Total govt debt exposure hit RM573 billion

Total govt debt exposure hit RM573 billion

Fiscal responsibility and public debts: Avoiding the panic button

MARCH 21 — Concerns over Malaysia’s high level of public debts are real. It is not surprising that this will feature prominently in public debates for some time, not least because the fiscal problems faced by some countries around the world continue to hog the headlines.

So while it is timely that Khairy Jamaluddin penned his thoughts on fiscal responsibility (published in The Edge, February 20) and in light of Deputy Finance Minister Awang Adek Hussin’s insistence that our debt level is manageable (despite being only two per cent away from the legal national debt limit), it is only proper that one of us from Pakatan Rakyat (PR) responds to further the public discourse on this issue.

After all, the culture of public debate has received a big boost recently and we (Khairy and I) had promised to continue to promote it after our first public debate in London in January. I shall start by acknowledging that there are common grounds on this issue across the political divide.

For example, although we may not hit the panic button yet, there is a strong basis for focused measures to alter the fiscal path the country is taking, without which there is a certainty in the future that Malaysia will face financial difficulties. Both Khairy and I can also agree that the concerns over the high level of public debts are justified and that politicians will be foolish not to pay heed. The most important common ground is to minimise the political bickering in any discussion on public debt as it is a national issue that cuts across different groups of society.
…

Let’s look at our present situation objectively. Federal government debt stood at RM456 billion as at Quarter 4 2011 (the latest available statistics from Bank Negara Malaysia). If we were to take into account the debt guaranteed by the federal government, the total debt exposure of the federal government hit RM573 billion in 2011 (equivalent to 67 per cent of the GDP).

On its own, we can argue that 67 per cent debt exposure is a cause for concern. Frankly, there is no definitive band of what constitutes a safe debt level for a particular country. Nor can a fair comparison be made against other countries. So, those who argue that Malaysia is in a better position than, say, Japan (at 67 per cent debt level) are making a rhetorical argument.

We ought to look at government and household debt in totality because that would be a good gauge of how such a level of public indebtedness would impact the stability of the economy and financial markets.

As at Quarter 2 2011, the household debt-to-GDP ratio stood at 77.6 per cent, according to Bank Negara Malaysia. That roughly translates into household debt of RM662 billion. Thus, the combined public debt (government debts and household debts)-to-GDP ratio as at end of 2011 can easily surpass the 143 per cent mark with most of this RM1.24 trillion of debt owed to local financial institutions.

…more
Fiscal responsibility and public debts: Avoiding the panic button — Rafizi Ramli
March 22, 2012 – TMI

Mahathir’s Disastrous Financial Speculation

A murky and embarrassing case is closed, hiding top government officials’ involvement

Sometime over the next few days, a court in Kuala Lumpur will put the finishing touches to an agreement that allows Tajudin Ramli, the former head of Malaysian Airline System, not only to walk away from charges that he had allegedly looted the airline of tens of millions of US dollars but with an RM580 million (US$293.2 million) out-of-court settlement from the government.

It appears to be a settlement that the government would rather keep to itself. At the heart of the agreement with Tajudin is a convoluted story that began as long ago as the 1980s when Malaysia’s central bank, Bank Negara Malaysia, at the urging of then-Prime Minister Mahathir Mohamad, began speculating aggressively in global foreign exchange markets, at one time running up exposure rumored to be in the region of RM270 billion — three times the country’s gross domestic product and more than five times its foreign reserves at the time.

Eventually, playing with the big boys came home to roost. In 1992 and 1993, Mahathir became convinced he could make billions of ringgit by taking advantage of a British recession, rising unemployment and a decision by the British government to float the pound sterling free of the European Exchange Rate Mechanism.

Mahathir ordered Bank Negara to buy vast amounts of pounds sterling on the theory that the British currency would appreciate once it floated. However, in what has been described as the greatest currency trade ever made, the financier and currency wizard George Soros’s Quantum hedge fund established short positions borrowing in pounds and investing in Deutschemark-denominated assets as well as using options and futures positions.

In all, Soros’s positions alone accounted for a gargantuan US$10 billion. Many other investors, sensing Quantum was in for the kill, soon followed, putting strenuous downward pressure on the pound. The collapse was inevitable. Quantum walked away with US$1 billion in a single day, earning Mahathir’s eternal enmity and earning Soros the title “the man who broke the Bank of England.”

Mahathir and Bank Negara, on the other hand, walked away with a US$4 billion loss, followed by another US$2.2 billion loss in 1993, the total equivalent of RM15.5 billion. Although the disastrous trades destroyed the entire capital base of Bank Negara, after first denying it had taken place, the then-Finance Minister Anwar Ibrahim repeatedly reassured parliament that the losses were only “paper losses” and, now that he is Opposition Leader and head of the Pakatan Rakyat opposition coalition, has managed to skate free of the controversy.

Eventually, the Finance Ministry had to recapitalize the central bank, almost unheard of for any government anywhere. It is reliably estimated that Bank Negara lost as much as US$30 billion in this and other disastrous currency trades, costing the head of the central bank and his currency trader deputy their jobs.

It was at one with Mahathir’s unfortunate penchant for believing he could beat the global financial system in other ways. In the early 1980s, at his behest the Malaysian government attempted to corner the tin market through Maminco Sdn Bhd, a dummy company set up to buy tin futures and physical tin to push up prices on the London Tin Market. Malaysia at that point was producing 31 percent of the world’s tin.

However, the rising prices as a result of Malaysia’s action caused miners to increase production in the other 69 percent of the tin world. At the same time the US government released its tin stockpile. The price collapsed, costing Malaysia RM1.6 billon with the subsequent low prices wrecking Malaysia’s tin industry. Mahathir has repeatedly railed against western governments for rigging the rules against him.

The attempt to corner the tin market and the subsequent loss established an interesting precedent in terms of what would take place with the speculation in the pound sterling. Rather than acknowledge the losses in the tin speculation, the government set up another dummy company called Makuwasa Sdn Bhd, creating new shares supposedly reserved for ethnic Malays which were allocated to the Employee Provident Fund, the country’s retirement fund for private and public workers. The plan was to sell these cheaply acquired shares at market price for a profit to cover Maminco’s losses. Finally, in 1986, Mahathir was forced to admit that Makuwasa was created to recoup the government’s losses from the Maminco debacle and to repay loans to Bank Bumiputra.

Fast forward to today and the out-of-court settlement between several government-linked companies and Tajudin Ramli, in which the government quietly cancelled Tajudin’s debt of RM840 million. It is believed to be the biggest such sum awarded in Malaysian history.

In 1994, according to affidavits that Tajudin filed in court he bought 32 percent of the shares of the government-controlled Malaysian Airline System at a price of RM8.00 at Mahathir’s behest – while the shares were trading at RM3.30 – and became executive chairman using funds from government-linked companies. According his allegations, the idea was to use the “profit” off the share sale to cover as much as possible of the forex losses by Bank Negara from Mahathir’s currency speculation.

…more
Mahathir’s Disastrous Financial Speculation
05 March 2012 – Asia Sentinel

Fix the economy, say struggling new-generation voters

KUALA LUMPUR, Feb 14 — The government’s talk of economic transformation and reform has little resonance with the nation’s newest batch of voters who are suffering from the erosion of spending power in the country which they feel has made it a struggle to survive and clouds their future.

Unlike the older generation of voters who were able to easily pay off a house and a car within a few years of starting work, today’s generation of young adult workers find themselves in debt before they even start working and are looking at 20-30 years to pay off a house, if they can even afford one, and as long as nine years to pay off a car.

The country is also grappling with poor purchasing power as reflected by KL’s ranking in the 2011 Prices and Wages report by Swiss bank UBS AG, placing a lowly 49 among major global cities, down from 47 in 2010.

While wages have largely remained unchanged for the past two to three decades, inflation has been steadily rising, hitting 3.2 per cent last year with prices of food and beverages increasing even faster at 4.8 per cent.

A poll of young working adults by The Malaysian Insider showed that that they were concerned that the difference between wages and the cost of living had reached a critical stage, with many looking at the prospect of either meagre savings or high debt and feeling hard pressed to survive without family assistance.

Among some of the suggested actions the government take were to set minimum wage levels while capping inflation.

…more
Fix the economy, say struggling new-generation voters
February 14, 2012 – MI

‘Felda’s listing a ploy to fatten UMNO’s warchest’

Feb 12: The controversial listing of Felda Global Venture Holding on the Bursa Malaysia in April is a ploy to prop up UMNO’s warchest, according to PAS vice president Husam Musa.

The listing, said Husam is politically motivated to fund UMNO’s machinery in the coming 13th general election.

“The goal is to increase UMNO’s political warchest to face the impending general election,” the Kelantan state exco member told a seminar recently.

Husam said the Kelantan state government would not surrender any lands presently developed by Felda to FGVH to facilitate the listing.

According to the listing plan, Felda is required to mortgage 360,000 hectares of lands under Felda Plantation to Felda Global Ventures Holding Sdn Bhd for 60 years, a move which pressure group, National Felda Settlers’ Children Association or ANAK, had warned would be disastrous for settlers.

It was understood that state land matters come under the purview of the Menteri Besar and FGV will have to meet the MB of each state to obtain ownership of the land.

The land approved by state in Felda areas are divided into two categories, one with settler’s ownership and the other developed by Felda Plantations.

As such, Husam said the Kelantan state government was planning to takeover Felda Plantations lands to bring in new settlers.

…source
‘Felda’s listing a ploy to fatten UMNO’s warchest’
13 February 2012 – Harakahdaily

‘Most Felda staff wary over proposed FGVH listing’

INTERVIEW It may have started as an acrimonious relationship between the 23,000 Federal Land Development Authority (Felda) staff members and the PAS-led NGO Anak, representing the descendents of the settlers.

However, following the proposed listing exercise of Felda’s subsidiary, Felda Global Venture Holdings Bhd (FGVH) planned in May, Anak president Mazlan Aliman claims the bulk of the staff are in common cause with them to oppose the move.

“This is because they recognise the listing exercise could be detrimental to Felda where it would face a deficit of between RM1.2 billion to RM1.5 billion, and this matter was raised by their former general manager, Zulkifli Abdul Wahab, whose protest was rewarded with an order to go on study leave,” Mazlan told Malaysiakini in a recent interview.

“Anak’s relationship with Felda staff members may have started acrimoniously, as we had brought lawsuits against Felda following the discovery of lower payouts to settlers, made police reports, and lodged complaints to the Malaysian Anti-Corruption Commission and the Human Rights Commission.

“This, however, changed when the staff members got to know the prospect of a deficit following the listing, and the risks involved. Now, they are worried over their welfare and hence, are now with us.”

Mazlan said Felda, before the proposed listing exercise, generated a revenue of RM2.4 billion in 2010, and it needed RM2 billion annually as operating costs to be used for development, infrastructure and the welfare of the more than 112,000 settlers in 317 land schemes nationwide.

However, he pointed out that following the proposed FGVH listing, Felda would only obtain revenue from two sources – namely the rental of 360,000ha of Felda Plantations Land on 99-year leases amounting to RM257 million annually, and the 15 percent revenue from agricultural operations which fluctuates at around RM200 million.

“So from RM2.4 billion, Felda would be left with RM508 million and this is only sufficient to pay the wages of the 23,000 staff. This is the deficit which Felda is likely to face and questions remain as to who would have to fork out the remainder,” he asked.

…more
‘Most Felda staff wary over proposed FGVH listing’
Feb 13, 2012 – Malaysiakini

Too much is at stake

There is a growing consensus that we cannot allow things to carry on as they are if we want to prevent the country from plunging into an abyss, writes Anil Netto.

This coming general election promises to be a watershed in our country’s history. There is a growing consensus that we cannot allow things to carry on as they are if we want to prevent the country from plunging into an abyss.

Here’s what is at stake: We all know the record on corruption has been abysmal. That billions of ringgit have been lost is common knowledge in coffee shops the length and breadth of the country.

Thus far we have been saved by our rich natural resources especially oil. But the oil is running out now. Unfortunately, the fat cats have not stopped feeding from the trough.

The opportunity costs have been tremendous. Ours could have been a land of milk and honey but alas, a minority especially the cronies and well-connected politicians have grown fabulously wealthy while the a huge number of workers toil away at low wages. These wages are further suppressed by middlemen importing migrant workers, many of whom are paid even lower wages in return for working even longer hours.

Neo-liberal policies have worsened the situation. Privatisation and corporatisation have forced Malaysians to pay more for services – education, health care, utilities – that had previously been provided free or at little cost. The neglect of food production has led to higher food prices. And after the general election, we can expect GST, an electricity tariff hike and the possibility of national health insurance premiums (while government spending on public health care remains miserly).

Not surprisingly, the gap between the rich and the poor has grown wider over the years, and this may have contributed to all kinds of social problems (Richard Wilkinson, The Spirit Level). The latest round of civil service pay rises, now held back for review, aggravates this trend.

…more
Too much is at stake
23 January 2012 – Aliran

Totalitarian/absolutist economy

The establishment, nourishment, protection and subsequent embellishment by any government of entities (corporate or otherwise) with monopolistic businesses and/or preferential treatment signal the rise of what I would term as totalitarian economy.

A totalitarian economy operates and behaves in manners not unlike a totalitarian or absolutist State. By its very nature, it feeds off compulsion and force, disallows and even destroys competition and gives no option nor choice to the consumers. It is beyond scrutiny as it is not answerable to any entity, let alone the very consumers which it aims to supply.

As a result of the totalitarian and absolutist approach, this economy owes little, if at all, affinity to the concepts of fairness and justness.

It is like a black hole. It swallows everything which is in its way. It then grows bigger. And bigger.

The only difference is that, unlike the real black holes, a totalitarian economy only grows bigger within the confines of the parameters defined by its own creators. Throw this economy into an unchartered territory, the real capitalist would just laugh its head off. With a mere snap of the capitalist’s finger, this totalitarian economy would be history.

That is not surprising. As a result of the constant nourishment, protection and forced embellishment of this economics absolutism/totalitarianism, such economy knows not how to compete. Its supernova-like explosive birth and subsequent growth deprives it of the ability to learn and to grow organically. This totally underdeveloped creature – underdeveloped in the sense that it is bereft of the elements which would ensure its vibrancy and survival in unchartered territories – has no defence mechanism nor the ability to adapt to changes within its surrounding, preferring to coil within the comfort of its mother’s lap.

A totalitarian/absolutist state compels its citizenry to submission by usages of physical force. It gives no option. Submit or be subjugated. Or even be incarcerated. And sometimes even killed.

A totalitarian/absolutist economy is not much less forceful or vicious. It gives consumers no choice nor option. You buy our cars. If not you have to pay substantially more for cars which are not ours. You use our supply. At our rates. If not, you would not have any other supply at all. Period.

Like a totalitarian state, totalitarian economy ensures great pains will befall its citizenry for any non-compliance or non-submission.

In this neo-totalitarianism, the consumers have no choice but to submit. If you do not buy our cars, you would be financially incarcerated by the finance companies for the duration of the hire-purchase agreements which you enter into to purchase other cars. You would be subjected to financial tortures inflicted upon yourself in the form of duties and taxes.

A totalitarian/absolutist state would not care a hoot about her people’s welfare. It exists for one purpose, namely, to ensure its own survival and continuity, at any price. It does not care about the price to be paid because really, the price is not paid by itself but by the people it subjugates.

…more
Totalitarian/absolutist economy
January 19, 2012 – Art Harun blog

Facades of economic success

When Mahathir Mohamad took over the leadership of Malaysia from the late Hussein Onn in 1981, he immediately embarked on a series of development programs, corporatizing and privatising national agencies and assets including road-building and utilities.

We all know now that it was a disaster. While the benefits led to a huge increase in the middle-class and there was a rise in consumers purchasing power, the setbacks were towering corruption and massive pilferage of the country’s resources. Such a deep and awful hole was dug in the nation’s coffers that Malaysians may never be able to recoup the losses even if a new government took over and dedicated investigators deployed to hunt down the loot salted away by the Umno-BN elite.

Spending the people’s money like there was no tomorrow

There also massive business failures as Mahathir sought an excuse to aggrandize and mask what was basically grand larceny under the guise of creating a super-class of Malay tycoons. The coterie of hangers-on need no introduction – men like Tajudin Ralim, Halim Saad, Rashid Hussain and Syed Mokhtar Albukhary have had their successes and also their belly-flops. Most required massive bail outs that set back the nation by tens of billions of ringgit. What kind of vision or planning was this? Sad to say, Mahathir was hardly the genius his supporters try to make him out to be . On the contrary, he made mistakes galore and spent our money like there was no tomorrow.

No doubt, the roads and highways built initially stirred the envy of many foreign neighbors including ministers from the Indian sub-continent, who once conceded that Malaysia was twenty years more advanced when it came to road infrastructure. Then came, the Petronas Twin Towers which briefly held the world record as the Earth’s highest building, followed by the Kuala Lumpur International Airport, administrative capital Putrajaya, tech capital Cyberjaya, the Bukit Jalil National Sports Complex, the LRT mass transport system and then the F1 circuit, which finished off the last of Mahathir’s infrastructure ‘legacy’.

Indeed, we could be finished off by this long list of Mahahir’s ‘achievements’. Even now, the country is battling to stave off bankruptcy by 2019. Perhaps this is why today, after 22 years of Mahathir, we have suddenly woken up from the mysterious spell he cast over us and realized that there is really no such thing as a free lunch. We, the ordinary folk, have to pay for it! And frankly, if we had done it ourselves, the jobs would have been 1,000 times better and 10,000 times cheaper!

…more
Facades of economic success: Do M’sians thank Umno or bring it to book!
16 January 2012 – Malaysia Chronicle

National debt to equal GDP by 2019 if Putrajaya remains spendthrift

KUALA LUMPUR, Jan 10 — Malaysia’s national debt will hit 100 per cent of the Gross Domestic Product (GDP) by 2019 should Putrajaya continue to borrow more than it earns, economists say.

Malaysian Institute of Economic Research (MIER) distinguished fellow Mohd Ariff Abdul Kareem warned that the federal government revenue was growing too slowly to keep up with its borrowings, which hit 53.1 per cent of GDP in 2010.

He said while the current size of government debt relative to GDP was not troubling, the pace of its growth in recent years was cause for concern.

Debt-to-GDP ratio jumped from 41.4 per cent in 2008 to 53.1 per cent in 2010 while government debt grew 14.6 per cent in 2008 and 18.3 per cent in 2009, far outpacing the country’s GDP growth, Ariff noted.

“If nothing is done to reverse the current trends in government expenditures and revenues, extrapolation suggests that Malaysia’s national debt will explode to 100 per cent of GDP by 2019.

“Should the debt growth gather speed, this can happen sooner,” he told The Malaysian Insider via e-mail.

Ariff (picture) pointed out that while government spending on fiscal stimulus packages in the face of global financial crises has mostly translated into infrastructure development, there was a need to trim fat from the bloated civil service, which formed a significant chunk of Putrajaya’s operating expenditure.

He said emoluments to Malaysia’s civil service — the largest per capita in the Asia-Pacific according to the OECD — have risen from 23.3 per cent of the operating budget in 2007 to 33.1 per cent in 2010, rising to 41.6 per cent in 2010 if pensions were included.

This was a major financial burden on the government, as were the cost overruns, wastages and leakages exposed annually by the Auditor-General, the professor for international finance at the International Centre for Education in Islamic Finance (INCEIF) said.

“There is certainly a need to rein in government operating expenditure, which must include a downsizing of the bloated civil service, to bring government procurements under greater scrutiny with increased transparency and accountability and to undertake serious tax reforms to raise more revenue,” Ariff added.

…more
National debt to equal GDP by 2019 if Putrajaya remains spendthrift, say economists
January 10, 2012 – MI

Towards a bankrupt Malaysia?

(courtesy Aliran)

That the budget that was tabled in the Dewan Rakyat on 7 October 2011 was an election budget is very clear. There have been numerous detailed comments on the budget by politicians and analysts (since then). In this article, we are just going to focus on one of the long term issues from the budget. It concerns the increasing debt burden of the federal government.

How big is the government debt?

The accompanying chart shows the federal government’s outstanding debt at the end of the successive years. As can be seen, the debt has been increasing since 1970. From the detailed data available form Bank Negara’s website, in 1991, it reached a temporary peak of RM99bn and then decreased to RM90bn by 1997. From then, it has been virtually doubling every five years. By the end of 2011, we can expect the figure to reach RM450bn.

In other words, since the Asian crisis of 1998, we have been growing by borrowing heavily. In the 10 years since 1999, our debt has quadrupled. If we continue on this path, by 2020, our national debt will reach RM1.6 trillion. If our population is 40 million then, each Malaysian will have a debt burden of more than RM40000 and this does not include our own personal borrowing. Assuming an interest rate of 5 per cent, paying the interest alone will cost the taxpayers RM80bn per year!

The government has been reassuring us by saying that our debt is manageable. It argues that the debt at the end of 2012 will be only 54 per cent of our GDP, which is relatively low compared to the current crisis nations like Greece and Italy. (GDP is a measure of the total value of all the goods and services produced in a year in the country.) While it may not reach the levels of Greece by 2012, at our current rate of borrowing it won’t take long before we become another Greece. Just to put this in perspective, our giant neighbour, Indonesia has a debt of only 23 per cent of GDP! Singapore has no debts.

The federal government debt alone does not tell the full story. Many government-owned enterprises also have borrowings. If these figures are included, then the total debt would be much higher. It is difficult to get the complete data on these borrowings.

Why has the debt been growing so rapidly?

Since the 1998 Asian Financial Crisis, the government expenditure has consistently exceeded its revenue by a considerable margin. For example, in 2011 the spending is estimated to be RM229bn while the revenue will be only RM183bn. So the shortfall of RM46bn has to be met by borrowing.

Of course it is not expected that the government balances its books every year. Prudent economic management requires the government to balance its budget over an entire business cycle. So we can have deficits during bad years and budget surpluses during good years. Since 1998, we have had at least two business cycles; yet every year without fail we have had budget deficits!

This is evidence of fiscal irresponsibility. Here is a government which does not know the meaning of saving for a rainy day. A good example is the situation in the current year.

…more
Towards a bankrupt Malaysia? — Subramaniam Pillay
December 27, 2011 – Aliran