Malaysia

Right decision to scrap HSR

The government has decided to scrap the RM110bil HSR project with its line of 350km. The cancellation may cost the government up to RM500mil in penalty, equivalent to 0.45% of the total project cost, which seems manageable. The decision would deal a setback to construction and rail companies in Asia, including those from China and Japan that are keen to gain a slice of orders.

The government’s decision to scrap the High-Speed Rail (HSR) link project appears to be a wise move as the project cost is more likely to outweigh its economic benefits. This project can take longer than envisaged to break even given the stiff competition with other modes of connectivity such as road and air. Much will depend on the pricing of the ticket and ridership.

The move has given some breathing space on savings, especially with the high public debt which is at RM1.09tril or 80.3% of the GDP. Although there will be some negative impact from the scrapping of this project in terms of spill-over effects, we believe the impact may not be significant. Meanwhile, the decision has raised questions about the government’s commitment to other big infrastructure projects, including those being pushed by China. While the previous government was a big proponent of China's Belt and Road initiative, our fear has always been that the Belt and Road projects may pile debt onto smaller countries and end up putting China in a strong position in influencing strategic decisions or even gain control of important infrastructure.

• The government has decided to scrap the High-Speed Rail (HSR) link project. The project, which cost RM110bil, was expected to generate an estimated gross national income of around RM209bil and create about 70,000 jobs. In scrapping the project, it may cost the government up to RM500mil in penalty, which is equivalent to 0.45% of the total project cost.

• The decision would deal a setback to construction and rail companies in Asia, including those from China and Japan that are keen to gain a slice of orders. The 350km line, with trains moving at a top speed of more than 300km/hour, was targeted to begin operation in 2026. About 90% of the rail network was set to be in Malaysia, including a terminal in Bandar Malaysia, a big property development owned by 1Malaysia Development Bhd (1MDB).

• The project has attracted interest from Asia and Europe. While Korea Rail Network Authority and a group of South Korean companies won the reference design consultant contract, Chinese firms, led by China Railway Signal & Communication Corp and CRRC Corp, Siemens AG, Alstom SA and some Japanese conglomerates are among those in the race for the project.

• The government’s decision to scrap the rail link project appears to be a wise move as the project cost is more likely to outweigh its economic benefits. Returns on this project is were not attractive as it will face stiff competition with other modes of connectivity such as road and air. Hence, the breakeven period may take longer than expected as much will depend on the number of passengers as well as the ticket cost.

• The move will also allow the government to save some of its expenditure on a project of such a scale, especially with the high public debt which is at RM1.09tril or 80.3% of the GDP. Although there will be some negative impact from the scrapping of this project in terms of spill-over effects, we believe the impact may not be significant.

• The government’s decision on the HSR has raised questions about its commitments to other big infrastructure projects, including those being pushed by China. While the previous government was a big proponent of China's Belt and Road initiative, which is supposed to have the potential to create the largest globe platform for economic cooperation, our fear has always been that the Belt and Road projects may pile debt onto smaller countries and end up putting China in a strong position in influencing strategic decisions or even gain control of important infrastructure.

Japan

No change to BoJ’s policy

Labour market conditions remained tight as reflected by April’s unemployment rate, which remained unchanged at 2.5%. Still, wages are not growing fast, below the prime minister’s request of 3% for 2018. And inflation remains a challenge, which is still below the BoJ’s target of 2%, reading at 0.6% in April.

Thus we expect the BoJ to maintain its current loose monetary policy to support domestic demand such as private consumption and capital expenditure to maintain its growth momentum. .

• The unemployment rate in April stood unchanged at 2.5% for the third consecutive month, a sign that labour market conditions remained tight amid a modest economic recovery. Job availability remained unchanged at 1.59. It implies that for every 100 workers, there were 159 job openings.

• The data suggests that labour market conditions are solidly improving. But the tightness in the job market has yet to fully translate into robust wage growth — a headache for policymakers grappling with pulling the economy out of deflation.

• Japanese companies have raised wages in 2018 but fell short of the prime minister’s demands for a 3% increase. This is reflected by the largest carmaker, who usually sets the tone for wages across the industry.

• For instance, Nissan granted an average increase of 2.4% in monthly pay, Hitachi offered 2.3% and Toshiba a raise of 2.5%. Meanwhile, Sharp gave a 3% raise and Toyota a 3.3% increase in monthly pay.

• Given that inflation is still low, we expect the Bank of Japan (BoJ) to maintain its current loose monetary policy. It is expected to support domestic demand such as private consumption and capital expenditure —seen as vital for the economy to maintain its growth momentum.

Source: AmInvest Research - 30 May 2018