Loyal Followers

Tuesday, August 09, 2011

Money matters

The outlook is grim I must say.

Underscoring the seriousness of the US debt-payment horror is the fact that as of July this year, Apple Inc’s nett operating cash balance of USD 76.4b far outperformed the entire US as a nation. At the same time, the US, as a nation, had a nett operating cash balance of only USD73.7b. (source: BBC report).

The US government debt is projected by S&P to hit 11 trillion this year, which would be equivalent to 75% of its gross domestic product or all the wealth that the US economy would generate this year. S&P also estimated the debt would increase to $14 trillion by 2015 and top $20 trillion by 2021, which at that point would mean that it will be 85 per cent of GDP.

In a grim postulation, S&P says in a worst-case scenario, US government debt could outstrip all the wealth generated in the world’s largest economy by 2021. (source: here).

With those kind of numbers, it was not surprising at all that the US credit rating was downgraded a notch from AAA rating to AA+. (source: BBC report).

How do all these affect us?

Back home, the numbers aren’t all rosy as well.

As of last year, our national debt was down from RM236.18b in 2008 to RM233.92b. (source: the Star report). That sounds good as it is on a downward trend. However, an analysis of our foreign debts as compared coupled with our domestic borrowings as well as the percentage in the increase of our debts as compared to  the increase in our GDP over several years paints a really worrying picture. See the analysis here.

The points are these:

  1. While our foreign debts decreased from RM236.18b in 2008 to RM233.92b, our domestic debts increased from RM217b in 2006 to RM371b in 2010.
  2. Between 2006 to June 2010, our gross domestic product grew at an average of 6.6% while the total debts grew at an average of 10.2%.
  3. Total debts to GDP ratio therefore increased by 39% from 64% in 2006 to 73% in 2010.

What the above means is that we are borrowing faster than we are producing income.

According to the US Census Bureau, between the months of January to May this year, the US’ exports to Malaysia totals USD6.1b while our exports are worth USD10.5b. The US Department of State's website shows that he United States is Malaysia's third-largest trading partner and Malaysia is the eighteenth-largest trading partner of the United States with annual two-way trade amounting to $33b.

The United States is the largest foreign investor in Malaysia on a cumulative basis, and was the largest source of new foreign direct investment in Malaysia in 2010 with direct investment in the manufacturing sector in Malaysia as of year-end 2009 of $15.1 billion, with billions of dollars in additional investment in the oil and gas and financial services sectors of the economy.

Such is the importance of the US to Malaysia. It goes without saying that a US in financial bad shape would inevitably equal to a Malaysia in economic doldrums.

Meanwhile, Malaysia’s Economic Transformation Program (ETP), an ambitious project to convert the country into a fully developed nation by 2020 remains critically linked to foreign investment. The ETP requires annual foreign investment in the range of $11 billion to fund a quarter of the proposed projects. However, average annual investment since 1997 has only been $3.1 billion.

A March 2011 report by Bank of America Merrill Lynch ranked Malaysia the second least popular market after Colombia among global emerging market fund managers. Malaysia, thus, is in no position to project a picture of chaos and disruption to the investors from outside.

In addition, recent well known events, the details of which are all too familiar to many, if not all of us, do not endear Malaysia too well to foreign investors despite strenuous efforts by the government to attract them.

Yesterday, Goldman Sachs revised our GDP forecast for this year from 5.4% to 5% with a similar cut of 0.4% next year from 5.6%. (source: the Malaysian Insider report).

Considering the state of the US economy and its burgeoning debts, the US government might just increase interest rates in order to lessen public spending; impose higher import duties on certain goods; impose some strict import conditions as well as broaden its protectionism policy over some industries.

The increase in interest rates would restrict cash outflows as well as investment activities thereby resulting in decrease of consumer spending and imports by the US. This is bound to adversely affect our exports to the US. Standing at USD33b a year, a 10% decrease in  our exports to the US would mean a snatch of USD3.3b from our liquidity. I wonder how many business would fold up and how many jobs will be lost in such situation.

Added to that the severely weakened US dollar as opposed to our Ringgit, things would not look too bright for our exporters as they lose competitiveness in terms of currency exchange. Perhaps we should take a serious re-look at our development policy and pay sufficient attention to the areas in which we are strong and not forgetting our traditional bread and butter, namely, the agricultural sector. Modern and thus efficient food production may be a good option as well.

The government must come up with a plan to counter the US meltdown – as well as the Europe meltdown which is fast forthcoming – as soon as possible. failure to do so would just exacerbate the current economics hiccups that we are facing.

Locally, living costs have been escalating lately as inflation rises. As of June this year, it was 3.5% although realistically, the people on the streets are feeling the pinch a lot more.

In order to alleviate the suffering of the people who are finding it tough to cope with the rising in the costs of living, the government yesterday announced a half-month bonus to the 1.3 million civil servants and a sum of RM500 to every pensioner.

The intention was good. Our Honourable Prime  Minister was reportedly saying the bonus payment “can lighten the burden... for the upcoming Aidil Fitri celebration.”

I am happy for the civil servants. The total pay out is RM2b. However, in my humble opinion that pay out would do little, if not nothing, to solve the problem at hand, especially the problem of the rising costs of living.

Can we all imagine a total sum of RM2b being spent in the next 10 days or so? How does that help in terms of controlling spiralling prices and inflation? In fact, quite to the contrary, this 2b additional spending within such a short span of time would only serve as inflationary factor.

The bonus could have been given in the form of a saving instrument for example. The government could give out ASB certificates to the civil servants (as well as other debt instruments to non-Bumi civil servants) to the tune of their bonus entitlement thereby ensuring some savings for the civil servants as opposed to cash pay outs which will do nothing but to flare up inflations.

I could be wrong as I am not an economist. But I have been opposed to stop-gap measures for a long time.

To me, all problems, especially national problems, will have to be met with a holistic solution. Stop-gap measures look good for a while, until more and more gaps appear in the future and we would run out of plugs to plug those gaps.


Anonymous said...

Excellent analysis.
Wow Arty besides being a lawyer , you are an economist too !

Eh...does that mean economic doomsday is here ?

Anonymous said...

Aiya! Why do you have to write about such complicated stuff. The PM and his people cannot comprehend all these rocket science stuff.

You ahould write in layman's term for them, e.g. how much commission will I pocket if I do this or do that, what is my free share of the profits or investment if I sign this document. This type of language, they will understand perfectly.

It will be foolish to think the that PM and his government is concern about impact of inflation to the rakyat or whether this country will be earning its GDP from exporting our women as domestic helpers in 10 years' time.

d.ali said...

Exactly, Sir. Had sort of same discussion with colleague at work this morning. When I pose to them the risk of increasing inflation following the quick-shot-popularity-seeking-announcement that may further dampen the already dwindling economy, none agreed as all they could think of now is that (i) their parent won't be asking for too much angpau this raya,(ii) none of their concern as that's what raya is all about; shop till you drop!

It sadden me since we, the young executive working at the GLCs couldn't see this coming, what more be critical of its potential impacts.


Anonymous said...

Just the other day, the Finance minister in charge of the EPU, Mohd Nor(the Forex gambler), was telling the heartlanders in Penang that all is well, as the financial 'meltdowns' in both US & Europe would NOT affect M'sia. M'sia can depends on Asia to achieve the projected growth.

So Art, u r death wrong as a non-econ trained doomsayer!

Hail the minister. Thank god we have u to chart our economy.

Donplaypuks® said...

There is an unhealthy concern over this Debt:GDP ratio not only in the USA, but all over the world.

Firstly, there was not an iota of doubt that the USA would NOT default on their debt. It was all politics and both the Republicans and S&P will pay a heavy price for dragging politics into economics and causing a blood bath on the stock markets of the world.

S&P and other rating agencies have this filthy habit of re-rating companies and now countries, long after the damage has been done. They did this to Malaysia too before, revealing that the way they rate anything is based on a flip of the coin than any real scientifically proven method.

The Forbes interview on CNN last night was very revealing. He was quite right. If the USA is not AAA rated, then no country in the world can be rated as such because they all depend on the US, US$ and economy so much! No other country innovates as much as the USA to keep the world economy going.

What the Republicans and S&P have done is the classic 'cutting your nose to spite your face'!!

we are all of 1 Race, the Human Race

Anonymous said...

I like your suggestion on how the half month bonus and RM500.00 to civil servants and pensioners ought to be disbursed.

Could not agree more with the impact such short-term liquidity would have on the inflationary trend especially if it precedes Hari Raya.

The sudden buying spree of more than 1 million people would certainly leave an impact.

What goes up seldom comes down when we talk about the prices of goods!

Pity those who have no such luck, the non-government servants and the rest of us who have to scrape by on whatever little that we have.

The cynical me thinks this is just a temporary feel-good measure and may not be good enough and may perhaps buy some much-needed votes for the PM. But the trail of disenchantment that follows the excitement of spending the bonus money will eventually exact its undesired toll beyond just the pockets of the spenders.

Antares said...

Not unlike timber tycoons who turn precious hardwood forests into golf courses and oil palm estates - and then, just to buy forgiveness or to stave off curses, handing out RM50 angpows to the now landless Orang Asli. The root of the problem lies in allowing those with completely shallow and misguided worldviews - and absolutely no ethical sense - to make crucial decisions on what "development" actually means.

Anonymous said...

i see the half month bonus as a GE vote buying tactic rather than a stop gap measure to people's economic woes

Lee Wee Tak said...

Art, nice write up. The live on debt way of life has finally caught up with the world.

I heard over the radio (98.8) this morning that the BN government has assured the rakyat that the U.S. melt down do not concern us too much as our economy is catered towards domestic market and mainly trade with India and China.

bull crap. google up wikipedia and we know US is a critical trade partner while our domestic market is laced with excessively long supply chain, loads of dubious middle men and produce a population from which 15% can pay income tax.

And the vote buying bonus further strengthen suggestions that our finance minister has no prudence or discipline.

Year after year, supplementary supply bills are requested. This administration lives on over 20 years, a damn conclusive proof that it only knows how to spend, not save for a rainy day.

The bulk of the local debts are from EPF and those PNB amanah this and that (pyramid anyone). I also heard on the radio this moaning that we can withdraw from EPF account 1 to buy more of this amanah.

God help us

Lee Wee Tak said...

and that wally on 9 August 14:11, pure simpleton cheer leading pom pom nitwit.

which Asia country is the minister talking about? Those nations, India and China, substantially export to U.S. hence if orders from U.S. decline, they wil also suffer....so M'sia will also suffer.

the thig to do now is to diversify, or strengthen the local market as well.

and now when the world economy is heading towards a downturn, Malaysians will find that there is no safety funds stocked up somewhere in time of need.

Undilak kelalaian Barisan Nasional

Anonymous said...

'Borrowing is FASTER than producing !'
after GE13, PR's stomach headache bukan aku punya lo !!

zzzpm : " hahahaa, who cares !? "

Anonymous said...

All speculation on my part but....There was a capital/cash flight from Malaysia in the 100's of billions. Call it dirty money/corruption money, whatever. UMNO/BN does not need FDI. They hold the purse string to this "illicit" money. Their dilemma is when should or when can they safely bring back this money. They have been touting PFI, the 1MDB, etc.., all these are interlinked to the "illicit" funds now parked in offshore account waiting for the right time to be repatriated back to Malaysia. They tell you it's saudi money, whatever, this are monies that have been siphoned, maybe "laundried" and now waiting to come back into malaysia as PFI. Remembering P in PFI is Private, not public or sovereign.

Anonymous said...

The S&P agency has poor standard, how to assign US with 'AAA' rating when it has US14 trillion dollar of debt. Now, how about CHina which has surplus?wonder how many 'A' they going to assign? Dow jones lost 600 pts when standard and poor take away one 'A'. I dare not imagine if it rate it 'DDD' instead of 'AA+'