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  THE
KWR INTERNATIONAL ADVISOR September/October
2004 Volume 5 Edition 6
In this issue:
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Indonesia – A Time for Change
By
Scott B. MacDonald
NEW
YORK (KWR) President Megawati Sukarnoputri was once regarded
as the great hope for Indonesian democracy. The daughter
of former president Sukarno, she was expected to bring
new life to the country’s nascent democratic institutions
and to provide a human face of the role of government
in the daily life of most Indonesians, be they among
the millions of poor farmers in rural areas or the struggling
urban middle class. Yet, Megawati was a disappointment
to many. A sizeable majority of Indonesian voters (roughly
61% thus far in the counting) regarded her as aloof,
uncaring and unable to deal with the pressing issues
of corruption, more equitable economic growth and terrorism.
As a result, on September 20, 2004, some 80% of the country’s
eligible voters cast ballots, with a sizeable majority
picking former security minister and general Susilo Bambang
Yudhoyono as the nation’s sixth president since
independence.
Probably Megawati’s most significant legacy will be that
she presided over a very difficult period in her country’s
history, maintaining some degree of national unity and being
able to make a peaceful transition of power to her rival Susilo
Bambang Yudhoyono following the historical event of the country’s
first ever direct presidential elections.
In all fairness, Megawati did help to instill a greater sense
of stability into a country still reeling from Suharto’s
fall in May 1998, the concurrent economic collapse (real GDP
shrank 14% during 1997-98), and the erratic tenure of President
Wahid, who resigned in 2001. Indeed, it be argued that under
Megawati’s brief three year administration the economy
regained momentum (growing at 5% annually), inflation has become
minimal, and the currency and stock markets have stabilized.
Although terrorism remains a concern, Islamic radicals are
hardly dictating the future direction of the country.
Why then did Megawati fail to win the elections, which saw
its first round in April? A large part of the problem is that
she failed to convince the majority of Indonesian voters that
she really cared about their lives. Despite some moderately
impressive accomplishments on the economic front, the primary
concern of many Indonesians was that the pace of economic growth
was not sufficient to make a dent in high levels of unemployment
and underemployment, which together account for roughly 40%
of the total work force.
Megawati also hurt her position with voters when she allied
herself to Golkar, Suharto’s old political party, an
association that tarnished her reformist credentials. In addition,
the President was not helped by the perceived greediness of
her husband, Taufik Kiemas, a wealthy businessman who named
himself the head of a high-level ministerial delegation negotiating
a multi-billion natural gas deal with China. Kiemas was not
a member of the government. Along these lines, Megawati’s
support among the urban and rural poor, formerly her main base,
badly eroded.
Megawati also lost because her competitor Yudhoyono ran a better
campaign. A former general with some training in the United
States, Yudhoyono emerged in the voters’ mind as someone
who would be tough on corruption and terrorism as well as take
stronger measures to get the economy moving at a faster pace.
He also has some appeal to foreign investors, having a reputation
as being market friendly and open to new ideas.
Yudhoyono has a tough road ahead. He must appoint a cabinet,
seek to introduce and implement policies that stimulate stronger
economic growth, attract greater foreign direct investment,
reduce unemployment and underemployment, and deal with terrorism.
Potentially complicating matters, the incoming president lacks
a majority in the nation’s parliament, with his Democratic
Party holding only 56 seats out of 550 seats. Moreover, the
largest party in the parliament, Golkar, has already indicated
it will become the official opposition to the government, setting
up its leader, former presidential candidate, Akbar Tandjung,
as a possible power broker.
Yudhoyono will be the fourth president to follow Suharto, who
was forced from power in 1998. Indonesians want jobs, public
safety and cleaner government. There have endured slow employment
generation, bombings and official corruption. Yudhoyono has
an opportunity to break with this track record of former governments.
It will not be an easy process. It requires a strong, pragmatic
leader, who is willing to operate with a spirit of parliamentary
government. Currently the new president will have some degree
of good will from both the voters and foreign investors. He
will have to move quickly to take advantage of that good will
and develop some degree of policy momentum. Failure to address
the country’s many challenges will only run the risk
of slowing Indonesia’s return to sustainable growth and
an improved standard of living for the population. Failure
would also create more recruits for radical Islam. This is
something that neither the majority of Indonesians or their
neighbors what to see.
UFJ
and Daiei: Japan’s Malaise and its Salvation
By
Daryl Whitten
TOKYO
(KWR) UFJ Holdings and retailer Daiei were the poster
children of what was wrong with Japan during the Heisei
malaise. However, the solution for the problems these
two companies face, underlies the salvation that will
allow Japan to emerge from its decade-long period of
economic stagnation. In other words;
-
Japan’s
banking industry is evolving from a “protected
species” into a (hopefully) globally competitive
industry, with each participant being left to
find its own unique positioning;
-
Substantial
consolidation is already taking place in many Japanese
industries;
-
This
is accompanied by a growing globalization of Japan’s
domestic economy as well as freer cross-border
capital flows that have fostered substantial net portfolio purchases of
Japanese equities, and
-
As
a result we are seeing both a growing domestic M&A
as well as cross-border M&A wave that
that is accelerating the consolidation/revitalization
of Japan Inc.
UFJ Holdings Inc.
Japan had 19 “major” banks
in the early 1990s. By 2004, the number
had shrunken to essentially five banking
groups: 1) Mitsubishi Tokyo
Financial Group, 2) Sumitomo
Mitsui Financial Group,
3) UFJ Holdings, 4) Mizuho Financial Group,
and 5) Resona Financial Group. Moreover,
the consolidation
is not over. Resona Financial
Group was effectively bailed out by the
government, while UFJ Holdings is now on
the block
-- with the government
being content to stand by on the sidelines
and let the other banking
groups bid for UFJ.
UFJ Holdings was formed
by the merger of two second-tier
city
banks and a trust bank,
effectively creating
an infrastructure comparable
to the other financial
groups.
But UFJ was always
considered the weakest
of the major financial
groups, and to have one
of the worst balance sheets
in
terms
of big
troubled borrowers. In
effect, strong banks were
merged with weak
banks to create “an average” bank.
But in the case of UFJ
and Mizuho, the weak were
gathered together in
the hope of creating an
average bank.
Subsequent FSA (Japan’s financial services agency)
inspections revealed that UFJ forged documents and minutes
of meetings to give a false impression of its bad-loan problem;
lied to FSA inspectors; hid data on a separate computer system;
and destroyed potentially incriminating documents. In addition,
UFJ extended loans to companies that were not in need of
funds in an apparent bid to inflate the amount of loans extended
to small companies. For these fraudulent transgressions,
the FSA slapped UFJ’s hand with a “business improvement
order” and said they would “consider” taking
the matter to court. These
shenanigans also convinced
the FSA that the group
should not continue its
banking operations
under the current regime.
The special bank inspections that
the FSA undertook in August were
unprecedented in that the agency
looked
into
the books
of major banks only four months
after last doing so. Banks have
drawn up rehabilitation plans for
retailers
and other
troubled borrowers, but these plans
have often been
criticized as too optimistic and
thus unworkable. Speculation in
the banking industry holds that
Daiei was the prime
target of these special inspections.
In early June, the FSA
conducted
onsite inspections of large banks
under a supervisory program drawn
up in April. Although it did not
disclose
the names
of these banks, they were eventually
revealed to be UFJ Holdings
Inc., Sumitomo Mitsui Financial
Group Inc. and Mizuho Financial
Group Inc. -- Daiei's three largest
lenders.
The FSA is making doubly
sure that there are no
hand grenades in the
major financial institutions’ balance
sheets as blanket deposit
protection will be lifted
from next April.
Additionally, the FSA deadline
for banks to reduce stock
holdings to within their
shareholder capital, and
non-performing loans to
FSA-specified levels is
March 31, 2005.
UFJ’s, fate is in some respect linked to Daiei’s
as the bank is Daiei’s biggest creditor, with more
than ¥400 billion in loans to the retailer. It is leading
resistance to Daiei's demands for more money, in part because
it has to meet a government deadline of March 31, 2005 to
cut its own ¥4.62 trillion
load of bad loans by two-thirds.
As the banks scrambled
to bolster capital in late
2002, early 2003
by ¥2 trillion, some
foreign investors were
quietly accumulating bank
stocks as Tokyo stock prices
were plunging.
It is believed, however,
that the foreign buying
of UFJ was conceptual
rather than based on in-depth
knowledge
of UFJ’s
real financial condition. Since Resona was bailed out, many
believed the worst that could happen to UFJ was they would
also be bailed out, and shareholders rescued in the process.
As news of UFJ’s
fraudulent behavior with
the FSA broke, however,
foreign investors moved
to dump the stock.
Now that UFJ Holdings is
clearly on the block, the
bank has positioned
itself fairly well. Both
MTFG and SMFG
badly want
UFJ’s trust business and their retail exposure in Osaka,
or at least do not want their competition to have them. Some
analysts argue that SMFG could better leverage UFJ’s
assets, and thus can afford to pay more. However, so far
the courts have supported MTFG’s assertion that they
have a window within which they can negotiate with UFJ. SMFG’s
offer of a 1:1 merger,
however, has raised the
stakes for UFJ, and its
perceived value in the
market place.
Consequently, the winner
in terms of stock price
is clearly UFJ,
and whoever eventually
merges the company
will have
to pay at least a fair
price. It is still possible,
however, that there will
be a contested
take-over bid for the
company, which would be
a first in Japan’s
banking sector. If a take-over
bid were to emerge, it
is possible even foreign
capital may be tempted
to jump into the fray.
Daiei
Inc.
Supermarket chain Daiei Inc. was founded by former
Chairman Isao, who has since been forced to resign.
During the 1980s, Daiei was the symbol of the retailing
revolution in Japan. At its peak, it grew to operate
2,252 regular stores and specialty stores through its
subsidiaries and franchisees. Its retail businesses
include supermarkets, discount stores, department stores,
and specialty shops. Other businesses include restaurants,
hotels, and real estate services. Domestic sales make
up more than 90% of its revenues.
A “Bubble” Poster Child
But in typical “bubble” fashion, Daiei
diversified haphazardly during the 1980s, loading up
on debt, but failing to keep up with new, more efficient
competitors. Finally in FY2001 (to February 2002),
the company effectively went bankrupt, losing ¥322.5
billion at the net income level, and reporting net
negative equity of ¥297.4 billion. Interest bearing
debt that year ballooned to ¥2,139.3 trillion,
with 90% of this debt either short-term borrowings,
or long-term debt due within one year.
Ever since, the company has been on life support, courtesy
of its banks and the Japanese government, which have
extended Daiei credit despite the ongoing deterioration
of its businesses. Daiei came to epitomize the industrial
sclerosis that befell much of Japan in the 1990s, and
has proved to be one of the most challenging restructuring
efforts to date. This is because Daiei had become “too
big to fail”. Bubble logic dictated that Daiei
couldn't be allowed to die, because they'd bring down
their banks, trigger massive unemployment and cause
heads in government to roll. With over ¥2 trillion
in debt, Daiei effectively owned the banks, who were
very reluctant to push for repayment from the company,
or to write down their loan exposure. The latest restructuring
plan represents the third such plan to be created since
2001, all with marginal success.
Daiei management has continued to reject requests by
its main creditors to seek aid from the Industrial
Revitalization Corp. of Japan, which ostensibly was
set up to facilitate such restructuring. Daiei continues
to insist it can halve its interest-bearing debt of ¥1,638.4
billion as of the end of Feburary 2004 by March, 2005
, by shutting outlets, selling assets, and asking banks
and investors for more financial aid.
"Previously we had envisioned a new business plan
that involved three banks and Daiei, but now we're
working
on the premise we'll need new business partners or
investors," Daiei’s president Takagi said.
Daiei is trying to persuade banks that the involvement
of lawyers and securities companies in its latest plan
will meet creditors' requirements for greater transparency,
one of the reasons the banks are seeking the involvement
of the bailout agency.
In Daiei’s revised restructuring plan to UFJ
Bank and its other lenders, it is calling on Marubeni
Cop. to assist it in its supermarket operations, and
Tokyu Land Corp. to help it attract and administer
tenants. The struggling supermarket operator also intends
to ask the two companies and Deutsche Securities Ltd.
to buy most of the ¥100 billion yen worth of new
shares it plans to issue to increase its capital, while
seeking roughly a ¥400 billion in loan waivers
by banks, a move that will cut the firm's interest-bearing
debt to less than half.
Daiei has been closing stores over the past two years.
As of February of this year (FY2003), total stores
(regular stores and specialty stores) had fallen to
1,677 stores from a peak of 2,252 in FY2001, including
84 regular store closures and 1,009 specialty store
closures.
But revenues continue to undershoot plan targets. Same-store
sales at Daiei appear to have fallen about 6% on the
year in August, marking the sixth straight month the
firm has missed its sales target of a 1% decline for
this fiscal year. This partially reflects Daiei’s
priority in the fiscal first half on generating profit
rather than lifting sales, but its efforts to slash
expenses are nearing their limit. Although a year-on-year
fall in same-store sales was factored into its business
plans from the beginning, the pace of decline is larger
than expected.
President’s Resignation Will Tip the
Scales
Investors appear to be betting Daiei will eventually
lose its battle to restructure without falling into
the arms of the IRC, as president Takagi reportedly
will be resigning to accept responsibility for the
company’s problems, and the intransigence of
Daiei in responding to creditor demands. This is because
the new restructuring plan failed to impress, and the
company has had serious problems meeting its restructuring
targets. Japan’s R&I credit rating agency
recently downgraded Daiei’s credit again on Aug.
11, lowering its rating for Daiei’s long-term
bond by one notch from B to B-. "The smooth relationship
between Daiei and its main banks, on which the evaluation
of Daiei's creditworthiness has been premised thus
far, is changing due to differences emerging between
the company and the banks over the formulation of a
reconstruction plan," R&I said.
Wal-Mart To the Rescue?
Wal-Mart Stores, the world's leading retailer, has
visited the IRC, and has hired banks to advise it on
a possible investment in Daiei. The world's biggest
retailer should make a bid for Daiei, say many Wal-MartÅfs
shareholders and analysts who follow the company. Adding
Daiei may help Wal-Mart overtake Aeon Co. and Ito-Yokado
Co. to become Japan's biggest retailer by sales at
the parent level. Wal-Mart's international sales in
the six months to July 31 rose 19%, or almost twice
the pace of its U.S. unit, to $25.6 billion.
Wal-Mart tentatively entered Japan in May 2002 by buying
a 6% in Seiyu, and has an option to raise its current
37% holding to as much as 69% in 2007.
Wal-Mart is just beginning to work its magic on Seiyu
Ltd.. It is plugging Seiyu into its international supply
network and introducing new inventory controls. Those
moves helped Seiyu narrow its first-half loss to ¥2.9
billion yen from ¥50 billion yen a year earlier.
Interest-bearing debt was down to ¥460.4 billion
as of December 2003, versus ¥633.3 billion in February
2002. But Seiyu, which reported losses in two of the
past five years, recently cut its full-year sales forecast
1.3% to ¥1.09 trillion yen. Moreover, investors
have yet to buy into the Seiyu restructuring story.
Its stock is the second-worst performer on the Topix
Retail Index in 2004, dropping 21%.
Will the Wal-Mart ploy work? There are a couple of
conditions. Daiei first has to fall into the hands
of the IRCJ. If this happens, then Wal-Mart is one
of just two or three players in Japan with the experience
and cash to turn around a retail operation as massive
as Daiei. Secondly, Wal-Mart's Seiyu success story
is still a work in progress.
Daiei’s Stock: A Roller Coaster Ride
Daiei’s stock had plunged from ¥500 in Q3
2001 to a mere ¥100 as the Nikkei 225 was hitting
7,600 at the height of investor concerns about financial
fragility, deflation and Japan’s exposure to
external shocks. In short, Daiei was being priced for
bankruptcy. Thereafter, the major banks scrambled to
bolster their balance sheets and Resona Bank’s
rescue by the FSA, greatly relieved concerns that new
FSA Minister Takenaka would push the banking sector
to the brink of another financial crisis.
From Q2 2003, stock previously priced for bankruptcy
soared, on the assumption that if other troubled banks
were rescued, their most heavily indebted borrowers
would also be saved, especially because a new organization
called the Industrial Revival Corporation of Japan
(IRCJ) was formed with the express purpose of revitalizing
such troubled borrowers. Daiei’s stock price
soared from the ¥100 level to a ¥635 high by
April 2004, representing a massive 6.3-fold gain, and
more than making up for the ground lost since Q3 2001.
But then the war of words between Daiei and its major
creditors began, exposing serious differences about
how the company was to be revitalized. Moreover, the
company was refusing to consider revitalization under
the IRCJ. As speculators bailed out of the stock, it
plunged 75% from the ¥635 high to a recent low
of ¥156, or basically where it was in early 2003.
Presently, there is an overhang of cumulative trading
volume between ¥150~¥300, and the stock is
still in a bear market, trading below its 13-week and
26-week MA. In reality, the stock is not worth ¥635
a share, unless it is broken up, the best pieces sold
off, and the remainder successfully revitalized by
someone such as Wal-Mart.
Solving “the Daiei problem”, however, will
not only represent a major turning point in Japan’s
bad debt problem, but also a big turning point in the
restructuring of corporate Japan.
More Similar Corporate Culture
As Japan's corporate culture becomes more similar to
that of Europe and the U.S., Japanese companies are
less resistant than before to personnel reductions
and the sale of operations. The stock cross-holding
structure, which had impeded M&A bids, has disintegrated
as well. A Commercial Code revision in early 2006 will
make it easier for overseas companies to acquire Japanese
firms through equity swaps.
Buyouts of well-managed Japanese companies could remain
difficult in light of past experiences with failed
takeover bids. To ward off unfriendly takeovers, managers
of Japanese firms are likely to seek realignment of
domestic companies and launch stock repurchasing programs
and other measures to boost corporate value. These
moves could lead to higher stock prices as corporate
value is improved.
However, the fact remains that the stock market capitalization
of leading Japanese companies is but a fraction of
their largest global competitors.
Major corporations such as Canon Inc. and Kirin Brewery
Co. are seeking increased flexibility in their stock
buyback structures so they can be prepared for potential
mergers and acquisition deals that involve these arrangements.
Until the changes to the Commercial Code were implemented
last September, companies were bound for an entire
year to a ceiling for stock buybacks that was decided
at a shareholders meeting. So even if an unexpected
acquisition opportunity presented itself, methods involving
stock swaps faced restrictions.
Under the revised Commercial Code, the board of directors
at a company has the freedom to set buyback amounts,
in exchange for more information disclosure. This allows
companies more flexibility in their capital strategies
that make use of stock swaps. The changes will raise
the number of options available to companies involved
in M&As. However, it will also increase the corporate
governance burden on companies to ensure that decisions
about capital policies are fully explained to shareholders.
As a result of these changes, one can expect to see
more restructuring and rationalizations over time,
and continuing progress in Japan’s attempts to
move further along the road toward a sustainable economic
recovery.
Business
Confidence in Russia is Under Pressure
By
Sergei Blagov
MOSCOW
(KWR) Despite the massive revenues Russia is enjoying from
record oil prices, foreign investors have become increasingly
put off by the yearlong legal campaign against Yukos and a
summer-long crisis of confidence in the banking system. Taken
together, an attack on Yukos, the banking crisis and a spate
of terrorist attacks are taking their toll on business confidence
in Russia.
Yukos, Russia's largest oil-exporting company, faces crippling
demands to pay back taxes, and the authorities plan to sell
its largest Siberian production unit to recover the multibillion
dollar debt. In mid-September, the International Monetary Fund
expressed concern about the impact of the troubles besetting
oil major Yukos on Russia's standing as a place to invest.
IMF First Deputy Managing Director Anne Krueger, visiting Moscow,
called Russia's investment climate "mixed" and noted
that, on a net basis, capital had started flowing out of the
country of late. "There is evidence around of foreign
investment and people taking advantage of some of the opportunities
created by ongoing structural reforms," Krueger told a
news conference after meeting senior Russian officials. "[But]
there does seem to be some hesitation," she said, expressing "some
concern" about Yukos.
Krueger singled out overhauling Russia's fragmented banking
sector, shaken by a recent crisis of confidence, as a key step. "Postponing
reforms of the banking sector will only complicate matters
in the future," she said.
Meanwhile, on Sep.14, President Vladimir Putin allowed Gazprom
the go-ahead to acquire the government's last major oil company
while simultaneously lifting an eight-year ban on foreign ownership
of the gas monopoly's local shares.
Uniting Gazprom and Rosneft, two of the three companies considered
best positioned to acquire the assets of besieged oil giant
Yukos, dramatically strengthens the government's hold on the
energy sector while paving the way for billions of dollars
of foreign fund money to flow into the stock market.
Prime Minister Mikhail Fradkov told Putin he had come up with
a way to increase the state's stake in Gazprom, the nation's
biggest taxpayer, from 38 percent to a controlling one, a condition
the Kremlin said had to be met before it would agree to the
elimination of restrictions on foreign ownership in the company.
Gazprom's subsidiaries own 16.6 percent of their parent company's
stock, and Fradkov told Putin that they would exchange most
of it to acquire Rosneft.
Currently foreigners are only allowed to buy Gazprom proxy
shares bundled into groups of 10 and sold at a premium in the
West as American Depository Receipts.
Gazprom CEO Alexei Miller later said the company would trade
10.7 percent of its own shares for Rosneft, valuing the deal
at about $5.6 billion. "This is a deal the market has
been waiting for a long time," Miller told journalists
in televised remarks. "It will be a real locomotive for
the whole Russian stock market."
The government believes it is creating what could be a global
energy force along the lines of Saudi Arabia's Aramco, breathing
new life into a depressed stock market. Some investors are
less enthusiastic. "The Ministry of Oil and Gas Is Back," privately
owned MDM Bank wrote in a note to clients, referring to the
Soviet-era institution.
Putin's announcement on Sep.13 that he was rolling back more
than a decade of democratic reforms by doing away with directly
elected governors and parliamentarians, also sounded somewhat
discouraging for investors. The merger of Gazprom with Rosneft
is seen in line with Putin's drive to consolidate power, which
started in politics and has spread into the energy sector,
which is the lifeblood of the Russian economy.
Moreover, the head of the Federal Energy Agency,Sergei Oganesyan,
recently told journalists that the state should ideally control
about 20 percent of Russia's oil production. If the newly merged
Gazprom-Rosneft were to take over key Yukos subsidiary Yuganskneftegaz,
the state would gain control of 20 percent of national oil
output. The new company will be well-poised to win any auctions
the government might conduct for assets taken from Yukos.
Yet despite all this, the World Bank sounds positive about
Russia. Russia ranks in the top third of countries in terms
of doing business, according to a report published by the World
Bank.
Despite acknowledging the country's need to improve corporate
governance and transparency, the World Bank put Russia in 42nd
place in its survey of legal parameters for businesses in 145
countries. The World Bank made no comparison to last year because
its set of criteria has since changed. "Russia's business
climate is one of the best in the region," the World Bank
said in a statement earlier in September.
The report analyzes governments' regulations on such things
as starting a business, hiring and firing workers, registering
property, enforcing a contract and filing for bankruptcy. The
World Bank positively appraised Russia's business climate because
of the country's flexible employment regulations and improvements
in business administration procedures.
It takes 36 days to register a new business in Russia, compared
to 123 days in Azerbaijan. Registering a property takes 37
days in Russia, while in Croatia it takes more than 2 1/2 years.
The country's ranking was hurt by such considerations as the
fact that it is the only economy among the countries with 40
largest stock markets without credit bureaus. Overall, Russia
was placed in the second best of five categories, along with
Armenia, Bulgaria, Georgia and Estonia.
Despite the World Bank’s optimistic pronouncements, big
Western lenders have become concerned about Russia. In August,
Societe Generale and ING Bank backed out of a megaloan to TNK-BP.
Soon afterwards, a $500 million loan to Norilsk Nickel was
scaled down to $300 million after HSBC abruptly left the lending
syndicate.
The capacity of Russian companies to raise debt abroad has
also been on the decline in 2004. While borrowed funds in the
first quarter hit $1.2 billion in international placements
-- including eurobonds, medium-term notes and commercial papers
-- that figure dropped to $450 million in the second quarter,
according to Standard & Poor's. In the long-term, Western
lenders' reluctance could have a knock-on effect throughout
the economy.
Less funds available to domestic banks will mean a decrease
in loans to second and third-tier real sector companies, which
do not raise debt abroad.
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India
Finds it Difficult to Stamp out
Terrorist Groups in the North-East
By
Kumar Amitav Chaliha
MUMBAI
(KWR) In the clearest sign yet that
last December’s Bhutanese army
offensive against the United Liberation
Front of Asom (ULFA) failed to destroy
the militant group, on August 14
a bomb in the central Assam town
of Dhemaji killed 22 people, mostly
children. They had been taking part
in a parade to mark India’s
independence day when the powerful
explosion tore apart the ceremony.
Many of the bodies were burnt beyond
recognition.
"It was a most cowardly thing to do," Assam’s
chief minister Tarun Gogoi told local media.
He had no hesitation in attributing the
attack to the ULFA. The bombing was followed
by a further six attacks within a one-week
period, which killed five and wounded more
than 50. A grenade attack by ULFA militants
outside a movie theatre in Dibrugarh in
upper Assam; the rebels have repeatedly
threatened attacks against cinemas carrying
Bollywood films, which they describe as
examples of Indian cultural imperialism.
The ULFA, along with two rival factions
of the National Socialist Council of Nagaland,
is the largest and most powerful of the
many rebel groups operating in India’s
northeast region. Since its inception in
1979, the outfit has been waging a violent
struggle to create a separate country comprising
Assam state.
One of the key difficulties facing New
Delhi in its attempts to stamp out the
various northeastern insurgencies has been
the groups’ tendency to base themselves
in neighboring countries. The rebel organizations,
which fight for a variety of different
but interlinked causes along ethnic and
religious lines, first began operating
from Bhutan in the early 1990s after being
driven out of their encampments in India
by New Delhi’s first coordinated
offensive against the groups, 1990-91’s
Operation Bajrang.
After years of diplomatic pressure in December
last year India finally managed to persuade
Bhutan to launch a military operation against
rebel camps in that country. In a two-week
long assault, the Royal Bhutanese Army
cleared some 30 rebel encampments, not
only those operated by ULFA but also those
of the Kamtapur Liberation Organization
(KLO), and the National Democratic Front
of Bodoland (NDFB). The operation was hailed
as a massive success and a body blow to
the rebels, and for six months the insurgencies
went into remission.
However, India failed to prevent the rebels
from regrouping, partly because the diplomatic
pressure that was successful in encouraging
Bhutan to expel the militants has so far
failed to sway Bangladesh, which provides
safe-haven for an estimated 100 camps (although
Dhaka vehemently denies this). The groups
have also set up camps in Myanmar, and
their ability to rebuild beyond the reach
of India’s armed forces meant that
last year’s offensive was always
unlikely to spell the end of the insurgencies.
The failure of neighboring countries to
help India in cracking down on the groups
is not the only security problem facing
the northeastern state governments. In
August, a campaign by civil-rights activists
in Manipur for the repeal of the Armed
Forces Special Powers Act erupted into
severe rioting. The 27-year-old federal
law provides for soldiers to open fire
on suspected rebels, arrest them, or search
their homes without warrants from civil
authorities.
The armed forces say they require the Act
to effectively combat the insurgents, but
a series of heavy-handed blunders by the
military under the Act’s auspices
have generated massive popular anger. State
politicians have come out in support of
the protestors, with many threatening to
resign unless the federal government makes
moves towards repealing the legislation.
Despite the brutal tactics of the ULFA
and similar insurgent groups, there remains
an undercurrent of popular support for
their goals. Many native inhabitants of
the northeastern states fear what they
see as the exploitation and usurpation
of their region by outsiders – immigrants
from mainland India and neighboring Bangladesh
and Nepal. While this remains the case,
and neighboring countries continue to refuse
India help in driving out the militants,
the rebels are likely to continue their
violent campaigns.
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Will
Larger Listings Bring Excitement
Back to Thai Stock Market?
by
Jonathan Hopfner
BANGKOK
(KWR) Thai Prime Minister Thaksin Shinawatra’s
trademark optimism was on full display
on the first day of the Focus Thailand
2004 investment conference Sept. 20, with
the leader telling an audience of local
and foreign fund managers and executives
that the country remained firmly on the
growth track.
Despite internal difficulties such as and
avian influenza, the persistent violence
in Thailand’s south, and global uncertainty
over oil prices, Shinawatra said, “'macro-figures
for last year and this year have continued
to be highly positive” for Thailand.
The prime minister predicted growth of
up to 7 percent this year, noting that
exports were rising and the nation’s
foreign exchange reserves swelling, prompting
Standard & Poors to recently reward
Thailand with a long-term sovereign credit
rating upgrade.
But Shinawatra was less sanguine about
the fate of the Stock Exchange of Thailand
(SET), which despite the country’s
impressive economic performance has disappointed
investors this year after emerging as Asia’s
best-performing market in 2003.
The market shed some 16 percent of its
value in the first quarter of 2004 after
registering growth of 116 percent last
year, hovering recently at around 650 points
since breaking the 800-point level in January.
Shinawatra’s most recent reference
to the decidedly lackluster market was
a pledge in his weekly address Sept. 18
to launch an investigation into trading
practices on the SET, soon after Ekkayuth
Anchanabutr, a wealthy businessman and
one-time fugitive prone to launching impromptu
attacks on the current government, accused
senior officials from the prime minister’s
Thai Rak Thai party of manipulating securities
prices.
Unfortunately, transparency and credibility – or
the perceived lack thereof -- may not be
the only factor causing some investors
to overlook the SET. After years of delays,
the government has still failed to bring
some of the country’s most appealing
corporations to market.
While there are ample protestations to
the contrary – Shinawatra told a
Sept. 9 luncheon staged by the Thai-Japanese
chamber of commerce that he was “determined” to
press ahead with the much-discussed privatization
of several state-owned enterprises in the “near
future” – the government’s
privatization drive has stalled and further
progress seems a distant, and politically
tricky, possibility.
Since the Airports Authority of Thailand
made its debut on the SET in March in a
$439 million IPO that was 20 times oversubscribed,
many local and foreign investors have eagerly
awaited the listing of other government
monopolies, such as the Electricity Generating
Authority of Thailand (EGAT).
More than a few observers see state-owned
firms as questionable buys. Many are inefficient
and chronically overstaffed, and it is
difficult to predict how they would fare
in a more competitive market. But not even
the most jaded commentators question the
fact that with their varied sources of
revenue, official connections, and commanding
grip on much of the country’s infrastructure
and resources, such enterprises present
a tempting investment opportunity.
And it is opportunities like this that
the SET sorely needs. With the vast majority
of recent listings dominated by undersized
manufacturers and producers, industry players
such as Marc Fuchs, country manager for
Credit Suisse First Boston Securities,
have noted that many long-term investors
still see the Thai market as “quite
small.”
Even the government seems to be admitting
that in terms of generating interest in
the SET, bigger is better, with Minister
of Finance Somkid Jatusripitak telling
the Focus Thailand 2004 conference Sept.
22 that many foreign investors felt the
relatively tiny size of most listed local
companies limited investment opportunities
in the country.
Jatusripitak said the planned debut of
sizeable holding company Thai Beverage
would mark a turning point for the SET,
but the shortage of large corporations
coming to the market means the pressure
to sell off chunks of state-owned firms
is mounting, and key not only to the SET’s
future, but the government’s credibility.
Since plans to partially privatize EGAT
in May in what would have been the largest
initial public offering in Thailand’s
history were scuttled by widespread labor
resistance, the government’s privatization
drive has produced little but promises.
Provincial electricity and water monopolies
are slated for listing next year while
2006 will apparently see the market debuts
of the port and transport authorities.
And though regulators are unlikely to complete
a legal framework for a newly liberalized
telecom market for months or even years – making
it nearly impossible to apply a market
value to the state telecom providers – Minister
of Information and Communications Surapong
Suebwonglee has insisted the TOT and the
Communications Authority of Thailand (CAT)
will both be listed no later than the second
half 2005.
But the deadlines for share sales in many
state-owned firms have been broken many
times in the past, and some analysts see
the government’s position now as
weaker than it was when the privatization
balloon was initially floated. Mass protests
by employees against the planned listing
of EGAT have inspired similar sentiments
in their counterparts at other state-owned
firms, who after watching the government
back away from the EGAT IPO are unlikely
to allow even minute portions of their
companies to be sold off without a fight.
In addition, the recent victory of an opposition
party candidate in the election for Bangkok
governor was a very visible indication
that Shinawatra’s Thai Rak Thai party
may not enjoy the virtual monopoly on power
it thought it did. The party’s earlier
predictions that it would take 400 out
of 500 parliamentary seats in next January’s
election have been quietly dropped, though
its rural support base remains strong.
A weak showing in the elections could stifle
any efforts by the prime minister and his
team to forge ahead with the politically
sensitive privatization initiative. While
Shinawatra’s critics are no doubt
viewing the apparent rejection of Thai
Rak Thai in Bangkok as an indication that
the upcoming polls will see the ruling
party become a shadow of its formal self,
potential and current investors in the
SET will be hoping for a very different
outcome.
No
Nukes Not Likely-The Case for
Uranium
By Jim
Letourneau, Big Picture Speculator
CALGARY (KWR) In 1979, Reactor 2 at the Three Mile Island nuclear power
plant suffered a partial meltdown. Public opinion galvanized
against nuclear power aided by a series of popular No Nukes concerts
and The China Syndrome, a movie portraying the nuclear industry
putting profits before safety. Uranium prices peaked at $40/lb.
In 1980 prices began to plummet and since 1984 they have not
been above US$20/lb.
Nuclear energy has seen its prospects brighten considerably since then.
Looming energy shortages force governments to make hard choices. Growing
concerns about greenhouse gases from burning fossil fuels have led some
environmentalists to advocate using nuclear power. That’s right,
some environmentalists are now in favor of nuclear power. They prefer “carbon
free” electricity with no air pollutants to the burning of fossil
fuels.
The majority of uranium production is used in nuclear power generation.
There are currently 438 nuclear power reactors in 31 countries providing
over 16% of the world’s electricity. In several Asian and European
countries the percentage of electricity generated from nuclear power
exceeds 35%. Many existing nuclear power plants have increased capacity
and China intends to quadruple its nuclear power generation by 2020.
While energy demand is forecast to remain strong, and oil prices remain
over $40 a barrel, the current uranium price of $19.65 is less than it
was in 1984. During this extended low price environment, marginal uranium
producers were forced to cease production; properties were abandoned
and claims lapsed. Today production is concentrated in a handful of major
companies including Cogema, Cameco, Rio Tinto and Energy Resources of
Australia. Uranium is now in short supply and an unforeseen mine shutdown
or disruption in an enrichment facility could cause a major crisis for
the nuclear industry.
Uranium consumption has surpassed annual production for the last 15 years
while uranium prices languished. New uranium supplies are unlikely to
be developed at prices below $20/lb. Investors need to be convinced that
prices will remain high for the long term before investing in new projects.
Approximately 50% of global uranium production comes from Canada and
Australia. With prices on the rise, a handful of junior exploration firms
in these countries are restaking old claims and dusting off shelved projects.
Companies with promising properties are seeing significant share price
appreciation. This should help with the financing of capital-intensive
exploration projects. However, the supply demand imbalance is unlikely
to be corrected in the short term. It takes at least 10 years to turn
a discovery into a producing mine. Permitting restrictions and bans on
uranium mining in some jurisdictions are likely to increase the time
it takes for new supplies to come on stream. The long time lag between
shortage and increased production is why commodity bull markets usually
last between 10 and 15 years. With analysts predicting uranium prices
as high as $100/lb before the end of the decade, it appears likely that
uranium prices are destined to move significantly higher before new supplies
appear.
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Pursuing
Business Opportunities in Scandinavia
By
Finn Drouet Majlergaard, Gugin
COPENHAGEN
(KWR) In some parts of the global business
community there is a tendency to see Europe
as representing the past, USA as
the present and Asia as the future. The truth is a bit more
diversified. Scandinavia, for examples, focuses very much on
the future and opens a lot of possibilities for investors and
companies looking for solutions to tomorrow’s problems.
Denmark ranks first among Europe's "Global Leaders" in information
and communications technology, according to the "eEurope 2005
Index", which measures ICT development and Internet usage among
28 European countries, reports EurActiv.com. Sweden and Norway follow
right behind. To Scandinavians this is no surprise -- but many foreign
investors overlook the region.
Scandinavians are among the most creative and innovative people in
the world. They are fast movers, flexible, and well educated. Furthermore
Scandinavian countries are politically very stable and rarely have
labor conflicts. An excellent infrastructure combined with swiftness
in the collaboration between public and private organizations ensures
a high degree of agility in the commercial life. Just as an example
it doesn’t take more than a week to register a company in Denmark – and
it is free!
Why is Scandinavia overlooked? The main reason is that Scandinavians
are quite poor on marketing. They are very focused on creating, innovating
and refining and don’t care much about market demands. This means
that foreign investors and potential business partners only discover
the gold if they have good relations inside Scandinavia already. And
good relations are important -- as is a need to understand the Scandinavian
cultures. In many ways the Scandinavian are closer to Asians than to
Americans – culturally speaking. They rely on relations a lot
more than a good bargain. You might have the best offer in the world,
but if they don’t know you or the partner who has introduced
you, you will most likely never get a deal. On the other hand – when
a relationship is established you can rely on that relationship.
Who should look at Scandinavia?: In particular, the greater Copenhagen
Area is interesting. The attractiveness of the Region has created the
largest metropolitan area in Scandinavia with a population of 3.5 million
inhabitants and a high concentration of companies. Approximately 3,400
foreign owned companies have chosen to locate there. Furthermore, 137,000
students attend courses at 14 universities with a scientific staff
of about 10,000 researchers.
The industry and research environment in the region have proven to
be particularly strong in food technologies, IT and life sciences.
These three competence areas have developed over a long time through
intensive collaboration between companies, research institutions, and
universities.
Companies that are interested in looking at the possibilities are advised
to go through the following steps, many of which are relevant to all
international expansion strategies:
1. Make an assessment of the possibilities
of your company. What are your strengths
and weaknesses? What is your current
strategy and how
could an engagement in Scandinavia underpin this strategy.
2. Do you have the necessary resources available? (Skills, money,
infrastructure, local contact, knowledge and processes)
3. Define precisely what you want to achieve and how much you are
willing to invest. Do you want to acquire a company, establish collaboration
or establish a branch of your company in Scandinavia?
4. Do the necessary research and business intelligence together with
your local partner
5. Search, select and act based on the intelligence you have acquired
When you have acquired a company or established
a relationship you need to focus
on a successful transition in order
to maximize the return
on your investment. A lot of companies overlook this part – often
with fatal consequences. What they need to go through is:
1. Spend some time getting to know your new
partner. Find out how you compliment
each other, create confidence and
understand and respect
each other’s cultures both national and corporate.
2. Make a detailed transition plan.
3. Choose a transition manager. It could be from your external partner,
who has experience in doing this.
4. Monitor the transition process carefully
5. Evaluate the results and adjust where needed.
We
all know examples on companies and even large
multinational corporations who have failed
because they didn’t take the transition and
business transformation process seriously. Disney is a great example.
They were
very successful with their theme parks in the US and successfully
expanded the concept into Japan. But when they came to Europe it
all went wrong
and Eurodisney is still suffering. Much of the problem might have
been avoided with a more detailed analysis and transition plan.
Scandinavia, in particular, the greater Copenhagen area is an ideal
choice for high-tech companies looking for areas of expansion.
But there is a need to do things right, which means the need to
have
a local partner, who can guide one though the process and maximize
the
return on a corporate investment. Over tree thousand companies
have done that already in the greater Copenhagen area alone – so what
is stopping you?
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Emerging
Market Briefs
By
Scott B. MacDonald
 Brazil
upgraded from B+ to BB- with a stable outlook.
Brazil is benefiting from a combination of high
commodity prices, low global interest rates (though
rising gradually), and the country's trade sector
is booming. Exports represent 17% of Brazil's GDP,
more than three times the level of four years ago.
Brazil is also expected to post a trade surplus
of $35 billion in 2004, boosting the current account
surplus to 1.6% of GDP. The Brazilian economy is
accelerating, leaping 5.7% y/y in the second quarter
- the fastest growth rate in eight years. At the
same time, Brazil's unemployment rate is declining
and retail sales rose 12% y/y in July. Equally
important, Brazil's fiscal management remains prudent.
Brazil's primary surplus is 5.4% of GDP, well above
the 4.25% target agreed upon with the IMF. Moreover,
the Ministry of Finance may raise the primary surplus
target to 5% of GDP. All of this is occurring at
the same time the government is investing heavily
in infrastructure. A new joint venture program
(PPP) will bring in much needed investment to upgrade
the country's ports, highways and electricity grid.
It is, therefore, no surprise that S&P finally
upgraded Brazil's credit rating to BB-. S&P's
action came shortly after Moody's raised the country's
ratings from B2 to B1.
Although Brazil's creditworthiness has some momentum,
there are ongoing concerns. In particular, the
country's overall external debt level remains high
and there are growing concerns over a possible
rebound in inflation. The IPCA inflation rate was
7.2% in August, versus a target of 5.5% in 2004
and 4.5% in 2005.
Considering that Brazil's monetary
program is based on inflation targeting, there
has been pressure from many Brazilian economists
on the central bank to raise interest rates to
preserve credibility. Last week, the central bank
(monetary policy committee is the COPOM) complied
by hiking the SELIC rate to 16.25% and signaling
this was the first of several rate increases. Many
local analysts believe the SELIC will finish the
year at 17%. The COPOM's decision was welcomed
by the market.
We expect the Lula administration will continue
to work on keeping a lid on inflation, while further
upgrading the national infrastructure and working
its way through structural reforms. At the same
time, we have concerns the country's higher interest
rates, if they continue to rise through 2005, could
dampen badly needed economic growth. With a SELIC
of 16.25% and an inflation rate of 7.2%, real interest
rates are 9%. This is a major opportunity cost
for Brazilian investors. Instead of investing in
the real economy, many Brazilians are happily enjoying
safe returns in government fixed income assets.
High real interest rates are a disincentive for
real investment. The problem becomes more acute
as capacity utilization increases. Normally, high
capacity utilization rates induce societies to
shift their savings into fixed investment. However,
an unnecessarily tight monetary policy may avert
this from occurring in Brazil, leading to bottlenecks
and inflationary pressures.
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Brazil
faces the tough challenge of finding the right balance
between quelling inflationary pressures and stimulating
growth. Stronger and sustainable economic growth
is needed to help reduce the debt burden. Brazil
remains the largest single debtor in Emerging Markets.
Yet, President da Silva has done an admirable job
in moving the country forward. The question for his
leadership is whether or not he can make necessary
changes in what is currently a positive environment
for Emerging Markets. We do not see any major liquidity
crunch for Brazil in what is left in 2004 and believe
that 2005 should be a manageable year. Foreign exchange
reserves are a comfortable $49 billion and Brazil
currently has access to international capital markets.
The real test will come when international commodity
prices begin to fall, something that may loom on
the horizon in 2006. Hopefully, President de Silva
and his team will have managed to move the country
that much further down the path of a stronger and
less-debt burdened economy. If not, Brazilian C Bonds
will not be trading anywhere near their current 99
cents on the dollar - a far cry from 45 cents two
years ago.
Book
Review: A Continent for the Taking: The
Tragedy and Hope of Africa
 Howard
W. French, A
Continent for the Taking: The Tragedy and Hope
of Africa (New York: Alfred A. Knopf,
2004). $25.00
Reviewed
by Scott B. MacDonald
 Click
here to
purchase Howard W. French's book, "A
Continent for the Taking: The Tragedy
and Hope of Africa," directly
from Amazon.com
Veteran
journalist Howard W. French has written an excellent
account of the trials and tribulations of modern
Africa (sub-Saharan Africa) as seen through the
eyes of a sympathetic observer during the 1990s.
Although he has hope in the title, the sense of
tragedy is a far more overwhelming sentiment that
permeates the pages. Beginning when he was a young
man, making a trip with his brother through Mali,
the sense of hope erodes as the reader follows
French through the plagues of AIDS and Ebola, the
massacres in central Africa (Rwanda) and a plethora
of failed political and economic experiments in
Congo (Brazzaville), the Republic of the Congo
(formerly Mobuto’s Zaire), and Liberia. We
are also left with a deep sense of frustration
and anger at the West, which in French’s
eyes, have consistently let Africa down. Indeed,
he notes the lack of support from the West when
the possibility of peace was melting away in Liberia
during the 1990s: “Washington and its European
partners were preoccupied with the crisis in Bosnia,
though, and scarcely seemed concerned with what
diplomats thought of as a messy, two-bit African
affair.”
Three messages emerge from French’s opus. First
and foremost, most of the rest of the world really
does not care overly about Africa. As he notes: “Africa
is the stage of mankind’s greatest tragedies,
and yet we remain largely inured to them, all blind
to the deprivation and suffering of one ninth of humanity.” Second,
whatever interest there is in Africa from the outside
is largely driven by self-interest. As he notes: “Africa
interests us for its offshore oil reserves, which are
seen an alternative to supplies from an explosive and
difficult-to-control Middle East, or for rare minerals
like coltran, which powers our cellular phones and
PlayStations.” In a sense, it is the ongoing
brutal nature of Africa’s encounter with the
West that has caused the region’s political and
economic development to be so badly off-track in the
early 21st century.
The third message is that despite all of the misfortune,
Africa and the Africans endure. The region has undergone
horrible diseases that have decimated local populations,
suffered from corrupt and brutal governments, and been
a chessboard when needed for external powers, acting
with little regard for Africans.
It is to the last point there are some weaknesses in
French’s book. While the West decidedly has had
a hand in creating Africa’s problems, local players
have also had a role in the dysfunctional nature of
many governments. Moreover, French chronicles some
of the major disasters in Africa, but he has little
to say about South Africa which witnessed a peaceful
transfer of power from white rule to a more open parliamentary
system, the economic success of Mauritius and Botswana
-- both with functioning elective governments -- and
Senegal’s peaceful development over the past
several decades. Yes, much is amiss in Africa, but
it is not all tragedy – there are a few spots
of sunshine that indicate that Africans can manage
their own affairs without a resort to force.
Howard French has written an accessible book that is
must reading for anyone with an interest in Africa
and current affairs.
For
pictures and updates of our recent Japan Small Company
Investment Conference, click above
Past
Issues of the KWR International Advisor
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©
2004 - This document is for information purposes only.
No part of this document may be reproduced in any
manner
without the permission of KWR International, Inc.
While the information and opinions contained within
have been compiled by KWR International, Inc. from
sources believed to be reliable, we do not represent
that it is accurate or complete and it should be
relied on as such. Accordingly, nothing in this document
shall be construed as offering a guarantee of the
accuracy or completeness of the information contained
herein, or as an offer or solicitation with respect
to the purchase or sale of any security. All opinions
and estimates included within this document are subject
to change without notice. KWR International, Inc.
staff, consultants and contributors to the KWR International
Advisor may at any time have a long or short position
in any security or option mentioned in this newsletter.
This document may not be reproduced, distributed
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without prior written consent of KWR International,
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