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Dispatch (Asia edition)
| by Peta Tomlinson, Nazatul Izma Abdullah, Sonia Kolesnikov-Jessop 06 Feb 2007 Topic: News |
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The worst drought in 100 years will cut Australian farm exports this year and hamper economic growth, the Government’s commodities forecaster predicts. The Australian Bureau of Agricultural and Resource Economics (ABARE) says the current protracted drought in Australia could see farm exports tumble by 8% to A$25.4bn in 2006/07, clipping 0.7% off the nation’s growth. Though ABARE expects the mining sector to remain robust – predicting a 13% rise in commodity export earnings year-on-year – it says the drought will impact on overall economic growth for at least the next few quarters. In December ABARE revealed that Australia’s ‘big dry’ had cut the nation’s winter crop production by 62%, while summer crop production was forecast to fall by 33%. The National Farmers Federation (NFF) has warned that the flow-on effects will filter through the economy, which is underpinned by agriculture’s A$103bn per year in production. ‘Without farming, 12% of GDP would be at risk – that includes 1.6 million Australian jobs, half of which are in Australia’s capital cities,’ said David Crombie, NFF’s President. ‘In short, when farmers feel the cold, the nation catches cold. At risk is an economic and social disaster on a scale we have not seen before in this country.’ Even the best farm management practices cannot fend off the ravages of drought under the current prolonged circumstances, Crombie continued. ‘The question is: do we, as a nation, throw our hands in the air and say farming isn’t worth the effort, or do we dig in and make sure Australia continues to have a sound agricultural base, emerging on the other side of this drought with our productive capacity intact?’ He added that Australian farmers are ‘the most self-sufficient in the world’, receiving just 4% of their farming income in government support, compared to 1% in the US, 31% in the EU and some 56% in Japan. Australian farmers have also achieved nation-leading productivity growth, averaging 3.8% each year for the past two decades. Crombie stressed that Australian farmers are not looking for handouts – just the recognition that all Australians need to pull together to get through it. ‘Giving up on farming is not an option any of us can afford to contemplate.’ The crippling drought is now in its 10th year. Tough water restrictions are in force in nearly all Australian capital cities, with Victoria’s State Government even threatening to cut off supply to serial water wasters. The Malaysian ringgit finally hit a nine-year high of RM3.50 to the dollar on 16 January. Year-to-date, the ringgit is the best performer among regional currencies, being up 0.74%, reports The Edge. The currency’s strength was attributed to strong inflows of foreign funds into an equity market that is playing catch-up with regional markets, as well as the ringgit lagging behind other currencies, which leaves further room for it to appreciate. The laggard ringgit rose 7% versus the dollar in 2006, against a 14% increase in the baht and a more than 9% rise in Indonesia’s rupiah. Analysts said the hands-off approach by the Malaysian authorities towards ringgit appreciation, strength in the Chinese currency and robust economic data have helped spur a bullish view of the ringgit, which is anticipated to accelerate in a range of forecasts from RM3.45–RM3.30 to the dollar by year-end. Malaysian authorities are believed to be in favour of a strong ringgit, which makes imports cheaper and boosts domestic consumption, stabilising the local economy at a time when the global economy is expected to slow. As far as trade is concerned, analysts say Malaysian exporters need not be threatened by a strong ringgit as long as the ringgit appreciates in tandem with other regional currencies, especially the renminbi. Recently, neighbouring Thailand spooked foreign investors with sudden flip-flops on investment policies and the imposition of capital controls to curb the baht’s strength. However, a more liberal and investment-friendly Malaysia has assured markets it would not revert to capital controls, which were imposed in 1998 to shield the economy from speculators during the Asian currency crisis. Prices for high-end properties in Singapore have soared to levels not seen since 1996 or prior to the Asian financial crisis and, while the mass market remains subdued, overall housing prices were 10% higher in the final quarter of 2006 than a year before – the biggest year-on-year increase since 1999. The latest data from the Urban Redevelopment Authority showed that fourth quarter prices were also up 3.7% on the previous quarter, again the biggest quarterly increase since 1999. The buoyant price index is largely attributed to the high-end segment of the property market, which is estimated to have increased 35% in 2006, thanks to a strong buying appetite from foreign investors which are banking on the strong economic growth and tourism prospects. Property analysts believe the current market recovery appears more sustainable than the short-lived recovery of 1999. The recovery then was a bottom-up one, while this time it is the top of the market dragging it up. They believe the mass market will take longer to recover, although some property developers are forecasting a 6%–10% rise in prices this year. Meanwhile, the cost of having an office in Singapore notched up the highest increase among all 134 locations covered in the latest DTZ Debenham Tie Leung annual Global Office Occupancy Costs survey. The 65% jump to US$7,860 per work station, per annum, took Singapore up to 55th position globally from 96th position last year, and put it among the top 10 in the Asia Pacific. However, the survey puts Singapore still behind other top Asian locations like Hong Kong, which is the second most expensive in the world at US$19,730, and Tokyo’s five central wards, which take the eighth spot at US$13,470. Also more expensive than Singapore are Seoul (12th), Mumbai (18th), Sydney (41st) and New Delhi (51st). With the very limited new supply set to continue until 2010, occupiers are finding it very difficult to secure office space in the financial district, which explains the sudden rise in rental prices, professionals said. Size matters when it comes to luring foreign investors. The proposed mega-merger of three Malaysian companies is poised to create the world’s largest listed palm oil company with a potential market capitalisation of more than US$8.5bn and a combined crude palm oil (CPO) output accounting for 5%–6% of global CPO production, estimates Arjuna L Mahendran, chief economist and strategist, Asia Pacific Credit Suisse. Synergy Drive is the special purpose vehicle that will acquire Sime Darby Bhd, Golden Hope Plantations Bhd, Kumpulan Guthrie Bhd and their subsidiaries in this mega-merger to form the world’s largest plantation group. Upon completion, government-linked investment institution Permodalan Nasional Bhd will emerge as Synergy Drive’s single largest shareholder, with an equity stake of around 45%. The creation of Synergy Drive is a step towards overcoming the lack of liquidity and the small market capitalisation of Malaysian stocks, which pose difficulties for foreign investors. ‘A typical mutual fund does not look at a stock until it crosses the US$1bn threshold in market cap. Having a world-class company, at least in size, will do much in directing interest to the Malaysian market,’ added Mahendran. Apart from giving the new jumbo entity a better grip on all aspects of the palm oil value chain, the merger offers other purported benefits. These include upping Malaysia’s competitiveness in the CPO industry through better procurement procedures, the creation of a more optimal capital structure by leveraging on a stronger balance sheet and disposing of non-core assets, and the revamping of management. Admittedly, mergers are difficult creatures to manage, and an exercise of this magnitude will take years and be more challenging than the norm. Already, the unexplained extension of the original merger deadline to 29 January from 15 January has raised concerns that integration could run into snags. Hardware big guns from both sides of the world are rushing to nail China’s burgeoning home improvement market, estimated to be worth a tidy US$50bn already, and growing at up to 20% each year. US giant The Home Depot, the world’s biggest home improvement chain, made its move in December, announcing a buy-out of local Chinese home improvement retailer, The Home Way. Relatively speaking, The Home Way is small fry – it has 12 stores across the whole of China, compared to The Home Depot’s 2000-plus outlets covering all 50 of the United States. Yet it could deliver a key to the door of one of the fastest growing home improvement markets in the world. However, America’s second largest retailer lacks a first mover advantage. While The Home Depot has been watching the China market since 2004, establishing a business development office to ‘gain consumer insights and evaluate marketplace strategies’, UK rival B&Q marched right in, opening its first store in Shanghai in 1999 through parent company Kingfisher. B&Q, Europe’s largest home improvement retailer and the world’s third largest, now has 58 stores in 27 mainland cities and this year will open its first in Hong Kong. By 2010, B&Q expects to almost double its presence with 100 stores across China. Steve Gillman, CEO of B&Q Asia Ltd, says the firm has focused on ‘the top 20 cities in China today’, where affluent young couples are buying their first home in unprecedented numbers. In contrast to their Western counterparts, Chinese consumers are not typically do-it-yourselfers, so unlike brands such as McDonald’s, the product range and market strategies cannot be homogeneous. Yet the fact that most apartments are bare concrete shells in need of a complete fit-out leaves plenty of scope for the decoration business. With B&Q’s China business now into its fourth year of growing profits, Gillman says there is ‘plenty of room for the big boys to play’. He says newcomer The Home Depot will ‘have to learn about doing business in China’, while ‘we’ll keep doing what we’re doing’. This includes a plan to open 10 new stores a year in China, almost doubling the B&Q presence by 2010. In what would have seemed unthinkable just a few years ago, Hong Kong’s stock market has overtaken New York to claim second place in the world, after London. And according to some, the city has Sarbanes-Oxley to thank. Is the impact of compliance really hurting the US market as some would argue, or is it more the nature of the beast – that Asia’s thriving economy, underpinned by China, simply makes Hong Kong the best place to be? According to Tse Kwok Leung, senior economist with the Bank of China, the burden of the Sarbanes-Oxley Act is simply proving too costly and too onerous for many of the Chinese mainland’s former state-owned enterprises, which are now morphing into some of the largest IPOs in the world. As a result, this has ‘curbed the interests of China enterprises to list in the New York market’. Because of Sarbanes-Oxley, he says, many Chinese companies have ‘given up on New York’ – and the damage may be permanent, as Chinese companies find they do not need New York after all. Hong Kong’s market is already international, and recent successes have seen it develop even further. The city also offers its Chinese neighbour a cheaper cost base, more simplified reporting, cultural synergies and geographical convenience. A more likely scenario, says Tse, is that Shanghai will emerge as the preferred platform for dual listings with Hong Kong. He points to last year’s record-breaking dual float of the Industrial and Commercial Bank of China (ICBC, China’s biggest lender) as the role model of the future. Howard Chao, the Shanghai-based partner in charge of global law firm O’Melveny & Myers’ Asia/International, agrees Sarbanes-Oxley has helped steer listings towards Hong Kong. ‘Hong Kong has become the natural market for IPOs by Chinese companies primarily because of its proximity to China, and the fact that most of the China-savvy investors and bankers are located there,’ he said. ‘Another factor has been issuer concern about the overall regulatory environment (including Sarbanes-Oxley) and related risks of liability in the US market. However, there are still many mid-sized Chinese private companies, especially those with a tech focus or strong international management, coming to the US to list. Our pipeline for US registered deals is strong, as is our pipeline for Hong Kong deals.’ Chao agrees that, for Chinese companies, the dual listing model of the future may indeed be Hong Kong and Shanghai. By listing in both, companies can take advantage of the strong demand in both markets, and raise their profile in the domestic Chinese market, which is often their ultimate target customer and operating market. in brief...
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