Financial Crisis And Its Impact On Malaysian Company

Tunku Abdul Rahman College

STRATEGIC FINANCIAL MANAGEMENT ABMF5355 Name: Juliana Tan Lee Ling I.D: 08 WBA 12516 Course: 2AMA2

Marks Introduction

20

Content

50

Conclusion

30

Total

100

GRAND TOTAL

PART A Introduction

Part A

Part B

Remarks

The world economy is moving into a recession which is expected to be the worst for many years. Global financial crisis occur between the years 2007–2009 has contributed to the failure of major businesses that leads to the downfall of consumers’ wealth, significant financial commitments imposed by the government and also a great decline in economic activity1. Many causes have been anticipated with different assumption carried out by financial experts. There are also many solutions have been implemented or are being considerate while major financial and other relevant risks still remains. The trigger that causes the crisis started between the years of 2005-2006 which is the collapse of the global housing bubble2, peaked in the US in the year of 2006 has caused the values of securities that is tied to housing prices to plunge after that. This further leads to the damaging financial institutions globally in regards of banks bankruptcy, limited in credit availability and resulted a loss of investors’ confidence creating a diverse impact on global stock markets which suffered huge losses during 2008. Economies worldwide have slowed down in late 2008 and early 2009 as credit tightened and international trade declined due to the global financial crisis3. There’s argument stating that credit rating agencies and investors failed to measure the risk involved with mortgage-related financial products and that governments and trade union did not set legislations to suit up with the 21st century financial markets. The root that causes the collapse of the global housing bubble started in the US, mainly due to the high default rates on adjustable rate mortgages (ARM), such as an increase in loan incentives like easy initial terms and a long-term trend of rising housing prices4 had attracted mortgage loan borrowers great offers with the belief they would be able to quickly refinance their borrowings at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became tougher. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher.5 1

www.freeencyclopedia.com/financialcrisis

2

http://crisis\Financial crisis of 2007–2009 - Wikipedia, the free encyclopedia.htm

3

http://crisis\Financial crisis of 2007–2009 - Wikipedia, the free encyclopedia.htm

4

www.freeencyclopedia.com/financialcrisis

5

http://crisis\Financial crisis of 2007–2009 - Wikipedia, the free encyclopedia.htm

Heading to the starting point of the crisis in 2007, large amounts of foreign money streamed into the U.S. from fast developing countries in Asia as well as oil-producing countries. Various types of loans were easily obtained and consumers starting to accumulate large amount of debts. As part of the housing and credit suddenly increases, the amount of financial agreements which obtained their value from mortgage payments and housing prices greatly increased. However, as housing prices declined, major global banking institutions are reported to face significant losses.6 The continuation of the issue that began in late 2006 in the U.S. continues to exhaust the wealth of consumers and weaken the strengths of financial institutions. Losses on other loan types are also greatly affected when the crisis expanded from the housing market to other parts of the economy. "The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the U.S. consumer as a source of global demand.” Therefore, the downturn of US economy has affected the world economy thereafter. Thus, global recession is clearly seen during the year of 2008 and total losses are estimated in trillions of U.S. dollars globally in global financial crisis.

Impact of the global financial crisis on Malaysian market and Government Policies For Malaysia, like other countries in the world has already felt the impact of the global financial meltdown as Malaysia’s key sectors show signs of slowdown. The Malaysian economy

6

Closely referred to

http://crisis\Financial crisis of 2007–2009 - Wikipedia, the free encyclopedia.htm

has been resilient in the first-half of 2008 but is increasingly being affected by the global downturn. The global equities markets are closely connected to each other therefore when the global financial crisis hit fall in Asian equities markets are even more severe than in the U.S. Equity markets decline and Malaysia is affected with a drop of 27% in the capital market7. The global meltdown in equity markets leads to a major decline in Bursa Malaysia which had negatively affected investors and consumers. This is because foreign equity funds in the whole of Asia are withdrew to cover the losses that are faced by US. As the US is the biggest importing country around the world which absorbs 25% of total world exports, thus when the global financial crisis hits, Malaysia traded with the US which cast a 19% of the US imports also being affected. Exports declined in line with deteriorating world demand. However as a diversified economy and export market, the global financial crisis leaves very little impact on the Malaysian economy when the US economy structure starts tumbling. Malaysian economy is still strongly grow can be evidenced by resulting in the Gross Domestic Product (GDP) achieving a growth of 7.1%. Although the drop in exports mainly are from manufacturing goods (78% out of total exports), it is then compensated with the increase in other manufacturing sectors like petroleum products, optical and scientific equipment. Even though the domestic development will be affected after the collapse of housing bubble, Malaysia’s economy will remain stable with a GDP growth. In response to the crisis, the Malaysian government has already announced several measures of economic stabilization plan such as firstly for bank deposits are guaranteed by the central bank of Malaysia until the end of 2010 and the government has injected RM5 billion into a special- purpose fund to support the stock market. The government also introduced a RM7 billion economy stimulus package to restructure the economy and overcome the global financial crisis.

8

These economy stimulus packages in Malaysia are in the form of housing benefits,

7

Dr Lim Mah Hui, Global Economic Trends

8

I&T Penang Properties Blogs

entrepreneurial credit facilities, and reduction in compulsory deposit options. National government has allocated an economic stimulus package of Malaysia, which is worth MYR 1.2 billion for construction of 25,000 homes for low and medium income groups.9 The economic stimulus packages in Malaysia are to encourage further development of infrastructure of the country by reducing import duties on iron and steel products and cement. Alongside with a reduction in import duties, the government offered benefits for construction sector industries to be set up. This is an opportunity for encouraging healthy competition in the construction market and its benefit would be enjoyed by consumers. A second Malaysia economic stimulus package is introduced and would be focusing on issues such as deregulation, simplification of procedures and doing away with red tapes 10. Part of this Malaysia economic stimulus package also deals with a movement that encourage Malaysia moving towards to becoming a free market system. Financial Crisis affecting the Malaysian Agriculture industry When the US economy plummets, it affects the economy all over the world including Malaysia’s agriculture industry. Being a top exporter of oil palms, rubber and other agricultural outputs, there are areas that are strongly affected this industry. In term of the pricing factor, an inflation of prices all over the world occurred. Being also one of the main exporters of these agricultural products, lesser exports are on demand leaving a profitability scar on Malaysia that eventually leads to product dumping. One of the examples that is faced by Malaysia in the agriculture industry is that the price of the palm oil fall significantly due to the decreasing demand worldwide for palm oil caused by the global financial crisis. Malaysian government then proposes solutions in the economic stimulus package to protect this sector by optimizing the usage of resources and increase agriculture contribution to national GDP. The government also implements several agricultural programs to curb the issue faced by this sector. For this crisis program, a sum of RM5.6 billion is provided under the

9

www.malaysianeconomicblog.com

10

www.malaysianeconomicblog.com

National Food Security Policy for the period 2008 to 201011. This allocation is to provide incentives to agriculture entrepreneurs and investors to reduce production costs and encourage higher quality agriculture output. Agricultural farmers, vegetable growers and aquatic breeders all will benefit from these incentives. By further helping the farmers, the Government proposes that import duty on farming tools such as pesticides and fertilizers be eradicated. In the National Agriculture Policy, the government also invested on a further development of agro-food sub-sector as well as agro-based industries with the declaration to its objectives of enhancing food security; increasing the productivity and competitiveness of the sector, deepen linkages with other sectors to create new sources of growth. This is done with the aim of strengthening marketing and global networking as well as enhancing incomes of smallholders, farmers and fishermen. Taken together, the Malaysian government is doing their best to relook at the role of agriculture in economic development, reassess and build on their relative strengths and their gifted nature to help Malaysia through times of turbulent. Financial Crisis affecting the Malaysian Automobile industry The Malaysian automobile industry is a key sector in the Malaysian economy and link heavily to the manufacturing and services sectors. This sector started off by importing vehicles, which is then progressed to assembly operations and the founding of a wide network of automobile components and parts manufacturers. Despite the global financial crisis, the performance of the Malaysian automobile industry was encouraging where the total industry volume of new vehicles registered in Malaysia for 2008 exceeded the MAA forecast of 510,000 units and attained the second highest in the Malaysian automotive industry history12.

11

www.malaysianews.com/agricultureoverview

12

www.informaworld.com/.../content~content=a910186312~db=all~jumptype=rss

The Malaysian automobile industry expected that the Malaysian motor vehicles subsectors will also not be significantly impacted by the current global economic slowdown as the local automotive industry is secured in the domestic market. Both Proton and Perodua, the two main national car companies, have insignificant exposure to global markets, at the same time as domestic demand is only marginally affected with about 7.5% contraction from last year13. However, the industry is foreseeing a lower total industry volume for 2009 in relation to the slowing down of our economic growth. The government would continue to support the industry and to undertake measures which would contribute towards enhancing the business environment in the country. In order to alleviate the adverse effects from the global economic slowdown, the Second Stimulus Package provides an additional fund of RM200 million injections to the Automotive Development Fund to assist and promote the development of the industry that includes the parts and components sectors. It is with the hope that this industry will continue in the development and production plans, productivity improvements, to increase working capital In addition, to boost sales of motor vehicles; the government has also allocated funds to support the scheme of scrapping old cars. A government policy is to provide a deduction of RM5,000 will given to car owner who scraps his car of at least 10 years old to purchase local cars like Proton cars from EON company. This is to develop and strengthen the local automotive industry14. The Third Stimulus Package given by the government is to impose 100% import duty and 50% excise duty on new hybrid CBU cars, with engine capacity below 2,000 cc to be given to franchise importers. This exemption is given for a period of two years to prepare for the local assembly of such cars.15 This will encourage more of the automobile and its components manufacturing businesses to be set up and stimulate the industry growth. Malaysian companies like Tan Chong Motor Holdings Berhad and Ingress Corporation Berhad selling and distributing foreign cars need to lower their profit margin to attract customers to purchase vehicle from their company. In order for them to sustain in their financing, they have to make more borrowings from banks for many years. 13

kereta.info/global-crisis-will-impact-automotive-industry-this-year/

14

www.miti.gov.my/cms/contentPrint.jsp?id=com.tms.cms

15

www.miti.gov.my/cms/contentPrint.jsp?id=com.tms.cms

While the Bank Negara Malaysia, the central bank, has reduced the overnight policy rate (OPR) and the statutory reserve requirement (SRR) in the first quarter of 200916, this was annulled by the increase in the hire-purchase interest rates for non-national cars by commercial banks in April 2009.These rates were increased by about one percentage point to 3.25% for loan tenures of five years and below, 3.4% for six to seven years and 3.5% for eight to nine-year loans.17 Furthermore, banks are getting more cautious and strict in providing hire-purchase loans, leading car buyers to face difficulties in financing their purchase. As a result, the production and sales of non-national vehicles and automobile component parts and accessories were affected by these factors. Financial Crisis affecting the Malaysian Housing Development industry The impact of the collapse of the housing bubble in US on Malaysia property market is said to be protected because the Malaysian banking industry is not exposed to the sub-prime lending crisis. Nevertheless, Malaysian economy will be affected in terms of reductions in exports, new investments, closing down of factories as well as increasing unemployment. This will affect the business and consumers’ confidence which will in turn influence the decisions and response of the players in the property market and finally the demand for properties will reduce. Property developers needed the building materials at the stage of construction is force to absorb higher costs or face incomplete work. However, the prices of building materials have not reduced since the subsequent drop in petrol prices. The property market in Malaysia will no longer be booming and will probably stay stagnant. However, the prices might not go down during the weak economy. This is the case because Malaysia is among the countries that are on the recommended buy list of global property advisors. Foreign investors think the property here is still cheap as compared to other countries in the region18. On the other hand, sales of the properties will still be affected and prices reaching sky high as the global financial crisis affected the investors’ confidence thus leading to the loss of major property development project being delayed and slow down of the industry. 16

www.miti.gov.my/cms/contentPrint.jsp?id=com.tms.cms

17

www.miti.gov.my/cms/contentPrint.jsp?id=com.tms.cms

18

blog.intproperties.com/.../malaysia-property-selling-guide/

Since the banks are stricter and control more of loan approvals, the government intervened by lessening of regulations for larger withdrawals of EPF for house purchases also with the help of Economic stimulus package, Malaysian government has set aside an amount of RM 7 billion that has been saved from fuel subsidy and would be directed for housing development19. Financial Crisis affecting the Malaysian Tourism industry The global financial crisis is to be blamed for recession of the world’s tourism industry. However, the World Tourism Organization, which had reported a 1.9 percent increase in international visitor arrivals in 2008 and forecast a more than four percent contraction in 2009 20. Malaysia government has proposed a stronger cash injection from the Government to stimulate local tourism businesses. Malaysian tourism experts provided guidance and advise to local tourism agencies to boost the numbers of tourist into the country by including extensive use of technology such as the Internet, create more value-added services, consider brand extension in promotions, focus on niche products such as youth travel, music and sports, volunteer tourism, eco-tourism and gastronomic tourism, strategic alliances, using icons as a marketing strategy and celebrity endorsement. In Malaysia, the banks provide a special loan known as “soft loan” for tourism projects with the preferential rates with lesser conditions and lower interest rate loans21. Malaysia's tourism industry is also expected to further gain from the Government's coordinated approach to maintain the competitiveness of the industry by developing attractive tourism products to stimulate domestic and international demands. The Government has been focusing on efforts to broaden Malaysia's tourism base by promoting Malaysia as a choice tourism destination in nonconventional markets such as the Middle East to adjust to the affect of the global financial crisis. 19

http://forum.jobstreet.com/index.php?showtopic=290

20

http://ww2.publicbank.com.my/cnt_review46.html

21

http://ww2.publicbank.com.my/cnt_review46.html

To attract more tourists into Malaysia, efforts will be taken to encourage more airlines to operate from Malaysia. For this, a rebate of 50% on landing charges will be given for a period of 2 years effective 1 April 2009 to all airlines that operate from Malaysia22. Apart from that, the Government will allocate RM200 million to upgrade infrastructure in tourist spots, diversify tourism products, organize more international conferences and exhibitions in Malaysia as well as improve the home stay programme. Apart from this, the Government will strengthen the Malaysia My Second Home Programme and consider issuing work permits to skilled spouses 22 of the programme participants.23

Conclusion It has been seen that the United States experience one of the worst economic crisis in two decades, disasters in its subprime market leading to housing foreclosures and the complete crumbling of the banking and financial system and lead to the global financial crisis which also affects Asian markets including Malaysia. RM33 billion has been wiped out of the Malaysian stock market24. The world is one global market therefore all the countries will not be excluded from the negative impacts. Financial crisis is far from over. It will spill over into real economy as the U.S. economy is going into stagflation while Asian economy slowdown but still maintains positive growth. Financial markets are still highly volatile in Asia and Malaysia. There are many lessons that can be learned from Malaysia’s experience with the financial crisis. It is clear that, besides the impact of the crisis on the economy, the various government policy responses also have an equally significant effect on the economy. The crisis has shown that rapid and high economic growth is largely not sustainable in the long run. Above all, the crisis has shown that a measure of consistency in policy-making must always be maintained 22

. =http://forum.jobstreet.com/index.php?showtopic=290

23

. =http://forum.jobstreet.com/index.php?showtopic=290

24

Talk on “The Global Financial Crisis and Implications on Malaysia”, Universiti Malaya, Kuala Lumpur, Faculty of Business & Accountancy

otherwise investors will always have a negative perception towards Malaysia because of policy concerns and uncertainties. With the bitter and painful experience of the global financial crisis, Malaysian as an affected country have had to challenge the external constraint imposed by global capital mobility is trying to make adjustment to the crisis and to rebuild the slow growing economy.