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 @www.kinibiz.com

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…



Auditor-General can do a lot on 1MDB

November 16, 2014

Auditor-General can do a lot on 1MDB

by P.Gunasegeram@www.malaysiakini.com

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?

The Avaricious, the Corrupt and the Uncaring

November 15, 2014

The Avaricious, the Corrupt and the Uncaring

by Balan Moses

Balan-Moses-ENG NEW-1THE mudflow and landslides that killed five in Cameron Highlands last Wednesday and caused untold misery to scores of others is a tragedy in more ways than one.

The human toll and damage notwithstanding, the price the public had to pay due to official malaise was astronomical. People who had been living their lives peaceably and in harmony with the environment were rudely awakened by mudflows and landslides caused by extensive land clearing and poor management of the same.

They had thought that last October 23rd’s incident where a mudflow had tore up houses and other buildings and tossed cars about was the last of this intrusion into their lives.But they were sadly mistaken as events last week amply proved.

CAMERON HIGHLANDSIllegal Land Clearing in Cameron Highlands

Thirteen months later a rural community that was minding its own business was shaken to its roots by the bitter fruits of the labour of the corrupt, the avaricious, the careless and the uncaring.

While many businessmen will generally do anything they need for the extra ringgit (as can be seen in the case of greedy people in the Cameron Highlands issue), I take exception to the continued malaise of government – in this case, the relevant federal authorities, the state government and its related agencies and the local authority  – in the matter.

The proliferation of farming activities, both legal and illegal, has been ongoing in the former hill station for decades with little being done to monitor such activities.If something had been done at the genesis of the problem, the people of Cameron Highlands, more specifically those in the Ringlet, Bertam Valley, Kampung Raja and surrounding areas, would not have been caught in this most distressing situation.

The rivers became silted over the years, the temperature rose, the beauty of pristine Camerons Highlands was desecrated by vegetable farms.But no one really cared. The businessmen continued with the expansion of their farms and the powers that be with the nominal supervision of such activities.

Last October, there was general umbrage in Malaysia, especially in government circles, over the mudflows amid promises that something would be done to ensure that this would not recur.

But they could not exercise authority over the perpetrators of such environmental carnage. Neither could they control nature, which did what came naturally to it, and moved tonnes of mud down an impossibly narrow and shallow river into  homes and habitation.

At this point, the northern Malay saying comes to mind. Pi Mai, Pi Mai. Dok Tang Tu.’So what happens now? Enough of finger-pointing, I say. It has got us nowhere. The only thing that can be achieved with this exercise is placing fault with those responsible. It cannot change the situation unless people are shocked out of their inertia and into action.

I am amazed that Government and elected officials are telling us the same thing that they did last year when a similar occurrence took place.Statements are now being made that should put the fear of God in those engaged in illegal land clearing. But will they work?

To be fair, I do not really know. The government appears to be well-intentioned in making these statements as it did the last time around. Only time will tell.

I believe the key to a change in the situation in careful and accurate mapping of the entire Cameron Highlands area by the local authority with the necessary equipment to perform the task in a particularly difficult terrain.

Helicopters may be the answer to this long and tedious task on mapping out areas of legal activity and otherwise. In this respect, I am astounded by statements alluding to the belief that the authorities may not have known the extent of illegal clearings in the Camerons.

This is unbelievable. It may be part of the Malaysians malady of government officials sometimes not seeing and acting on problems that overtly affect the people. One thing is sure: We need dedicated and conscientious officials who are willing to go the extra mile to keep our hills safe for future generations.

I believe I speak for all Malaysians when I say that we are unwilling to see another tragedy anytime down the road. We must act now. There is no other choice.


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

November 15, 2014

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

by AH Manaf @www.themalaysianinsider.com (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.


Tengku Razaleigh Hamzah’s Letter to his Parliamentary Colleagues

November 12, 2014

COMMENT: This is a well written letter by YBM Tengku Razaleigh Hamzah, our former Minister of Finance and incumbent Member of Parliament for Gua Musang. Unfortunately, this letter missed its target. It should be addressed the Prime Minister cum First Finance Minister and his colleagues and staff at the Treasury. Our Parliamentarians, especially backbenchers from the ruling party, are not interested in substantive issues related to our public finances. These MPs prefer to shout down at opposition parliamentarians when the latter speak before our august House. No meaningful debate can, therefore, take place in our Parliament.  Just look at the antics of Bung Mokhtar, MP for Kinabatangan, Sabah for starters.

That said, the MP from Gua Musang has done what none of the MPs in the ruling government have done. He discusses openly the state of our national finances which are deteriorating rapidly due to internal factors arising from mismanagement of our economy by the Prime Minister, and negative developments in the global economy, particularly the economic slowdown in China which can undermine our growth prospects in 2015.

Tengku Razaleigh said, “The Government has been ignoring these signals towards a global economic reset, begun with the 2008 sub-prime crisis in the US and sovereign debt issues in the Euro-zone, which is now shifting its focus to Asia with the slowing down of the Chinese economy and the Modi government’s recharging of the Indian economy.” He mentioned our government’s exposure to the loans of 1MDB, which, in the event of default, would have serious repercussions on our national balance sheet and the economy. Of course, he is not alone in raising alarm bells. Tun Dr. Mahathir and others have been critical of Prime Minister Najib Tun Razak on 1MDB.

Najib and 1MDB

Not only have government backbenchers turned a blind eye to the emerging 1MDB scandal, they have also chosen to silence the opposition parliamentarians whenever they raise the 1MDB debt issue. Even our mainstream media refuses to write or comment on an issue of public interest. 1MDB matter is very serious no doubt. And the Najib administration must come clean on this matter as Malaysians have the right to know the facts relating to 1MDB investment activities and the state of its finances.

With regard to the 2015 Budget,  Tengku Razaleigh said, “[T]he problem with our public finance is not so much on the revenue side, but on the expenditure side. The increase in public sector fixed overhead costs cannot, for instance, be at the expense of development expenditure, especially when so much more is needed to bring up the economic status of Sabah and Sarawak in terms of social infrastructure and basic amenities compared to the Peninsular states. The share of the latter expenditure has been decreasing as the operating budget increases, from in excess of 30 per cent a decade ago to about 15 per cent of the total budget proposed for 2015.With the Auditor-General exposing wastage, profligate spending, unaccountable losses, and sheer incompetence and intransigent corruption, both petty and in high places, we are excused from any restraint to express our anger and intolerance as taxpayers and ordinary citizens at the current state of affairs.  There are efficiencies that can be had to enable cutting back on the secularly rising operating budget over the years.”

I have said a number of times in the past that the easy part of the Budget is raising money. The government is vested with the powers to tax. The challenge is using revenues to bring maximum benefit to the rakyat.  Is the present government doing this? Obviously not.  Just read the Auditor-General’s report which “exposes wastage, profligate spending, unaccountable losses, and sheer incompetence and intransigent corruption, both petty and in high places…”(Tengku Razaleigh)

We can no longer turn a blind eye  to our country’s finances. We must make it known to politicians in power and their professional advisors that we expect greater transparency and accountability in fiscal management. I also do not need to remind them that governments have been fallen when their economies are mismanaged.  –Din Merican

Tengku Razaleigh Hamzah’s Letter to his Parliamentary Colleagues

Y.B. Member of Parliament.
Y.B. Tuan,
Tengku Razaleigh Hamzah
With the utmost respect to you as responsible Members of Parliament duty-bound to serve the interest of our beloved Malaysian people, I am writing to you about some critical economic issues besetting our country today, affecting the rakyat and impacting on our future generations. Avoiding the “business-as-usual” debate on the 2015 Budget tabled by the Government now on-going in the august House, I choose this route in order to underline the seriousness of the matters involved. The negative impact of the current Budget proposals, I believe, will most immediately be felt by our middle-class, recent graduates, first time employees and the poorer income groups.  While endorsing the “people economy”, the Budget 2015 does not seem to give them priority over the “capital economy”.
2. From the current perspective, we can only see that the nation is moving headlong in the wrong direction, that current economic trends are not sustainable, which, if not corrected, will lead to a crisis, which we can ill afford, sooner than we can safely anticipate, nor can we get out of it without much hardship to our ordinary citizens. Such a crisis will threaten the future peace, prosperity and security of our nation.
3. The 2015 Budget projects that GDP growth rate next year will likely be around five to six per cent, which is thought  to be sufficient as envisaged in the Economic Transformation Programme (ETP) to push the country forward to achieve developed status by 2020. This forecast may be overly optimistic given the current global economic threats and our own model of growth that depends so much on our external markets and the optimism of foreign interests in our economy. As noted in the 2015 Economic Report, the downside risks are at higher odds that may impel an economic shock through our body politic. More importantly, these figures conceal some forewarnings that are not highlighted.  I think the Government has been ignoring these signals towards a global economic reset, begun with the 2008 subprime crisis in the US and sovereign debt issues in the Eurozone, which is now shifting its focus to Asia with the slowing down of the Chinese economy and the Modi government’s recharging of the Indian economy. While rocking all boats, only those prepared with anticipatory reforms will be able to weather the incoming storm.
4. In terms of government fiscal management, the tipping point, induced by an external economic collapse such as a crash of the US Dollar or a debt default by 1MDB, would throw our financial sustainability into a spin. The rule of thumb for sustainability (whether it can be funded by current output together with net foreign inflow) for any given year is that the sum of government debt (in 2014 around RM41billion) plus outstanding loans of commercial banks and households (now totaling RM1,273 billion) – making up to RM1,314 billion – must NOT be more than five times the sum of government revenues (that is, 5xRM225b=RM1,125 billion).  Clearly this rule of thumb has been breached!
5. A good part of this deficit and the national debt overhang arises on the operating budget side from tax expenditures to support consumption to achieve growth, for example through the BRIM awards, and to finance the public wage, subsidies and pension obligations. This consumption-based expenditure, together with the high energy and food subsidies given to industry and the public to sustain aggregate demand, is itself not sustainable. This type of expenditure to boost the economy does not add to the capacity building through investment that is necessary to enhance future economic growth.  But the Government still persists over the last five years in driving a consumption-based pump-priming to compensate for the weakening growth fundamentals on the revenue side, including exports. I believe it is more fruitful to provide allocations for the growth of the agricultural sector to enhance food security and stop foreign exchange outflow through the import of food. This is more beneficial in the effort to support the cost of living of the masses in times of economic emergencies.
6. The problem with our public finance is not so much on the revenue side, but on the expenditure side. The increase in public sector fixed overhead costs cannot for instance be at the expense of development expenditure, especially when so much more is needed to bring up the economic status of Sabah and Sarawak in terms of social infrastructure and basic amenities compared to the Peninsular states. The share of the latter expenditure has been decreasing as the operating budget increases, from in excess of 30 per cent a decade ago to about 15 per cent of the total budget proposed for 2015. With the Auditor-General exposing wastage, profligate spending, unaccountable losses, and sheer incompetence and intransigent corruption, both petty and in high places, we are excused from any restraint to express our anger and intolerance as taxpayers and ordinary citizens at the current state of affairs.  There are efficiencies that can be had to enable cutting back on the secularly rising operating budget over the years.  I would have recommended that an Auditor-General office be established in every ministry and government agency to ensure necessary compliance and accountability in public spending. An Office of Ombudsman answerable to Parliament should also be established on the executive side besides the Public Accounts Committee of parliament. At the same time, we need to control and eliminate corruption by strengthening the Financial Procedure Act through its revision and amendment.
7. The rising cost of living is the most urgent issue in the economy.  The raft of knock-on price increases subsequently in transport, electricity and food items etc. act to increase the build-up of pressure on the cost of living now facing the people. The issue of the rising cost of living affects everybody, but impacts the middle and lower income classes more than others. The main causes of rising prices are insufficient supplies to meet rising demands. Hence more could be done to liberalize the economy. We must monitor the cost of electricity to ensure its affordability among the people. The same goes for road toll charges. It must be reviewed to ensure that unavoidable cost increases must be reasonable. If a road toll cannot be avoided, then the government must finds ways not to burden the people. More licenses, less quotas, a greater ease of doing business especially for small and medium businesses and traders, should be considered.
8. The cost of housing has been rising in major urban centres, and house prices have been accelerating due to demands engendered by foreign and local investors, not just for higher-end properties but also the lower cost categories.  Affordable housing, even with the 1Malaysia Prima Homes Plan, is currently beyond the reach of fresh graduates and the lower middle class who are facing the spectre of unemployment or low wage employment and heavy debt. In this regard, I would like to see the government, through Bank Negara, reviewing the private housing loan programme of commercial banks for houses below RM250,000 which should be based on service charge rather than on compound interest.
9. Next year’s implementation of the Goods and Services Tax (GST), although having a one-time impact and is then dissipated through the rest of the economy, is bound to add to this pressure on living costs.  In order to ease the rising burden on the rakyat, I would like to propose that the implementation of the GST be postponed until the economy is consolidated and strengthened. It is hoped that our economy would enjoy a rapid and a long-term high growth. Should there still be a need to implement the GST, it is hoped that the rates will be recalculated.
10. Beyond that macro-picture, I am seriously concerned about the high personal and household debts that are reaching critical levels, now in excess of 87 per cent of GDP, due to housing mortgages and car loans, study loans, credit card and personal (through Ar-Rahnu or Ah-Long) consumption charges that are pushing debt repayment ratios close to 30 – 40 per cent of household incomes. This situation has led to the acceleration of personal bankruptcies and mental pressures on families, and is not sustainable in the best of times, what more in an economic crisis. Yet, while it is most needed now, along with unemployment insurance, the government has been tardy in amending the bankruptcy laws and provisions, and the enhancement of other safety nets such as for medical expenses.
11. In as far as bankruptcies are concerned, it is worthwhile for the government to limit the bankruptcy period to, say, 12 months. This will ease the pressure against the bankrupt apart from sparing him the embarrassment of his situation. In striving for equity, the loan providing institution should provide a breather through moratoriums meant to postpone the application of the provision of the bankruptcy law while the borrower makes the effort to repay the loan. This would certainly be helpful to families with limited excess savings when they face unexpected emergencies. It should be noted that many government pensioners and private sector retirees are hard put in making ends meet now in the effort to face the ever-rising cost of living on their limited pensions and EPF savings.
12. Corruption itself adds to the cost of living and is a burden to all. When development projects, big or small, have a political mark-up imposed on contract awards and taken up front, little much is left to contractor profit margins that can only be charged to end-users, that is the taxpayers and consumers. To quote a columnist recently, the insufficient checks and balances continue to dog the country’s economy, thus leading to increasing concentration of power within the executive branch and persistence in rent-seeking behaviour, patronage politics, opaque governance practices and pervasive corruption.  Is it any wonder then that Malaysia is perceived as among the world’s worst countries on integrity?
13. Besides corruption, we also need to be vigilant against the occurrence of any and all forms of economic sabotage to the detriment of our national resources and wealth to benefit our future generations. It is for this reason of instituting checks and balance that reforms of the Official Secrets Act and the Universities and University Colleges Act, a freer press, and a freedom of information legislation are required. The restoration of the reputation of the courts and the enforcement agencies, including independence and enhanced power of the anti-corruption agency, SPRM, must be set in train if we are serious about tackling this cancer in our political system, bureaucracy and society in general.  Even the Standing Orders of Parliament and the structure of the Senate may have to be reformed in order to respectively allow for private members bills and greater independent representation of the states in our system of fiscal federalism.
14. Worse, whether it is a consequence of government policies or not, the distribution of wealth in the country, as expected, is extremely skewed. The wealth of Malaysia’s top 10 per cent exceeds those of the bottom 70per cent, and about 12 per cent of Malaysian households have no wealth at all. In fact, the wealth of the top one per cent, in 2012, is much higher than the whole of the bottom 40 per cent combined.
15. The government’s position as reflected in the Budget address is to divide the country into two economies: the capital economy and the people economy.  The latter refers to the world of capital, enterprise and big investment, while the latter consistent with the New Economic Model refers to the bottom 40% of households in terms of income distribution.  This is an unfortunate even dangerous classification.  To solve the issue of inequality and achieve social justice in a rich and favoured nation such as ours requires treatment of all classes of stakeholders in the nation.  Economic growth must involve and benefit all, not through distinctions of capital and work.
16. The status of inequality and imbalance, and the issue of fairness in economic benefit remain the main faultline in our society.  These economic cleavages tend and can lead to dissatisfactions among the communities and the breakdown of social cohesion built over the decades of our now maturing nation.  They take on emotional overtones and extremism, and have led to racial envy and biases and prejudice that undermine the underlying and potentially unifying values of our ethnic diversity. In view of the issue being closely linked to economic activities, I would like to suggest that the government and relevant agencies draw up policies favouring local contractors and suppliers, including those from Sabah and Sarawak, in the awards of contracts, both major and minor.
17. Going forward, the challenge of achieving a high-income economy is our ability to create quality and high-paying jobs, especially for new entrants into the labour force who have higher post-secondary and tertiary qualifications; not the low paying jobs that are now being filled by foreign workers in plantations, construction business and assembly-based manufacturing. Shifting to a service-oriented economy may be part of the answer to this economic restructuring, but we cannot abandon higher-valued manufacturing altogether while maintaining our industrial competitiveness by importing such foreign labour to keep our unit labour costs down. Longer term sustainability of economic growth requires the enhancement of the knowledge content of our manufacturing and service industries, which require innovation, technology and new entrepreneurship. This will increase productivity which, in turn, will raise wages and salaries. This involves not just the upskilling of our labour force, but also the provision of correct incentives and institutions to support such value-added growth. I wonder whether the New Economic Model is sufficiently geared towards the above tasks.
18. Achieving social justice and fairness is where the work of economic reform is most important and most urgent.  These involve reform of the tax system in its separate treatment of capital and labour, the handling of labour market discrimination in the public and private sector, policies that improve the wage share of gross national income, and practices that achieve equality of opportunities and outcomes. Moving to a higher wage regime and away from a cheap labour policy involving guest workers in order to maintain our competitiveness is not an insurmountable task. This is so because data show that productivity, especially in the manufacturing sector, has been rising steadily over the years, but the wage-productivity gap has also been widening. As an immediate remedy, on top of the minimum wage law, I would suggest that a productivity-indexed bonus system be implemented by both the government and private sector employers. This is one of the more critical issues if the goal of inclusive development for Malaysia is to be achieved.
19. In spite of criticisms in the House, civil society and the media, especially social media, the Government leadership has continued to ride over these critical faultlines in our economy in the proverbial “three-monkeys” fashion, pushing through a “roll-over” budget that routinely moves the tough questions that need to be addressed immediately further down the road to the next budget and five-year plan.  The critical issues involved are of a structural nature not easily tackled via routine annual provisions.
20. I would submit that the national task to address the economic fault lines above will require new and bold ideas. These ideas need to be implemented over the next five to 10 years with supporting institutional reforms to reset the nation on the right path as promised by our founding fathers. These reforms require considerable political will to put them into effect; they cannot be undertaken piecemeal.
21. I am afraid for our economic situation. In truth we urgently need comprehensive economic reforms and institutional adjustment for resetting the economy in order to put our people out of harm’s way.
22. The people expect bold changes and even bolder leadership. We certainly cannot deny them the answers to their concerns and aspirations. Leaders should be more sensitive to the demands and feeling of grass roots. We must always be concerned about their worries and aspirations. The reality is that there is a need for change now; otherwise, as a nation, we are doomed to the status of a failed state.  This is what we have to answer for to our future generations.
23. You may think that I am a pessimist. No, I am not. I am a passionate believer in the capacity and capability of our people and especially of our youth who are going to inherit this beloved country, lead it to the global stage and sit hand in glove with countries of the first world. This, then, is the challenge before us and I know we can rise to it tackle it with our collective wisdom.
Thank you.
Yours truly,
(Tengku Razaleigh Hamzah)–November 3, 2014