The Budget: How the government is spending OUR money

Finance Minister and Prime Minister Datuk Seri Najib will present Budget 2010 in Parliament on 23 October.

Every year, come this time, there is plenty of speculation about what “goodies” the government will “give” the rakyat. And every year, after the Budget is announced, there are the usual proclamations of “it’s a people’s budget”, “it’s people-friendly”, “it’s a growth budget”.

You may walk away happy with a small income tax cut, or on the fact that cigarette and beer taxes have not gone up. But there is much more to the Budget than just those few ringgit you saved.

The real “goodies” are hidden away from public view. RM47.8bn is being spent on education and training this year. That’s equivalent to RM8,000 for each student in public education. And yet, so many parents feel compelled to send their children to private schools or for private tuition. So, what happened to all that money?

Also, did you know we spend the same amount on defence - RM13.7bn – as we do on healthcare ? Do you think that is the right choice?

My upcoming book, The Budget: How the government is spening OUR money is a guide to how our government raises its funds and how it spends all that money. The federal government alone spends about RM200bn per year. On top of that, there is also spending by state and local governments. Do you think you got your money’s worth?

The first of its kind in Malaysia, this book explains in plain English where the federal government gets its income and what it spends it on. Interested citizens and taxpayers will find this an accessible read, while professionals will, for the first time, find the numbers compiled in a concise format.

Or, just buy it for the illustrations by Antares!

It’ll be in bookstores by mid-October. If you’d like to a copy delivered to you by mail, please send your name, address and phone number to budgetbook@chichang.net.

Publishers REFSA will contact you just before the book hits the shelves. Indicative price is RM25 + RM5 postage within Malaysia.

Should the CEO also be the CFO?

The two most powerful positions in corporate management are of chief executive officer (CEO) and chief financial officer (CFO). The CEO is the boss and sets overall direction. The CFO controls the purse-strings.

Quite often good CEOs and CFOs will disagree. CEOs by nature and expectation have to seek new growth opportunities to expand corporate profits. They would tend to emphasise the rewards over the risks. CFOs are entrusted with financial stewardship. And when it comes to stewardship, being conservative and risk-averse are the preferred traits.

So, that’s how it works in the corporate world. No reasonable board of directors would countenance the CEO also holding the CFO position. There is just too much at stake to have one person holding the two most senior positions.

That’s also how it’s supposed to work in government. The prime minister leads and the finance minister tells him what the government can afford. Perhaps the most celebrated such pair in recent history was telegenic British prime minister Tony Blair and dour Chancellor Gordon Brown.

Over here in Malaysia though, no eyebrows are raised that the prime minister is also the finance minister. This practice began during prime minister Mahathir’s tenure, was continued by Abdullah Badawi and now Najib has continued the practice.

This might explain the deteriorating state of government finances. By 2009, we would have run 12 consecutive years of budget deficits. Our federal government debt alone is expected to reach RM414bn in 2009. This is more than double the RM206bn level nine years ago in 2000.

Put in other ways:
1. Federal government debt today is more than half the size of our entire RM741bn economy.
2. This is a burden that our youth will have to repay. The debt is equivalent to RM20,700 per person, based on about 20m youths (defined as Malaysians aged 39 and below.

Note that the actual debt burden is higher. The RM414bn number excludes debt incurred by other government-linked corporations (GLCs) such as PLUS Expressways and Tenaga Nasional. Other countries which have not embarked on extensive privatisation programmes incur road construction and electrification costs as part of their national budgets. PLUS and Tenaga alone among the GLCs have RM33.3bn of borrowings – equivalent to 8% to the federal government debt. On top of that, there is borrowing by other government-linked entities such as Syarikat Perumahan Nasional Berhad (SPNB), Putrajaya Holdings Sdn Bhd …..

Even more concerning is that we incurred the increasing debt even while we reaped the windfall gains from high oil prices. More in my up-coming book ….

Independence

Merdeka Day is just around the corner. Here is food for thought from Xanana Gusmao, fighter for independence and the first president of East Timor:

“Independence for East Timor has never been an end in itself but rather is a means. True independence is the recognition of the freedom of others, is the respect for the supreme interests of populations, is the respect for the most basic human rights, is the fundamental right of peoples to determine their own destiny.

When independence is only a trampoline for rulers to enrich the families of a parasitical elite, with the confiscation of peasant lands, and with total disregard and indifference for the miserable living conditions of workers, when independence blinds rulers, greedy for their own well-being and the profits of their grandchildren’s grandchildren and who set the country’s doors wide open for the invasion of international monopolies that ruthlessly destroy the environment, when independence denies the citizens the freedoms to express, to assemble, to organize and to question; when all this happens in a country with its own flag and president, the independence is but a luxurious reality for only a few, and a nightmare for millions of others ….”

Letter from the Commandant, an excerpt of a speech written by Xanana Gusmao while imprisoned in Cipinang, July 1995.

The above is taken from “The Truth and What to Do With It”, Off the Edge, Apr 09.

Malaysians are poor – based on our tax records

Only 1 million or so Malaysians pay tax. That’s 10% of the working population. Take a look around you. 9 out of 10 adults you see don’t pay tax. That’s a phenomenally narrow tax base. 1 million Malaysians are paying for the government services for all 24 million of us; 26 million if you include the (legal) foreigners.

Or perhaps it’s more accurate to say 1 million Malaysians are paying for the “work” done by our government, which includes trips to Disneyland, Mount Everest and other exotic locations.

Hafiz Noor’s musings on income tax got me thinking.

Firstly, are the vast majority of Malaysians that poor, that 9 million working Malaysians don’t pay tax?

Secondly, if the core issues are not addressed, more and more Malaysians will do their utmost to avoid tax. Because, we don’t seem to be getting our money’s worth.

One function of taxation is to raise revenue to fund social services such as roads, schools, hospitals and security. Yet, in Malaysia, we 1) pay tolls, 2) are forced to send our children for private education, 3) go to private hospitals when we are very ill and 4) engage private security to patrol our home neighbourhoods because of the rising crime rates. Another function is redistribution, that is to take from the rich to help the poor. No right thinking human should be against that. But how much of that do we see going on in Malaysia? We see billions of ringgit being squandered on follies and some scandal or other; and on the other hand there are so many obvious examples of poverty.

So, where did all our tax money go? This lack of accountability fuels the sense of injustice by the taxpayer and increasing efforts to avoid or downright evade tax. Why pay tax when “the government is going to waste it anyway”?

Which brings me to the broader, third issue. There are about 12 million eligible voters. The fact tbat only a fraction of these voters pay taxes is fertile ground for populist politicians offering voters short-term goodies at the expense of longer term economic disaster.

Voters will be tempted to vote for whoever offers cheap petrol/electricity/[insert whatever you want here] because they don’t have to cover the cost. The only way the costs can be covered would be to raise taxes. Our taxes, once you factor in the indirect taxes, are already among the highest in the world. Raise them further and the brain drain will get worse. We will face economic ruin when our best and brightest are all gone.

How can we get around this? One – break the addiction to cheap foreign labour so that Malaysians can move up the value chain and earn enough income to pay taxes. Two - accountability by the government – so we know where our tax money is going and feel we have a stake in its spending. Dare we hope for the report on the Port Klang Free Zone problems to be made public; and just as importantly, the people responsible held accountable and penalized?

Where are the good Malaysian employers?

The best employers in Malaysia are foreign, based on a study by human resource consultancy Hewitt Associates in conjunction with The Edge, The Edge Financial Daily and Asian Strategy and Leadership Institute (ASLI).

Only two home-grown firms made it to the Top 10 – property developer SP Setia at No 6 and Telekom Malaysia at No 10.

That's a sad indictment of 53 years of Barisan Nasional (BN) rule. BN economic policy is characterised by secure monopolies, oligopolies or various protections for industries ranging from autos to banks, gambling, telecoms and satellite tv.

All this protection resulted in some very rich businessmen emerging – enough to support the largest Ferrari showroom outside Italy. That's right – the RM20m showroom was officially opened on 31 March in a glittering ceremony graced by royalty.

So, we can been proud that our richest can now compete with the best in the world. On the other end of the scale though, our workers are forced to compete against the most lowly-skilled in a race to the bottom for the lowest wages and worst working conditions.

The BN government often defends protectionist measures as necessary to defend the rakyat's interests. The survey results suggest otherwise. Opening more industries to foreign competition could lead to better working conditions and remuneration for the ordinary worker.

For the record, the top 10 employers are:

1. The Ritz-Carlton, Kuala Lumpur
2. American Express (M) Sdn Bhd
3. Four Seasons Resort Langkawi, Malaysia
4. Federal Express Services (M) Sdn Bhd
5. Agilent Technologies
6. SP Setia Berhad
7. Hilton Kuala Lumpur
8. Intel Technology Sdn Bhd
9. Golden Arches Restaurants Sdn Bhd 10.
Telekom Malaysia Bhd

When competition is bad ...

Watch out! Your weekly dose of English Premier League (EPL) could get a lot more expensive next year.

The rights to broadcast EPL are auctioned off every few years. Right now Astro holds the Malaysian broadcast rights until 2010. Bidding for the 2010-2013 EPL rights will commence later this year.

The Edge last week reported that Telekom Malaysia may decide to bid for these rights. Telekom is looking to launch broadband tv. Securing the hugely popular EPL franchise will almost certainly mean a few hundred thousand new subscribers, giving its service a substantial boost.

Conversely, Telekom's gain would be Astro's loss. Astro without EPL would not be very attractive to many.

Which means we could see a very intense bidding war between Astro and Telekom.

Competition is usually good. It is normally the best way to better products and services and lower prices for consumers. But in this case, the winner of any Astro-Telekom competition is not the Malaysian consumer. It is the multi-millionaire EPL footballers, managers and hangers-on. They will enjoy the benefits of whatever expensive price that Astro or Telekom pays. Malaysian consumers will foot the ultimate bill.

Regular readers will know I am all for free markets, competition and transparency. However, sometimes, markets do fail. This is a clear case of market failure, when a few hundred EPL magnates make more millions, paid for by millions of Malaysians who earn just a few hundred ringgit a week.

We have already experienced one round. Astro subscribers may remember sports became a lot more costly in 2007. Prior to that, Astro had a comfortable lock on the rights to televise EPL in Malaysia. That changed in 2007, when Astro suddenly found competition while it was bidding for the EPL rights for 2007-2010. It bid very high to secure the rights, and then raised subscription fees to cover its costs.

When markets fail, higher authorities must step in. Khazanah could play a role, as it is a shareholder in both Telekom and Astro. Could it prevail on the two companies to cooperate instead of compete? In the first place, I don't see how Telekom is going to deliver broadband tv on its decrepit Streamyx platform. Rather than pay so much and giving WAGS even more to splurge on frivolous luxuries, it should use the money to improve its services.

Or if it is too much to ask for Khazanah to arbitrate between two competing companies, the government should set up one umbrella organisation to bid for EPL rights for Malaysia. Since there will be only one bidder from Malaysia, the price should be much lower. This organisation can then sell the rights to Telekom, Astro and any other interested party. Any profits can be deployed to good use – whether charity, public transport, sports development ...

Trouble for SMEs in mini-budget

Overshadowed by the crowing RM60bn headlines surrounding the mini-budget announced last Tuesday is a measure imposing double levies on foreign workers. This applies to both new and existing foreign workers.

The intentions behind this move are good - to raise employment opportunities for Malaysians, but the timing is terrible. Implementing this could actually lead to even greater unemployment for Malaysians and fewer job opportunities as our businesses, including small-and-medium enterprises (SMEs) have become addicted to cheap labour.

The Barisan Nasional government has for too long now pandered to the business community's lobby for cheap labour and paid too little attention to productivity. Businesses kept asking for cheap labour, which the government obligingly delivered by freely granting work permits for lowly skilled Indonesians, Bangladeshis, Myanmese ...As many as 2,000 approvals PER DAY were granted at the peak, according to Sunday Star report (Mar 15)! The result: no incentive for Malaysian employers and employees to invest in productivity-enhancing measures and low incomes and low standards of living for working-class Malaysians.

The right time to move up the value-added curve is when times are good and companies have extra profits to invest. The worst time is now when businesses are struggling with collapsing revenues. It is a business fact - costs are stickier than revenues. Customers can stop buying your product overnight. But you can't turn around and reduce your capacity overnight. It also works in reverse - if sales go up 10%, your costs don't go up by 10% immediately. So in good times, profit grows quickly; but in bad times, profits can quickly turn into losses as revenues plunge faster than costs.

This double-levy initiative serves to increase business costs at a time when businesses are struggling. It could well tip barely-afloat enterprises into bankruptcy. And that would mean Malaysians would also be thrown out of work, along with the cheap foreign labour. Of course there would be far more cheap foreign workers affected than Malaysians, but this is akin to throwing the baby out along with the bath water. We need to keep whatever employment opportunities we have.

Here's a better idea. Khazanah, despite its miserable execution record, has been given RM10bn to spend under the latest stimulus package. Instead of giving it to Khazanah to fritter away on various projects of 'long-term' benefit (by which time we are all dead, as Keynes astutely observed), let's help small and medium enterprises (SMEs) support Malaysians by offering them a cash payment for each Malaysian employed instead.

It could work this way: For each Malaysian employed, who earns less than RM2,500/month, the government will pay RM1,000 of the wages. This will narrow the gap between the cheap foreign labour and Malaysians, encouraging SMEs to employ locals while still keeping their costs competitive. RM10bn will be enough to cover 420,000 Malaysians for 2 years! After that, the government can slowly reduce this support, say to RM800 per year, then RM500, then zero. This will give both employers and employees time to reinvest in productivity enhancements which result in higher wages AND higher profits.

Before anyone accuses me of plagiarism - let me say here that Singapore is implementing a similar move.

GDP growth decelerated sharply in 4Q08

As anticipated, by nearly everyone else except the BN government, economic (GDP) growth plunged in the last 3 months of 2008. Just 0.1% growth was reported. The jaded analyst in me is suspicious of this number, which just made it to positive territory. My prediction: Sometime in the near future, this number will be revised down and be in negative territory.

BN still has its head-in-the-sand. While it is flip-flopping on toll rate hikes and still predicting growth this year in 2009, those of us who work at real businesses instead of relying on government handouts know that recession is more likely.

Which makes the impending stimulus plan very crucial. Planned and executed well, it will help buffer Malaysians against this global economic downturn. But what happened to the first RM7bn stimulus in the first place? As an interested reader put it, “Can we as rakyat ask the government to table in parliament all the details of the projects that have benefited from the allocation. for example, if it is a bridge project, please name the description of the bridge, the location, the person awarded to, the contract sum, the contract period and henceforth ...”

Private hospitals = licence to over-charge

I was appalled when the BN government tried to privatise Institut Jantung Negara. I am all for government getting out of business. But medical care should not be a business.

We deserve competent, reliable medical care at reasonable prices. But that has become increasingly hard to find as the BN government disregards its healthcare responsibilities. The result – highly lucrative private hospitals, profit-driven doctors and astronomical medical bills.

This is my unfortunate recent experience at a private hospital in Kuala Lumpur. The bill was covered by medical insurance, but it still left a very sour taste in my mouth as I felt completely exploited and taken advantage of by the hospital.

Yes, it is a private hospital, and private entities are entitled to make fair profits. But this hospital was gouging the patients. It certainly wasn't making an honest profit because it 1) Forced patients to accept unnecessary services and 2) Over-charged for medical supplies. Besides which it was clearly not operating efficiently.

Operating efficiently can be a matter of perception, so let's stick with the facts, stating with the unnecessary services forced on patients:

a)After registration, a porter escorted us to the relevant hospital department. We were shocked when told this was compulsory. Why? Surely the hospital sign-posting is clear enough for two able-bodied adults to find their own way. Why pay someone just to do this? The savings can go towards cheaper medical bills;
b)On arriving at the ward, the nurse was very insistent on us ordering a “Complimentary meal”. Who are we kidding? The cost of the meals is surely built into the hospital charges. Meals can be made optional. Some patients coming out of anaesthesia simply cannot consume any food, some prefer home-cooked food and some wish to just go straight home-sweet-home. Waiting for a hospital meal just means more unnecessary time in the ward, which means more costs;
c)Which brings me to an interesting point. The hospital in its “Conditions of Service for Inpatients” says it will take “approximately an hour to process the bill”. Also, it says, “half day room charges are applicable … if patients are discharged after 12:00pm”. My question: if the doctor gives the patient clearance to go by 11.15am but the hospital only produces the bill at 12.15pm, is the patient liable to pay the extra half day charge? And is this why the nurses are so keen to have the patients eat the “complimentary meal?”
d)Then, there was a “complimentary” toiletry kit at the bedside comprising a plastic water jug, small towel, shampoo, soap, powder, comb, toothbrush, toothpaste and toiletry bag. That “complimentary” word again. How about just having the convenience store downstairs stock toiletries at reasonable prices?
e)And finally, two bottles of “complimentary” water. Again, unnecessary cost, not to mention the environmental impact. Surely the hospital can instal water coolers;

The gouging does not end there, Besides the unnecessary items, the hospital over-charges for medical supplies. Just two examples: a) RM10 for a pair of surgical gloves. A quick search on the internet shows US$90 for 200 pairs, or about RM1.70 per pair. The hospital was charging 6x as much!; b) RM3 for cotton buds. The doctor used the grand total of 3 sticks. I think I can buy an entire pack for RM3;

The over-charging was clear only because I asked for the detailed bill, which, by the way, took 10-15 minutes to produce. The hospital usually just gives a summary bill, which presumably most patients just sign because it's covered by insurance. Isn't it normal, good business procedure to show the detailed bill when requesting payment?

Even with the detailed bill, three items were not adequately explained (i) gaseous supply; (ii) medication; (iii) nursing procedure. We did not use any gas, nor take any medication and there was no observation by the nurses.

Private hospitals are taking advantage of a captive, disadvantaged market. People who are ill just want to get better. They don't have the time or energy to shop around or argue. This is when new laws are appropriate – to protect the weak and level the playing field. The BN government, instead of chasing poor families to belt-up, should come up with a law to force private hospitals to clean up their acts.

Until it does, you and I end up paying for the higher costs and the unjustified profits. You don't notice the cost at first, because it's covered by your medical insurance. But the insurance company needs to make money too. Ever notice how your medical insurance premiums keep going up? It's in our interest to keep private hospital charges fair.

Some insurance companies have been pushing the hospitals to be fairer. Help them to help you. If you have a similar experience and agree with me, write to your insurance company so they have the facts to help them negotiate.

This new year: Let's resolve to help ourselves

I hope you've had a nice end to 2008. Relaxing, unwinding, taking it easy with family and friends … remembering there's more to life than just material wealth …

The treadmill starts again tomorrow. A new year with new budgets and new targets to meet amidst an intimidating backdrop of global and local economic headwinds. The newspaper headlines are still depressing, and it does look like it will be a tough year ahead.

With tough times, there will be increasing calls for the government to do more. And yes, I agree the government must help the most disadvantaged and poorest of society. But I am sure there'll also be appeals for help from able-bodied, capable, intelligent Malaysians, such is the subsidy mentality that permeates our society today.

Let's break out of this subsidy trap. Subsidies don't make us richer. They just make us weak and dependent. Our manufacturers claim they need cheap power and labour to be competitive. The reverse is true – it is cheap power and labour that have made us uncompetitive.

Power is so cheap in Malaysia that companies and individuals barely make any effort to consume it wisely. The best evidence – how many of us wear jackets/sweaters in the office because the air-cond is too cold? And take a look at the lights – both in your home and at the office. I'll bet there are more old-fashioned energy-hungry menthol bulbs and even worse, halogen lamps instead of energy-saving bulbs.

And consider petrol. While our businesses lobbied for lower prices, corporations such as courier company UPS in the US actively used their creativity and skills to reduce consumption. UPS looked closely at the delivery routes taken by its vans. It discovered lots of time was lost, and fuel burnt, as the vans waited to make left turns. It replanned routes to minimise left turns and maximise right turns, where wait times are far shorter. The result: Less fuel burnt AND greater productivity – one driver can now make more deliveries, which can then justify higher wages!

Cheap fuel and power only perpetuates inefficiencies, further weakening Malaysia's competitiveness against leading nations. Businesses in those countries actively sought ways to minimise energy consumption when fuel prices were high. These energy-saving methods are now part of their competitive arsenal; and they have an extra source of profit margin now that energy prices have fallen.

So, for 2009, let's resolve to use our brains and work smarter. Not use our brains to scheme for subsidies.

Happy New Year and cheers to a wealthier, more prosperous, more productive Malaysia!

Cheap power may benefit foreign workers and rich more than ordinary Malaysians

The Penang state government has been actively meeting businesses to see how it can help mitigate the economic downturn and minimise retrenchments. A very common refrain is to please cut electricity tariffs. Pakatan MPs in other states are also getting similar feedback from industrialists and entrepreneurs, “The cost of business is going up, we're facing challenging times, please cut power tariffs.”

The subsidy mentality permeates all levels of our society. Cheap power is a subsidy too. And like all subsidies, we should look closely to see if it truly benefits those most in need. Before we cut power tariffs, we should find out: 1) How many Malaysians the companies actually employ and 2) What will the companies do with the savings?

“How many Malaysians the companies actually employ” is particularly pertinent. When Indonesia liberalised fuel prices, including gas prices a few years ago, many manufacturers who depended on gas left Indonesia. It used to be a major player in the latex glove market – one where Malaysians such as Top Glove and Supermax complete. They quit, Malaysia ramped up market share.

But how many Malaysians did that really benefit? Top Glove, the world's biggest maker of latex gloves, was hit with a RM11.4m fine for having 1,769 illegal foreign workers on Aug 16, 2006. It has not reduced its dependence on foreign labour. The IHT reports that it employs 3,500 migrants - about half its work force - at 12 factories across the country. 

Why are we subsidising this company and all these foreign labourers? Subsidies should go towards developing core Malaysian skills and improving productivity, not employing low-skilled low-valued add foreign labour.

Which brings me to the next question, What will the companies do with the savings? Any bets it'll tell workers you're lucky to stay employed; and the owners will happily pocket the additional profit? That doesn't help Malaysia – it just means another long-term subsidy which we cannot afford. No pure handouts please. Companies must earn the cheaper power by coming up with better ways of doing business.

Malaysians subsidising foreigners (2) – Astro spends RM1.2bn on Indons …

Investment analysts note that Astro has incurred RM1.2bn (that's right RM1,200,000,000) of write-offs so far on its foray into providing satellite tv to Indonesians. Ever thought about how Astro can afford such a large loss? It's paid for by you and me, ordinary Malaysians who have to suffer high subscription fees and poor service thanks to Astro's monopoly on satellite-tv in Malaysia.

Because there's no competition in Malaysia, we have to pay whatever Astro demands and accept its over-priced packages offering us channels we don't want nor need, and we have to accept frequent service breakdowns in the rainy season. Astro then takes that money to offer cheap services to Indonesians. If Astro had not burnt that amount away in Indonesia, it could afford to give you a 50% discount on your subscription fee for one year!

But it doesn't look like it's going to happen since it has a cosy, secure monopoly granted by the BN government. If our companies are big enough to go overseas, they are big enough to face competition here in the local market. Local consumers will then benefit from lower prices and better services.

5% 2008 GDP growth = sharp slowdown in 4Q08

“Malaysia to hit 5% economic growth, says Najib,” reported The Edge Financial Daily yesterday (2 Dec). Datuk Seri Najib Razak was commenting on 2008 GDP growth.

That full year number is irrelevant – it is heavily influenced by the record oil prices and benign global economy earlier this year. The pertinent figure is what’s happening currently. And going by our Finance Minister’s 5% number, it’s not looking good.

GDP growth was over 6% for the 9 months up to Sept 08 (9M08). Now we’re told it’ll be 5% for the full year. Simple maths tells us this suggests just 1.2% growth for the last 3 months of the year (4Q08) – a very sharp slowdown!

Our GDP growth has been decelerating:
1Q08: 7.4%
2Q08: 6.7%
3Q08: 4.7%
4Q08: 1.2%?

The BN government targets 3.5% growth in 2009. Against this backdrop, do you think that’s achievable? I take no pleasure in bearing bad news. But pretending things are fine will not help us. The crunch will be much worse when it hits if we are unprepared. The sooner we accept reality and the faster we take remedial measures the higher the chances for us to alleviate some of the pain.

PS: I'll be participating at "The New Economic Vision for Penang and Malaysia" conference at the Traders Hotel this Friday and Saturday. My panel slot at 2pm Friday is on "Moving up the Value Added Ladder." And after hours I look forward to the Jazz Festival and Alleycats!

Look deeper into IOI cancelling its Menara Citibank purchase …

At the last minute, IOI Corporation decided not to complete the RM587m acquisition of the Menara Citibank office tower in Kuala Lumpur. IOI forfeited its RM73m deposit - 12% of the purchase price. Here are 3 potential reasons:

1) It is an IOI problem. IOI cannot afford the deal because crude palm oil prices have collapsed. But a quick check with my analyst friends finds most of them forecasting about RM2bn pa of operating cashflows with CPO around RM2,000/ton. So, it doesn’t look like IOI itself has issues;

2) Which takes us to … IOI thinks the Malaysian economy will get a lot worse. And it thinks property prices will fall by at least another 20%. (Otherwise, why would it forgo the 12% deposit?);

3) Or, IOI thinks Citi is in serious trouble and will be forced to do a fire-sale later.

Any thoughts? Comments welcome.

Malaysians subsidising foreigners …

Picking up on the likes of Maybank, Telekom, Astro, Genting, Maxis and YTL investing chunks of money overseas ….

It can be argued they have grown too big for Malaysian markets and this is part of normal corporate development. Some would say we should be proud that Malaysia has been able to grow such large companies.

I see no reason to be proud - all these companies are either monopolies or operate in cosy oligopolies with limited competition in Malaysia. All the extra funds they have are from the supernormal profits they reaped from you and me, the average Malaysian, thanks to the government protecting them from competition.

Take Astro, which has a government-granted monopoly on satellite tv. While it was operating in highly competitive Indonesia, it was charging Indonesians less than Malaysians. And consider Telekom, spending huge sums overseas while giving us atrocious Streamyx service, charging us RM25/month minimum fixed line charges and crying to the government that it cannot afford to spend on broadband in Malaysia (and successfully getting a subsidy!).

Investments overseas don’t generate that many jobs for Malaysians. But the investments are paid for by Malaysians through inflated prices and poor service in Malaysia due to the lack of competition. Government policies need rethinking. If our companies are big enough to go overseas, they are big enough to face competition here in the local market. Local consumers will then benefit from lower prices and better services.

Even the philanthropists are sending money overseas!

The University of St Andrews in Scotland has named its new GBP40m (RM210m) medical school the B.C. Sekhar School of Medicine, after Tan Sri Dr B.C. Sekhar, a former chairman of the Rubber Research Institute of Malaysia, reported the New Straits Times on 20 Nov.

Sekhar's youngest son Datuk Vinod Sekhar reportedly said his father loved creating solutions for problems that ailed the world. "This is what the School of Medicine and Science is about. It's a school that has a fully integrated scientific approach to research which will allow for faster solutions to be created," he said.

Here’s a point to ponder: Why did the Sekhars choose to spend their largesse in Scotland and not at home here in Malaysia? First, it was businessmen going overseas – the likes of Maybank, Telekom, Astro, Maxis, Genting, IOI and YTL Corp, for example. Remember Malaysia was the only ASEAN country to experience net capital outflows last year?Now even the philanthropists are taking their money out.

What’s wrong with Malaysia? We, the general public, know the answers – inept government, inefficient bureaucracy, out-dated policies …. Now if only the BN government would stop their internal party politicking and get on with preparing us better for the coming global recession.

The End of Wall Street's Boom

Here's an excerpt from an article on www.portfolio.com, by Michael Lewis, whose Liar's Poker was one of my inspirations:

When a Wall Street firm helped him get into a trade that seemed perfect in every way, he said to the salesman, “I appreciate this, but I just want to know one thing: How are you going to screw me?”

Heh heh heh, c’mon. We’d never do that, the trader started to say, but Moses was politely insistent: We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it, but only after you explain to me how you are going to screw me. And the salesman explained how he was going to screw him. And Moses did the trade.

Read more.

Forex reserves plunged 7% in 2 weeks

Our foreign exchange reserves plunged by or RM26.2bn in the last two weeks of October. This was a 7% fall in just a fortnight, taking our reserves down to RM345.6bn as at 31 Oct 2008.

Given that we are still running a trade surplus, the reserves must have fallen due to capital flows.

Foreign investors had been leaving Malaysia. Data on the equity market is impossible to find, but debt market data shows foreign investors sold RM19.1bn of debt papers in Aug, accelerating from RM4.2bn in July. I’m sure the outflow continues, not helped by inflation at a 26-year high, the government saying the 2008 deficit will be worse at 4.8% (from 3.1% initially forecast) despite record high oil revenues and raising the 2009 budget deficit forecast to what many consider an optimistic 4.8% (previously 3.6%). Foreigners now hold just RM81.5bn of debt paper as at end Aug, down from RM100.6bn in July and the peak of RM126.5bn in April.

Perhaps locals too joined in the exodus. You would be worried if you could be arrested "for your own protection." The ringgit continued to plunge against the US$, down another 2.7% in Oct, after falling 7.3% in the 6 months ended Sept. Yes, it’s true investors have been exiting emerging markets generally, and the dollar is finding unexpected strength, but we are doing poorly even when compared to Thailand. Last month, a bank offered me 8.7 baht to the ringgit. I was shocked. Last year I got 10 baht. I had expected 11 or 12 baht this time because quite literally there was blood on the streets in Thailand.

What does this say for confidence in the ability of the Barisan Nasional government?

That’s palm oil in your teh tarik; when fresh milk is not whole milk

Take a closer look at the labels next time you’re shopping for fresh milk at the refrigerated section of the supermarket. I had assumed “Full Cream Milk” is made from fresh milk, especially since it’s sitting in the chiller compartment. But something made me look at the ingredients that day. I was shocked to find “Full Cream Milk” is made from milk solids, milk fat, something called choline chloride and permitted food conditioners.

Only “Fresh Milk” is actually made from fresh cow’s milk without additives. And those of you thinking you’re being healthier by going for “Low Fat Milk” – be aware that it also contains choline cloride and food conditioners.

Condensed milk has already disappeared from our shelves. Will whole milk also become impossible to find? Wait, I hear you say. You must be wrong. How do they make my teh tarik if there is no condensed milk?

Teh tarik now contains palm oil! It’s Condensed Creamer being sold nowadays. And look at the ingredients – palm oil is in it. Now, I am a strong supporter of palm oil and am dismayed by the unfair western lobby against it (Remember the misinformation that palm oil is bad for the heart? And now they’re bringing orang utans into the argument? Oops. I might have just antagonised some greenies. Let me say upfront that I’m a member of the Malaysian Nature Society and we’ll save this for another blog another time).

I like palm oil; I use it to cook at home and it’s great for deep-frying my chicken chop. But I absolutely hate palm oil in my tea! I noticed the emergence of palm oil two years ago, when my favourite coffee-shop drink, teh-C-kosong started tasting odd. Because there is no sugar to mask the taste, the “funny” taste of the “milk” quickly became apparent. That was when I started looking more closely and realised that most manufacturers were selling Evaporated Creamer instead of Evaporated Milk. The difference – palm oil is used instead of milk.

What are the health implications? Are we sowing the seeds for a whole generation of calcium-deficient adults? How many parents realise that the ‘milk’ they are putting into the Milo/Horlicks/Nescafe/tea/coffee is actually creamer? Nutrition is not my forte; so comments here would be very welcome.

From the economic perspective, it is clear evidence that price controls do not work. Condensed milk is a “controlled-price” item. If the controlled price is too low, there will first be lower quality as poorer ingredients are used, then shortages as less efficient producers pull out and ultimately no product at all when it is unprofitable for anybody at all to make it.

Next, it also leads to a misleading inflation (CPI) number. If the price is controlled and does not change, then the CPI shows no inflation. But the product itself is also not available in the market, so consumers either have to settle for inferior substitutes, or more-expensive products. Minister of Domestic Trade & Consumer Affairs Shahrir Samad had honestly and sensibly pointed out in March that price controls are in place on products that do not exist! He said he was working on resolving these. I do hope he does, at the very least so that I will be able to get decent teh-C-kosong again.

(With thanks to Lulu for help with background).

MIC-A for Malaysia

I received an email chain-letter the other day. The writer fumed about the various pro-bumiputera policies in place and the ever-shrinking share of non-bumis in Malaysia.

Titled “WAKE UP!!!” the email contained 55 assertions along the lines of “12% is what ASB/ASN (Malays Own banks) got per annum while banks fixed deposit is only about 3.5% per annum”, "99% of 2000 Petronas gasoline stations are owned by Malays”, “0 Chinese or Indians were sent to Japan and Korea under 'Look East Policy'” (assertions reproduced here verbatim for context and to give an indication of the tone of the email. I have not confirmed the assertions)

The writer concluded with “FIGHT FOR YOUR OWN RACE”. I understand the angst, but believe we should step up from this “Us” against “Them” attitude. All Malaysians should work together to grow the economy for all, and a helping hand should be extended to those most in need.

It is an unfortunate fact that after 38 years of the NEP and its successor policies, bumiputeras are still, on average, the poorer section of society. The average bumi household earns RM2,711/month, Chinese RM4,437, Indians RM3,456 and Others RM2,312 (Source: 9^th Malaysia Plan, data for 2004). If we believe in social justice and measures to help the poorest, then by design the policies will benefit bumiputeras and others more than Chinese or Indians, because they are the ones in greater need.

The pertinent issue is, who benefited from all the pro-bumiputera policies if the average bumiputera did not? The wealth transfers over the last 30 years were immense. Consider one example – all companies going for listing on Bursa Malaysia have to allocate 30% of their shares to bumiputeras. And another example – APs to import cars, given primarily to bumiputeras, were reportedly worth tens of thousands of ringgit EACH. Why then is the average bumiputera income still lagging so far behind after all these efforts?

The answer is the increasing gap between the richest and the poorest. Malaysia's gini coefficient (a measure of income disparity between the richest and the poorest) has been rising. The higher the number, the greater the disparity. And for bumiputeras, the Gini coefficient rose from 0.433 in 1999 to 0.452 in 2004 (Source: 9^th Malaysia Plan). These pro-bumiputra policies, which were intended to help poor bumiputras, were and are still being reaped mainly by an elite few instead. And I am sure you will agree, most of this elite few are UMNO-related.

Malaysia economic policy should not be about Malays, Chinese, Indians dan lain lain fighting for a share of the pie. It should not be each community hunkered into our own silos and scheming to deprive the other of their assets. The issue should be all of us working to grow the pie, and giving a share to those most in need. It should be all of us standing up against UMNO corruption and arrogance. Hmmm ... how about a Malaysian political party ... MIC-A – Malays, Indians, Chinese ... ALL for Malaysia.