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Fraud Biggest Risk for Middle East companies

28th May 2018

This year’s survey found that 42 per cent of executives surveyed in the Middle East believe that corrupt practices still occur widely in business.

Dubai – Forty-eight per cent of Middle East respondents cited fraud and corruption as the greatest risk to their company, followed by cyberattacks, according to EY Global Fraud Survey.

“The findings show that there is often a lag between the introduction of stronger anti-corruption laws and a change in behaviour. While new laws and regulations have been introduced and enforcement intensified, non-compliant behaviour still remains, though the Middle East is certainly tackling the issue,” Charles de Chermont, EY MENA Fraud Investigation & Dispute Services Leader, said in a statement.

This year’s survey found that 42 per cent of executives surveyed in the Middle East believe that corrupt practices still occur widely in business.

“Businesses remain vulnerable to significant financial and reputational harm. Management teams must identify and address the root causes of such conduct in their organisation. Compliance programs need to keep pace with the impact of rapid technological advancements and the increasingly complex risk environment on business operations,” Charles said.

The report finds that individuals shirk responsibility; when asked who is held accountable for ensuring employee integrity, 50 per cent of respondents believe that integrity is the primary responsibility of either management or the board, and only 14 per cent feel that individuals should take primary responsibility for their organisation behaving with integrity.

 

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Asia Pacific Exchange Kicks Off Singapore Trading with Palm Oil Futures

28th May 2018

SINGAPORE/KUALA LUMPUR (May 25): Singapore’s third derivatives exchange kicked off trading on Friday with the launch of palm oil futures, as the largely China-backed bourse looks to get a foothold in the region in preparation for other contracts down the line.

The Asia Pacific Exchange (APEX) hopes the US dollar-denominated palm olein futures will give traders another option beyond benchmark ringgit-denominated contracts, and is touting the market as a place for Southeast Asian sellers and other international players to get access to Chinese buyers.

“Right now, China’s market is more domestic, we are trying to bring out the Chinese market to international players,” APEX’s Chief Executive Eugene Zhu told reporters after the launch.

APEX’s September palm olein futures contract opened at US$635 a tonne and was last down 0.3%. A November contract was up 1.7% after opening at US$650 a tonne.

“Traded volume in the first half-hour seems very good, but we need to see if this is just first day euphoria or if the market can sustain,” said a palm oil futures trader in Kuala Lumpur. He declined to be identified as he was not authorised to speak with media.

Under the contracts, palm olein is for physical delivery, on a Free on Board (FOB) basis, at Pasir Gudang and Port Klang in Malaysia, while in Indonesia, it is for delivery at Belawan and Dumai ports. Those two countries produce nearly 90% of the world’s palm oil, used to churn out products ranging from chocolate to soap.

APEX’s major shareholders include Chinese conglomerate CEFC China Energy, Chinese futures commission merchant Xinhu Group and other international investment funds.

China is the world’s No.2 buyer of palm oil, with the commodity comprising about 70 percent of its edible oil imports.

Zhu, the former head of the Dalian Commodity Exchange (DCE), said the palm futures would complement other exchanges in the region.

“There will arbitrage opportunities and it will help to generate more volumes for all the exchanges,” Zhu said.

The benchmark palm oil contract on the Bursa Malaysia Derivatives Exchange was trading down 1.1% on Friday, while the most-active palm olein contract on the DCE had eased slightly.

Bursa Malaysia launched dollar-denominated crude palm oil and palm olein contracts over the last decade, but Kuala Lumpur-based traders said trading volumes for both contracts are
close to zero due to a lack of market makers.

APEX plans to offer other futures and options based on commodities from sectors including agriculture, energy, petrochemicals and metals, as well as on interest rates and stock indices.

 

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Do Investors Have the Right Narrative on Malaysia?

28th May 2018

SINGAPORE (May 28): It has been another dramatic week in Malaysia. The new Pakatan Harapan (PH) government has revealed that the country’s total debt and liabilities have breached RM1 trillion ($336 billion). It has also come to light that the previous Barisan Nasional (BN) government had been bailing out the scandal-ridden 1Malaysia Development Bhd (1MDB), paying off nearly RM7 billion worth of its debts since April last year. In the Ministry of Finance’s 2017/18 Economic Report, total federal government debt was reported to be just over RM685 billion as at end-June 2017.

Now, the new PH government is trying to stabilise Malaysia’s finances. Among other things, salaries for ministers will be cut by 10%, and about 17,000 “political appointees” on the government payroll will be dismissed, according to Prime Minister Dr Mahathir Mohamad. In addition, a number of government agencies answerable to the PM’s office will be closed. The authorities are also going after members of the previous government who may have broken the law. Former prime minister Najib Razak was himself hauled into the Malaysian Anti-Corruption Commission’s headquarters this past week to answer questions about 1MDB.

There was, of course, little doubt that things were going to change after Najib was booted out of office. And, so far, just about all the suspected excesses of his government are proving to be true. Notably, the Auditor-General’s report on 1MDB in 2015, which was declassified on May 15, corroborated much of what was said by the US Department of Justice in its civil forfeiture complaints of July 20, 2016. Separately, the police have reportedly found that the bags of cash seized over a week ago from residences in Kuala Lumpur as part of their probe into 1MDB added up to an eye-watering RM130 million.

So, it must be rather ­perplexing for Malaysians who voted for change that analysts and media commentators appear to think that the new PH government led by Mahathir will not be as good at formulating and implementing economic policies as the ousted BN government led by Najib. A commentary by Bloomberg on May 17 suggested Mahathir’s supposed contempt for markets, demonstrated by his calling George Soros a moron and bringing down a protective curtain of capital controls during the Asian financial crisis, is consistent with his decision to bring an end to the Goods and Services Tax.

A separate commentary in The Straits Times (ST) on May 16 actually stated that Najib’s economic policies were good for Malaysia and should be preserved, with specific reference to the introduction of GST as well as the scrapping of fuel subsidies and the building of the high-speed rail that will link Singapore and Kuala Lumpur.

Things were not fine

On the face of it, these ideas are easy to defend. A good sovereign credit rating is crucial for countries such as Malaysia to maintain the confidence of global capital markets. Fuel subsidies can be a huge fiscal burden when oil prices rise. And, many countries — including Singapore — see GST as a means of widening their tax base and efficiently raising government revenue. There are also certainly a lot of positive economic spin-offs that would come from a high-speed rail link between Singapore and KL.

Yet, many Malaysians would probably disagree that Najib left their economy in “reasonably good shape”, as the ST commentary asserts. For one thing, US$1 is now equivalent to RM3.95. At the beginning of 2009, the year Najib took office, US$1 was equivalent to RM3.47. Also, even based on just the borrowings that have been officially disclosed, Malaysia’s federal government ended up more indebted during Najib’s time in office. Last week, The Edge Singapore reported that Malaysia’s federal government debt averaged 53.1% of GDP from 2008 to 2017, versus only 38.7% from 1998 to 2007.

There were also complaints that wage growth was not keeping up with the cost of living. In fact, the fiscal discipline Najib pursued could well have added to the pain felt by ordinary Malaysians. Anushka Shah, a senior analyst at Moody’s Investors Service, notes in a May 14 report that although the previous government achieved eight consecutive years of fiscal deficit reductions to 2.8% budgeted for 2018, lower expenditures mainly drove the consolidation, with revenue falling as a share of GDP since 2012.

Then, there is the monumental scandal surrounding 1MDB. While there was evidently a cover-up in Malaysia, the affair was investigated in other jurisdictions. Notably, the Monetary Authority of Singapore began an investigation as far back as in March 2015, and was bringing bankers who had aided Low Taek Jho, or Jho Low, a key figure in the scandal, to book the following year. So, it cannot have escaped the notice of anyone with an interest in Malaysia that something very bad was happening in the country. Indeed, by May 9, a clear majority of Malaysian voters knew they needed to take back their country from an utterly corrupt and dishonest government.

Caricatured by analysts, media

Despite all of this, the narrative in financial markets on Malaysia’s PH government remains focused on the fiscal risks related to its promise to scrap the GST and reintroduce fuel subsidies, and the fallout that could come from its promised review of mega projects such as the KL-Singapore High-Speed Rail link. Worse, it seems that some commentators are promoting a caricature of PH and its leaders to support this narrative.

Invoking the memory of Mahathir’s tangle with Soros and experiment with capital controls during the Asian financial crisis is a case in point. Analysts at the time (myself included) feared these moves would result in investors fleeing. However, Mahathir also fixed the ringgit at a low enough level to spark an export boom, and Malaysia soon recovered from the crisis.

One could argue that analysts are barking up the wrong tree again. While they have been demanding to know how the shortfall in GST revenue will be addressed, Mahathir appears to be simply taking an axe to government expenditure. A smaller budget might be temporarily negative for the economy, but surely a leaner and more efficient government will provide a better platform to spur long-term growth.

Another example of the PH government being caricatured by the media is a reference in the ST commentary to well-known economist Jim Walker describing the PH manifesto as being “economically illiterate”. A full reading of Walker’s comments on SmartKarma shows that he was actually reiterating a bullish stance on Malaysia despite the surprise outcome of the May 9 elections. The way he sees it, “the economy is doing very well and Chinese investment flows — although Beijing has clearly backed the wrong horse — will not stop because of this setback.”

As for his comment about PH’s policy manifesto being “economically illiterate”, he said that the same was true of the former Pakatan Rakyat coalition that Anwar Ibrahim led five years ago. “The likelihood is that the worst aspects of the proposed policy programme will be ditched as politics clashes with economic reality,” Walker added.

Malaysia Inc again?

Ultimately, the real task ahead for the new PH government is not just to keep a lid on Malaysia’s fiscal deficit. To win the confidence of financial markets as well as Malaysian voters, it needs to find a way to stimulate economic activity and spur investor enthusiasm.

Mahathir’s recent references to “Malaysia Inc” could be an indication of where things are headed. During his first time around as PM, he promoted a business-friendly form of government focused on drawing investment and fostering growth. He also pushed the sale of government-linked companies to the private sector. It was not an unqualified success. It led to accusations of crony capitalism, and companies such as Perwaja Steel and Malaysia Airlines ran into financial trouble.

Yet, with some of Mahathir’s biggest critics back then now sitting in his cabinet, insisting on a greater emphasis on transparency and good governance, re-visiting this economic strategy could lead to a more positive result. Whatever the case, it’s about time analysts and media commentators widen their narrative on Malaysia to the possibilities that lie ahead instead of focusing on the risks of veering away from fiscal conservatism.

 

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Asian Banks May Just be At the Centre of the Trade Finance Boom

28th May 2018

The region is expected to account for over a third of trade flows by 2020.

As global trade flows increasingly shift its centre to Asia, banks must double down to capture trade finance opportunities that arise in an industry that has processed over $9t in transactions in 2017, according to a report from the International Chamber of Commerce.

The median transaction volume reported in APAC was about 36,000 transactions for the year to a total value of $2.15t, nearly double the level processed in North America, and about 10 times the median volume in Africa.

“Asia-Pacific is still in a pole position: as an anchor for large portions of trade financing globally, which reflects the fact that major global supply chains and trade corridors are anchored or linked to the region,” ICC noted.

Asia-based corridors are expected to grow between 4% to 9% a year from 2017 to 2026 to represent more than a third (38%) of global trade flows by 2020 whilst the US share is expected drop to 8.7% over the same period as emerging regions like Asia and Middle East with high levels of documentary trade take center stage.

Banks are therefore zeroing in Asia to capture the wealth of opportunities presented by the high levels of documentary trade in the region. In fact, nearly nine in ten (88%) of global banks have explored new markets in APAC, whilst 87% looked to western Europe and 82% to North America.

Lenders headquartered in the Middle East shared the same sentiment as nearly 79% said that they explored APAC – almost twice as much as their own market (43%) whilst banks in Western Europe were most likely to have explored APAC (54%) as opposed to their own market (35%).

The growing internationalisation of the renminbi is also expected to lend support to the Asian cause as growing use of renminbi for trade transactions could direct the focal point in global trade to the APAC.

It comes as no surprise that banks headquartered in APAC (89%) alongside those in Africa (81%) had the most positive outlook in both traditional trade finance and supply chain finance.

Priority areas for the coming years remain attracting non-bank capital and leveraging on emerging technologies like blockchain to enhance operational efficiencies in the heavily paper-based industry.

 

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Can Indonesian Banks Survive the Severe Local Currency Depreciation?

28th May 2018

The Indonesian rupiah has plunged to a three-year low which might level strain on the banking system.

Indonesian banks may just be able to weather the downturn of currency depreciation, according to UOB Kay Hian, as they only hold a maximum of 15% of total loans denominated in foreign currencies.

Although previous stress tests have shown that a rupiah depreciation above Rp17,000/US$ level could level a certain amount of strain on the country’s banking system, banks remain sufficiently shielded although small banks face higher risks than the country’s larger lenders.

BBRI forex loan composition is at 10% whilst BBCA is at 7%. Both BMRI and BBNI are at 15%.

“The low amount of foreign currency assets and liabilities (<3%) leads to a lower probability of bank failure in the event of a severe rupiah depreciation,” said UOB analyst Alexander Margaronis, adding that hedging by corporations and banks could also mitigate risks from rupiah depreciation.

The rupiah plunged to its weakest level against the dollar last May 16 after trading at 14,102 per dollar, representing a three-year low. The local currencies of emerging markets took a heavy beating as the greenback strengthened to its highest level this year whilst yield on the ten-year US Treasury reached a seven-year high.

“In the short and medium term, currency pressures may persist in spite of strong economic fundamentals if oil prices and interest rates continue to rise and the dollar appreciates,” Margaronis added.

Here’s more from UOB:

Higher benchmark rate may not necessarily lead to higher lending rates due to subdued loan growth in the past three years and interest income pressure since 2016. Thus, the only way to boost revenue is from higher loan growth which is what large banks are doing currently. Yet, if large banks charge higher lending rates, this could hurt their loan growth. In the past, due to high economic growth and loan demand, banks were opportunistic and raised rates. This time is different.

Larger banks have been reducing rates for all deposit types on the back of higher system liquidity. Rates for current, savings and time deposits have come down by 10bp, 20bp and 80bp in 2017 respectively, offsetting some NIM pressures. The squeeze in deposit market share for smaller banks by 100bp each in 2016-17 could make liquidity tighter for them, forcing them to compete and offer higher time-deposit rates. Hence, NIM could see further pressure since loan rates continue to fall due to subdued loan demand.

Among peers, BBNI has done the most to improve, with the highest gain in loan and deposit market share and operations. Its Achilles heel remains loans at risk (10%) despite NPL ratio coming down the most. BBCA remains the most defensive bank and investors who were overweight on the stock gained the most. BMRI still faces significant asset quality issues but has the potential to improve the most. It has the most attractive valuation now as valuation has come down to more rational levels.

 

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A Saudi-Backed Asia Refinery Is Going to Be a Fuel Juggernaut

21st May 2018
  • Malaysia’s 300,000 b/d RAPID plant to start operating in 2019
  • Diesel margins seen shrinking in the near term before recovery

 

As China sends a flood of fuel abroad, a giant project in Southeast Asia that’s backed by Saudi Arabia is set to add to the regional deluge.

State-run Saudi Arabian Oil Co. is helping finance a $27 billion refinery and a petrochemical complex in Malaysia’s southern state of Johor. The project, known as Refinery and Petrochemicals Integrated Development, or RAPID, will add a new stream of fuels near Asia’s main oil trading hub of Singapore at a time when China continues to unleash record amounts of diesel and gasoline onto the global market.

“The immediate impact from RAPID will lead to more Malaysian exports of diesel and jet fuel, while also reducing the need to import as much gasoline,” said Joe Willis, a senior research analyst for refining and oil products at Wood Mackenzie Ltd. in Singapore. “For middle distillates, Johor is conveniently located next to the Singapore storage hub.”

 

A renaissance in diesel, also known as gasoil, had underpinned oil’s rally into a bull market last year, and profits from making the fuel have rebounded to near their highest level since November 2014 on the back of healthy global economic growth. Still, concern is growing that China’s unprecedented levels of exports as well as the additional shipments from Malaysia may weigh on Asian refiners’ margins.

The profit from turning crude into diesel, or the so-called gasoil crack, was at $16.62 a barrel at 2:50 p.m. in Singapore, up from an average $12.24 last year, according to data from PVM Oil Associates.

The RAPID project, operated by Malaysia’s state-owned Petroliam Nasional Bhd, known as Petronas, is due to start operations in 2019 with 300,000 barrels a day of crude-processing capacity. That’s a massive increase for the Southeast Asian country, which has a total 660,000 barrels of daily capacity now, according to Willis.

Saudi Strategy

For Saudi Arabian Oil Co., known as Aramco, the project is part of its long-term strategy of investing in Asian refineries to lock in demand for its crude in the world’s biggest oil-consuming region amid a fight for global market share. The Malaysian complex is estimated to export as much as 50,000 barrels a day of diesel, according to WengInn Chin, a senior oil market analyst at industry consultant FGE.

Still, Chin is hopeful the overall impact will be limited in the long-run. When RAPID reaches full utilization in early 2020, Asian refiners will be scrambling to meet a bump in appetite for the fuel as maritime rules that start in 2020 push shippers to replace dirtier fuels with cleaner ones like diesel, Chin said.

“We expect to see a surge in diesel demand, which will more than offset the production of RAPID,” Wood Mackenzie’s Willis said.

Nevyn Nah, an analyst at industry consultant Energy Aspects Ltd., is concerned about how diesel profits will be affected in the near-term. Net exports of gasoil from Malaysia are likely to exceed 80,000 barrels a day next year as RAPID starts operations, he said.

“With new mega refineries starting up in China and Saudi Arabia by the first quarter next year, there could be a brief window of weakness in diesel cracks before IMO effects kick in,” he said, referring to the upcoming maritime regulations to be implemented by the International Maritime Organization.

 

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Singapore Introduces New Reporting Standards for Banks

21st May 2018

It will require data collection of RMB business activities and deposit rates to be rationalised.

The Monetary Authority of Singapore (MAS) has imposed regulatory changes on the reporting standards for banks that will take effect on 1 October 2020.

MAS will require banks to collect more granular data of their assets and liabilities by currency, country, and industry. “Greater granularity allows better identification of potential risks to the banking system,” the de-facto central bank said. “This is in line with MAS’ objectives to collect data in machine-readable format and to reduce duplicate data submissions by financial institutions.”

The regulator will also require the rationalisation of the collection of data on RMB business activities and deposit rates with the aim of providing greater consistency and reusability of the data.The last change involves the removal of the Domestic Banking Unit and Asian Currency Unit and for banks report their regulatory returns in Singapore dollar and foreign currency instead.

MAS had earlier provided banks with the finalised template for their data submissions which will provide them with 24 months to make the necessary changes to their systems and processes in order to meet the new requirements.

Banks can still use the existing reporting forms for data submission before the changes kick into effect on 2020.

The regulator also formed an industry working group to review whether transactional data provided to the OTC trade repository can be used as an alternative source for data collected in the revised regulatory requirements. “If possible, this will further rationalise data collection for OTC data reporting, improving efficiency and reducing costs for banks,” it concluded.

 

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Spot Prices Spike Amid Flurry of Interest from Asian Buyers

21st May 2018

Reuters are reporting that Asian spot LNG prices have spiked amid a flurry of buying interest from buyers in China, Pakistan, South Korea and India, and as new supply from Australia is delayed by several months. Spot prices for July LNG-AS delivery in Asia were at US$8.70 per million British thermal units (mmBtu) this week, jumping 80 cents from the previous week, according to several LNG traders. Price assessments last week were still looking at cargoes loading in June.

The LNG market is in the midst of the northern hemisphere’s low-demand spring season, during which little gas is typically used. Demand this year has been relatively strong, however, pushing spot prices higher than the seasonal average.

Stronger prices for other power generating fuels coal and oil are also lending support to LNG prices. Oil prices climbed to above US$80 per barrel this week, the first time since late 2014.

Global gas inventory levels heading into the summer are below the seasonal average as well, also boosting prices, Goldman Sachs analysts said.

Gas inventories across the Organisation for Economic Co-operation and Development may be 650 billion ft3 below the seasonal average, equivalent to a shortfall of 4.3 days of demand, the Goldman analysts said.

Maintenance in Angola’s Soyo plant in July and delays on Australia’s massive new Ichthys LNG project are also expected to tighten supplies.

Meanwhile, Chinese buyers, including state-owned companies, are back in the spot market looking for cargoes for the next few months, trade sources said.

Gas distributor ENN, for instance, is seeking a commissioning cargo for China’s first privately owned LNG import terminal, expected to be ready in two months.

Pakistan LNG is also seeking six LNG cargoes of about 140 000 m3 each for delivery over July to August, as three new power plants in the country start up after initial teething issues.

South Korea’s POSCO and Korea Midland Power Co Ltd (Komipo) are both seeking spot cargoes for delivery in July as well.

Korea Gas Corp may look for cargoes ahead of winter to build up inventories and to meet summer demand, though the requirement will depend on the status of nuclear plants in the country.

Indian Oil Corp and Bharat Petroleum Corp Ltd are also looking for cargoes for delivery in June.

On the supply side, Indonesia’s Donggi-Senoro LNG export plant has offered a cargo for late-June loading, traders said.

 

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ENN Seeks Commissioning Cargo For China’s First Private LNG Import Terminal

21st May 2018

SINGAPORE, May 17 (Reuters) – Chinese gas distributor ENN is seeking a commissioning cargo for the country’s first privately owned liquefied natural gas (LNG) import terminal, three industry sources said on Thursday.

The cargo is for delivery in the middle of June, one of the sources said.

ENN’s Zhoushan terminal in China’s eastern Zhejiang region, with a capacity of 3 million tonnes per year, will likely start operations in two months, a senior company official told Reuters, declining to be named as he was not authorised to speak with media.

“We are aiming to (start) the terminal in the second half of the year and are in the final stages now,” the source said.

ENN has signed long-term deals including sales and purchase agreements with Chevron Corp and Australia’s Origin Energy and also has an agreement to buy LNG from Total. The deals total about 1.5 million tonnes per year of LNG.

China overtook South Korea as the world’s second-largest LNG importer in 2017 with imports of 38 million tonnes, 46 percent higher than the year before. The imports soared after the government ordered millions of homes to switch to natural gas and electric heating from coal to counter rising air pollution.

To meet the higher demand and to reduce their dependence on supply from state-owned companies, Chinese companies are building their own LNG terminals to import the fuel directly.

Guangzhou Gas Group, a local government-backed gas distributor and a major supplier to Guangzhou province, plans to build a 2 million-tonnes-per-year receiving terminal at the port of Nansha by 2020.

State-run Sinopec Corp operates three LNG receiving terminals at the ports of Qingdao, Beihai and Tianjin, each with a import capacity of 3 million tonnes per year.

Since the first LNG terminal in Guangdong province opened in 2006, China’s state-owned companies now operate over 50 million tonnes of annual import capacity.

 

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Asian Banks Pilot Cross-Border Payment Test Over RippleNet

21st May 2018

The collaboration aims to streamline cross-border payments.

Mitsubishi Corporation, MUFG Bank, Bank of Ayudhya and Standard Chartered have jointly launched the pilot test for moving real funds over the cross-border payment network of RippleNet, according to a press release.

The collaboration aims to make cross-border payments more convenient and improve the capital efficiency of corporate entities. It leverages on Ripple’s software which makes use of an internet protocol to provide pre and post-settlement messaging function and enable real-time settlement and delivery of funds.

The pilot test will be carried out by MC between accounts of subsidiaries in Thailand and Singapore under the Bank of Thailand regulatory sandbox framework and is the first result of a joint project between the companies to improve cash management with a real-time, multi-currency, multiple-bank platform.

The sending bank is the Bank of Ayudhya and sender is Thai-MC Company Limited.

On the other hand, the receiving bank is Standard Chartered Singapore and recipient is MC Finance & Consulting Asia Pte Ltd.

The transaction will be denominated in Singapore dollar.

 

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