Time to ride on BML !

I know riding on stocks is the furthest thing that comes to your mind when it comes to investment. With few shares to invest and much chaos on the process of buying, you would rather leave your earnings under the pillow; the perfect safe invented by our great grand fathers. You wouldn’t care about the invisible man that steals your money everyday. The evil and the powerful man………… yes …inflation!!!

Yet what we have been doing is opposing with the rational economic behaviour of self-centered man. What I feel is that we have little information on our investment opportunities. So why not consider some of the alternatives we have? For a head start, I attempted to do a little bit of analysis on the new offering of BML which constitute 490000 ordinary shares of $50 at a rate of $143 offered to the general public. The opportunity is hanging there till 19th August 07. We still have time to decide on its viability.

Looking at the Earnings Per Share and dividend pay-out in figure 1, one would say the company has been performing well. Especially within the last couple of years. Share performance in figure 2 shows the same robustness. But don’t get carried away. What you see may sometimes trick your eyes. So some serious math would be required before getting into conclusion.

First, let’s see if the company’s net assets really worth the premium we are paying.
At the year end of 2006, BML had Total Net Assets worth MRf 644,758,794. This is Mrf 147.14 per share after the share split and bonus issue. Quite a satisfactory figure I must say. I would actually pay the premium even if the NA (net assets) per share falls below Mrf 143. The reason is the option characteristics embedded with the shares. Little beyond this article. However you can find the same rationality when investors pay for common stock of companies with higher liability than asset.

Now let’s attach a mathematical figure for the dividend growth and capital growth. I used arithmetic model rather than the logarithmic model and derived an average dividend growth of 16.68% from the last 5 year figures. Note pointing, however, the figure is pushed up much from the last year dividend which had a 50% increase. The crucial question is whether we consider this as an abnormal dividend and leave out of our model, something I thought as not so wise. Why? Well the fundamental of the market suggest that the company can pursue paying such higher dividends every now and then. As a matter of fact, banking sector is experiencing high growth. BML has been doing some serious investment. As a result the earnings are rising fast and the future looks bright. The share of its non-interest component has been increasing. We can expect a boom anytime in the future. Let it be from the credit cards or mobile banking. There is everything to gain from the tech savvy youngsters.

Using the earliest available share prices up until the share split and bonus issue and using the same arithmetic model, I derived an average capital growth of 32.43% per annum. Again, a figure quite good enough for investment.

So altogether, from above two components, we can make a rough prediction on how our investment in BML shares can grow. This is illustrated in figure 2. The bottom line is that we can get all our investment money back through dividends in 4 years time and we can then sell the share at a profit of nearly Mrf 460; a near return of 82% per annum. A hell of a good investment it seems.

May be I’m little optimistic compared to you on this. But I’m not kidding. BML new offering is really worth looking at!!!! See if you can derive the same conclusions as mine. Don’t rush. But if you do, remember the following points.

• The analysis above is no way enough and does not provide a substitute for financial advice.
• No comparison has been done with other investment opportunities out there.
• People’s risk preferences are different, you may need to find yours first.
• Variance is not included in above analysis.
• Diversification is always good.
• The article does not consider any ethical issues.

What is Causing Inflation in Maldives?

The most recent inflation figure published by authorities in the Maldives is the inflation of March 2007 and it stood at 3.93% (moving average). The overall trend is that the prices have been increasing since the beginning of the year. The highest weight is given to “other food” item (food other than fish and beverages) in the CPI calculation. It accounts for one fourth of an average Maldivian’s consumption. The CPI index for ‘other food has been increasing significantly since June 2006, although its’ price growth has decelerated in the first quarter of 2007. Housing and utilities represents 5% of the CPI weights and is increasing at a steady (around 5%) rate every month. Household equipments has an accelerating trend in the prices every month August 2006. Health prices were increasing at high levels last year but since December the prices are increasing at a speed above 10%. Communication prices are on a declining trend since June 2006. Prices of hotels and restaurants are increasing sharply although it accounts for just 1% of the CPI weights. Tobacco and narcotics accounts for 2.8% of the weights and it is also increasing at a high rate.

In general, the Maldivians are feeling the current inflation due to the increase in prices of food, housing and utilities and health prices. The inflation felt in the economy could be higher than what numbers suggest as depicted by media and comments from public regarding continuous increase in price of some of the daily and basic commodities in the Maldivian market.

What could be causing inflation in the Maldivian economy? Rest of this article would try to get an explanation for this question.

Deficit budget?
Milton Friedman stated that inflation is a monetary phenomenon and economic theorists who have opposing theories also agree with Friedman. It means that inflation can only be triggered by money creation or by increasing money supply. Therefore a budget deficit by itself does not create inflation and inflation driven by a budget deficit depends on how the deficit is financed. A budget deficit can be financed by borrowing domestically, borrowing from abroad or by printing money. Domestic borrowing will not trigger inflation as money supply would not be affected. However, increasing foreign debt or printing money would cause inflation as it would increase money supply.

The Maldivian budget is forecasted to be at a deficit of MRf3.7 billion in 2007 to be mainly financed by foreign debts. However the deficit for the first quarter of 2007 stood at MRf438.8 million and is mainly financed domestically through issuing T-bills (according to MMA’s Quarterly Economic bulletin March 2007).

If this claim is right, then budget deficit would not have caused inflation or at least the budget would not be the primary cause of cause of inflation.

Revenue increasing proposals such increasing import duty or implementing a tax system can also cause inflation through higher costs. The budget has revenue proposal such as increasing import duty on certain items and increasing work permit fee. This would indeed increase the costs of various business sectors. However it is not clear that these policies have been implemented yet. When they are not implemented there would not be any cost push inflation caused by the budget.

A Surge in aggregate demand?
A budget deficit (including the fiscal deficits of recent past) may cause inflation indirectly through increasing income of the people. A budget deficit would cause national income to increase. The Maldives has also recorded a huge 19% increase in real GDP. These factors would increase the demand for commodities from people and if the supply is not sufficient enough, it may result in relative increases prices of certain commodities and hence in turn (if those commodities are weighted high in CPI) inflation.

A shortage in supply of some commodities?
Of course a shortage in supply of goods would cause to drive the prices. But this would only cause the relative prices of those commodities to rise, not the general price level. This is claimed to be the case by some reports in media as there has been only increase prices of some food items. But on the other hand prices of such goods may increase due to the inelastic nature of demand for such goods. It could still be caused by a factor that is causing inflation and necessities are being affected more than other types of goods.

Import data shows that there has been an increase in imports of food items in the first quarter of the year compared to the first quarter of last year. But has such imports has decreased compared to the previous quarter (last quarter of 2006) slightly. Therefore it implies that demand for goods has grown considerably in recent months the import supply of such goods is not sufficient to offset the increase in demand.

Public expectations
Inflation can be fueled by public expectations of inflation. The deficit budget has increased speculation among various businessmen in the Maldives that sooner or later some revenue boosting policies in the budget are going to raise their costs of business activities. This might have caused them to increase the prices of goods as soon as possible as it has to be done in a near future when those policies are implemented. The budget received huge criticism but it was credible. Most people believed that activities in the budget would be done. This might have caused an expectation regarding an increase in costs during the year which made businessmen be proactive and hence increase the prices.

This might also be coupled with speculations about future commodity supply in the world market as there has been a shortage of supply of good as some traders say.

Money growth?
Monetary data indicated that there has been increase in money supply. Monetary base and M1 increased at a decelerating rate but M2 has grown by 18% during the first quarter of 2007. MMA states that this rise is accounted by increase in foreign currency deposits from tourism. A steady money growth would keep inflation stable but excessive increase in money supply would cause price instability – meaning undesirably high rate of inflation. An 18% growth in M2 after a 12% increase in the previous quarter could increase income but it is unlikely that it is the most important factor that is causing current surge in general price level.

World market influences?
The Maldives is an economy highly dependent on imports and foreign trade. Therefore trends in world market are translated into the Maldivian economy. Increase in world prices of commodities would cause the prices in Maldives to increase too. This would again be supported by fixed exchange rate system. As the local currency would not fluctuate, an increase in foreign price would directly be seen in the Maldives. Commodity prices in the importing countries might have increased to cause the Maldivian prices to surge and this has been cited by some traders as well. Higher oil prices would also increase the costs of many Maldivian businesses and hence various other commodities. Therefore factors that are in the world market could cause inflation to rise.

Conclusion
In conclusion, inflation in the Maldives is caused by a variety of factors. These include increase in demand for goods excessively, world market trends and public expectations. The budget of 2007 might not have directly contributed to inflation although expectations resulting from it may fuel inflation.

A Glance to the Liberalization of Fisheries Sector

The fishery industry is an industry subject rapid and huge fluctuation in fish caught depending on the season, weather and many other fringe factors. These erratic fish collection affects a few other companies whose business depends on the fish collection. There is always an uncertainty about the amount of fish being caught in a given season. Local fishermen are working hard increasing the fish collection in general, but State owned MIFCO are not always able to meet hard work of fishermen. It’s normal in the Maldives to throw away the fish in peak seasons and it’s normal to see grief of fishermen on such occasions. So in order to make things right for local fishermen, to increase the growth of the industry and to increase the contribution of fisheries sector to the national economy, the fisheries sector was liberalized. Licensed private companies started operating on specific zones to achieve those goals. Have these companies made an impact to the industry? Have liberalization made any positive effect?

There is a relatively wide market for local fishermen. Around 70 percent of the fish catch are exported in fresh, chilled, frozen, canned, dried and carious other forms. Remainder of the fish is used for local consumption. Local consumption is assumed to remain same or grow very slowly in short term because it basically depends on the population of the country. If that is case, then fishermen would only be better off if the exporters are demanding more fish (also noting that a large weight of the fish caught is sold to the exporters).

Export of fish would very much depend on the international market performance, especially of those countries where the Maldivians export fish. Major export partners are Sri Lanka, Thailand, Japan, and UK. There are many other European countries to which Maldivian fish exports are directed.

The global fish prices are, like any other commodity, subject to changes in demand and world supply. Price and global fish catch observations in Japanese sashimi market and European fresh and canned tuna market shows generally the price changes normally occur due to fluctuations in world supply rather than demand. But during times of higher prices, exporters would tend to export more fish. In both Europe and Japan, there are huge fluctuations in tuna prices during the 2000’s. In Europe the prices fell during 2003 but have been on a rising trend since then. In Japan the prices were on a falling trend from early 1990s but started picking up on 2003. So the last couple of years are some good years for exporters as prices have an upward momentum although they are subject to sharp short term fluctuations.

The unit value of the Maldivian tuna exports (both skipjack and yellow fin) followed a similar trend. Unit value or average price received for the exporters fell during late 90s but has been on a rising except for 2003. Maldivian exporters could be assumed to have a good time in global tuna market since 2003 as it has prices were strong overall since 2003. The year also coincides with the first time newly licensed companies have exported a shipment even though some companies were given the license in 2000.

In early 2000s the amount of tuna exported has increased sharply but since the intervention of the private companies this growth has slowed down. Ideally one would assume them to fly high but data suggests that there are barriers in their way. These barriers could be the small capital or small fishing fleet of the companies compared to state owned fisheries giant, MIFCO.

Liberalization or privatization of the sector would indeed increase the competitiveness of the industry. But this competitiveness is not very clearly seen and also the companies failed to take the maximum advantage of good global market conditions.

However, as private companies started to export the falling unit value of Maldivian tuna started to pick up again. It is worth noting that average price receive for all Maldivian tuna is much lower than that of the prices in Japanese, US or European markets. This may be due to lower prices received from two largest export partners, Sri Lanka and Thailand. Therefore increase in unit value suggests that private companies are more oriented towards European and Japanese markets where they can obtain good value. This could perhaps be a good road to move on as it will increase the profitability and revenue of the companies and will eventually benefit the industry.

During recent years when fisheries market was growing and doing well in terms of price, the Maldivian fishermen has to throw away fish they caught. The thrown away fish otherwise would have been maximizing profit for the companies. But storage difficulties have not them enabled to do so. Then the question is why the companies and investors are not keen to expand storage facilities and exploit the benefits of some good years in the industry? The answer may lie in the huge seasonal fluctuations witnessed in fisheries. Local fishery companies have supposedly expanded their storage capacity but the supply of fish currently is not sufficient to cover the cost of this expansion.

To conclude, the secondary fisheries sector has not gained much so far from liberalization. The speed of the growth in fish processing and exporting sector has declined but unit value received for the companies and other exporters has increased. So the industry is on a good track, trying to expand and exploit benefits, but not fast enough. Local fishermen have gained a little as private companies are (supposedly) offering higher prices for fish than MIFCO. MIFCO has also increased their prices recently because of the competition in a low supply season. So this kind of competition would better off fishermen and competition between companies will increase as fisheries sector was more liberalized. Fluctuations would occur in the fisheries sector and the companies need to cope with this. Local companies need to have a strategic plan rather than being short sighted. Some of their investment activities might not be economical in short run but it could be a money making machine in longer term given the current global long term market trends.