income is "the basis for bonuses and judgments about what a company's stock is worth," says Stephen A. Zeff, an accounting professor at Rice University. "I just don't know what the markets would do if companies stopped reporting a bottom line somewhere." In the U.S., professional investors and analysts have taken a more nuanced view, perhaps because the manipulation of numbers was more pronounced in U.S. markets.

That said, net profit has been around for some time. The income statement in use today, along with the balance sheet, generally dates to the 1940s when the SEC laid out regulations on financial disclosure. But many companies have included net profit in one form or another since the 1800s.

In its fourth annual report, General Electric Co. provided investors with a consolidated balance sheet and consolidated profit-and-loss account for the year ended Jan. 31, 1896. The company, whose board at the time included Thomas Edison, generated "profit of the year" -- what today would be called net income or net profit -- of $1,388,967.46.

For the moment, net profit will probably exist in some form, although its days are likely numbered. "We've decided in the interim to keep a net-income subtotal, but that's all up for discussion," the FASB's Mr. Herz says.

The Economics of Islamic Finance

admin — Tue, 15 May 2007 23:01:57 -0400

UNLESS you happen to know it all already, a new IMF working paper on "The Economics of Islamic Finance and Securitization", by Andreas Jobst, is worth pulling down and reading with the help of a few cold compresses for the forehead. None of it is easy going, but I doubt we'll find quite such a lucid overview anywhere else for free.

The moving principle of Islamic finance, says Mr Jobst, is that:

Islamic law does not object to payment for the use of an asset, and the earnings of profits or returns from assets is encouraged as long as both lender and borrower share the investment risk together. Profits must not be guaranteed based on assumption, and can only accrue if the investment itself yields income ... Hence, Islamic finance literally outlaws capital-based investment gains without entrepreneurial risk.

Sounds a healthy approach, no?

Well, yes and no. The trouble is, there is a strong preference in the financial market for investment gains without entrepreneurial risk, with the general result that

shariah-compliant lending in Islamic finance requires the replication of interest-bearing, conventional finance via more complex structural arrangements of contingent claims.

You can pretty much skip the algebra that sets in from pages 8-16: take it from me that organising an asset-backed securitisation as a gigantic repurchase contract for pooled assets, in which an exerciseable transfer of ownership does indeed take place, is a complicated business.

What is more, the underlying assets have to be shariah-compliant too: no pork, porn, alcohol, firearms or tobacco anywhere in the mix.

But the real trouble begins with the legal approvals. As Mr Jobst points out, from the investor's perspective, both the underlying reference assets, and the transaction structure, need to satisfy two legal regimes: applicable commercial law as well as Islamic law.

And with Islamic law, there is no guarantee of finality:

Islamic jurisdiction is not bound by precedent and legal opinions may deviate from previous decisions made by other shariah scholars. Shariah law is open to interpretation and religious boards frequently hold divergent views on key shariah issues. There is no consistent ruling of Islamic courts on the religious compliance of the eligibility of certain assets and transactions structures for securitisation ... [A] shariah board has consderable discretion in the interpretation of Islamic law and may choose any other school of thought to inform their decision-making process.

Which puts the problems of most financial-markets regulation in perspective, I think you will agree.

Presumably product standardisation could help reduce transaction costs and increase legal certainty. But so long as Islamic finance is primarily about replicating the substance of conventional finance by other formal means, the place ofconventional finance sounds secure for a good while yet.

Economics Watch: Indicators & Trends

admin — Thu, 15 Mar 2007 15:13:59 -0400

January exports up 8.9% to nearly RM47b

Malaysia's exports remained robust in January 2007 at RM46.98 billion, up 8.9% from a year ago, underpinned by higher shipments of electrical and electronic (E&E) products, chemicals products and palm oil. However, this came below market consensus of 14.3%.

The Malaysian External Trade Development Corporation (Matrade) said consistent with the seasonal and regional trends of lower exports in January compared with the preceding month, exports in January 2007 were 10.5% lower than the RM52.53 billion in December 2006.

E&E products accounted for RM22 billion of the exports, followed by chemical and chemical products (RM2.71 billion), liquefied natural gas (RM2.4 billion) and palm oil (RM2.1 billion).

Malaysia's export growth pales in comparison to its regional peers, with the exception of Indonesia, which staged a stronger rebound in January.
Economists expect export growth to trend lower between 5% and 7% in February and March.

January's trade surplus fell to RM6.61 billion as imports picked up significantly, especially for intermediate and capital goods.

Import growth accelerated unexpectedly to 17.6% to RM40.38 billion in January from RM34.34 billion year-on-year. However, the imports were lower than the RM40.94 billion in December 2006.

CIMB estimates exports to grow at 7% in 2007 on the back of stronger global growth momentum, especially the US economy in the second half of the year.

Foreign reserves up strongly by US$3.4b in February

Bank Negara Malaysia's foreign exchange holdings rose by US$1.8 billion (about RM6.3 billion) in the second half of February (US$1.6 billion) to US$86.9 billion as at end-February.

This increase is the highest monthly rise, matching the net rise of US$3.5 billion in July 2005 when the ringgit was floated.

Year-to-date, foreign reserves have gained US$4.4 billion, compared to US$1.7 billion a year earlier.

The rise of reserves in February was mainly due to strong net inflows of portfolio money, in tandem with the buoyant equity market.

The central bank has continued to absorb excess liquidity from the banking system. As at February, it mopped up funds of some RM214.4 billion.

Moving forward, economists expect foreign reserves to rise at a more moderate pace, given the narrower trade surplus on the back of slowing export growth. They also expect some unwinding of portfolio funds following the recent sharp correction of equity prices.

January IPI growth slows unexpectedly

Industrial production skidded sharply to 2.3% year-on-year in January compared with 6.4% in December 2006. This was significantly below market consensus of 6%.
The main cause for the slowdown in IPI was the manufacturing sector, which slowed from 7.9% in December 2006 to 2.3% in January. This is partly due to slower production across the board, in tandem with the slowing global demand.
Output growth of the electricity and mining sectors came within market expectations, increasing by 8.1% and 0.2% respectively in January.

CIMB expects IPI to grow between 3% and 4% in the first quarter of the year, while IPI to moderate to 4.5% in 2007.

Economy grows modestly in most of US
Economic activity is growing at a modest pace in most parts of the country but has started to slow in the Northeast and Texas, according to a report by the Federal Reserve.

The Fed's "beige book", a collection of anecdotal economic reviews from the Federal Reserve's 12 regional banks prepared for its policy makers' March 20-21 meeting, gave no indication that the Fed might be about to lower interest rates.
Nevertheless, investors continue to put high odds on the possibility that the Fed will do so by the end of June.

The report found "modest expansion in economic activity" in many districts, including the regions centred on Chicago, Minneapolis and Philadelphia. But some districts noted some slowing, including Dallas, Boston and St Louis. It also noted continued demand for skilled workers and some pressure to increase wages.
For most regions, retail sales and the service sector were steady, though vehicle sales remained weak -— especially sport-utility vehicles and models from domestic manufacturers.

However, manufacturing, which had been a weak spot over the past few months, was "steady or expanding", and commercial real estate was strong in several districts.

A number of districts reported that manufacturers were optimistic about the near future and had plans to increase investment in coming months.
In a separate report, the Fed said growth in consumer credit slowed in January, tracking slower retail sales. Overall, consumer credit increased US$6.44 billion during the month to US$2.411 trillion, led by loans for things like cars and vacations.

Thailand's 4Q2006 GDP growth slackens further

Thailand's economic growth slackened further to 4.2% in the 4Q2006 from 4.7% in 3Q, but this came in ahead of market expectations of 3.9%.
For the full year, real GDP expanded by 5% compared with 4.5% in 2005, which is in line with market expectations.

The country's low levels of consumer and business confidence remained a significant drag on domestic demand.

With exports expanding at a stronger pace relative to imports, net exports contribution to overall GDP growth soared to 3.9% points in 4Q from 0.5% points in 3Q

Economists expect net exports contribution to be lower in 2007 as exports slow in tandem with the slowing global growth.

CIMB expects that slower growth will persist in the first half of the year as potential foreign investments are being put on hold for fear of more radical changes in the country's policy. For 2007, the research house is maintaining growth estimates at 4%.

It also expects the Thai central bank to cut policy rates by another 50 basis points to 4% by 2Q2007.

Japan's indicator index points to a slowdown

Japan's index of leading indicators stood at 35 in January, the third straight month for the figure to hold below 50, Cabinet Office data showed. These indicators suggested Japan's economy might lose some steam in the coming months, but analysts doubt there will be any severe slowdown.

A reading below 50 for the index -— which looks at 12 economic indicators that predict future developments — points to a slowdown over the coming half year, while a level above 50 indicates expansion.

The data came amid expectations that the country's economic growth might moderate during the first half of this year, hampered by a decelerating economy in the US, a major overseas buyer of Japanese goods.

Economists do not expect a severe condition even if the economy stagnates as the world economy is expected to regain strength in the later half of the year.

January's leading indicators, as well as other recent data that showed increases in unsold industrial items on manufacturers' shelves and pointed to lower output in the January-March period, cast a cloud over the outlook, analysts said.
Meanwhile, Bank of Japan deputy governor Kazumasa Iwata said the central bank's. February interest rate increase would not impede economic growth.
Iwata also played down the impact of the rate rise on the economy as Japan's interest rates are low, compared with its economic growth rate. He expects Japan's economy to grow by 2% in the fiscal year ending this month.

Iwata said the weakness of Tokyo share prices could hurt sentiment, but it won't damage the overall outlook for the economy.

He said recent developments, such as the unwinding of so-called yen carry trades and the drop in global stock prices, are technical position adjustments.

SOA governance overlooked in Asia

admin — Thu, 01 Feb 2007 14:11:07 -0500

While many companies recognize the benefits service-oriented architecture (SOA) can provide, the lack of governance is often the reason why many implementations fail.

Speaking today at the launch of webMethods' Fabric 7 business process management suite, Eric Lim, general manager at webMethods Asean and India, said: "Companies have realized it's not so easy to [deploy] SOA, and many who've tried it have failed."

"People now realize they need to have governance [in place] for SOA to work," Lim said.

According to analyst company Gartner, the lack of governance is one of the most common reasons SOA projects fail. "SOA governance isn't optional, it's imperative," Gartner said, in a September 2006 research note. "Without it, returns on investment will be low and every SOA project out of pilot phase will be at risk."

Ravi Shekhar, an analyst at Springboard Research told ZDNet Asia: "Today's enterprise functions in a very complex business environment, dictated not just by business or market dynamics, but also by complex and stringent regulations.

"You combine this with the growing complexity of enterprise IT architecture and you have an array of challenges often related to decision making," Shekhar added.

He noted that for SOA projects to be successful, strong governance, manageability and planning--which Asian companies lack--are required.

"These requirement are often beyond the processes and skills of Asian organizations," he said. "A considerable threat to the successful adoption of SOA across Asia is a body of failed SOA implementations due to inadequate planning and governance, which then tarnishes SOA's merit to a broader audience."

In September last year, webMethods acquired Infravio, a provider of SOA registry and governance applications, for about US$38 million. Gartner said the acquisition is the right move toward completing webMethods' offerings in SOA governance, across the design and usage cycles of SOA service components.

The acquisition, Gartner said, also places a strong emphasis on the registry and mediation capabilities of Infravio, as a means of making service location, retrieval and versioning an integrated part of the governance effort.

webMethods Fabric 7 includes the Infravio X-Registry and Infravio X-Broker, which bring together a UDDI (Universal Description, Discovery and Integration protocol) version 3.0-compliant registry, messaging and service orchestration, as well as service level agreement management, versioning and audit logging.

According to Gartner, Fabric 7 could position the company to compete more strongly with other governance vendors such as Hewlett-Packard, AmberPoint, Progress Software and SOA Software.

In addition to integrating its acquisitions, Gartner said webMethods must add more business services to its portfolio so that governance capabilities can be applied to specific industry problems. Without this, the acquisition will expand webMethods' governance presence but not elevate the company to a new level of solution provision in vertical markets, the analyst added.

According to Andy Wilkinson, senior vice president and general manager at webMethods Asia-Pacific and Japan, his region contributes about 12 percent to the company's annual revenue of about US$200 million.

Growth in this region, however, was flat last year, Wilkinson said. This was due to the lackluster IT market conditions in Japan, a country that contributes the bulk of webMethod's Asian revenue, he added. The company has more than 400 customers in the region, including China Mobile, Hong Kong Disneyland and Neusoft.