24 August 2015

Malaysia in an Economic Equation



www.kopihangtuah.blogspot.com



ECONOMICS was my favourite subject when I was in Uni. It may well still be my favourite subject given my interest in the Malaysian Socio-Political-Economic dynamics. On my first day at school in Year 13 of Uni Foundation, I was taught to understand this equation, if I remember it right - pls correct me if wrong :


GDP = Aggregate Demand = (c - t) + I + G + (x - i)


GDP is Gross Domestic Product, an aggregate measurement of the total production by a particular economy that is assumed to reflect the demand for that production. In economics, an equilibrium of Aggregate Demand equals Aggregate Supply will always be met as and when market forces react against or with each other to arrive at that equilibrium. In laymen's term, 'you produce what people want to consume' versus 'you consume what is produced by the market' will strike a balance resulting in price determination. What are the variables of the market forces? Well, here they are, based on the above economic equation:

(c - t) is Consumption Expenditure less Taxes. The inflation rate is now at 3% to 4% - still not too bad to ensure prices of a basket of consumer items are affordable save for oil and gas product that is haywired at the moment. Taxes dampen disposable income and thus, reduce propensity to consume. However, if Taxes are reinjected back in the equation via G, which I will explain later, will have positive impact to the economy. Another indicator to gauge whether we have enough stamina to ensure sustainable consumption expenditure is the unemployment rate. Currently it is low at 3% implying that there would be plenty of disposable income across the population.

I is Investment. Currently foreign investments are at RM22 billion. Although a lot has been pulled out over the past month, RM22 billion is still higher than RM18 billion registered in 1998. Our political turmoil had dampened foreign investors' confidence but many are still maintaining their investments in Malaysia. So, we are still not in dire straits position (never I hope).

G is Government spending. As evident in Rancangan Malaysia ke-11, a lot will be allocated for the nation's development well in excess of RM200 billion with maximum 4% budget deficit projected. This commitment from Government will make the country even more conducive for economic growth as it will address matters such as infrastructure, redistribution of wealth, entrepreneurship catalysts, education, new sources of economy for diversification to rely less on oil and gas as well as enhancement of various economic corridors.

(x - i) would be Net Exports, i.e. Exports less Imports. We are a net export country. However we rely too much on oil revenues. Recent fall in Ringgit affects us negatively because of this over reliance. However, Ringgit will be cheap now pushing exports back up again given 76% of our exports come from manufacturing. Imports are important for our consumption. We are still under control for the retaining of imports to meet demands as our foreign reserve at USD96 billion is enough to support 7 months of retained imports, which is well above Global standard of 6 months.



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09 August 2015

Malaysia's Stable Outlook Despite Political Turmoil




www.kopihangtuah.blogspot.com




It is quite amusing that Malaysians themselves are very negative of their own economy when foreign rating agencies like Standard and Poor's and Fitch Ratings are very optimistic. This shows that the agencies are objective in their assessment of the fundamentals of economics rather than be biased by political propaganda.



STANDARD AND POOR'S (SnP) has affirmed Malaysia's "stable" outlook with an "A-" rating for long term and "A-2" rating for short term foreign currency sovereign credit ratings as reported by the New Straits Times recently on 28 July 2015. This outlook was concluded despite the political turmoil that is haunting the Najib administration particularly on issues surrounding 1MDB. One would conclude, prima facie, that the political turmoil is so pervasive that the overall confidence of Malaysia would have impair the ratings by SnP or even any other rating agencies. It appears that not only SnP, even Fitch Rating has concluded favourable a few weeks ago as confirmed by the Secretary General of the Ministry of Finance, Tan Sri Irwan Serigar. So, why would the outlook still be positive? It is because of the fundamentals of the economy.

Considerable monetary flexibility as weighted against moderate fiscal deficits of 3.9% and manageable Government debt burden is one of the factors. The policies that supported this are not impeded by the corruption allegations involving 1MDB. In fact, it will help Malaysia to withstand a slowdown in the oil and gas sector in years to come. To complement this, there is a need to boost the exports, for which, quite conveniently, the Ringgit has indeed weakened to help realise this. A weak Ringgit is not necessarily bad. A weak Ringgit is what we need. When Malaysian exports are cheaper (as a result of weak Ringgit), demand will grow to expand exports further especially for manufactured goods (that will partly offset the fall in revenues from oil). This is what it means by good fundamentals. One should realise that in any economic cycle, there must be a balancing act. This is the balancing act.

Bank Negara Malaysia has also operated effectively in controlling inflation that is now at 3% to 4%. Reliance on external debts have also been reduced given the active domestic bond market particularly the Sukuk market. General Government debt of 2.9% of Gross Domestic Product ("GDP") expected for 2015-2018 is a significant improvement from the 6% for the past period of 2009-2012. On the flip side, Malaysia is exposed to contingent risks associated with guarantees on debts and letters of support particularly the ones related to 1MDB for a total amount of RM11.4 billion. However, given the strong asset backing of RM52 billion covering power and realty assets, over the RM42 billion debts on the balance sheet of 1MDB, such contingent risk is remote from being materialised. 

Malaysian public enterprises have diverse financial profiles with strong cash flows and considerable portion of liquid assets. To demonstrate confidence, the non-resident holders of Ringgit-denominated Malaysian Government Securities has risen sharply to 28%. With sound policy making, floating exchange rate and high foreign exchange reserves, SnP is confident that the foreign investors will maintain their investments in Malaysia. So far, the policies as presented in the Parliament for the 2016 Budget as well as the 11th Malaysia Plan has been favourable towards developmental expenditure. Ringgit is still floating albeit continuous weakening but a blessing in disguise to boost the export market. Foreign exchange reserves stood at 7.6 months of retained imports which is well above the global standard of 6 months. All these, coupled with strong large domestic institutional investors and local capital market, will drive Malaysia to better growth expected to be at 5.5% for the GDP for 2015.

It is quite amusing that Malaysians themselves are very negative of their own economy when foreign rating agencies like SnP and Fitch Ratings are very optimistic. This shows that the agencies are objective in their assessment of the fundamentals of economics rather than be biased by political propaganda. They acknowledge the strength of the Government policies and are confident with the commitment from the Government to drive macroeconomic reforms as evident by the implementation of non-popular initiatives such as the Goods and Services Tax ("GST") and the subsidy rationalisation.



Malaysia is exposed to contingent risks associated with guarantees on debts and letters of support particularly the ones related to 1MDB for a total amount of RM11.4 billion. However, given the strong asset backing of RM52 billion covering power and realty assets, over the RM42 billion debts on the balance sheet of 1MDB, such contingent risk is remote from being materialised.






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02 August 2015

How Worthless Are 1MDB Power Assets?




www.kopihangtuah.blogspot.com




With all the information reported by the Edge digital, I guess the big "hoohaa" about 1MDB buying worthless power assets (because PPA expiring soon) is an episode of Benny Hills Show (or, if Malaysians are not familiar with the British comedy, let us use Jangan Ketawa or Scenario)


MALAYSIANS, including me, have been following the 1MDB issue quite closely particularly from the business perspective. The biggest issue is of course the RM42 billion debt that is claimed to be backed by assets worth RM52 billion. There are many components to this RM52 billion but I will need the full Balance Sheet to analyse it, which I do not have. Nevertheless, some qualitative comments can be made and in this case, I would like to refer to the power assets, the power plants. The amount paid for the power plants was alleged to have been overpriced as those are plants with Power Purchase Agreements (PPA) that will expire soon. How true is this?

The Edge digital article for yesterday's edition (1 August 2015) "Can TNB get a good price for 1MDB’s power assets?" reported some delightful information. Why delightful? Well, now I am comforted that many of those power plants do still have significant remaining concession years under each PPA. It should be noted that 1MDB paid RM12 billion and assumed RM6 billion of legacy debt to buy all the power plants. The Edge says "1MDB may be hoping for RM18 billion to RM21 billion in terms of enterprise value, but industry executives estimate that the assets might only be worth around RM14 billion in these fire-sale circumstances." They further said that it is not fire-sale time and there are immense interest from a bunch of people including from Qatar, China, Malaysia, Philippines, Indonesia, Saudi Arabia and others to buy those power assets.

In this case, they might just be able to get the RM18 billion to RM21 billion that they were hoping for. In fact, if not break even to recover acquisition price as well as the assumed debt, they may even get profits out of it. Now, what would be a good indicator for those power assets to be able to meet that value expectation? One of the answer would be the remaining useful lives of those assets as I had mentioned earlier. The Edge digital had listed the power plants in their article (as reprinted in the below table). As mentioned earlier, only small portion of that portfolio will expire soon (or has expired). 

















Looks like only Teluk Gong and EPC in Bangladesh is expiring soon or expired recently. The 2 totals to 550MW which is small when compared to the total of 5,594MW that 1MDB owns. The PPA that is expiring in January 2016 could easily be renewed by the Government (Via Tenaga Nasional Berhad). The other one that has expired is a small 110MW power barge moored off Bangladesh that is still running and in negotiations with the Bangadeshi Government for an extension. Even if the extension is not given, the barge can simply sail to another area where power is needed.

With all the information reported by the Edge digital, I guess the big "hoohaa" about 1MDB buying worthless power assets (because PPA expiring soon) is an episode of Benny Hills Show (or, if Malaysians are not familiar with the British comedy, let us use Jangan Ketawa or Scenario). I think 90% of the people have or had this perception (of worthless assets) but we are now revealed, with this enlightening information, that the reality is contrary to the popular believe. My sincere hope is that 1MDB can recover monies (with profits) so that the Rakyat's interest (in our sovereign wealth) can be protected. Amen.



* kopihangtuah



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