Frankly Speaking: Jan 18-24, 2010

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Capital outflowsIt is interesting to note how Swiss-based UBS Investment Research and Malaysia’s largest investment bank, CIMB, interpret the country’s capital outflow position differently.

In a recent report titled “Malaysia: How Bizarre?”, UBS wrote that there were “extraordinarily large” capital outflows to GDP and percentage declines in the country’s foreign exchange reserves in late 2008 and early 2009.

While it said this was largely driven by foreign investors’ portfolio divestments due to the global financial crisis, it pointed out that over the last decade, capital outflows from Malaysia had been domestically driven, and this, it said, puts the investment outlook for the country in question.

CIMB, meanwhile, in its report titled “External Reserves: Looking behind the numbers” said the decline in reserves during the said period “was expected” due to foreign investors pulling out from the local capital markets in the wake of the financial turmoil in the second half of 2008.

“The capital outflows have attracted many negative comments and are, in our view, exaggerated,” it said, citing that the outflow would reverse as investors returned to local markets.

The bank also said as companies and individuals are now allowed to invest overseas more freely, this has enhanced capital mobility and hence contributed to a decline in the country’s reserves. But it said that over time, these companies and individuals would repatriate their profits and dividends back to Malaysia.

The undertone of CIMB’s report is that the country’s investment prospects remain sound, as opposed to UBS’ doubt.Nevertheless, looking outside the charts and numbers, it doesn’t take an economist to know that Malaysia’s outlook is on a slide.

The fact remains that Malaysia is a small and saturating market. Meanwhile, it is fast losing the cost competitive edge to other emerging markets. Unless the country can find the right formula to sustain growth, local capital will continue to flow out while foreign direct investment will bypass the country. This will indeed be worrying.

Openness kills corruptionIt is disturbing that the new chief of the Malaysian Anti-Corruption Commission (MACC) Datuk Abu Kassim Mohamed has begun his tenure with a message that discourages transparency.

At his first press conference last Wednesday, Abu Kassim invoked a clause in the MACC Act that makes it an offence to divulge reports filed with the commission and to leak news of ongoing investigations.

This, he said, was because successful graft investigations depend on the elements of “secrecy” and “surprise”. The rationale is decidedly odd, to say the least.

It only takes an example like the Port Klang Free Zone fiasco, which may cost the country RM12.5 billion, to show that there is no advantage in keeping a tight lid on cases of financial misconduct, especially of such a scale. On the contrary, it is patent that the public pressure generated by some two years of media coverage of the scandal was central to the progress of investigations into the case.

Another recent case that proves this point is the theft of two F5E fighter jet engines from an air force base. Official action on the case remained under wraps for about two years, and only after the news story broke did the authorities demonstrate urgency in pursuing the case to show an outcome.

Suffice to say that the chief commissioner is totally off the mark if the aim is to discourage corruption. Indeed, Abu Kassim’s stance is not only contrary to the basic principles of transparency and the right to information, it also doesn’t show that the commission is in tune with the times.

Furthermore, he should realise that in this age of the Internet, the information that the MACC wants to keep from the public eye can be safely posted outside Malaysia’s jurisdiction.

Spotlight on Axis IncThe list of issues at beleaguered garment manufacturer Axis Incorporation Bhd seems to be getting longer and longer. Last week, a summary report by the company’s consultants, BDO Consulting Sdn Bhd, made clear the depth of the rot in the company. A list of 13 key findings was stated in an announcement to Bursa Malaysia, which indicates that there were discrepancies at the core of Axis’ business. 

A day after the consultants’ findings were released, the company was served with writs of summons by three financial institutions for sums owed.

On Jan 8, the company announced that a police report had been lodged with the Malaysian police for investigations to be conducted in relation to the machinery assets in Cambodia written off in the audited financial statements for the year ended June 30, 2009.

Without going into the details, the findings of BDO Consulting seem to indicate that those responsible for the running of the company had failed in their duties, and even worse could have misappropriated funds from the company.

Axis also states in its announcements that, “most of the transactions and/or balances that gave rise to the aforesaid allowances, write-off and impairment and issues raised by the auditors for the financial period from April 1, 2008 to June 30, 2009 relate to the transactions and/or balances that occurred or were brought forward from the period prior to August 2008”.

Some of the directors who served during the time period have just resigned. Where does all this leave the minority shareholders of company? While the authorities can cite the maxim caveat emptor or “Let the buyer beware” to the shareholders who had their fingers burnt, there clearly has to be some form of scrutiny of such companies. There have to be some answers for the misadventures at Axis, with the directors who owe a fiduciary duty to the minorities roped in to give some explanation.

This article appeared in Capital page of The Edge Malaysia, Issue 789, Jan 18-24, 2010.