Implications Of The Rate Hike.

(From Malaysian Business)

IN conjunction with the announcement of the nation's 3Q2005 Gross Domestic Product (GDP) numbers, Bank Negara Malaysia (BNM) had on Nov 30 raised its Overnight Policy Rate (OPR) by 30 basis points (30 bps) to 3.0% on the back of a strong gain in private consumption.

The hike (which essentially means a likely rise in banks' interest rates) was viewed by many as a major event even though it was widely expected. The hike, the first in seven years, was seen by many economists as the beginning of a tightening cycle.

If this is the case, this will definitely have widespread repercussions on various economic sectors, and especially on private consumption.

However, in a recent investment report to clients, AmResearch Sdn Bhd says the initial impact could be more towards affecting sentiment on the local stock market rather than actually hitting listed companies' earnings.

It argues that this is likely to be the case since many of the highly- geared listed companies have either locked in their borrowing costs (through instruments such as bonds and Islamic debt securities) or, in the case of some of the big-cap stocks, a huge part of their borrowings is in the form of foreign currency-denominated loans (which will not be affected by higher local interest rates).

In general, cash-rich (normally consumer-based) companies would be the beneficiaries of such an interest rate hike (as deposit rates are likely to be raised at the other end) while leveraged (normally manufacturing- based and property) companies will be the biggest losers, says Hwang-DBS Vickers Research.

According to OSK Investment Research (OSK Research), the impact of an interest hike is mainly negative on many non-banking sectors (see Table 1) although certain consumer sectors like food and tobacco/beverage would be less affected.

INTEREST RATE DIRECTION

Still, just a 30 bps rise in the interest …