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Can the current account surplus grow?

by November 19, 2016 General

ON the surface, the tripling of the current account (CA) surplus to RM6bil in the third quarter compared to the previous quarter looks promising. But can the CA surplus be sustained at this level?

Considering the weak ringgit, convention suggests that exports should get a boost and the surplus should widen.

However there is reason to believe it may not be sustainable.

Why? Well, the CA surplus is largely driven by a trade surplus, that is, the country exporting more than it imports, and the outlook for trade globally looks gloomy at this point, given the structural problems in the developed economies, and the geopolitical uncertainties.

For an export-reliant economy like Malaysia’s, the CA balance is very important as it is an indicator of the health of the economy. If the CA surplus narrows, it means that the country is exporting less and that has an impact on the manufacturing sector, which made up 23% of the economy last year. Slower growth in the manufacturing sector will eventually have an impact on the services sector when consumers spend less.

There are some economists who believe that Malaysia will have a CA deficit next year because of the weak ringgit. This will weigh on the balance of trade, which is exports of goods and services minus their imports.

A weaker ringgit will mean more expensive imports and while some may argue that a weak ringgit also makes exports more competitive, this will only hold true if there is demand. In this respect, even though commodity prices are low, it has not spurred demand.

The worry is that commodity prices will remain low for too long. For Malaysia and other oil-exporting countries, the deal to cap oil production by the Organisation of the Petroleum Exporting Countries members will be important. If there is no deal, then oil prices may drift lower, bringing the prices of liquefied natural gas, of which Malaysia is a major producer, lower. Coupled with the weaker ringgit making imports more expensive, this will certainly weigh on the trade balance and, therefore, the CA surplus.

Don’t forget that low oil prices also have an impact on the ringgit performance.

KLK sticks to its guns GDEX goes into retail business

KUALA Lumpur Kepong Bhd (KLK) is sticking to its guns and not likely to raise the price again in its bid to acquire London-listed MP Evans Group Plc.

Although MP Evans’ chairman Peter Hadsley-Chaplin had said that the company is worth substantially more than 740 pence per share – the revised offer that KLK has put on the table for the shareholders of the UK-listed company – the Malaysian plantation company has defended the new price.

It pointed out that the new price, which is much higher than the initial offer of 640 pence per share is a significant premium to MP Evans market price and the highest ever traded in the last 20 years. KLK said the new price represents a price earnings multiple of 54.2 times based on MP Evans earnings for last year and that the shares had low liquidity.

For KLK’s offer to be accepted, more than 50% of the voting shares must agree.

KLK noted that MP Evans received letters of intent from shareholders representing 54.72% of the issued share capital of the company in relation to the initial offer of 640 pence per share announced on Oct 25. However it said that the letters of intent does not mean that the shareholders cannot change their mind on the new offer.

It added that the letters of intent do not bind the shareholders who have signed them.

“Indeed, they expressly provide for any such MP Evans shareholder simply to notify MP Evans if it no longer intends to reject the increased offer, with the effect that the MP Evans shareholders who have entered into the letters of intent can freely accept the increased offer at any time,” it points out.

In a stock exchange filing yesterday, KLK says the offer can be increased if another offerer emerges or if the board of MP Evans recommends that KLK make an increased offer.

Save for these two factors, KLK says the revised offer “is final and is not capable of being increased”.

Considering that KLK has stated quite clearly that it would not raise the offer, the ball is now on the court of MP Evans shareholders.

As for KLK, it faces a currency risk since the ringgit has depreciated against the pound sterling. But the risk could change if the sterling deteriorates as Brexit nears in 2018.

GDEX goes into retail business

COMPANIES operating in the digital economy space warrant close scrutiny for all the right reasons. This is because the digital economy virtually operates without defined borders, rules and regulations.

The media industry was the first to feel the impact. The impact of the Internet and the wireless broadband services has made the business of providing news so competitive that media companies are forced to cut costs to maintain their margins.

In the logistics business, taxi permits were once a prized commodity. Now, taxi drivers are giving up the licences to become a driver for Uber or GrabTaxi. In Europe and the US, Uber and GrabTaxi have already encroached into the space occupied by public transport such as buses.

In this respect GD Express Carrier Bhd’s (GDEX) latest acquisition is rather intriguing. It has acquired a 30% equity stake in Web Bytes Sdn Bhd for RM5.5mil.

The company specialises in the provision of software solutions to the retail industry and its solutions are used by small outlet chains and large franchises.

According to the announcement, Web Bytes has more than a thousand customers through the region.

Starting off primarily as a courier company, GDEX has positioned itself as a beneficiary of the boom in e-commerce with its ability to deliver goods to customers who place their orders online. The last mile connection has propelled the stock to have notable shareholders such as Singapore Post and a market capitalisation far more than others in the similar industry.

Going into the retail space is something new for GDEX. It is an area that is largely dominated by traditional names with strong brands. For now it is difficult to foresee what GDEX plans to do with its investment in Web Bytes.

But considering its track record, GDEX venture into providing solutions for the retail industry is something to watch out for.