Hong Kong Monetary Authority Intervene in Currency Markets, by Stuart Yeomans

Hong Kong’s Monetary Authority (HKMA) has intervened in the currency markets for the third time in less than a week, selling a total of HK$6.63bn (US$855m) to halt the rise of the Hong Kong dollar against the US dollar.

Hong Kong currency pushes up against the upper limits of its trading band of US$1 to HK$7.75

The mechanisms that govern Hong Kong’s currency board, by which the Hong Kong dollar’s exchange rate is linked to the US dollar, mean that the central bank must buy US dollars when the Hong Kong currency pushes up against the upper limits of its trading band of US$1 to HK$7.75.

In an attempt to halt appreciation of the local currency after it hit HK$7.75, the lower limit of its trading band to the U.S. dollar. The HKMA started selling Hong Kong dollars in the foreign exchange markets on October 19 2012. This was the first of such a move, the central bank had made since December 2009.

The link of the Hong Kong dollar to the US dollar was put in place in 1983 when negotiations about the future of the British colony after 1997 had sparked nervousness in the local business community.

In 2005 Hong Kong committed to keep the exchange rate between HK$7.75 and HK$7.85. The link has given Hong Kong companies stability in commercial contracts while tethering monetary policy to that of the U.S., where borrowing costs are being held down to spur hiring and prop up the housing market. Hong Kong’s jobless rate is near a four-year low and home prices are at all-time highs, as Bloomberg reports.

Property prices in Hong Kong are among the highest in the world as local and mainland Chinese investors have rushed to buy apartments in the city as a hedge against inflation.

‘The city had $301.2 billion of foreign-exchange reserves as of the end of September, amounting to about eight times the currency in circulation. The holdings grew 8.5 percent in the past year’, Bloomberg reports.

According to Bloomberg, the analysts said that the strong inflow of money into Asian currencies and stock markets has been prompted by increasing investor appetite for emerging markets as they sought better returns. In a recent note to clients, HSBC said that the more “equity-oriented” currencies such as the Indian rupee, the Korean won and the Taiwanese dollar had outperformed as money had flowed into local stock markets.

The recent strength in the Hong Kong dollar against the US dollar was in line with other Asian currencies because the US. Federal Reserve’s quantitative easing measures had also weakened its own currency. Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong, said to Bloomberg by telephone that “there could be more intervention” in Hong Kong.

According to the Financial Times, over the past couple of years, the fact that the dollar peg allows the local central bank little latitude to curb asset price inflation in the city through raising interest rates, for example, has led to calls from HKMA’s previous Chief Executive Joseph Yam, to reconsider the currency mechanism. ANZ said that it remained confident that the system would stay in place for the foreseeable future. “The intervention suggests that the HKMA will continue to defend the HKD peg,” it said. “The currency reserve is sufficiently strong to defend against not only normal capital flow but also speculative pressure . . . The HKMA intervention and recent strength of the HKD will probably be temporary and successful.”

Government officials, however, have stressed that the linked exchange rate serves the city well by giving the financial centre the stability it needs. The lack of convertibility of the Chinese renminbi also makes it an unlikely currency for the Hong Kong dollar to be linked to despite the strong economic ties between China and Hong Kong.

 I hope that you have enjoyed reading this post.

Stuart Yeomans 

CEO

Farringdon Group

Malaysia’s confidence in withstanding capital in-flows, by Stuart Yeomans

As Asian nations take the necessary steps to prevent asset bubbles after the U.S. boosted stimulus, Central Bank Governor Zeti Akhtar Aziz has reassured the Malaysian community by saying that;

 ‘Malaysia can manage capital inflows due to monetary easing in advanced economies.’

Governor Zeti, speaking with confidence

Zeti who oversaw the Malaysian response to capital outflows during the Asian financial crisis more than a decade ago, also said;

‘The country has the tools and flexibility to absorb any excess liquidity.’

Zeti spoke confidently and this is because of the good news that the Malaysian economy is withstanding the impact of weakening global growth, with the gross domestic product forecast to expand about 5 percent this year.

The Malaysian Ringgit is also very strong; I personally remember the currency being over seven Ringitt to just one pound sterling around 5 years back. We are now looking at a conversion rate of around RM4.9 to GBP1.

Due to the Malaysian financial system reaching new levels of maturity in terms of development and its functioning, the cash flows that Malaysia are in receipt of, can be intermediated.

This is in regards to both surges of inflows and reversals. All these effects are disbursed through the financial system rather than concentrated.

Malaysia are not the only country confident of this; Brazil has also signaled confidence that it can counter any surge in flow stemming from the U.S Federal Reserves QE3.

I hope that you have enjoyed reading this post.

Stuart Anthony Yeomans 

CEO

Farringdon Group

Does Indonesia need Policy Tightening? by Stuart Yeomans

Speedy economic growth, together with massive credit increases and deteriorating current accounts have spurred fears among many analysts that Indonesia’s economy may be overheating, which may see the central bank of Indonesia being forced to increase interest rates.

Indonesia has seen a sharp deterioration in its current account position over the past year. However, this is largely explained by a slump in foreign demand rather than an unsustainable consumer boom driving up imports. Large inflows of foreign direct investment mean the country should have few problems sustaining a deficit over the medium term. While credit is growing rapidly at the moment, strong credit growth in part reflects a period of catch-up after a prolonged period of deleveraging which followed the Asian financial crisis. In addition, unlike in Hong Kong and Vietnam, there is little evidence that strong lending growth is fuelling asset price bubbles. Most new lending is being directed to productive sectors of the economy.

The recent performance of the economy has certainly been impressive. In 2011, GDP grew at its fastest pace since the Asian financial crisis (1997-98), and the strong growth has continued into the first half of this year. However, strong growth on its own does not mean the economy is overheating. To determine whether the current impressive expansion is sustainable, let’s look at four main indicators: the current account; credit growth,; inflation; as well as our estimates of trend growth.

There has been a sharp and sudden deterioration in Indonesia’s current account position, which has been in deficit for the past three quarters. However, while a current account deficit can sometimes be a symptom of overheating, this does not have to be the case. The worsening of the current account is not the result of an unsustainable consumer boom driving up imports. Instead it is due mainly to a sharp fall in exports, which is the result of weaker global growth and falling prices for the goods that Indonesia sells abroad.

As a low-income, fast-growing economy with plenty of opportunities to invest, it arguably makes sense for Indonesia to be importing capital from the rest of the world (in other words, running a current account deficit). Moreover, while a current account deficit can be a source of instability, this is unlikely to be the case in Indonesia. Unlike the last time Indonesia ran a current account deficit in 1997, the country is much less dependent on volatile portfolio inflows to fund the deficit. As a result, Indonesia is much less vulnerable to a balance of payments crisis than it was 15 years ago.

Another possible sign of overheating is rapid credit growth, which is now expanding by 25% y/y – one of the fastest rates of growth in the region. Strong credit growth which is sustained over a number of years is certainly something the authorities need to keep an eye on. Indeed, rapid credit growth was one of the main causes of both the Asian financial crisis, as well as the problems that Vietnam is now experiencing. Recent rapid credit growth in Indonesia in part reflects a period of catch-up after a prolonged period of deleveraging which followed the Asian financial crisis. Credit as a share of GDP in Indonesia actually fell from over 60% in 1997 to less than 20% in 2000. In 2011, credit in Indonesia was still the equivalent to only 30% of GDP, one of the lowest levels in the region. In addition, as an economy develops and the financial sector becomes more sophisticated, it is normal and healthy for credit to grow faster than nominal GDP.

As important to how quickly credit has been growing is where the new lending has been directed. There is little evidence that strong credit growth in Indonesia is fuelling asset price bubbles. Whereas places such as Hong Kong and Vietnam have seen a surge of lending into property, only 8% of bank lending in Indonesia has been into property-related sectors. As a result, while property prices have massively outstripped wage growth in Hong Kong, prices in Indonesia are increasing at a much slower pace than incomes. In addition, the stock market is also showing little sign of excess. Since the start of the year the Jakarta Composite has moved roughly in line with trends in the rest of the region. Moreover, the current price-earnings ratio of the Indonesian stock market is broadly in line with its long-run average.

Consumer price inflation was just 4.6% y/y in August, and is comfortably within Bank Indonesia’s (BI) central 3.5-5.5% target range. Admittedly, inflation is likely to rise before the end of the year due mainly to rising food prices which are being pushed higher by unfavourable base effects. A good harvest and the suspension of some import duties on food helped to suppress food prices last year. However, the any spike in inflation is likely to be temporary, and is not a sign of economic overheating. Core inflation, which is a better guide to underlying inflationary pressures, has been stable and is likely to remain low.

Indonesia’s economy grew by 6.5% in 2011. Despite the downturn in global demand, growth in Indonesia has barely slowed, with GDP expanding by 6.4% year-on-year in the first half of 2012. This compares with average growth since 2001 of just over 5%. This on its own is not evidence of overheating. Increased political stability and a rising investment rate have all helped to boost trend growth in Indonesia, which is now estimated to be around 6.5%. In addition, capacity utilisation in Indonesia is not unusually high, and is broadly in line with the average level of the last few years.

There also seems little danger of a wage-price spiral developing in Indonesia. Limitations with the data make it difficult to form firm conclusions, but wages appear to be increasing slowly. Meanwhile, a relatively high unemployment rate suggests there is still plenty of slack in the labour market.

Considering all of the evidence, it is rather unlikely that Indonesia’s economy is overheating. As a result there is little urgency for Bank Indonesia to tighten monetary policy. Indeed, given the poor outlook for global demand and the likelihood that the crisis in the euro-zone will worsen again soon, we believe interest rates in Indonesia will remain at their current record low level for the rest of this year and next. That being said, a further significant deterioration in the current account or a step-up in credit growth may see policy tightening.

I hope that you enjoyed reading.

Stuart Anthony Yeomans 

CEO

Farringdon Group

Progress….. for Quality Expatriate Financial Advice in Malaysia by Stuart Yeomans

As some of you will be aware, I have been working hard with my colleagues at the LIIA to help increase the advice standards in Malaysia, through developing a progressive qualification pathway which will increase the advisory standards in Malaysia.

Helen Burggraf from International Adviser, interviewed me last month for an update on our pathway and to give readers an insight into what we plan. Below gives you a snippet into what we have accomplished so far. For the full story click here

Labuan in Move to be a Top International Insurance Centre

“Labuan, a group of tiny islands off the coast of Malaysia, this month is pulling the wraps off an ambitious plan to transform the regulation of its insurance industry.

It is counting on the introduction of a new regulatory environment to enable it to further develop its own insurance industry – and by association, that of Malaysia, of which Labuan is a part.

As part of this effort to raise the jurisdiction’s regulatory bar, a new qualification regime has been drawn up, with the intention of setting   rigorous and consistent standards for insurance brokers active in Labuan and Malaysia who look after international clients. As part of the scheme, these brokers will be listed, on a central database, to enable would-be clients to find them easily.

These measures are being paired with a marketing campaign that aims to ensure that all expats and other potential clients living in Malaysia know that they should do business only with qualified IFAs and brokers while there.

“By the end of next year, every adviser in Malaysia who looks after expat high-net-worth Malaysian clients will have a minimum of the Chartered Insurance Institute’s Certificate in Financial Planning (CFP),” said Stuart Yeomans, group chief executive and partner of Kuala Lumpur-based expat-specialist advisers Farringdon Group, and  member of the council of the Labuan International Insurance Association (LIIA), an insurance industry trade group. 

 “This will effectively pole-vault Malaysia, as a jurisdiction, to being at least the equivalent of the UK, qualification-wise.”

One side effect of this strategy is expected to be the quick end to what is said to be a relatively widespread practice – for now – of financial advisers and insurance brokers “tripping in” to Malaysia to look after foreign clients there, in spite of not holding the necessary Malaysian licences.

A crackdown on such in-tripping brokers has already begun, Yeomans said…….

The qualification pathway began on the 1st of September 2012

Features of the new standard

The new minimum standard for advisers in Labuan and Malaysia is described as being equal to the UK’s “CFP4” level, and is being accompanied, as it is in the UK, by a requirement for 35 hours a year of continual professional development.

Where it departs from the UK norm, though, is in the fact that it has been developed in a “matrix” format that provides a standard certification for individuals whose qualifications are based on different countries’ exams – for example, Australian, Malaysian, Singaporean or American, as well as British, according to Yeomans.

Another feature is a compulsory three-and-a-half-day “induction” course, the first of which will begin being held this month, which is aimed at all advisers currently practicing in Malaysia.

This is seen as an ongoing scheme that ultimately will aim to reach all new foreign IFAs and insurance brokers, to ensure they are up to speed on such topics as the Malaysian tax system, anti-money-laundering rules, and the full range of investment products available in the Malaysian market to foreign clients.

A half day of ethics training is included as part of the programme, as it has been drawn up, and all advisers – who will, as part of the new regime, be required to join the CII and MII – as a matter of course be expected to comply with the CII’s ethics code.

According to Yeomans, the induction course is a step beyond what most if not all other jurisdictions currently offer.”

Thanks to Helen Burggraf from the International Adviser for a great story.

I am going to publish a full detailed story about this new qualification pathway, which give you a detailed view into Labuan and Malaysia’s plans for the future!

I hope that you enjoyed reading.

Stuart Anthony Yeomans 

CEO

Farringdon GroupFarringdon Group

Greece Future in the “EURO” by Stuart Yeomans

With the recently announced fiscal methods to generate USD 17.5bn of savings required by the Troika, Greece has inched closer to securing its next loan from its bailout package. However, this may not be sufficient to secure Greece’s long term future within the debt stricken euro-zone.

The fiscal methods which are to be introduced over the next few years were agreed after weeks of bickering between the Government’s three coalition partners. Most of the incomes are to be generated by a decrease in spending which will come from reductions in pension payments and public sector salaries. The announcement has been significant, as Greece has not secured its next payment.

Adjustment, austerity and consolidation of Greece’s fiscal position have to be done gradually because any drastic prescription or conditionality would drive the country into a new phase of economic recession. Drastic measures would increase the cost to the economy and make recovery potential more remote.

International Monetary Fund (IMF) chief Christian Lagarde recently said Greece should at least be given another two years to reach its budget goals, arguing that the euro-zone should not blindly stick to tough budget deficit targets if growth weakened more than expected.

As for the recently announced methods to generate savings, the Troika may query 15% of the suggested cuts, which may delay the disbursement of the next loan tranche. The Troika will also need to be convinced that all other requirements they have demanded are en route. Furthermore, the Troika have insisted that all promised fiscal measures are being implemented before it disburses all the money.

However, having secured its next instalment may not necessarily mean that the uncertainty of Greece’s long term future in the single currency will be put to an end. The worsening in the growth outlook this year means that the economic assumptions on which the rescue package was initially based are now much too optimistic, leaving a hole in the finances of the bail-out package.

The budget assumes that the hole for next year is pretty small, perhaps just €1bn. Despite a sharp downward revision to the economic growth forecast – GDP is expected to contract by 3.8% next year rather than stagnate – the Government only expects the primary surplus to be 0.7% of GDP lower than the 1.8% of GDP target set out in the original bail-out plans. Note that the gap would have been larger if the size of the fiscal package had not been increased by €2bn. If GDP “growth” was even weaker, the financing gap for 2013 and 2014 could be rather larger, particularly if the privatisation programme generated less revenue than expected.

The bigger worry though, is that the more pessimistic GDP growth and budget deficit forecasts have led the Government to raise the public debt to GDP ratio forecast to 179% next year, far higher than the forecast of 167% in the original bail-out programme.

This could have major implications for the IMF’s involvement in the bail-out since, in principle, it will only lend to governments if the deal is expected to reduce the recipient government’s public debt to a sustainable level.

Indeed, this latest development could prompt the Fund to up the pressure on the ECB and/or euro-zone governments to agree to some sort of official sector debt restructuring, something which the ECB and most core governments are fiercely resistant to. In all, the longer-term future of the bail-out remains far from certain.

Stuart Anthony Yeomans

CEO

Farringdon Group

Does Indonesia need Policy Tightening? by Stuart Yeomans

Speedy economic growth, together with massive credit increases and deteriorating current accounts have spurred fears among many analysts that Indonesia’s economy may be overheating, which may see the central bank of Indonesia being forced to increase interest rates.

Indonesia has seen a sharp deterioration in its current account position over the past year. However, this is largely explained by a slump in foreign demand rather than an unsustainable consumer boom driving up imports. Large inflows of foreign direct investment mean the country should have few problems sustaining a deficit over the medium term. While credit is growing rapidly at the moment, strong credit growth in part reflects a period of catch-up after a prolonged period of deleveraging which followed the Asian financial crisis. In addition, unlike in Hong Kong and Vietnam, there is little evidence that strong lending growth is fuelling asset price bubbles. Most new lending is being directed to productive sectors of the economy.

The recent performance of the economy has certainly been impressive. In 2011, GDP grew at its fastest pace since the Asian financial crisis (1997-98), and the strong growth has continued into the first half of this year. However, strong growth on its own does not mean the economy is overheating. To determine whether the current impressive expansion is sustainable, let’s look at four main indicators: the current account; credit growth,; inflation; as well as our estimates of trend growth.

There has been a sharp and sudden deterioration in Indonesia’s current account position, which has been in deficit for the past three quarters. However, while a current account deficit can sometimes be a symptom of overheating, this does not have to be the case. The worsening of the current account is not the result of an unsustainable consumer boom driving up imports. Instead it is due mainly to a sharp fall in exports, which is the result of weaker global growth and falling prices for the goods that Indonesia sells abroad.

As a low-income, fast-growing economy with plenty of opportunities to invest, it arguably makes sense for Indonesia to be importing capital from the rest of the world (in other words, running a current account deficit). Moreover, while a current account deficit can be a source of instability, this is unlikely to be the case in Indonesia. Unlike the last time Indonesia ran a current account deficit in 1997, the country is much less dependent on volatile portfolio inflows to fund the deficit. As a result, Indonesia is much less vulnerable to a balance of payments crisis than it was 15 years ago.

Another possible sign of overheating is rapid credit growth, which is now expanding by 25% y/y – one of the fastest rates of growth in the region. Strong credit growth which is sustained over a number of years is certainly something the authorities need to keep an eye on. Indeed, rapid credit growth was one of the main causes of both the Asian financial crisis, as well as the problems that Vietnam is now experiencing. Recent rapid credit growth in Indonesia in part reflects a period of catch-up after a prolonged period of deleveraging which followed the Asian financial crisis. Credit as a share of GDP in Indonesia actually fell from over 60% in 1997 to less than 20% in 2000. In 2011, credit in Indonesia was still the equivalent to only 30% of GDP, one of the lowest levels in the region. In addition, as an economy develops and the financial sector becomes more sophisticated, it is normal and healthy for credit to grow faster than nominal GDP.

As important to how quickly credit has been growing is where the new lending has been directed. There is little evidence that strong credit growth in Indonesia is fuelling asset price bubbles. Whereas places such as Hong Kong and Vietnam have seen a surge of lending into property, only 8% of bank lending in Indonesia has been into property-related sectors. As a result, while property prices have massively outstripped wage growth in Hong Kong, prices in Indonesia are increasing at a much slower pace than incomes. In addition, the stock market is also showing little sign of excess. Since the start of the year the Jakarta Composite has moved roughly in line with trends in the rest of the region. Moreover, the current price-earnings ratio of the Indonesian stock market is broadly in line with its long-run average.

Consumer price inflation was just 4.6% y/y in August, and is comfortably within Bank Indonesia’s (BI) central 3.5-5.5% target range. Admittedly, inflation is likely to rise before the end of the year due mainly to rising food prices which are being pushed higher by unfavourable base effects. A good harvest and the suspension of some import duties on food helped to suppress food prices last year. However, the any spike in inflation is likely to be temporary, and is not a sign of economic overheating. Core inflation, which is a better guide to underlying inflationary pressures, has been stable and is likely to remain low.

Indonesia’s economy grew by 6.5% in 2011. Despite the downturn in global demand, growth in Indonesia has barely slowed, with GDP expanding by 6.4% year-on-year in the first half of 2012. This compares with average growth since 2001 of just over 5%. This on its own is not evidence of overheating. Increased political stability and a rising investment rate have all helped to boost trend growth in Indonesia, which is now estimated to be around 6.5%. In addition, capacity utilisation in Indonesia is not unusually high, and is broadly in line with the average level of the last few years.

There also seems little danger of a wage-price spiral developing in Indonesia. Limitations with the data make it difficult to form firm conclusions, but wages appear to be increasing slowly. Meanwhile, a relatively high unemployment rate suggests there is still plenty of slack in the labour market.

Considering all of the evidence, it is rather unlikely that Indonesia’s economy is overheating. As a result there is little urgency for Bank Indonesia to tighten monetary policy. Indeed, given the poor outlook for global demand and the likelihood that the crisis in the euro-zone will worsen again soon, we believe interest rates in Indonesia will remain at their current record low level for the rest of this year and next. That being said, a further significant deterioration in the current account or a step-up in credit growth may see policy tightening.

Stuart Anthony Yeomans

CEO

Farringdon Group

Senior Trader Suspended as RBS gets Tougher on LIBOR Scandal by Stuart Yeomans

The Royal Bank of Scotland has taken its most drastic action so far against traders involved in the LIBOR rigging scandal by suspending the most senior figure to date. The suspension of Jezri Mohideen, the head of rates for Europe and Asia Pacific, has come at a time when talk of huge fines for the Edinburgh-based bank. It is claimed Mr Mohideen instructed other traders to lower the submission of the LIBOR rate to strengthen the banks position in respective markets.

The most high-ranking staff member so far to become embroiled in the scandal which is sweeping the banking industry was considered by many as a high-flyer in the banking world and had been promoted to the head of rates for Europe and Asia back in 2010. The allegations stem from his previous role as head of Yen products in Tokyo. In an instant-message conversation recorded in 2007, two colleagues have alleged that Mohideen, instructed colleagues in the U.K. to lower RBS’s submission to yen Libor that day. So far no comment has been made by Mr Mohideen or RBS in relation to the suspension and the only comment made by a bank spokesman said: "Our investigations into submissions, communications and procedures relating to the setting of Libor and other interest rates are ongoing. RBS and its employees continue to cooperate fully with regulators". The suspension of Mr Mohideen could be the start of a more companywide witch-hunt for individuals who took part in the LIBOR-rigging scandal.

This follows the suspension of 7 other traders late last year, two of which have recently been re-instated by the bank and another Tan Chi Min – also known as Jimmy Tan- is suing the bank for wrongful dismissal. He claims the rate rigging was “systemic” in the bank, a claim that has been re-iterated by inside sources in recent months.

With Barclays Plc, Britain’s second-biggest lender by assets, paying a record £290 million ($466 million) fine in June it is expected RBS, 81% owned by the UK taxpayer, could exceed that amount for its involvement and many other banks are facing investigation.

This comes at a difficult time for RBS as shares fell 1% amid warnings from analysts that the bank would need to cut the price of the 316 branches it was planning to sell to Santander for £1.6bn.The sale, forced on RBS by Brussels as a result of the £45bn taxpayer bailout, fell through on Friday after more than two years of negotiations. The sale may now have to be completed at a cut-price £0.5bn- £1bn less than the deal agreed with Santander back in 2010.

Stuart Anthony Yeomans

CEO

Farringdon Group