Marcus Rashford, Kelvin Tay ,Tony Pua and the Great Deficit debate

Kelvin Tay, the UBS Regional Chief Investment Officer was roundly condemned by YB Tony Pua for being critical on the Malaysian economy during a recent interview with Bloomberg . UBS themselves came out with a press statement which seemed to imply that he was wrong on the facts. The Rembau Times however is sticking up for Mr. Tay. Read why.

YB Tony Pua slammed Kelvin Tay as being biased.

Lately, I have been following the “Rants and Bants” YouTube channel, which is a social media channel dedicated to Manchester United.  In the wake of Manchester United’s 4 – 0 thrashing at Everton,  the commentators did not disappoint those who sought to experience schadenfreude at the expense of the egos of the so called Manchester United stars as they lambasted people like Marcus Rashford as being “simply not good enough” to be United’s No 9.

Rants and Bants is a no holds barred Youtube channel that slams under performing Manchester United stars.

However, there was an interesting debate surrounding whether or not it was sufficient for players to run around and cover every blade of grass to exclude them from any criticism should the results go the other way. In this regard, the commentator Rants had an interesting point.

Rashford is a frequent target of Rants and Bants


Rants’ point was that it does not matter if Marcus Rashford runs around for 90 minutes like “a headless chicken” because what he is interested in is in the end product. Could he hold the ball up? Could he make an attempt on goal? Could he play in Lukaku? Did he score?  Rants went on to make a comparison between Barcelona, who make the ball work for them and some Manchester United forwards, who seem to run around with little effect. And that would include Alexis Sanchez, Manchester United’s most highly paid star who does a fair bit of running but to no effect.

Well, what does this have to do with the topic at hand? Its all about critics, and when they are right, and when they are right, even when they are wrong.

Last week, UBS Global Investment Wealth’s Regional Chief Investment Officer, Kelvin Tay, let rip on the Malaysia economy during an interview session with Bloomberg TV. In it he suggested two negative factors, namely

  1. Malaysia had a Current Account Deficit which was 3.5% of GDP
  2. Abolition of GST would make the country more dependent on oil revenue, which could disappoint if Brent prices fall below $70 per barrel.
YB Tony Pua, adviser to the Finance Ministry, slammed Mr Tay as being biased.

Immediately, YB Tony Pua, the advisor to the Finance Ministry questioned the credentials of Mr Tay, akin to putting him in the same category as a “kangkung economist” when he correctly pointed out that Malaysia’s Current Account was not in deficit and Mr Tay had mistaken the Budget Deficit for the Current Account Deficit.  This criticism was supported by fellow Oxbridge graduate, Deputy Minister Dr. Ong Kian Ming.  The error was glaring, and you did not need a Cambridge Masters graduate and an Oxford economics graduate to point out, but it does help the Malaysian Cabinet that we do have such “brains trust” at our disposal.

This error was finally admitted by UBS themselves, who conceded that Mr Tay had made mistakes and regrets any misunderstanding that may have arose.

Round 1 – Malaysia Bahru.

But here is where the Manchester United analogy comes in.  Mr. Pua and Dr. Ong were right in defending Malaysia and pointing out the interviewer’s mistake with respect to confusing the Budget Deficit with the Current Account Deficit, but that does not mean a thing in terms of actually contributing to Malaysia’s growth – specifically, in attracting attracting portfolio investment into the country, which would improve our weakening Balance of Payments. Like Marcus Rashford, they ran a lot, won a freekick outside the area courtesy of UBS, but did they score?

Round 2 – The Rembau Times sheds light

Now, The Rembau Times is not completely sold on the idea that Mr. Tay was entirely wrong. He was wrong in terms of the using the wrong term but taken in context, everybody knew what we was talking about. And that is that Government revenues will fall below its lofty expectations  this year which would could cause the Government to incur a larger than expected fiscal deficit.

Let’s examine the first argument, which is the abolition of GST would result in an increased reliance in Oil revenue from Petronas and contribute to a larger Federal Deficit.

Based on the following, the Government’s estimated fiscal revenue for 2019 is RM 262 billion (ish). In 2017, GST contributed RM 44.3 billion in terms of revenue, in 2019, the Government estimates 0 dollars. However, the total revenue is expected to increase massively from RM 220.4 billion in 2017 to RM 262 billion. That is an increase of RM 42 billion.

So, what gives? We start with a reduction of RM 44.3 billion in revenue and end up with a higher revenue of RM 42 billion. That is a swing of RM 86 billion!

The sources are as follows

  • Increase in Sales tax of RM 13 billion and service tax of RM 8 billion, totalling RM 21 billion
  • Increase in Non-Tax revenue of RM 42 billion, from RM 39.5 billion in 2017 to RM 81.7 billion in 2019.

It is this increase in non-tax revenue, aka dividends received from Petronas, which supports Mr Tay’s argument that the Government revenues will be more “oil dependent”, but which we will qualify further.

Number one, the Government expects to receive RM 56.3 billion in 2019 from its investment stake in non-financial institutions (aka Petronas), up from RM 29.3 billion in 2018 and RM 17.9 billion in 2017. That is more than a 90% increase year-on-year and more than a 200% increase from 2017. The “delta” on this amount alone compared to 2017, when GST was fully in place amounts to RM 38.4 billion, which is comparable to the GST revenue forgone. Petronas themselves have said that they were confident that they could pay an RM 54 billion dividend, comprising of a regular dividend of RM 24 billion and a special dividend of RM 30 billion.

In 2018, Petronas EBIDTA  (Earnings Before Income Depreciation Tax and Amortisation) was RM 116.5 billion, on the back of the following production stats

  • LNG Sales Volume –  28.94 million tonnes
  • Natural gas sales – 2,777 mmscfd
  • Crude production – 777 kboe/d
  • Condensate – 173 kboe/d

If we were to fast forward to today, the key question is whether or not  this RM 54 billion is sustainable. By Petronas own statement, they seem to imply that the RM 30 billion is a “one off” dividend, and they probably have good reason to be a bit more circumspect.

Here is where I have a big issue. Mr Tay was slightly off in identifying the price of Brent as being a source of risk to Malaysia, it actually is the spot price of Liquefied Natural Gas (“LNG”).

Several days ago, TheStar reported something that was very concerning. If Petronas moves to spot pricing from index linked pricing, this means bad news as the spot price for LNG is currently very weak.

Based on export data, the total export value for LNG in 2018 was RM 40.1 billion, which was from 24.347 million tonnes of export. (This number will be slightly lower from Petronas LNG sales volume because of Petronas includes sales from international segment which do not count in Malaysia’s exports).  This translates to about  RM 1,649 per MT of LNG, or about USD 410 per MT. This works out to a price of USD$ 7.9 per MMBtu, lets call it USD $8 per MMBtu.

The risk today is that LNG’s current spot price is only about $5 per MMBtu, so if Petronas were forced by their buyers to switch to spot based pricing, based on a benchmark like Singapore’s LNG as opposed to Brent pricing, we are looking at a revenue shortfall of USD $3 per MMBtu or about USD $4.2 billion.  If prices collapse to USD $3, which it could as a whole host of LNG supply hits the market, Petronas is looking revenue shortfall of about USD $7.3 billion.  Unfortunately, LNG prices are probably going to collapse because there is just a massive explosion in supply, which could put a bigger pressure on Malaysia precisely at the time when there is a greater reliance on the National Oil Company to plug the gap due to the GST.  So Mr Kelvin Tay is may have misfired in terms of using the wrong terms, but he is spot on in terms of raising a risk that has not been adequately addressed by our Cabinet ministers and their advisers.


I share Mr Tay’s concern on the budget projections. Unfortunately this so called “people’s budget” did not really work to shore up Pakatan Harapan’s support, primarily because of a misallocation of resources – trying to pay up on the GST refund in one go when they should have spread it over several years. But I do hope that Pakatan Harapan does well on the economy, however merely shooting the messengers of bad news does not really cut in today’s world.

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