Wednesday, June 24, 2015

The RM22 bil 'hole'

Budget 2016 is not too far away and Government agencies - especially Treasury and the Economic Planning unit - have begun the preparations since March. It should be tabled in Parliament in 4 months time in October.

I decided to look at some numbers and back of the envelope calculation, I found a RM22 bil 'hole' or deficit.

No, I am not even talking about the annual budget deficits at over RM30 bil.

I believe we are short of RM22 billion for 2016 just by looking at the Government's revenue which will be affected as a result of GST and crude oil prices, ceteris paribus.

And I hope the Government is aware of this. I stand corrected.


GST Revenue
  1. This year, GST revenue is expected to contribute RM23.3 billion (that's what the Government said before so many other things were exempted from GST)

  2. And with GST in place, we must not forget that the Government has agreed to forego some revenue.

  3. The abolished Sales and Services Tax gave us RM17.2 billion last year.

  4. The Government announced that individual income tax rates will be slashed by 1-3 percent. Let's just assume it is a 1% reduction, that's estimated to be a loss of revenue of RM260 million.

  5. Companies will enjoy a 1% tax reduction. That's another RM728 million gone.

  6. The net gain from GST implementation stands at no more than RM5 billion.

Petroleum Revenue

  1. The Federal Government's dependence on oil has been declining from RM64.2 bil or 40.2% of total revenue in 2008 to just RM67 bil or 29.7% of total revenue in 2014.

  2. But note that in 2014, Brent Crude oil averaged at USD100 per barrel.

  3. However in 2015, the average Brent crude oil price is expected to be at USD61 per barrel. That's a 40% drop.

  4. PETRONAS' contributions to Government is calculated based on previous year's price, ie in 2016, dividends are calculated based on 2015 crude oil price.

  5. If we assume that crude oil prices throughout 2016 and dividends are down by say 40%, that means the oil revenue to Government will also be down by 40%.

  6. That's approximately RM27 bil.

Net position
  1. The Government's tax revenue has always been enough to cover operating expenditure but never enough for development expenditure - agricultural subsidies, grants for smallholders, build schools and roads, etc.

  2. In the past 5 years, the Government's budget deficit averages at around RM36.5 bil, all due to if not mainly because of borrowings for Development Expenditure.

  3. Now with GST and lower crude oil prices, the Government stands to gain an extra RM5 bil from GST policy but face a shortfall of RM27 bil from petroleum revenue - in net terms, that's a RM22 bil hole.

  4. This hole could be bigger if GST revenue targets are not met.

  5. So where's the money going to come from?

  6. Does it mean the Government have to slash the development expenditure budget? I don't think so. This affects a lot of votes especially in rural areas or states such as Sabah and Sarawak.

  7. Can the Government afford to cover this with borrowings? I am not sure.

  8. RM22 bil is approximately 2 percent of GDP. Malaysia's 2014 debt to GDP ratio closed at 53% in 2014 and we have a debt ceiling of 55%.

Perhaps, it is time for GLCs to pay some dividends, if they are making money and not giving extra headache to the Government.

We'll see. I am looking forward to October when the Government tables the Budget 2016.

Sunday, May 24, 2015

1MDB saved us money?

I've not penned my thoughts down in an article about 1MDB since this circus began.

Most of us are short of filing for a missing persons report on 1MDB management. You run the operations on a daily basis, not the Prime Minister. Leaving the Prime Minister and the Government alone when under attacked for your mess is definitely not professional, what more to say with the flip-flop Parliamentary replies that were based on points submitted to the Ministry.

Anyway, after reading the arguments written by independent parties who 'defended' 1MDB recently on online news portals and social media, my fingers became itchy and here I am typing this.

I read that the arguments supporting 1MDB's existence and its hands in the takeover of the IPPs were:

a) 1MDB bought the IPPs.

b) There is a revised power purchase agreement.

c) TNB registers higher profit as a result

d) Malaysian consumers benefit from lower tariff

e) Petronas will not have to incur higher subsidy which benefits only these private companies

f) Consumers are the ultimate winner

g) We should thank 1MDB for saving our country from excessive subsidy granted to IPPs from the earlier regime


I'm not sure if these people are actually experts or consultants but as much as I know with my amateurish knowledge, PETRONAS subsidies do not benefit only these private companies or IPPs. The Government subsidises gas at approximately RM10bil a year annually, depending on gas prices, through Petronas by keeping gas prices below market rates. These subsidies are enjoyed by everyone who uses gas such as the manufacturing sector and of course including TNB and the IPPs.

What's the agenda of these people by singling out that only the IPPs benefited with words like 'mistake done since 1990s' and throwing shots at Tun?

I will give in if you say the point of controversy here is the quantum which TNB pays to the IPPs.

The electricity sector is broken down into three parts - generation, transmission and distribution. Back in the 1990s, Tun wanted to break down the monopoly of electricity generation by TNB after the nationwide blackout.

The only issue was, who was willing to come in to a highly regulated industry? Let's not beat around the bush. When we mix government regulations, politics, and the magic word "demi rakyat" together, it's a no-go zone basically for any investors. I think some of the telco CEOs are hating their jobs now, if you know what I mean.

I've read somewhere that the IPPs were allowed to have returns on investment of 20%. Was that excessive or fair I leave it to you. But just to highlight, the average lending rate in the 1990s were between 8-12% and investors were able to get annualized returns of about 18% from investing in stocks. I don't even want to talk about opportunity costs in construction and properties at a time when Malaysia was booming. While we are on this, isn't it true that TNB also owned shares in the IPPs?

Going back to the 1MDB argument, it seems to me that 1MDB has two objectives only -

(1) to buy over IPPs, sell electricity cheaper to TNB, TNB make more profits

(2) properties such as the development of TRX


I will leave point 2 for another day.

I find it rather amusing to see how 1MDB is being marketed or positioned to be the saviour of the energy sector. Hilarious when I read that because of 1MDB's takeover of the IPPs, the Government saved money and 1MDB charges lower rates to TNB which then increased TNB's net profits. And along the way, the rakyat enjoyed low electricity tariffs.

If that is the case,

(a) At what rates are the IPPs (under 1MDB now) selling to TNB? I take it as 'at a lower rate', but what is it? Cost price, with a profit?

(b) Why are IPPs and Tun branded as though they are the devils while 1MDB are the saviors and TNB the model GLC company? Why do we need to go so far? So, can the rakyat enjoy even cheaper electricity tariffs since TNB is making more money nowadays?

(c) What did 1MDB tell their institutional investors - both local and foreign - whom they sold their bonds to and whom they borrowed money from? Did 1MDB tell them that they are taking their money for them to buy power plants just to earn lesser (kalau ada lah) by selling energy at a cheaper rate to another unrelated company so that it makes more profits and the rakyat pays the same tariff as before? If not, that's a crime. What's that called, intentional criminal breach of trust?

(b) Why did we raise funds by selling bonds to KWAP, EPF and others? So, we actually borrowed money from the rakyat, to buy IPPs, charge lower rates to TNB, suffer losses and liquidity issues, so that TNB makes more profits and maintain the tariff for the rakyat's benefit? I don't get it.


Perhaps a consultant, preferably a financial consultant, and the Treasury can enlighten us on how do we expect to raise funds by selling securities - MGS, GLC bonds, Sukuk etc - in future?

Go back to the drawing back, you. And come back with better answers and argument.

Otherwise, all of us should just shut up and wait for the Auditor General's Report, the single most credible voice in this country which the Prime Minister has tasked to leave no stone unturned in this mess. That's when we talk.

Tuesday, April 14, 2015

I believe

I believe Tun Dr Mahathir had noble intentions when he raised a few questions publicly to the Prime Minister. At his age, what else could he possibly want? Tun spent 3 decades of his life in Government (22 years as PM) and continue to give advice on issues even after his retirement. He only wants what is best for the party and the soil that we stand on today - Malaysia.

I believe the Prime Minister still has the highest level of respect for Tun, judging from his tone and angle during the Soal Jawab. The sacrifices and contributions Tun made in developing unity and growing our economy throughout his years as Prime Minister are engraved in the hearts and memories of many of us. He gave the good years of his life to this country.

I believe Tun's questions on 1MDB were fair. Many are confused with what's happening. But the confusion stem from the complexity of the topic (money markets and corporate finance are dry topics to many) and further complicated by the many statements out there. There have been too many contradicting statements including those from the Treasury and 1MDB CEO. Let's not forget the fact that people also read Sarawak Report and The Edge's stories on this topic. I wonder why the Government or Treasury hasn't setup a 1MDB Taskforce (Comms) just like we always do with other issues. If we are gonna talk, shouldn't we have just one source, one voice and one storyline with solid facts?

I believe that the RM50 billion assets and RM42 billion liabilities are on the table as audited. But we must understand also that 1MDB is losing money with these assets and investments. Soon, the net assets will become net liabilities if we do not restructure not just the debt but also the subsidiaries and the operating procedures soon enough. We cannot depend only on monetizing some of the 'idle' assets quickly, such as Tun Razak Exchange. We must never forget those companies and transactions that cause 1MDB to be in the red. Otherwise, profits from TRX will just end up covering the losses elsewhere. I know we have the expertise in Government, Treasury and other investment arms to help turnaround this into a success and I believe we can.

I believe the Prime Minister has taken bold steps and was being transparent in his actions on 1MDB. He made the right move when he ordered the Auditor General to verify 1MDB accounts after which the report will be passed on to the Public Accounts Committee which comprises of Opposition leaders like Tony Pua. Let's be fair and honest here. Did you expect the Prime Minister to make this move? Surely not if you think he has something to hide. Whatever reasons or explanation the Prime Minister gives on 1MDB will never be accepted by critics now. As supporters of the Government, the party and as concerned citizens, we should wait for the Auditor General's Report on 1MDB before we comment further.

I believe we should applaud the Prime Minister when he agreed with UMNO Youth's request that the audit should be thorough and completed as soon as possible. This is the single, most credible piece of document that could answer all questions out there, hopefully, and we must have it on the table fast.

I believe the Economic Planning Unit of both Federal and State Government of Johor should come out publicly to share and explain the cost benefit analysis for the proposed crooked bridge (within the borders of Malaysia). The Government can afford a bridge but the benefits must far outweigh the costs for anyone to invest in it. Besides environmental and legal issues, of course. Surely someone has done some studies on this project, no? We have heard the argument that the bridge will allow ships of certain sizes to pass the Straits of Johor and it could boost the shipment volume in Tanjung Pelepas, Pasir Gudang and perhaps Kuantan. But there might be other issues and challenges that we don't know and the agencies should not leave the Prime Minister in the shooting range. Speak up!

I believe the Prime Minister when he said that he did not order anyone to kill Altantuya and he has never met or known her. Swearing on the Quran is not a small matter. It is a grave and heinous sin if the truth is otherwise. And there is not a shred of evidence which links the victim to the Prime Minister. The closest we have seen was the doctored photo by an Opposition leader.

I believe Tun still cares for the Prime Minister and perhaps wanted to see a different side of him. The Prime Minister and Barisan Nasional must enter into the combative mode - attack and not back paddle to defend ourselves all the time. We must make a stand on policies and key issues, make it loud and clear. We need to focus on the details in whatever we do and whenever we communicate. After all, in this age of digital and social media where information flows freely and perception is key in politics, we should be detailed, fast, strong and articulate or risk falling behind.

I believe with Tun's vast experience in politics and Government, if both could still work with each other, Barisan Nasional will be at its strongest when that happens.