Rock Bottom Economics

November 26, 2014

Rock Bottom Economics

by Paul

KrugmanSIX years ago, the Federal Reserve hit rock bottom. It had been cutting the federal funds rate, the interest rate it uses to steer the economy, more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis.

But, it eventually reached the point where it could cut no more, because interest rates can’t go below zero. On December 16, 2008, the Fed set its interest target between 0 and 0.25 per cent, where it remains to this day.

The fact that we’ve spent six years at the so-called zero lower bound is amazing and depressing. What’s even more amazing and depressing, if you ask me, is how slow our economic discourse has been to catch up with the new reality. Everything changes when the economy is at rock bottom — or, to use the term of art, in a liquidity trap (don’t ask). But for the longest time, nobody with the power to shape policy would believe it.

What do I mean by saying everything changes? As I wrote way back when, in a rock-bottom economy, “the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly”. Government spending doesn’t compete with private investment — it actually promotes business spending.

Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets and investors that they will push inflation up. “Structural reform”, which usually means making it easier to cut wages, is more likely to destroy jobs than create them.

This may all sound wild and radical, but it isn’t. In fact, it’s what mainstream economic analysis says will happen once interest rates hit zero. And, it’s also what history tells us. If you paid attention to the lessons of post-bubble Japan or, for that matter the United States economy in the 1930s, you were more or less ready for the looking-glass world of economic policy we’ve lived in since 2008.

But as I said, nobody would believe it. By and large, policymakers and “Very Serious People”, in general, went with gut feelings rather than careful economic analysis. Yes, they sometimes found credentialed economists to back their positions, but they used these economists the way a drunkard uses a lamppost: for support, not illumination. And, what the guts of these serious people have told them, year after year, was to fear — and do — exactly the wrong things.

Thus, we were told again and again that budget deficits were our most pressing economic problem, that interest rates would soar any day now, unless we imposed harsh fiscal austerity. I could have told you this was foolish and, in fact, I did, and sure enough, the predicted interest rate spike never happened — but demands that we cut government spending now, now, now have cost millions of jobs and deeply damaged our infrastructure.

We were also told repeatedly that printing money — not what the Fed was actually doing, but never mind — would lead to “currency debasement and inflation”. The Fed, to its credit, stood up to this pressure, but other central banks didn’t. The European Central Bank, in particular, raised rates in 2011 to head off a nonexistent inflationary threat. It eventually reversed course, but has never gotten things back on track. At this point, European inflation is far below the official target of two per cent and the Continent is flirting with outright deflation.

But are these bad calls just water under the bridge? Isn’t the era of rock-bottom economics just about over? Don’t count on it.

It’s true that with the US unemployment rate dropping, most analysts expect the Fed to raise interest rates some time next year. But, inflation is low, wages are weak and the Fed seems to realise that raising rates too soon would be disastrous. Meanwhile, Europe looks further than ever from economic lift-off, while Japan is struggling to escape from deflation. Oh, and China, which is starting to remind some of us of Japan in the late 1980s, could join the rock-bottom club sooner than you think.

So, the counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time to come, which makes it crucial that influential people understand those realities. Unfortunately, too many still don’t; one of the most striking aspects of economic debate in recent years has been the extent to which those whose economic doctrines have failed the reality test refuse to admit error, let alone learn from it.

The intellectual leaders of the new majority in Congress insist that we’re living in an Ayn Rand novel; German officials insist that the problem is that debtors haven’t suffered enough.

This bodes ill for the future. What people in power don’t know or, worse, what they think they know but isn’t so, can very definitely hurt us.

–also published in

With Bad Economic News, Abe’s Magic Seems to Evaporate

November 21, 2014

Japan: Between Monetary Stimulus and Fiscal Austerity

Chairman Lodin, come clean on 1MDB, figures don’t lie

November 19, 2014

Chairman Lodin, come clean on 1MDB, figures don’t lie

by Kharie Hishyam

Like a toddler learning to walk, controversial state investment fund 1Malaysia Development Bhd is slowly coming out to refute its critics. But proper explanations are yet to come and its latest public statement only spawns more questions.

Amid the burning fire of controversy over its questionable dealings, state investment fund 1Malaysia Development Bhd (1MDB) has come out and “assured” Malaysians that its investments were carefully made and professionally managed. Alas, the same characteristic of being professionally managed can also probably be said about many of the 23 public-listed companies in Bursa Malaysia’s PN17 list. But what’s in labels anyway?

In the corporate world results, not reputation, is what delivers and one wonders why 1MDB, with all the professionalism within its managerial ranks, has bled losses year after year with only paper gains papering over the red ink.

lodin-wok-kamaruddinA corporate figure once said that numbers tell a thousand stories and it is in 1MDB’s numbers that the story contradicts what its chairman, Lodin Wok Kamaruddin, said about 1MDB’s investments.

So what had 1MDB so prudently invested in? According to its audited accounts, 1MDB invested a total of RM13.4 billion for the financial year ended March 2014 (FY14) in various places globally. This figure includes the RM7.7 billion parked in a structured investment company called a Segregated Portfolio Company (SPC) based in the Cayman Islands, managed by Hong Kong-based Bridge Partners.

And for these investments, 1MDB gained dividend income of RM437 million, which represents a paltry return of 3.26% on its investments. Considering the point that 1MDB could have parked the money in fixed deposit or government bonds and still get similar return — with an added bonus of less foreign exchange risk — it begs the question of why 1MDB bothered to go overseas in the first place.

Of course there is an even uglier side to the investment story: 1MDB’s audited accounts reveal that the investment fund is earning a mere 0.68% interest on its cash pile of nearly RM4 billion.

On the other side of the coin is that 1MDB’s finance costs or interest rates range from roughly 5% up to as high as 18% per annum.In effect, 1MDB is earning much less with its money compared to how much it is paying to have that money in its coffers. Worse, a big chunk of its money is left idle after paying so much to borrow the money in the first place, earning next to nothing in interest.

Why? Simple logic dictates that to make profit, capital must be put to work such that it earns more money than it costs to acquire the capital in the first place. That’s how you earn profit.

1MDBLeaving the capital idle definitely does not qualify as “investing”, unless having idle cash qualifies as investment (a poor one if you have loan repayments to meet). Why incur borrowing costs for nothing?

No wonder 1MDB is finding it difficult to service its loan commitments. Speaking of which Lodin stated that the investment fund believes it can meet its financial commitments.

“Some of the loans are long-term in nature but we believe this financial commitment can be met,” Lodin was reported as saying by Bernama, adding that 1MDB is looking to restructure its short-term loans to match its longer-term investments. “We are also in the process of adding and unlocking value to the assets that we have acquired.”

Najib and 1MDB

Recall that 1MDB already extended its RM5.5 billion bridging loan, originally part of a RM6.2 billion loan from Maybank Investment Bank in 2012, multiple times, even delaying its power assets listing due to negotiations on its debt obligations.

Now this begs yet another question: why borrow on such short horizons if the capital is intended for long-term investments? Would it not make more sense to match the repayment timeline with when the returns on investment are expected to flow in?

And unlocking value to the assets 1MDB had acquired, of course, would not be too difficult. Its properties were acquired cheap from the government, after all, and from there it is simply a matter of bringing valuations up to market benchmarks.

As for its power assets, KiniBiz had previously examined why 1MDB grossly overpaid for them, even borrowing money to do so despite having much cash lying around. Now is this prudent investing as 1MDB Chairman Lodin so generously claimed? Hardly. Numbers don’t lie and in 1MDB’s case, red ink remains red however you call it otherwise.

Perhaps 1MDB is revolutionising investment before our very eyes. Maybe there is a deeper wisdom to its strange madness of borrowing at high cost and making low-return investments.

Or maybe, just maybe, 1MDB simply made poor investment choices and consequently lost some RM5 billion over the past few financial years bar paper gains from revaluing its properties.

In which case what 1MDB seems to be saying right now fits right into the first part of the Kübler-Ross’ five stages of grief: denial. And we have not even talked about its losses of up to RM4 billion from its bond mispricing yet…



Malaysia: High Income Nation, but Low Income Rakyat

November 18, 2014

Malaysia: High Income Nation, but Low Income Rakyat

By Anas Alam Faizli

Anas Alam FaizliMalaysia’s current socio economic structure can be summed up in four words, “Rich Malaysia, Poor Malaysians.” Malaysia is blessed with abundant natural resources with petroleum being the most precious. Add the land, other commodity resources, large youthful population and the country has all the essential ingredients to flourish.

How then did this small nation of 30 million manage to end up with the unsolicited title of among the region’s most unequal nation between the rich and poor. What happened?

NEP: The Noble Intention, Initially

The NEP that was introduced in 1970 was the grand plan that were two things; our proactive action to begin developing the newly independent nation, and our reaction to the British Divide-and-Conquer system.

Textbooks tell us that the NEP strategy was two-pronged; eradication of poverty, and the restructuring of society. But what popular culture and the masses cannot help but to associate the NEP with is the deeply entrenched Bumiputera agenda at its core which target Bumiputeras to own 30 percent equity share in the Malaysian economy.

But “share of the economy” here apparently has broader connotations and implications. It expands from assets and equity ownership, right down to contract procurement, education quotas, and employment policies. Bumiputeras were the poorest of all ethnic groups. Thus the idea was to positively discriminate Bumiputeras, get them on their tracks, and realize a more equitable ownership of the economy. And thus we began traversing down this path of affirmative action.

As time went by and various development plans under the Malaysia Plan or Rancangan Malaysia were undertaken, tremendous improvements were made. Bumiputeras and Malaysians, in general, now own more assets than their parents. A middle class population burgeoned. Poverty rate, measured on an absolute basis, has gone from as high as 49.1 percent to 1.7 percent as reported in the latest Household Income Survey for 2012 published recently.

The Trickle-Down Disaster

Unfortunately, in the 1990s the equity target was still far off the target. Time was running out and Malaysia took a short cut with the ill-planned “trickle down” effect. Malaysia throttled down the road of enriching and empowering a few Bumiputeras who would go on to be successful entrepreneurs and asset owners and the subsequent multiplier effect will trickle down onto and propel the rest of the Bumiputera community. The philosophy was for this “trickle down” effect that surely, it was believed, would be inevitable.

The trickle down effect did not and does not work. Even the Prime Minister Dato’ Seri Najib Tun Abdul Razak himself acknowledged this in a recent interview with Martin Soong of CNBC. In fact, it perpetuated high inequality amongst Malaysians. It became something we so desperately clung on as an economic doctrine and still believed as true.

So even before we got there, we are now taking on a new “Malaysian Dream”. Surely, it is only natural that the next course of action is aiming for a bigger middle class. Or are we really achieving it?

Yet Another Missing Target?

We say High Income Nation is the way to go and have set a new target to achieve a per capita income of US$15,000 by year 2020. It means the Gross National Income (GNI) – a measure of the country’s production adjusted with net incomes from overseas – divided by the country’s population must equal US$15,000. That target, we are told, is achievable by 2017-2018. Currently, our per capital income is $US9,970.

Never mind that many of the relatively lower income-earners find themselves in pretty much the same position on a relative basis. Never mind that Bumiputera households are still the poorest on average in the bottom 40 percent rung of Malaysian households. Never mind that even if most of this nation’s income in year 2020 accrued to say, only 100 of the richest people in the country, we can achieve that $15,000 per capita target because it is grossly divided by the whole population.

Measuring income in US dollar term is already problematic. Many in the research community and the public have expressed concern about this as the US dollar is not the currency that most Malaysians earn and transact in. So when the Ringgit was stronger than the US Dollar last year, we have every reason to question whether GNI per capita measured in dollar terms, represented the true magnitude of growth per capita, and whether this target is truly achievable.

But even if we put this currency issue aside, the $US15,000 per capita income target cannot be that headline “dream” we can congratulate ourselves on when achieved. Here are some reasons why:

Rich Malaysia, Poor Malaysians

First, for majority Malaysian households, about 90 percent of their incomes are attributed to wage and salary, including self-employment. Even for those who can afford to own some assets, this is still true. What more those who do not even own assets, and thus do not have incomes from owning assets.

Note that Malaysian GDP (measured using the income method) will indicate the following breakdown: 28 percent wages and salaries, 67 percent business profits (including mixed income), and 5 percent taxes and subsidies. What does this mean? It means that out of total GDP, only 28 percent is attributable to the working Malaysian population.

For the past 15 years, the contribution of wages and salaries to Malaysian GDP has fluctuated between 26 to 32 percent and the only reason it hiked up to 32 was because of the recession in 2008 when corporate profits declined. In Singapore, this number is already as high as 42 percent in 1997.

In other developed countries such as Korea, Canada, the UK and Japan, the corresponding number is 46 percent, 51 percent, 55 percent and 52 percent, respectively. Malaysians are not getting the bulk of the country’s production into their pockets! This is set to worsen; the ETP’s document (A Roadmap for Malaysia: Chapter 2) itself indicated that forecast wages over GDP for the NKEAs will drop to as low as 21 percent in 2020! What are we smoking and what are our priorities, really?

In fact, for the past 15 years as well, the salaries of Malaysian workers have been lagging behind our productivity. Productivity growth rates were in line with rates of growth of salary circa 1998, but it has been slowly lagging thereon. As of last year, the productivity in the manufacturing sector is 45 percent above salaries. This roughly translates into the fact that our workers are under-paid by at least 45 percent. All this illustrates how GNI per capita will not represent well the incomes that majority Malaysians will enjoy as wages and salaries.

Second, more than 90% of the wage-earning workforce does not even earn much. Only 11.05 percent of government income is generated from personal income tax and only 1.7 million of the 12.4 million workforce is eligible to pay tax. EPF reported that 78.6% of its contributors database earn RM3,000 monthly or less. This is another illustration of how low the majority of the Malaysian people’s incomes are at the individual level. So what is this High Income Nation we are about to achieve in a few years? A High Income Nation with a low earning population?

Third, there is the grave issue of purchasing power. High income alone does not necessarily translate into better economic well-being and quality of life if that high income cannot purchase much. A simple analysis would show how a fresh graduate in 1980 could purchase more compared to today’s graduate. With an estimated pay of RM1,000 a graduate could afford an Opel Gemini costing RM12,400 or about 12 months of his salary and purchase a decent house, perhaps even in Taman Tun, costing at RM62,000 or 56 months of his salary.

Today, a graduate can have a basic pay of RM2,500 which is only 2.5 times higher than a graduate in 1980. But a comparable Mazda 6 now costs RM178,000 or about 71 months of his salary and a decent house far outside Kuala Lumpur, say in Nilai, would cost RM350,000 or 140 months of his salary. The cost of living has spiraled viciously upwards and the purchasing power of the average salary man has slumped.

Fourth is the issue of inequality, and this is by far the most compelling argument against a headline US$15,000 High Income Nation target. There is a reason that many academics, civil society groups and the people at large have recently been blowing the inequality trumpet; Malaysia has among the highest income disparities in the region. On August 3, 2013 the Second Finance Minister Datuk Seri Ahmad Husni has also acknowledged this.

Income growth measured from 1970 have shown that the Top 20 percent households far overtake that of the Middle 40 percent and the Bottom 40 percent households, while the income gap between them on average is widening. The GINI coefficient, which measures the degree of disparity between the highest income and the lowest income, remained rather stubbornly high without any improvement around 0.43 to 0.44 across the span of the past 20 years for Malaysia.

Earning RM10,000 a month on a household basis will already put you as the top 4 percent of Malaysian households, and essentially in the same group as even tycoons like Ananda Krishnan. 73 percent of households earn less than RM5,000, with an average of 2 income earners or workers per household. This alone shows how much disparity there is. Furthermore, it renders our $15,000 High Income Nation target achievable in form, yet void in spirit and substance.

How did this high and persisting inequality happen? The failure of that very “trickle down effect” that we hoped for is a major contributor. The continuous enrichment of the select few continuously fosters this gap in a long and perpetual cycle. The inequality in our education system also contributed to the large 77 percent of Malaysian workers being only SPM qualified and below thereby commanding low salary levels.

For the sake of profits, businesses are unwilling to invest in productivity and training of locals. We appease the business community by giving way to large influx of foreign workers, especially in factories, in place of relatively more expensive locals. The myth that locals are choosy and unwilling to work in factories is then proliferated, despite locals being able to work in factories if compensated adequately. This is proven in the oil and gas industry; hard laboring welders and fitters are all local Malaysians, despite having to work under scorching heat, as the compensation is rewarding.

So What is Really the Malaysian Dream?

We do not have one! But if we plan to have one, we cannot leave the average salary man behind, the man that forms more than 80% of the Malaysian population. We need a dream that is inclusive and holistic and addresses quality livelihood for Malaysians at large, and not just a select few.

Income inequality is a very serious impediment to our hopes for a truly developed nation. It would be a great irony if the majority of Malaysians do not truly experience that high-income status, once we reach that $US15,000 mark.

How are we to declare ourselves high income when the effects of inequality such as crime, unemployment, health and social problems as well depleting social goods will be so apparent? Even if we do make that high-income bar, problems that emerge out of inequality raise serious questions about the sustainability of that high-income status.

For as long as we do not come together, commit to say no to inequality in resolute, and help alleviate the bottom 60 percent potential economic producers, this problem will not solve itself and will come back to haunt us.

Moving forward our policies should be designed and constructed based on this understanding. We would have not proposed a regressive GST to increase our source of revenue if we understood this fact.

We would have instead tried to increase revenue from other sources that will not hurt the majority of our people like the inheritance tax, progressive taxation and capital gains tax.  But that argument, is for another day.


Auditor-General can do a lot on 1MDB

November 16, 2014

Auditor-General can do a lot on 1MDB


AmbrinQUESTION TIME: Perhaps – perhaps – the Auditor-General may not be able to or have to audit the accounts of scandal-ridden national strategic investment fund 1Malaysia Development Bhd or 1MDB. But surely he can make an assessment of the impact of 1MDB on government finances and the threats it might pose. And more.

It’s easy for Auditor-General Ambrin Buang to throw his hands up in the air and say there is no reason for him to audit 1MDB because it has already been audited by a big four accounting firm – Deloitte.

To quote him: “Why are we not auditing 1MDB? My answer is that its accounts have already been audited by one of the ‘big four’,” Ambrin told a town hall meeting session with the media on Wednesday on the third series of the 2013 Auditor-General’s Report that was released on Monday.

“So, there is no reason why we should come in again,” he said, responding to media questions on why it had not taken any audit action on the controversial 1MDB. Auditing financial statements is a very labourious examination.”

Indeed it is. But does that mean that the auditor-general sits around and twiddles his thumbs while a major scandal involving a company fully owned by the government’s Minister of Finance Inc unfolds right before his eyes? Surely he has been reading the newspapers.

Don’t highly questionable things like raising funds willy-nilly, underpricing bonds while paying too much for assets, paying high interest rates, keeping billions of ringgit in low yielding deposits while raising even more funds and paying a fortune in fees to Goldman Sachs not pique the auditor-general’s curiosity?

Let’s put down some facts first about 1MDB for the benefit of the auditor-general. It would not have made any profits since its inception in 2009. If not for revaluation of government property sold cheaply to it, its losses to date would have been RM5 billion as at end March 2014.

Najib and 1MDB
On the liability side, it is funded by RM1 billion in share capital by the Minister of Finance Inc. But its borrowings as of March 31, 2014 amount to a massive RM42 billion, 42 times the share capital.

The gearing ratio, the percentage of debt to shareholders funds or equity of RM1.7 billion, is a massive 24 to 20 percent which could be among the largest if not the largest for any large company in Malaysia. In the private sector, that kind of gearing will be considered unbearable.

To cap it all, it is doing very little with that kind of borrowings. It has bought power assets worth some RM10.5 billion for which it took a loan despite there being considerable liquidity within the firm. Even if we subtract that RM10.5 billion from RM42 billion, some RM31.5 billion is substantially unaccounted for.

Available for sale assets, a vague term for financial assets which are held for sale and for which there may be no provision for diminution in value, comes up to a massive RM13.4 billion, including RM7.7 billion tied up in Cayman Islands in a mysterious segregated portfolio company which no one knows anything about.

Apart from that, there are various cash or near cash assets which account for a further RM9.1 billion. Add these up and the total amount of assets doing practically nothing comes up to a massive RM22.5 billion. Why keep these assets in near cash and then borrow some more?

In the first few years alone of its life, after stripping out revaluation gains, it is obvious that 1MDB has not been able to earn more than the interest on borrowings as shown by the RM5 billion losses. Why? And why is it continuing to borrow? And can it ever get assets that will earn significantly more than the interest costs?

Loan mispricing

What about 1MDB’s loan mispricing, which is already over RM4 billion and could eventually amount to RM7 billion or more if new loans were made on the same basis? And what about the massive fees paid to Goldman Sachs of over RM500 million for arranging some loans?

Surely the Auditor-General can do something about these. After all, the Minister of Finance Inc, is a government company, no different from any company owned by a ministry. 1MDB is that company’s wholly owned subsidiary. Surely the auditor-general has every right to probe any government company which poses a threat to government finances.

Remember that the government originally said that it guaranteed explicitly only RM5.8 billion of loans and denied there was any letter of support for anything more. But now after the support letter came out in the press, it now concedes there was indeed such a letter for a further RM10 billion.

How many more letters of support could there be for 1MDB? And what about other government companies and bodies? Legal opinion is that the letters of support are in substance no different from guarantees and that the government will have to pay up in the event of default by 1MDB. Surely this is an area which concerns the auditor-general and the amount of contingent liabilities the government has to bear.

The Auditor-General plays a role as the watchdog of the government and the public. It is his obligation to publicly highlight potential threats to government finances and to make recommendations to avoid them, and probe them if need be. He has done this commendably well for other government departments and bodies. Why should any exemption be given for 1MDB? What’s so special about 1MDB?

Mr. Auditor-General do your Duty, not make excuses

November 15, 2014

Mr. Auditor-General do your Duty, not make excuses

by AH Manaf (11-13-14)

AmbrinI read with concern your reply on why you did not audit 1MDB, saying their accounts had already been audited by one of the “Big Four”, and that it is a “very laborious task” to audit a firm.

In view of the controversies surrounding 1MDB, passing the buck to “The Big Four” is simply not good enough. It creates a misleading impression of the role, scope and limitations of external auditors.

Companies involved in the biggest scandals in financial history employed leading audit firms. Enron was audited by Andersen. Our own BBMB was audited by Touche Ross (later swallowed up by Deloitte who happens to be 1MDBs current auditor). Deloitte was the auditor in the Transmile scandal.

Lehman Brothers the golden boy of investment banking that went spectacularly bankrupt in 2008, was audited by Ernst & Young. It is chilling to remember that Lehmans went bust by selling US$50 billion worth of toxic asset to Cayman Islands banks on the understanding that they would be bought back eventually.

What this created was the impression that Lehman’s had US$50 billion more cash than it did and US$50 billion less toxic assets than it held. All this under the nose of Big 4 Ernst & Young.

Auditors are not infallible, if they were, there would be no financial scandals. Audit firms are businesses like any other and operate within the scope of auditing standards which themselves are not infallible.

Sir, I do not dispute that reopening 1MDBs books is “very laborious task”. The decision whether to take on this task should be determined among other things by the entity’s risk profile and I would like to ask whether you factored these considerations into your decision?

1. 1MDB has gone through 3 of the Big 4 firms in the space of 5 years according to reports in The Star, The Edge and the Singapore Business Times.

2. 1MDBs first auditor was Ernst & Young who resigned without signing a single set of accounts (The Star, The Edge).

3. 1MDBs second auditor KPMG resigned late 2013 (i.e., many months after FY March 2013 ended) without signing off the accounts.

4. 1MDBs third auditor Deloitte issued unusually lengthy notes and critical judgments to the FY 2013 accounts. In the industry this can be termed “Cover Your Back”, disclosing as much detailed information as possible in order to protect your reputational risk in the event of future problems.

5. Add to this 1MDBs unusual and inexplicable late filings of annual reports for FY 2013 and FY 2014. Some of 1MDBs subsidiaries have allegedly not filed accounts since FY 2013.

Najib and 1MDB

1MDBs former 100% subsidiary SRC International’s accounts have not been filed since March 2012. This subsidiary is now 100% held by the MOF and has borrowings of RM4bn via KWAP bonds guaranteed by the government. The auditor of SRC in FY 2012 was Deloitte International.

As I explained, auditors are not infallible. They cannot 100% evaluate a company’s financial health.However, they are trained to watch out for “alarm bells” and evaluate fraudulent and other risk factors.

The question is, why did 1MDB’s first two auditors extricate themselves from a lucrative and prestigious government account? With 1MDBs multiple auditors, late filings, missing subsidiary accounts, I find it astounding that your alarm bells as the Auditor-General of Malaysia have not rung at all.

You as the Auditor-General have extensive powers as enshrined in the Audit Act 1957 including the power to “call upon any person for any explanations and information which the Auditor-General may require in order to enable him to discharge his duties”.

I would like to ask, before dismissing the need for the “laborious task”, did you make any enquiries formal or informal to ascertain the claim and discover the reasons why 1MDB had 3 external auditors in 5 years?

Did you communicate with officials at the MOF to find out why 1MDBs ex-subsidiary SRC, now 100% owned by MOF has not filed accounts since FY March 2012?

With borrowings of RM4 billion from pensions fund KWAP guaranteed by the government, surely this company warrants the interest of the Auditor-General’s office.

In addition to the unusual pattern of 1MDB auditors and annual reports, there is publicly available information which also rings alarm bells and enhance the case for investigation.

1. 1MDB’s unusual revaluation policy. 1MDB’s revaluation surpluses recorded in the accounts are RM826 million (FY2011), RM569 million (2012), RM2.7 billion (2013) and RM896 million (2014).

Therefore, total revaluation in the last 4 years amounts to a colossal RM4.9 billion. If you deduct this amount from 1MDB’s current shareholders funds of RM2.4 billion, 1MDB is in a position of negative equity of RM2.5 billion, i.e., the company would be “balance sheet insolvent”.

I will not go into the applicability of MFRS14, but this begs the question why 1MDB adopted an unusual revaluation policy in contrast to most property developers who book in land at cost or book value?

The simple calculations show that if 1MDB did not undertake this unusual revaluation policy, its shareholders funds would be negative to the tune of RM2.5 billion, and the company would be considered “balance sheet insolvent”.

In the event of a material downturn in the property market this has serious implications for 1MDBs asset cover.

2. The infamous RM7 billion Caymans account (SPC). As you know, Segregated Portfolio Companies (SPCs) are notoriously difficult to value.

Deloitte took pains to highlight in the notes that they depended on unidentified “independent third party valuers”, meaning they themselves did not do a mark-to-market or other valuation. Furthermore much of 1MDBs total RM16 billion cash and portfolio investments held abroad is classified by Deloitte in the notes as “Level 3 assets”, i.e., illiquid assets whose fair value cannot be determined by observable measures (high levels of Level 3 assets have been implicated in insolvent companies of the 2007 global financial crisis).

These issues are highlighted for users of the accounts to read and make their own informed interpretations. My question is, did you?

A brief look at the history of this Cayman’s 7 billion and how it came into being as noted in the accounts is again enough to raise alarm bells.

A joint venture with Petrosaudi, mubahara notes, KPMG’s “emphasis of matter” (audit flagging up significant uncertainty), stake purchased by an undisclosed third party and finally the 7 billion proceeds placed in an off-shore Cayman account.

We therefore should ask the question, why did Deloitte highlight in the accounts that they did not evaluate this Cayman portfolio investment themselves?

Sir, taking all this into account, can you really claim you have done everything in your power to dismiss all allegations and doubts before dismissing the need for the “laborious task” of opening 1MDBs books?

I also address this question to the chairman of the Public Accounts Committee, Datuk Nur Jazlan Mohamad, in view of the PAC’s role of examining not only the audit report but the “accounts of public authorities and those administering public funds” and “other matters it deems fit.” – November 13, 2014.