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Session E : How Can Malaysians & Malaysian Companies Best Prepare for a financial Crisis Presentation to PERDANA LEADERSHIP FOUNDATION CEO FORUM 2014 24 September 2014 Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential OVERVIEW Background : Malaysia’s Experience Thus Far Impact Areas and Consequences Mitigating Action Plans for Companies Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 2 1. BACKGROUND : MALAYSIA’S EXPERIENCE THUS FAR Pre 1997 : ‘Business as Usual’ Typical business cycle Growth spurts & recessions 1997/1998 : Asian Financial Crisis Origins in Thailand, May 1997 - ‘Tom Yum Kung’ crisis July 1997 – Thailand, Malaysia, South Korea, Philippines August 1997 – Indonesia October 1997 - Hong Kong In Summary Credit bubble Currency speculation Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 3 1. BACKGROUND : MALAYSIA’S EXPERIENCE THUS FAR 1997/1998 : Asian Financial Crisis EXCHANGE RATE Exchange rate (to USD1.00) June ’97 July ’97 Change Malaysia - Ringgit 2.5 4.1 (39%) Thailand - Baht 24 41 (40%) Indonesia - Rupiah 2,380 14,150 (83%) Philippines - Peso 26 42 (37%) South Korea - Won 850 1,290 (34%) Source : Bloomberg Private & Confidential Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer 4 1. BACKGROUND : MALAYSIA’S EXPERIENCE THUS FAR 1997/1998 : Asian Financial Crisis (+ve outcome) Recognised need to spread risk better Accelerated development of Malaysian Capital markets Banking sector was further strengthened Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 5 1. BACKGROUND : MALAYSIA’S EXPERIENCE THUS FAR 2008/2009 : Global Financial Crisis FI contagion Lehman Brothers – bankrupt Merrill Lynch, AIG, Freddie Mac, Fannie Mae, Royal Bank of Scotland etc – required rescue In Summary Over leveraging of FIs Financial Over Engineering Risk Mispricing Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 6 1. BACKGROUND : MALAYSIA’S EXPERIENCE THUS FAR 2008/2009 : Global Financial Crisis Pump priming of economy Genesis of Danajamin Nasional Berhad Incorporated in 2009, equally owned by Ministry of Finance Inc & Credit Guarantee Corporation Malaysia Bhd Provided financial guarantees to 24 bond/sukuk programmes amounting to RM6.9 billion Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 7 2. IMPACT AREAS & CONSEQUENCES Volatility Foreign exchange Liquidity & credit Interest rates Massive shift in equilibrium Damage to institutions & social fabric Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 8 2. IMPACT AREAS & CONSEQUENCES Massive shift in equilibrium × Developers using short term financing (overdrafts / revolving credits) to finance long term development Exporters gaining massively from currency exchange devaluation New winners & losers ….. Not long lasting (it is a crisis) Disruption Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 9 2. IMPACT AREAS & CONSEQUENCES Opportunities Exist Cash is king ! Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 10 3. MITIGATING ACTION PLANS FOR COMPANIES Action Hedging - Currency Hedging - Interest Rate Hedging - Commodity Mindset / Attitude No over leveraging / cash is king Prudent asset / liability matching Aspirational -> (diversification) Go regional -> global Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 11 3. MITIGATING ACTION PLANS FOR COMPANIES Prudent asset / liability matching Malaysian Capital Markets Ideal platform to raise long term & fixed rate funding Average Portfolio Duration (in years) Source : Danajamin Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 12 3. MITIGATING ACTION PLANS FOR COMPANIES Prudent asset / liability matching (cont’d) January 2008 7.50 End-Sept 2008* 7.50 7.00 7.00 6.50 6.50 6.00 6.00 5.50 5.50 5.00 5.00 4.50 4.50 4.00 4.00 3.50 3.50 3.00 3.00 3Y 5Y MGS 7Y Cagamas 10Y AAA Source : Bondwed 15Y 20Y AA2 3Y 5Y MGS 7Y Cagamas 10Y AAA 15Y 20Y AA2 Source : Bondweb Note* : After collapse of Lehman Brothers Rates movement obvious in financial crisis Not an issue for companies who locked-in in January 2008 Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 13 3. MITIGATING ACTION PLANS FOR COMPANIES Prudent asset / liability matching (cont’d) 19 September 2014 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 3Y 5Y 7Y MGS 10Y Cagamas 15Y AAA 20Y AA2 25Y 30Y Source : Bondweb Rates will head north in financial crisis Would a company look back with regret then ? Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 14 STRATEGIC TAKEAWAYS Corporate – To Dos Adopt prudent fiscal management Leveraging responsibly Maintaining own cash reserves Proper asset & liability matching Overseas diversification Corporate – To Avoid X Irresponsible financial management Over leveraging Not maintaining cash buffers Punting on low short term rates for long gestation assets It is about striking the right balance ! Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 15 THANK YOU Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 16 Disclaimer This Presentation has been prepared by Danajamin Nasional Berhad (“Danajamin”) for use at the Perdana Leadership Foundation CEO Forum 2014 (PLCF2014) and is solely for informational purposes to facilitate discussion on “Session E : How Can Malaysians & Malaysian Companies Best Prepare for a Financial Crisis” of PLCF2014. Whilst Danajamin has exercised good faith and due care in the preparation of this Presentation with the belief that statements contained therein are not false or misleading, Danajamin does not make any representation as to the accuracy or completeness of the Presentation and its contents. Danajamin expressly disclaims any and all liabilities to the Perdana Leadership Foundation or any other parties for representations, expressed or implied, contained in or omissions from the Presentation or any other written or oral communications transmitted as a result of the circulation, publication or use of this Presentation contrary to the provisions contained herein. Malaysia’s Malaysia’sFirst FirstFinancial FinancialGuarantee GuaranteeInsurer Insurer Private & Confidential 17