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Decided to make adjustments on the way I blog & share due to time constraints and other commitments. In the coming weeks you should see them. Short updates but more frequent & concise.

Monday, October 31, 2016

Budget 2017: Gearing For Election

I have stopped compiling my own datasheets (Budget 2016 (see link)) as it is taking too much time. Furthermore it is now the digital age and the same information can be found easily elsewhere :)

Let's look at a few pointers highlighted by The Edge Malaysia (see link).
The numbers: The share of the operating expenditure (opex) of the budget rose to 99% of government revenue in 2013 and 2014, significantly higher than the 79% to 82% from 1998 to 2003 (excluding 91% in 2000). Opex has stayed above 95% of government revenue since 2008, during which there were two election years (2008 under Tun Abdullah Ahmad Badawi and 2013 under Datuk Seri Najib Razak).
What that means: High opex means more money is going to government operations, leaving less for development expenditure (devex). This is akin to a company having less money to grow the business as most of its income is going to administrative expenses. The saving grace is that the RM50 billion devex projected for 2016 is up from RM47.4 billion in 2015 and RM39.5 billion in 2014, although most of it had to be debt-funded due to the high opex.
Aboi: Development as a % to budget allocation is now only 17.6%! During Dr.M's time it was in the mid 30s, Pak Lah's at 20s and now Najib's a pathetic 10s. How low can we go? Revenue only grew 3% and that's after GST's RM30b being added, income tax is not growing as much it means the economy is not really expanding. Spending taxation is not like income taxation.

The numbers: Based on the total government debt of RM655.75 billion as at 2Q2016, Malaysia’s 2016 debt servicing cost is RM26.64 billion — that is RM2.22 billion a month, RM512.3 million a week or RM73 million a day — enough to give RM828 to every Malaysian (RM2.30 a day to 31.8 million citizens for the whole year).
Debt service charges have increased in tandem with rising debt. While the federal government’s debt remains below 55% of gross domestic product (helped by some off-balance sheet transfers), the absolute amount quadrupled in 15 years to RM655.75 billion in 2Q2016 (excluding RM178 billion in quasi-government debt in 1Q2016) from RM165 billion in 2002. In 2008, debt stood at RM306 billion.
Malaysia only saw budget surpluses between 1993 and 1997 when the economy grew 9.5% per annum on average. This year’s GDP is projected to slow to 4% to 4.5% from 5% in 2015 and 6% in 2014. If a balanced budget is only attained in 2020, Malaysia would have had 23 straight years of budget deficits. Budget 2017 is expected to be the 19th straight year, with the fiscal deficit target expected to be 3%.
What that means: While borrowings are usually needed to fund development, debt service charges are generally seen as unproductive. And nearly 12% of government revenue is needed for this purpose this year with debt service charges at RM26.6 billion — enough to buy Telekom Malaysia Bhd, whose market capitalisation is only RM25.1 billion currently and pays dividend of at least RM700 million annually.
The RM26.6 billion is also enough to give every Malaysian a KFC Dinner Plate meal (RM14.90 each) every week for the whole year with RM50 to spare.
If debt and debt service charges were lower, more money could also go towards helping the middle and lower-income groups. Tellingly, BR1M allocations for the five years from 2012 to 2016 totalled RM20.6 billion (allocation had risen to RM5.9 billion for 2016 from RM1.8 billion in 2012).
Petronas has contributed some RM900 billion in oil revenue (including dividend plus taxes) to the federal and state governments in the past four decades. If 15% of that had been set aside, the country would have at least RM135 billion to cushion the tough economic times.
Aboi: In fact we have been running budget deficits for 19 years! And we just broke a new record, 97.76% of the revenue is used for management - paying civil servants salaries etc.. Loan servicing/paying bank interest alone is a whopping RM27b while development's RM46b is funded solely through more debt.

The numbers: Some 40% of government revenue goes to paying the emolument and pension bill. The nation’s pension obligation of RM19.5 billion in 2016 alone is 8.6% of federal government revenue and 9.1% of opex. A decade ago, pension or retirement costs were only RM8.3 billion. It was even lower in 1997 at RM3.6 billion.
Pension obligation will only rise as Malaysians are living longer and healthcare costs for the elderly will also go up. By 2035, one in 10 Malaysians will be aged 65 and above. By 2021, Malaysia will reach that 7% threshold that the World Bank defines as an ageing society — not that far away.
The civil service emolument bill, on its own, too has doubled the past decade, from RM32.6 billion in 2007 to RM70.5 billion in 2016.
What that means: While it is good that employees get a bigger share of the profits of a company, in an environment of slowing economic growth globally, the odds are stacked against the government’s coffers, although it may well want to continue shouldering the rising civil service emolument and pension bill. That means a civil service and public pension reform would have to be on the cards in the medium term, unless Malaysia can successfully expand its coffers.
Aboi: First; the GST and the minimum wage policy is killing businesses so there is no way to expand the coffer. Second; the new perks being added are just the exact opposite of reforms. Computer loan, motorcycle loan, housing loan - more and more hutang! Quarantine leave - fully paid leave, tak payah kerja! And more bonus payouts RM500/RM250 which is becoming like a handout - similar to BR1M!

The numbers: Malaysia has clearly not skimped on education with RM436 billion allocated to it the past decade (2007 to 2016) — the need here is to get the desired quality from the money spent.
Over the same period, however, the country spent RM221 billion on home security and defence — more than the amount spent on healthcare (RM160 billion) and housing (RM12 billion) put together.
While defence allocation was reduced from RM27.1 billion in 2015 to RM26.9 billion in 2016, it is still nearly double the RM16 billion allocated in 2007 and RM6 billion in 1998.
Healthcare allocation was RM21.7 billion in 2016, almost unchanged year on year, but had more than doubled over the past decade from RM9.8 billion in 2007.
What that means: Malaysia is said to be subsidising more than 90% of healthcare costs, but as Malaysians live longer, there is added pressure on public healthcare funding. Adding to that is the prevalence of diseases such as diabetes, hypertension and cancer, which also adds to the cost of subsidising healthcare. Experts expect a public healthcare reform to take place in the medium term to shift more cost to the consumer.
Aboi: Reversed priority and yet our ESSCOM does not seem to be doing its fair share of funding. Ransom kidnappings is a weekly occurrence in Eastern Sabah. Talked about housing where are the PR1MA houses? Sudah 5 tahun tapi belum dapat kunci.

The numbers: Malaysia has cut subsidies for sugar, cooking oil, gas (for cooking) and petrol. The subsidy rationalisation to favour targeted subsidies rather than blanket ones, successfully reduced its subsidies bill. Before fuel subsidies were scraped on Dec 1, 2014, subsidies had reached RM44.1 billion in 2012, RM43.4 billion in 2013 and RM39.7 billion in 2014 — 20% to 21% of total government revenue.
The projection of RM26.1 billion for 2016 (11.6% of government revenue) is just above the RM23.1 billion in 2010 and is still more than double the RM10.5 billion in 2007.
What that means: Subsidies continue to take up just over one-tenth of government revenue. That is not necessarily bad if the money indeed benefits the bottom 40% of the population who need the aid the most. Experts have observed that the government could better stretch every ringgit used for targeted subsidies if resources to help a particular group are pooled, thus minimising agencies’ areas of overlap.
Aboi: We should expect prices of goods to go up in 2017 as the allocation has been halved to only RM10b. My best guess would toll, electricity, cooking oil and flour. Yet our MO1 increased BR1M, in a sense we are shifting and not eliminating subsidies.

This is like a big merry go round. When salaries are being eaten up by higher prices we will have to raise the minimum wage again. The prices will go up again. Why? because employers sufffer higher salary costs and they must recoup the higher salaries. Prices will go up. People will suffer again. Once again the budget is a Kerja Bodoh.

MO1 merely added condensed milk to it and made it an 'Election' budget. He read the budget using a teleprompter just to look good on national TV and he gave out perks/benefits/handouts largely targeting the ruling party's voter base. And lastly he ended his speech drumming up the idea of how there will be an “ultimate victory in the 14th general election to the Barisan Nasional.

November Prediction of Pump Oil Price (Ron 95)

**It is easier to predict the direction of fuel price than to estimate amount of swing of fuel price due to the government REFUSING to disclose the exact compute mechanism.**

Sorry I was out on holidays and therefore I missed out the October postingThis is the 13th time I'm posting my prediction in a blog posting. Please bare that I will repeat some lines for new readers :) Also I always care to post my predictions before any official news or other analysts have given their views (typically too late after the queue starts at the stations).

Why is this sort of important? Say every month you know ahead of official price announcement and let's assume there is a price swing on average of 10 sen per month and you can fill in 35 litres. 0.10 x 35 x 12 = RM 42 savings a year. Obviously you don't feel it's a lot but every year you will always call and beg for credit card waiver of RM50 on govt service charge? Ironic isn't it? :) My total savings for 2015 is: RM 50.75 and YTD: RM 6.75.

October 2016
Oil spikes as a weekend marathon of talks between major oil producers failed to finalize plans to implement an output cut, threatening the viability of an agreement reached last month to reduce production between by as much as 2%. Again an absence of production cuts from OPEC as they intent to keep market share at a cost to their budget deficits. Prospects for oil to go higher than it is right now appears dim.

MYR is likely fall a little more due to OPEC's internal disagreement over a planned output cut. The speculation that Bank Negara would still lower the OPR by another 25 basis points is still alive and could be as early as 23rd November 2016 as the country's growth remain tepid. Budget 2017 is a letdown in my opinion; RM214.6 for management and only RM46 for development. It is an 'election' budget in which its perks and benefits are largely targeting the ruling party's voter base. Hence investors don't see a big reason why they should pour money into Malaysia - MYR to remain weak for another year. 

Some asked why did the price of crude oil drop in 2015?
- Strong US dollar; all commodities are priced in dollar and that includes oil.
- Organization of Petroleum Exporting Countries (OPEC); refuses to cut production in order to maintain market share.
- Oversupply of crude oil; thanks largely to US shale oil producers which is now the world's biggest swing producers.
- Declining demand; world's no.2 economy China is slowing.
- Iran nuclear deal; removes Western sanctions and thus allowing country to export oil once again.
- Successful Paris climate change breakthrough talks; marks the beginning of the end of the fossil fuel age.

How come our pump fuel price did not drastically drop in 2015? 
- This is primarily due to weakening MYR to the USD.

Aboi's Nov'16 Prediction Analysis

RM/L between Aug and October weaken: 1.62 vs 1.87. Average oil price bumped up from $48.06 to $53.51 and MYR remain continues to remain weak (4.02 to 4.17). Not very good news after the so called 'election' budget. I will predict that fuel price to be increased by up to 15 sen to RM1.95 for RON95. Please fill your tank as soon as possible today before the announcement.

Below is a table of my previous predictions way back to the beginning of 2015. My predictions are based on Tapis crude oil price, performance of Ringgit (added after Mar) & domestic politics (which was added after May). My total savings to date: RM 50.75. As for YTD: RM 6.75.

**It is easier to predict the direction of fuel price than to estimate amount of swing of fuel price due to the government REFUSING to disclose the exact compute mechanism.**