Forex losses by Bank Negara Malaysia, Facts were concealed; Mahathir, Anwar and Nor Mohamed implicated: RCI

Important report: RCI Secretary Datuk Dr Yusof Ismail speaking to media after submitting a police report over Bank Negara forex trade losses in Putrajaya.

THE Royal Commission of Inquiry into the foreign exchange losses suffered by Bank Negara Malaysia (BNM) back in 1990s has recommended that three people be probed over their involvement and liability.

They are former prime minister Tun Dr Mahathir Mohamad, his then finance minister Datuk Seri Anwar Ibrahim and ex-Bank Negara advisor Tan Sri Nor Mohamed Yakcop, whom the report also named as “principally liable for criminal breach of trust”.

The 524-page report also called out Tun Daim Zainuddin, who served as finance minister from July 14, 1984 to March 15, 1991, for having aided and abetted Nor Mohamed by leaving BNM “to its own devices”.

The commission found that the Cabinet in the 1990s was not given the full picture by Anwar on the forex losses, adding that he had “deliberately concealed facts and information and made misleading statements”.

“The Commission is of the opinion that there was deliberate concealment as BNM’s annual reports did not state the actual losses incurred from the forex dealings from 1992 to 1994.

“It is also of the opinion that the then prime minister (Dr Mahathir) had condoned the actions of the finance minister,” it said.

The RM31.5bil losses, it said, were hidden using “unconventional accounting treatments”, such as booking losses to reserves in the balance sheet and the absorption of the remaining losses by the transfer of shares from the Government to BNM as well as the creation of a “Deferred Expenditure” to be repaid in instalments over a decade.

“All the actions to conceal the losses were discussed and approved by the board of directors before the accounts were signed off by the Auditor-General.

“No further action was taken by the Finance Minister and Treasury secretary-general (as a board member) despite being informed by the Auditor-General on the losses and the unusual accounting treatments,” said the report.

Anwar, noted the Commission, had been informed about the actual forex losses suffered by BNM.

Dr Mahathir, it said, was informed by Anwar together with then Treasury deputy secretary-general Tan Sri Clifford Francis Herbert in late 1993 that BNM had suffered estimated losses of RM30bil on the forex dealings for 1992 and 1993.

However, in the extract of minutes from three Cabinet meetings on March 30, April 6 and 13 in 1994, Anwar had made “no mention of the actual losses of RM12.3bil for 1992 and RM15.3bil for 1993.”

Anwar had chaired the March 30 meeting as the deputy prime minister. The losses for 1993 were reported as RM5.7bil.

“The prime minister, who chaired the meeting on April 6, did not correct or offer more information when the forex losses for 1993 were recorded as only RM5.7bil,” it pointed out.

“The Commission is of the view that it is the finance minister’s responsibility to inform the Cabinet the significant financial affairs about BNM as the Cabinet has collective responsibility with the finance minister and the prime minister for the country’s affairs.”

Dr Mahathir, it said, claimed to have no knowledge of the real amount of losses, which was untenable with his meticulous nature, as well as that under the law, BNM was the banker and financial agent to the Government with the remainder of its net profit to be paid into the Federal Consolidated Fund.

The report said as pointed out by Herbert, he had expected Dr Mahathir to be outraged but his reaction was quite normal with him uttering “sometimes we make profit, sometimes we make losses”.

“His reaction to and acceptance of the huge forex losses suggest that he could have been aware of the forex dealings and its magnitude,” said the report.

The RCI also found Dr Mahathir’s claim that he could only remember the amount of RM5bil forex losses when informed about it in a meeting with Anwar and Herbert in late 1993 to be “questionable”.

It said this was because based on testimonies of other witnesses and documentary evidence, the RM5.7bil only surfaced when Bank Negara’s 1993 annual report was presented to the Cabinet on March 30, 1994.

“Despite his denials, the Commission is of the opinion that a thorough investigation should be carried out to determine the extent of his involvement and liability,” said the report.

By Martin Carvalho, Hemananthani Sivanandam, Loshana K. Shagar, and Rahmah Ghazali The Star

Police set up taskforce to probe possible criminal offences over Bank Negara's forex losses

Inspector-General of Police Tan Sri Mohamad Fuzi Harun says police will open investigation paper following a report that was lodged by Royal Commission of Inquiry (RCI) secretary Datuk Dr Yusof Ismail. (Image is for illustration purpose only).

KUALA LUMPUR: Police have set up a taskforce to investigate possible criminal breach of trust and cheating which may have been committed during Bank Negara Malaysia’s foreign exchange losses in 1990s

Inspector-General of Police Tan Sri Mohamad Fuzi Harun said police would open investigation paper as the forex Royal Commission of Inquiry (RCI) had lodged a police report this afternoon.

“A taskforce has been formed and it will lead the investigation. We are investigating the case under Section 409 of the Penal Code for criminal breach of trust,” he told the New Straits Times when contacted.

RCI’s secretary Datuk Dr Yusof Ismail, who is the Finance Ministry Strategic Investment Division director, had lodged a report at Putrajaya police headquarters at 4.10pm asking police to start an official investigation.

In the police report, it was stated that those who were involved in the alleged wrongdoings were Bank Negara Malaysia (BNM) officers, BNM Board of Members, National Audit Department, Finance Ministry and the prime minister who served during the period.

Royal Commission of Inquiry (RCI) secretary Datuk Dr Yusof Ismail seen leaving the Putrajaya police headquarters after lodging a report. Pic by AHMAD IRHAM MOHD NOOR

The RCI, in its 528-page report that was tabled in Parliament today, said it believed that Datuk Seri Anwar Ibrahim, who was Finance Minister at the time, had misled the government and concealed the actual losses suffered by BNM.

RCI also said it believed that the prime minister at the time, Tun Dr Mahathir Mohamad, had approved Anwar’s “misleading statements”.

The commission also revealed that the losses were far larger than that what was initially reported by the central bank, RM31.5 billion as against RM5.7 billion, in the period of three years.

Yusof spent almost 40 minutes at the police headquarters and later spoke to reporters who were waiting outside.

He said in the report, the commission had requested the police to start a official investigation on the possible criminal breach of trust, forgery and other wrongdoings which may have been committed during the forex activities.

"Our report is basically requesting the police to start investigation and for the Attorney-General Chambers to take action based on the findings by the police," he said.

Putrajaya OCPD Asst Comm Rosly Hassan who confirmed that the report was made, said a special unit in Bukit Aman would investigate the case.

By TEOH PEI YING and HASHINI KAVISHTRI KANNAN New Straits Times


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PROBE NOR MOHAMED, DR Mabatbjr, ANWAR - PressReader

It recommends that they be investigated for possible CBT, fraud

• New Straits Times

FILE PIC

Former finance minister Tun Daim Zainuddin after giving his statement to the Royal Commission of Inquiry in September.

THE RCI believes Datuk Seri Anwar Ibrahim had concealed Bank Negara’s actual forex losses from the cabinet, and that Tun Dr Mahathir Mohamad condoned his actions. The panel, in confirming that RM31.5 billion was lost, says there are grounds to investigate them for criminal breach of trust and fraud.

THE Royal Commission of Inquiry (RCI) into Bank Negara Malaysia’s (BNM) foreign exchange (forex) losses in the 1990s has recommended investigations against former prime minister Tun Dr Mahathir Mohamad and his one-time deputy, Datuk Seri Anwar Ibrahim.

The RCI, in its 528-page report that was tabled in the Dewan Rakyat yesterday, said the duo had concealed facts from the cabinet.

It also recommended that Dr Mahathir and Anwar be investigated for criminal breach of trust and fraud.

“There is a basis for an official police investigation into BNM board of directors, National Audit Department, then finance minister and prime minister for criminal breach of trust and fraud in the performing of the speculative forex transactions and in hiding the losses from the cabinet and Parliament,” the report said.

Former BNM adviser Tan Sri Nor Mohamed Yakcop was also implicated as the commission found that he was responsible for the billions of ringgit in losses.

RCI had recommended that Nor Mohamed be investigated for alleged criminal breach of trust and for allegedly contravening the Central Bank Ordinance 1958.

The commission also found that former finance minister Tun Daim Zainuddin had allegedly abetted Nor Mohamed. Daim was finance minister until 1991 before he was replaced by Anwar.

BNM lost RM31.5 billion in forex trading between 1992 and 1994. Nor Mohamed was in charge of several portfolios in BNM at the time, including the management of external reserves.

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Malaysia's economy: stronger but eroding purchasing power

The story is the same everywhere – the rising cost of living has not been accompanied by an increase in wages.

HERE we go again – another set of impressive growth figures. Bank Negara has announced Malaysia’s latest economic growth at a commendable 6.2% in the third quarter of 2017.

The pace of economic growth for the three months up to September was faster than the 5.8% registered in the second quarter of the year.

This growth rate was the fastest since June 2014.

On a quarter-on-quarter seasonally adjusted basis, the Malaysian economy posted a growth of 1.8% against 1.3% in the preceding quarter, according to the Statistics Department.

Malaysia’s robust economic growth has been attributed to private-sector spending and a continued strong performance in exports.

To quote Bank Negara governor Tan Sri Muhammad Ibrahim last Friday: “Expansion was seen across all economic sectors.”

But try explaining this impressive economic growth rate to the average salaried worker struggling to pay his monthly household bills.

Stretching the ringgit is especially great for those living in urban areas, and Malaysia is increasingly becoming urbanised.

The story is the same everywhere – the rising cost of living has not been accompanied by an increase in wages.

Compounding matters is the depreciation of the ringgit, reducing the purchasing power of the ordinary folk. They can’t buy the same amount of food as they used to previously.

Employers are being forced to cut operating costs to match declining profits.

Job security is becoming paramount. Many are fearful of losing their jobs, as companies cut cost to cope with the challenging business landscape.

And the reality is that many companies are not hiring, as evident from the unemployment rate of 3.4%.

The Malaysian Employers Federation (MEF) has cautioned that more people would be out of a job this year due to the current economic challenges.

Apart from the challenging landscape, technology has disrupted several brick-and-mortar businesses, forcing them to change their way of doing business.

According to MEF executive director Datuk Shamsuddin Bardan, economic challenges will compel bosses to review their workers’ requirements.

While official statistics show that the economy is charting a strong growth path, the trickle-down effect is not being felt.

Why is the sentiment on the ground different from what the politicians and officials are telling us? Why is there a disconnect in the economy?

Are the figures released by the government officials more accurate and authoritative compared with the loud grumblings on the ground that are anecdotical in nature devoid of proper findings?

We hear reports of supermarkets and hypermarkets closing down, but could that be because their business model no longer works as more Malaysians turn to online shopping, with e-commerce companies announcing huge jumps in traffic?

It is the same with the malls – retail outlets are reporting lower sales and this is compounded by the fact that there is an oversupply of malls.

International restaurant chains such as Hong Kong’s dim sum outlet Tim Ho Wan and South Korean bakery Tous Les Jours and South Korean barbeque restaurant Bulgogi Brothers have ceased operations.

But then again, it could be that their offerings and prices had failed to compete effectively against the local choices.

According to the central bank, demand is anchored in private-sector spending.

“On the supply side, the services and manufacturing sectors remain the key drivers of growth,” Muhammad said.

Looking ahead, the governor said that the economy this year is poised to register strong growth and likely to hit the upper end of the official target of 5.2%-5.7%.

The trickle-down effect is not being felt simply because there is uneven growth in the various sectors of the economy.

The property sector, which provides the biggest multiplier effect, continues to be in the doldrums.

The weak ringgit has had a big impact on the price of food, especially processed food and beverages that make up 74.3% of Malaysian household spending.

It was reported that Malaysia had imported a whopping RM38bil worth of food between January and October last year.

In recent weeks, the ringgit has strengthened to about RM4.16 against the US dollar. But it is still far from RM3.80 to the dollar and the outlook of the currency remains uncertain.

We can’t even hold our heads up against the Thai baht and Indonesian rupiah – two currencies that have appreciated against the ringgit.

The headline economic numbers are showing good growth, but Malaysians’ purchasing power has dropped and our living standards have eroded. That is the bottom line. We are living in denial if we do not admit this.

This column first appeared in StarBiz Premium.

Source: On the beat by Wong Chun Hai, TheStaronline

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Recalling Bank Negara’s massive forex losses in 1990s

The government is moving ahead to investigate whether there were any wrongdoings in the massive foreign exchange losses suffered by Bank Negara some 25 years ago. Many people today may not have a good recollection of what happened, while many others probably had no knowledge of it until it became news again recently as the sitting government took aim at this nasty episode under Tun Dr Mahathir Mohamad’s rule.

I was a reporter with Reuters then and had covered the losses that surfaced when the central bank released its annual reports for 1992 and 1993 in March 1993 and March 1994, respectively. I recall that those losses first puzzled me and others because bank officials did not come forward to talk about them at the press conference nor was the information contained in the press release. They were, however, disclosed in the last few pages of the 1992 report on the bank’s financial statement, which normally do not attract attention, as reporters would focus on the earlier parts that touched on the performance of the economy and banking sector.

But that year, we took a cursory look at those back pages and spotted something odd. Bank Negara’s financial statement showed its Other Reserves had plunged from RM10.1 billion in 1991 to RM743 million in 1992, or a loss of RM9.3 billion. There was also a Contingent Liability of RM2.7 billion.

When we asked about this, I recall that both then Bank Negara governor, the late Tan Sri Jaafar Hussein, and his deputy, Tan Sri Dr Lin See Yan, said it was nothing serious, as they were mere paper losses that could be recovered later. We were not convinced, but we were unable to challenge them, as we did not under stand the manner in which Bank Negara presented its accounts.

The next day, however, the market was abuzz with talk that the bank had lost billions in foreign exchange transactions and I remember writing stories on this for the next week or so. But nothing more came of it, although opposition MPs led by Lim Kit Siang continued to press the Ministry of Finance and Bank Negara for answers.

The matter really blew up a year later when Bank Negara tabled its 1993 report and disclosed another forex loss of RM5.7 billion. Here is what Jaafar said:

“In the Bank’s 1993 accounts, a net deficiency in foreign exchange transactions of RM5.7 billion is reported, an amount which will be written off against the Bank’s future profits. This loss reflected errors in judgment involving commitments made with the best intentions to protect the national interest prior to the publication of the Bank’s 1992 accounts towards the end of March 1993. As these forward transactions were unwound, losses unfolded in the course of 1993. In this regard, global developments over the past year had not been easy for the Bank; indeed, they made it increasingly difficult for the Bank to unwind these positions without some losses. For the most part, time was not on the Bank’s side. Nevertheless, this exercise is now complete — there is at this time no more contingent liabi lity on the Bank’s forward foreign exchange transactions on this account. An unfortunate chapter in the Bank’s history is now closed.”

Jaafar took responsibility for what happened and resigned, as did the bank official directly responsible for its foreign exchange operations, Tan Sri Nor Mohamed Yakcop.

How did Bank Negara lose the billions?

Jaafar said the losses were owing to commitments made to protect the nation’s interests. He was referring to the bank’s operations in the global forex market to manage the country’s foreign reserves and, obviously, something went wrong in a big way.

Forex traders and journalists who covered financial markets in the late 1980s knew that Bank Negara had a reputation for taking aggressive positions to influence the value of the ringgit against the major currencies. When the bank is not happy with the direction of the ringgit, up or down, it makes its intentions known by either selling or buying ringgit.

One question I had always asked forex dealers when writing market reports for Reuters was, “Is Negara in the market today?”

Bank Negara has always maintained that its market operations were to prevent volatility and undue speculation. Its critics, on the other hand, said it also did so for profits, which it enjoyed for years.

What went wrong in 1992?

That was the year George Soros and other hedge funds bet heavily against the British pound on the basis that it was overvalued. The Bank of England (BOE) fought back by buying billions of sterling while Soros and gang shorted the battered currency.

As it did not want to deplete too much of its reserves to defend the fixed rate of the pound within the European Exchange Rate Mechanism, BOE capitulated by withdrawing from the ERM on Sept 16, 1992, since called Black Wednesday.

It was widely believed then that Bank Negara had bet on the wrong side of the fight between BOE and the hedge funds. It never thought that central banks could lose against specu lators, but BOE lost and Soros was said to have pocketed at least US$1 billion.

Bank Negara has never confirmed nor denied that this was indeed what happened but the evidence, although circumstantial, points to this as the reason for the loss of RM9.3 billion in its 1992 accounts and the subse quent loss of another RM5.7 billion in 1993, bringing its total loss to RM15 billion.

Was the loss more than RM15~30 bil?

Former Bank Negara assistant governor Datuk Abdul Murad Khalid was reported as saying recently that the losses were actually US$10 billion. That would work out to RM25 billion at the then exchange rate of RM2.50 to a dollar. Murad also alleged that there were no proper investigations into the matter.

Following his allegations, the Cabinet has now set up a task force led by former chief secretary to the government, Tan Sri Sidek Hassan, to investigate whether there were wrongdoings that caused the losses, whether there was a cover-up on the size of the losses, and whether Parliament was misled.

So, who should the task force call up as part of its probe? I am guessing the following:

1. Tun Mahathir, who was the prime minister then;
2. Tun Daim Zainuddin, who was the minister of finance from 1984 to 1991 when Bank Negara was active in the forex market;
3. Datuk Seri Anwar Ibrahim, who was the minister of finance when the losses surfaced in 1992 and 1993;
4. Dr Lin, who was deputy governor of the central bank then;
5. Tan Sri Ahmad Don, who succeeded Jaafar as governor;
6. Murad, who made the allegations; and
7. Nor Mohamed, who was head of forex operations. 

Who is Nor Mohamed?

Nor Mohamed is the man who lost billions for Bank Negara and resigned along with Jaafar in 1993. He then kept a low profile with short spells at RHB Research Institute and Mun Loong Bhd.

In an ironic twist, the man who lost billions for the country was later credited with helping save the ringgit from currency speculators in 1998.

Frustrated by the year-long failure of governments and central banks to fight off speculators, who had devalued Asian currencies (the ringgit plunged to as low as 4.80 to the dollar), Tun Mahathir turned to Nor Mohamed for help. The doctor did not understand how the currency market worked and Nor Mohamed took him through it in great detail. The two men then confidentially devised the plan that shocked the world — the imposition of controls on Sept 1, 1998.

Widely criticised at the time (Ahmad Don and his deputy Datuk Fong Weng Phak resigned in protest), some now say the move helped bring an end to the crisis, as speculators feared other affected countries would do the same.

Nor Mohamed’s star shone again and he later became Minister of Finance 2 under Tun Mahathir and Tun Abdullah Ahmad Badawi. He is now deputy chairman of Khazanah Nasional.

But now, a ghost from his past has been dug up as fodder for the political contest between Prime Minister Datuk Seri Najib Razak and his biggest nemesis, Tun Mahathir. The objective is obvious. Tun Mahathir has attacked Najib incessantly over 1Malaysia Development Bhd. The current administration is fighting back by saying billions were also lost under Tun Mahathir’s watch. Tun Mahathir says there is a 1MDB cover-up and his foes are accusing him of doing the same.

Will the task force unearth anything that is not already known?

The task force needs three months to complete its work, so we will just have to wait for the full picture before we can come to any conclusion that can bring closure to something that happened 25 years ago.

Perhaps, one day, we will be lucky enough to also have the full picture of the affairs of 1MDB. Current Minister of Finance 2 Datuk Seri Johari Abdul Ghani did say this month that no action had been taken against anyone in Malaysia over 1MDB because we have only “half the story” so far.

In that case, should we not have a task force on 1MDB as well so Malaysians can have the full picture?

By: Ho Kay Tat

Ho Kay Tat is publisher and group CEO of The Edge Media Group

This article appears in Issue 772 (March 27) of The Edge Singapore which is on sale now.

RCI can shed more light on forex losses

Bernama pic of Sidek

 Figures could be even greater than what had been disclosed, says STF chairman

KUALA LUMPUR: A Royal Commission of Inquiry (RCI) can reveal more details on the foreign exchange (forex) losses suffered by Bank Negara (BNM) in the 1980s and 1990s, said Tan Sri Mohd Sidek Hassan.

The chairman of the Special Task Force (STF) to probe the forex losses said the figure was greater than what was disclosed.

However, the STF was unable to scrutinise further due to the limitations that it had, he said in an interview on Friday.

“As a task force, we have limitations. We were established on an administrative basis and not under any legislation.

“As such, the STF had no power to coerce anyone to come forward for any discussion or to give any information,” he said, adding that it only had access to documents that were available to the public, such as BNM’s annual reports and consultations between the central bank and the International Monetary Fund.

“We also cannot compel anyone to come forward. Even if you ask them to come and they don’t want to come, there is no issue about it.

“And even if they came and we questioned them, and they refused to answer, we cannot do anything about it.

“And it was not under oath. Even if they answered, we don’t know if that was the truth.

“So, that is why the RCI is better, although it is safe to say that the STF has reason to believe that the actual loss is different and much more than the figures given earlier,” said Sidek, a former Chief Secretary to the Government.

He added that the RCI could have access to documents relating to the forex losses, for instance from the Finance Ministry or BNM.

On Jan 26, former BNM assistant governor Datuk Abdul Murad Khalid revealed that the central bank suffered US$10bil (RM42.9bil) in forex losses in the early 1990s, much higher than the figure of RM9bil disclosed by BNM.

Subsequently, a seven-member STF headed by Sidek was formed in February.

Sidek, who is Petronas chairman, said the STF focused on the three points in the terms of reference, one of which was conducting preliminary investigations into losses by BNM related to its speculative fo­­reign currency transactions.

It also investigated whether there was any action to cover up the losses and whether the Cabinet and Parliament were misled and it had to submit to the Government recom­mendations for further action, including the establishment of an RCI.

On June 21, the STF submitted its findings, concluding that it found that a prima facie case to merit in-depth investigations by establishing an RCI.

Explaining the process of the investigation, Sidek said 12 people, including former BNM governor Tan Sri Zeti Akhtar Aziz, were interviewed by the STF, and all coopera­ted well.

Among the others who were summoned by the STF were PKR adviser Datuk Seri Anwar Ibrahim, DAP adviser Lim Kit Siang, and former Finance Minister II and BNM assistant governor at the time Tan Sri Nor Mohamed Yakcop.

Asked on the need to investigate something that happened about two decades ago, Sidek said though it took place a long time ago, it had been revealed that the losses were huge.

“I feel that the people need an explanation on the matter, and the Government had decided to conduct an investigation.

“Therefore, an RCI is the only way for a complete understanding. If this is not done now, the matter will prolong.

“Five or 10 years from now it will crop up again.

“With a full investigation through an RCI, there could be closure to this,” Sidek said. — Bernama

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US government monitoring its oversea citizens by Foreign Account Tax Compliance Act (FATCA)

Malaysia to ink pact in line with FATCA

KUALA LUMPUR: All local financial institutions will be required to declare their American customers to the United States Internal Revenue Service (IRS) under a new agreement to catch its tax evaders who hide their money overseas.

Malaysia will be entering into an inter-governmental agreement with the US in line with the implementation of its Foreign Account Tax Compliance Act (Fatca).

Inland Revenue Board (IRB) chief executive officer Tan Sri Dr Mohd Shukor Mahfar said Malaysia would fully enforce all the requirements of Fatca by September next year.

“Fatca is a very interesting move by the US to monitor its citizens who have income outside of the country. The rest of the world is required to abide by Fatca or the US government will impose a withholding tax of 30%.

“So, IRB, as the tax authority for Malaysia, along with Bank Negara, will be signing the agreement,” he said at the National Tax Conference 2014 here yesterday.

The tax is imposed by withholding earnings on the funds in the account of the US citizen and paid to its government.

Under the Act, all foreign financial institutions must declare the financial holdings of any US citizen or cough up a 30% withholding tax on their own.

The US imposes income tax on its citizens, regardless of which country they reside in.

Many countries, including Switzerland which was previously considered a haven for those who sought to keep money overseas in secrecy, have signed the agreement.

Other countries listed by the US Treasury website are Britain, Australia and France while Indonesia, Thailand, Singapore and China are those which have consented to entering the agreement.

Earlier, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said the proposed amendment to Inland Revenue Board of Malaysia Act would be tabled at the Dewan Rakyat sitting in October.

Previously, a controversy had erupted when it was alleged that the amendments would transform the tax agency into a firm that invested taxes collected on behalf of the Government.

The Finance Ministry later denied this, adding that all direct taxes collected by the board would be channelled to the Federal Consolidated Fund.

By P. Aruna The Star/Asian News Network

IRS Notes:

Foreign Account Tax Compliance Act

FATCA Current Alerts and Other News
The provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) became law in March 2010.
FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts
FATCA focuses on reporting:
	By U.S. taxpayers about certain foreign financial accounts and offshore assets
	By foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest
The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.

Individuals		Financial Institutions		Governments
U.S. individual taxpayers must report information about certain foreign financial accounts and offshore assets on Form 8938 and attach it to their income tax return, if the total asset value exceeds the appropriate reporting threshold. Form 8938 reporting is in addition to FBAR reporting. > Learn More ...		Foreign To avoid being withheld upon, a foreign financial institution may register with the IRS, obtain a Global Intermediary Identification Number (GIIN) and report certain information on U.S. accounts to the IRS. > Learn More... U.S. U.S. financial institutions and other U.S withholding agents must both withhold 30% on certain payments to foreign entities that do not document their FATCA status and report information about certain non-financial foreign entities. > Learn More...		If a jurisdiction enters into an Intergovernmental Agreement (IGA) to implement FATCA, the reporting and other compliance burdens on the financial institutions in the jurisdiction may be simplified. Such financial institutions will not be subject to withholding under FATCA. > Learn More ...

Is timing right for Bank Negara Malaysia interest rate increased now!?

Bank Negara says going forward, the over all growth momentum is expected to be sustained.

We are actually quite surprised that Bank Negara chose to make this measure this month!

AFTER keeping interest rates low for the past three years to support economic growth, Bank Negara has finally decided that it is the time to “normalise” interest rates.

In response to firm growth prospects and expecting inflationary pressure to continue, the benchmark overnight policy rate (OPR) was raised by 25 basis points (bps) to 3.25% on Thursday.

This is the first hike since May 2011 and the reasons, although not spelled out, were broadly hinted towards containing inflation and curbing rising household debt.

Most economists are unperturbed with the move, as the central bank has hinted of an imminent hike in OPR after the Monetary Policy Committee (MPC) meeting in May.

According to a Bloomberg survey, 15 out of 21 economists estimated a hike.

“Amid firm growth prospects and with inflation remaining above its long-run average, the MPC decided to adjust the degree of monetary accommodation,” Bank Negara says in a statement.

The economy grew by 6.2% year-on-year in the first quarter with private consumption up 7.1% and private investment expanding by 14.1%.

The prolonged period of low interest rates in Malaysia has been supportive on the domestic economy, hence the recent rate hike has sparked the question whether the time is right for a hike amid a recovery in the global economy.

“Despite higher costs of living, stable income growth and favourable labour-market conditions are expected to buoy private consumption growth,” said CIMB Research in a report.

It expects the country’s economic growth to increase to 5.5% this year and 5.2% in 2015.

Bank Negara remained positive on Malaysia’s growth outlook, riding on the back of recovery in exports, robust investment activity and anchored by private consumption.

Financial imbalances

“Going forward, the overall growth momentum is expected to be sustained.

“Exports will continue to benefit from the recovery in the advanced economies and from regional demand. Investment activity is projected to remain robust, led by the private sector,” says Bank Negara.

There are a lot of factors that could derail the recovery in the world’s economy, including a risk in China’s growth slowing and a slower recovery in Europe and the United States.

“We are actually quite surprised that Bank Negara chose to make this measure this month. The fact that the latest normalisation drive would push the ringgit higher and that puzzles us as export momentum may decelerate in the next few months due to waning competitiveness,” says M&A Securities.

Nonetheless, it believes the economy is capable of absorbing the adjustment.

Prior to the 2008-09 Global Financial Crisis, Malaysia’s OPR stood at 3.5%. The country’s OPR was subsequently cut down to as low as 2% to support the domestic economy during the height of the global downturn in early 2009 before being raised gradually to the present level.

Between November 2008 and February 2009, Bank Negara had cut the OPR by 175 basis points in response to the global economic crisis. “The rise in OPR will likely to improve Malaysia’s attractiveness amongst foreign investors, leading a stronger capital inflows, lower bond yields and appreciating ringgit,” says AllianceDBS Research chief economist Manokaran Mottain in a report.

He says that since the previous MPC meeting in May, the market has been influenced by this expectation.

Year-to-date, the ringgit had rallied to RM3.172 per US dollar on July 9, registering a 2.06% gain. However, at the close yesterday, the ringgit closed lower at RM3.21 against the greenback.

The central bank also highlights that the increase in the OPR is to ease the risk of financial imbalances, which may effect the economy’s growth prospect.

“At the new level of the OPR, the stance of the monetary policy remains supportive of the economy,” Bank Negara says.

The OPR is an overnight interest rate set by Bank Negara. It is the interest rate at which a bank lends to another bank.

A rate hike would have an impact on businesses and consumers, as changes in the OPR would be passed on through changes in the base lending rate (BLR).

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz was reported as saying that signs of financial imbalances would also factor into policy decisions, because a prolonged period of accommodation could encourage investors to misprice risk and misallocate resources.

“Higher interest rates should help to ensure a positive real rate of return for deposit savings and deter households from turning to riskier investments,” says CIMB Research.

The low interest rate environment has resulted in rising household debt level, which reached a record of 86.8% of gross domestic product at the end of last year.

“Although the increase in the OPR will likely have some impact on consumer spending and business activities, it will help to moderate the increase in prices,” says RHB Research Institute.

It expects inflation to moderate but to remain high, hovering above 3%.

Most economists are expecting OPR to remain unchanged at 3.25% for the rest of the year, although price pressures are likely to remain.

They say Bank Negara may resume its interest rate normalisation only next year.

“The price pressure is likely to remain, in view of further subsidy rationalisation (another round of fuel-price hike this year),” CIMB Research says.

Muted impact

“Another 25bps hike will crimp domestic demand,” Manokaran opines, adding that there are other measures that may be taken if household debt continues to grow at a worrying pace.

Malaysia is the first country in the South-East Asia to increase its benchmark rate on the back of improve confidence in exports growth and robust investment activity.

According to CIMB Research, Malaysia’s equity market has already priced in an interest rate hike following the May MPC meeting.

The research house says while the is negative for equities, the impact on the stock market should be muted as the increase is minimal.

“Rate hikes are negative for cyclical sectors such as property and auto, as well as consumer stocks due to lower disposable income,” it says.

In the property sector, rising interest rates would increase mortgage payment and reduce affordability.

However, CIMB opines that the impact of a gradual rise in interest rates will be mitigated as the key drivers of property demand are the overall economy and the stock market.

“But the overall impact should be muted as net gearing for corporate Malaysia is less than 10%,” it adds.

CIMB notes that the banking sector will benefit from the rate hike due to a positive re-pricing gap between lending and deposit rates.

“We estimate that a 25bps rise in OPR could enhance banks’ earnings by 1% to 2%.

“This would outweigh any slowdown in loan growth in an environment of higher interest rates, while asset quality is expected to be unaffected,” it says.

Contributed by Intan Farhana Zainul/The Star/Asia News Network

No justification for interest rate hike: Kenanga

Investment bank research head cites expectations of softer economic growth in H2

 
Adib Rawi Yahya/theSun

KUALA LUMPUR: Kenanga Investment Bank Bhd has taken the contrarian view and believes that an interest rate hike is unlikely to materialise today, saying that it would be unjustified given jittery economic fundamentals that would not be able to take such a hike.

Most analysts opine that Bank Negara is likely to raise the overnight policy rate (OPR) for the first time since May 2011 today, even though they tend to differ on the quantum of increase, between 25 basis points (bps) and 50 bps. The OPR currently stands at 3%.

Bank Negara is scheduled to hold its latest monetary policy committee (MPC) meeting this evening.

Kenanga Investment Bank deputy head of research Wan Suhaimie Saidie (pix) opined that this is not the right time to raise interest rate as economic growth is expected to trend lower in the second half compared with the first half of the year.

"Due to softer external demand and slow down in other parts of the world, I don't think Bank Negara will raise interest rate, unless they revise the gross domestic product (GDP) higher," he told a media briefing here yesterday.

Wan Suhaimie said as Malaysia is an open economy, the interest rate outlook will be externally dependent, whereby it has been observed that Bank Negara would shift towards tightening mode when the global manufacturing PMI breaches 54.0.

"However, it may take at least another three to six months before the index breaches 54.0," he said, adding that there is little reason for Bank Negara to raise the OPR for the rest of the year.

Wan Suhaimie believes with the implementation of the goods and services tax (GST) next year, the local economy may even slow down for at least two quarters, making the case for an interest hike far from compelling.

Kenanga expects GDP in the first half to be close to 6%, while second half is projected to average by 5.2%, with a full year growth rate of 5.5%.

Wan Suhaimie said instead of raising the interest rate, Bank Negara could take additional macroprudential measures to address imbalances in the financial system, such as reducing the loan-to-value ratio and debt-to-income ratio.

According to data compiled by Kenanga, Bank Negara is one of the most conservative central banks in the world, with only 10 rate adjustments made over the past 10 years.

M&A Securities concurred with Kenanga on the unlikelihood of a hike in OPR today albeit for a different reason.

"Policy decisions would need to get the cabinet endorsement first. Being a caring government that would like to avoid political backlash, we think that the government would prefer Bank Negara Malaysia (BNM) to defer that to the September MPC meeting," it said in an economic report yesterday.

It explained that on the back of rising cost of living and the upcoming stress of the goods and services tax, the last thing BNM and hence, the government would want to see is the adjustment be a burden the people.

"As 55% to 60% of Malaysian population, as in the Muslims would be observing the month of Ramadan of which their spending would increase, the government would risk its reputation if it proceeds with a policy hike. There is a small chance that the government would execute this in our opinion," said M&A analyst Rosnani Rasul.

It said impact to the ringgit would also be more conducive if policy rates get adjusted in September and that an adjustment of 25 bps would suffice.

With no hike in the OPR, volatility in the market will continue and is likely to see the ringgit fall back to 3.20 to 3.30, Wan Suhaimie opined.

The ringgit has been rising lately, surging to as high as 3.1860 early this month in anticipation of an interest rate hike.

Contributed by Lee Weng Khuen sunbiz@thesundaily.com 10 July 2014

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Malaysian Central Bank raises defence; weak currency

 

Malaysia banks told to set minimum CA ratio at 1.2% of total loans

PETALING JAYA: Banks have been told to have a minimum collective assessment (CA) ratio of 1.2% by the end of next year, sending a strong signal to the industry to improve its standards of prudence.

According to a circular from Bank Negara to financial institutions early last week, all banks are required to set aside a minimum of 1.2% of total loans effective Dec 31, 2015.

The requirement, effectively, will put a stop to the present situation where banks are left to set aside their CA ratio based on their own risk assessment of their asset profile.

“Most banks have maintained a CA ratio of lower than 1.2% because there is no minimum set by Bank Negara. This circular effectively sets the standard for a minimum requirement,” said a banker.

The CA ratio was previously known as the general provisions that all banks were required to adopt. The general provisions requirement was a minimum of 1.5% of total loans, a ratio set by the central bank.

However, after the introduction of the new accounting standards three years ago, the general provisions requirement was replaced with a CA ratio, with banks free to set their own ratio.

The central bank no longer set the minimum requirement for banks to comply with in regards to the provisions.

According to a research report by CIMB, banks that had a CA ratio of less than 1.2% as of September last year were Malayan Banking Bhd, Public Bank Bhd, Affin Bank Bhd and Alliance Bank Malaysia Bhd.

Bankers, when contacted, were divided on the impact that the requirement would have on their bottom lines.

According to one banker, the move to comply with the ruling will not impact profitability because the additional amount required to be set aside can be transferred from retained earnings.

“Funds out of retained earnings will not impact the profit and loss (P&L) account of banks. It’s not a P&L item,” he said.

However, it would affect the dividend payout ability of banks, added the banker.

Another banker said the financial institution was seeking clarification from Bank Negara on whether to set aside the provisions from its profits.

“If that were the case, then it would impact profitability,” said the banker.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan said the background to the new requirement was that Bank Negara wanted to ensure that impairment provisions could keep pace with strong credit growth.

“In addition, the regulator would like to promote consistency in practices in ensuring adequate rigour and data quality in arriving at the appropriate level of collective impairment and the factors that are considered by banking institutions.

“Adequate impairment provisions serve as necessary buffers against potential credit losses; hence, they can reduce the likelihood of systemic risk for the banking sector,” he said in an e-mail response to StarBiz.

He said the sector might witness an increase in the overall level of impairment provisions at the industry level.

“Nevertheless, this should be seen positively, as the higher credit buffers would now render the sector stronger,” he noted.

CIMB Research in a report stated that the proposed new guideline could have a negative impact on banks based on its theoretical analysis.

It pointed out that several banks would have to increase their CA provisions under the new ruling and this would lead to a rise in the banks’ overall credit costs.

“Those which do not meet the requirements would have to increase their CA (and ultimately credit cost) in 2014-2015, even if their asset quality is improving. For banks with a CA ratio of above 1.2%, the new ruling would limit the room for them to further reduce their CA ratios,” CIMB Research explained.

According to CIMB Research’s estimates, banks’ net profits could be lowered by around 0.5% (for Hong Leong Bank Bhd) to 11% (for Public Bank) in 2014 to 2015 if a minimum requirement of 1.2% for the CA ratio were implemented.

Another analyst, however, is of the view that the new requirement from Bank Negara would have a negligible impact on the operations and earnings of banks.

“We think it is not a major concern for most banks because, firstly, the grace period for the implementation of the new guideline is long. Secondly, the minimum ratio of 1.2% will not comprise of only the CA component alone, but is also a combination of the CA and the statutory or regulatory reserve.

“In general, we see the new guideline as a measure to standardise the way banks gauged their capital buffers.
“The bottom line is, we think the new guideline will only serve to further strengthen banks’ capital buffers,” the analyst added.

By Cecilia Kok and Daljit Dhesi StarBiz, Asia News Network

Silver lining in weak currency

Weaker currencies are a boon for Malaysia and Indonesia, helping to tip the balance of trade back in their favour, as exporters benefit from rising demand for goods and commodities from advanced economies, coupled with steady growth in China.

The favourable trade surplus, economists said, would ease the pressure on these emerging countries’ deteriorating external accounts, which is a major sore point for foreign investors.

They added that rising exports would provide the much-needed tailwind for Asian economies to sustain growth even as domestic demand moderated.

Malaysia on Friday reported a 2.4% growth in exports in 2013, backed by a 14.4% jump in December that exceeded the market’s expectation by a wide margin.

“We still maintain our long-term view of impending growth momentum in the coming quarters,” Alliance Research economists Manokaran Mottain and Khairul Anwar Md Nor said in a report.

They predicted exports in 2014 to grow at a faster pace of 5%, backed by steady but improving export demand from advanced economies.

While imports grew at a faster pace than exports in 2013, Malaysia continued to enjoy a strong trade surplus.

The favourable trade surplus combined with an anticipated smaller services deficit and transfer outflows would translate into a larger current account surplus of RM16.7bil or 6.6% of gross domestic product (GDP) in the last quarter of 2013.

“The cumulative current account surplus is estimated to reach RM37.8bil or 3.9% of GDP in 2013, helping to assuage fears of a current account deficit,’’ CIMB Research economist Lee Heng Guie said.

This, he said, was positive for the ringgit and the capital market.

The ringgit, along with other emerging Asian currencies, have been under pressure since June last year after the US Federal Reserve began talking and later started to reduce its quantitative easing (QE).

The US Fed first pared its monthly bond purchases programme from the original US$85 billion a month to $75 billion in January. This was cut further by $10 billion starting from February.

“Capital outflows from emerging markets are likely to continue in the months ahead as the Federal Reserve winds down its QE3 programme,” said Macquarie Bank Ltd’s Singapore-based head of strategy for fixed income and currencies Nizam Idris.

Fears about the US Fed tapering down the supply of cheap money to the market first surfaced in May last year and it triggered a huge sell-off on emerging market assets.

Countries such as Indonesia and India had seen their currencies depreciate the most in 2013, Both economies had wide current account deficits.

Last year, the Indian rupee plummeted the most in two decades, while rupiah depreciated by about 20% against the US dollar over the past 12 months.

Not helping emerging market currencies is the recovery in advanced economies, such as a rebound in economic growth in the US which rose by 3.2% in the fourth quarter of last year.

But if economic recovery in the US and eurozone were to stay on course, so would demand for cheaper emerging market exports. This, in turn, would help shrink the huge current account deficits that had hobbled countries such as Indonesia, India and Turkey.

For many emerging economies, 2014 had gotten off to a grim start.

Concern over the Chinese economy’s marked slowdown and the Argentine peso’s steep slide in January has brought upon renewed pressure on the currency market.

But the current market volatility does not portend weaker growth.

CIMB Research in Indonesia observed that the strains in the financial markets did not translate into a significant slowdown in the economy as the country’s real GDP growth accelerated to 5.7% in the last quarter of 2013.

Its exports surged in December, while imports slowed on the weaker rupiah. This helped to widen its trade surplus to $1.52 billion, the largest since November 2011.

The favourable trade numbers narrowed its current account deficit of $4.06 billion.

CIMB Research expects growth in Indonesia “to trough” in the first half of 2014 as the lagged effect of the rupiah depreciation and Bank Indonesia’s aggressive policy-tightening cycle in June-November 2013 works through the economy.

“Pre-election bounce in consumption should offset the weakness, allowing Indonesia to post 5.6% GDP growth in 2014,’’ it said.

Malaysia, too, is on track for sustained growth. CIMB Research projected GDP growth in the third quarter would probably expand by 5.3%, taking the full year growth rate to 4.7% for 2013. - The Star/ANN

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Bank Negara Malaysia new ruling to curb interest capitalisation and developer interest bearing housing loan schemes

Fee ling the heat: Although the guidelines on the prohibition of the DIBS is not surprising, the new rule on using the net selling price to determine the loan- to-value ratio is a negative surprise to some analysts.

PETALING JAYA: A new circular from the central bank that took effect last Friday will pile more pressure on an already hard-hit property sector, even if its merits are likely to be felt in the long-term, analysts and industry executives said.

In a bid to make the property market sustainable, the new rules have put the brakes on interest capitalisation schemes (ICS) and the developer interest-bearing scheme (DIBS).

It also calls for the use of the net selling price of a property as the benchmark for obtaining bank loans, which raises the amount to be paid upfront.

Alliance Research’s banking analyst Cheah King Yoong said the measures were “more onerous” than anticipated and posed downside risks to his 9% loan growth estimate for the banking sector next year.

“Although the guidelines on the prohibition of the DIBS was not a surprise, the new rule on using the net selling price to determine the loan-to-value (LTV) ratio is a negative surprise to us.

“While it is difficult to gauge the impact on banks, the fact that this new rule applies to all property financing, including first-time home buyers, means that property buyers’ affordability will be affected, and this will lead to lower property loan growth,” Cheah said in a report yesterday.

“We believe the latest policies illustrate the sheer determination of the authorities to contain the growth of household debt.

“These measures, together with potential rate hikes in 2014, fiscal tightening by the federal government and subsidy rationalisation next year, could further drag on loan growth in the retail segment, temporarily leading to a rise in credit costs, and dampen investor sentiment on the banking sector,” he added.

The circular prohibits financial institutions from granting end-financing facilities to individuals or non-individuals for the purchase of property offered under an ICS, including the DIBS.

Financial institutions are also barred from granting a bridging facility to finance a property development that offers ICS.

According to Alliance Research’s Cheah, this effectively removes any alternative incentives that developers might concoct to replace the DIBS.

“Nonetheless, our channel checks show that for the banking groups under our coverage, property loans with the DIBS only made up 1% to 3% of their outstanding mortgages,” he said.

Affin Bank is the exception, with some 7% of its mortgage loanbook comprising loans tied to the DIBS.

“Given that property loans with the DIBS are immaterial to overall outstanding mortgage loans as well as new mortgage loans approved, we do not expect the restrictions to have a significant impact on the banking sector,” Cheah said.

Public Bank has the highest exposure to housing loans at 56% of its gross loans, followed by Alliance Bank with 55% and Hong Leong Bank, 46%, company data showed.

Another key item on the circular requires banks to calculate the LTV ratio based on the net price of a property instead of its gross price.

To illustrate, a property with a list price of RM1mil, rebate of 5% and 90% financing would incur a down payment of RM50,000 after discount.

Under the new regime, the down payment increases to RM95,000 because the 90% loan will be computed using the discounted price tag of RM950,000.

While property executives expect a slowdown in sales, they believe that genuine buyers will remain undeterred.

Mah Sing Group Bhd group managing director and CEO Tan Sri Leong Hoy Kum told StarBiz via email that demand for properties would continue to be robust, especially among those buying to own or for long-term rental income.

“There is still a large supply-demand gap as supply growth for properties has been on a decreasing trend since 2003, with Malaysia’s supply growth in the second quarter of this year at only 0.8%.

“The fundamentals driving the property market’s growth in recent years have not changed, for example a younger population leading to new household formation, a rising middle-income group, the supply-demand gap and stable employment.

“Initiatives in Budget 2014 may remove the speculative element, but not the fundamentals,” he said.

Leong noted that the lending environment was still conducive, with low interest rates and banks offering BLR minus 2.4%, from BLR minus 2.1%-2.2% a year ago.

Mah Sing had stopped offering the DIBS for most of its launches since the start of the year. None of its projects in Iskandar Malaysia feature the DIBS.

-  Contributed by John Loh The Star./Asia News Network

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