Blog Page 28

Riskiness of the East Coast Rail Link

December 2014 Floods in the East Coast

During last week’s Budget announcement, the Prime Minister announced yet another multi billion ringgit mega-project,  this one involving the construction of a High Speed Rail link from Kuala Lumpur to  East Coast and ending at Tumpat.

Thanks to the Sarawak Report, the intelligentsia has been clued on this project as early as July,  when the portal published a story complete with documents detailing the estimated project cost at RM 27 billion and an alleged  RM 29.8 billion MUTU (Mark Up and Top Up) required for this project. The RM 29.8 billion MUTU was earmarked to assume the indebtedness of remaining 1MDB liabilities.


Interestingly, Works Minister, Datuk Seri Fadillah Yusof , was quoted as saying as late as the last week of Jul ’16 that “(The East Coast Rai Link) It was never discussed in Cabinet.”  So either the Sarawak Report has a clairvoyant ability to predict what Najib is going to do or the Works Minister is not telling the truth. As glaring as this inconsistency appears given that the Prime Minister announced the project and its allocation during his Budget speech, it is not uncommon or unexpected.

If people took Cabinet Ministers at their words, we would have more than five different competing explanations for the same things, with the only consistency between them being that it is all based on conjecture and bunkum. In fact, sometimes Cabinet Ministers don’t even seem to care whether what they say is even remotely believable, such is the level of disdain they display towards the “sensitive” rakyat, who voted them in.

The cost of RM 56 billion requires some comment. At a railway line 600km long, this works out to RM 93 million per km, or about US $23 million per km. This figure may appear large but it is actually comparable to World Bank estimates for China’s typical infrastructure cost for High Speed railways of about US$17 – US $21m per km. This revelation makes it less likely that the project was artificially inflated in order to bail out 1MDB, no matter how convincing Sarawak Report’s evidence actually is.

However, the Currency Markets still pay note to actual facts, especially if it involves a multibillion ringgit project mooted at the time when the country is facing three major risks or decisions that are not properly thought out.

Firstly, one will have to question the wisdom of building a rail link that traverses places that are flood prone. After all, it was in December 2014 that vast swathes of the East Coast was severely flooded, something that could potentially cause billions of ringgit worth of damage to any planned railway.

The second has to do with the economic rationale. Even though the Government has been keen to moot the concept of an ECRL corridor (these days you can slap the term corridor to almost any place to justify a billion ringgit ticket items), just how exactly a multibillion ringgit high speed rail link will help manufacturing and trade stumps most analysts.

This is because the primary manufacturing industry in the East Coast consists of oil, gas and petrochemicals. Gas travels by pipeline through the Peninsular Gas Utilisation (PGU) system, oil and petrochemicals travel by water. The end terminus of Tumpat, which is a good 1,300 km from the industrial centre of Rayong in Thailand. The only industry that may see a meaningful lift would be Tourism, and that too only for the upper tier of this segment as Rail tickets may cost at least RM 100 – RM 150.

The third has to do with the relatively weaker state of the country’s fiscal position especially with respect to the growing External Short Term debt obligations. Given the poor track record of rail investments and the fact that the local bond market is already digesting multibillion issuances from Danainfra and MRT Corp, the Government intends to seek China’s help to fund for this project.

This is certainly not a problem for the Chinese Government, who regularly funds development projects in African nations as part of its diplomatic and economic expansion efforts. However, this may mean that the entire project will feature a high percentage of import content and result in capital outflows, at a time when the current account balance is weak and the Ringgit is under pressure. The obligation will also be expected to show up as a sovereign development loan or as a Government guaranteed obligation.

Either way, even at a conservative interest rate of 3.00% per annum (100 bps over Treasury), this will amount to interest repayments of about US 400 million per which could further increase stretch the Government’s finances. With this 2017 Debt Servicing Charges at RM 28.9 billion and the Government’s debt load set to continue to increase at a clip rate of RM 30 – 40 billion per year, hiding another RM 50 billion off balance sheet liability through the Non-Financial Public Enterprise (NFPE) route may have ending not unlike that of a Greek tragedy.



Defund the JPM



It is this time of the year again.

No, it is not another public holiday or the date for some demonstration, or counter demonstration.

It is the time for this annual exercise called the “Budget Speech”, delivered by the Prime Minister, who for more than a decade already doubles up as the Minister of Finance.

It is quite something for the press to play this thing up. In fact, on that day when the Prime Minister delivers his speech in Parliament, customers in warungs up and down the country will be glued in with bated breath, as if Dato Seri Najib was about to announce a special allocation especially for them.

In a way, that is true for those involved in the murky world of Government tendering. Projects may take years from concept paper to allocation, and it is very important for those seeking to win Government projects to know whether the allocation is sufficiently large, and reassess whether their “cable to Ma’am” is strong enough.

However, for some time now, Cabinet Ministers have had little festive cheer over this period. Year after year, it seems that the Budget Boys in the Treasury have been pruning and cutting all their allocations. The total budget for 2016 was RM 267.2 billion, which was only about RM 12 billion higher than in 2013, when it was RM 255.6 billion. However, the bulk of the increases were to the Prime Ministers Department, whose spending allocation increased by a cool RM 10 billion, from RM 13.4 billion in 2013 to RM 20.4 billion in 2016, an increase of 53%. In 2008, the year before Dato Seri Najib took over as Prime Minister, the total spending for the Prime Minister’s Department was only RM 6.9 billion.

In contrast, other Ministries have seen their allocation trimmed, slashed or perpetually undefended.

For example, the allocation to the Ministry of Higher Education was slashed by RM 2.5 billion, from RM 15.8 billion to RM 13.4 billion. Heavy-weight Ministries like the Ministry of Home Affairs and Ministry of Defence had small cuts. Other Ministries which are considered in the “featherweight” category have to make do with a fraction of the allocation. For example, the Ministry of Youth and Sports, helmed by Rembau MP and UMNO Youth Chief, Khairy Jamaluddin, had to make do with an allocation of RM 931 million for 2016.

In Prime Minister Department budget-speak, this is just a single line item.

The Prime Minister’s RM 20 billion budget boasts of hundreds of millions and billions allocated to projects with little meaning, use or oversight. Examples include the RM 750m allocated for “Restructuring Communities”, RM 610 million for “Development Projects”, RM 1.3 billion for “People Friendly Projects” and RM 3 billion for a “Facilitation fund.”

So the question is why does the Prime Minister have to spend so much money year in and year out?

After all, if his predecessor could do with RM 7 billion a year, and that in itself was considerably larger than the spending during Dr Mahathir’s time, why does Dato Seri Najib need 3 times the amount to do practically the same job.

And the performance of his tenure as Prime Minister is actually worse.

The GNI Income Per Capita growth figure, which was well into double digits when the currency strengthened in 2010, has been largely left out this year as the figure contracted due to a slowing economy and weakness in the currency. Perhaps that may explain the sudden reduction in PEMANDU, an organisation best known for their ability to quote numbers from nowhere, whose budget shrank from RM 142 million to RM 29 million for 123 staff. But don’t feel sorry for the Government’s jargon creators par excellence, this still amounts to a respectable RM 240k SPPK, or  “spending per Pemandu Kon-sultan”.


The Rise of the Red Shirts



A common misconception people have about Malaysia is the implication a multi-racial society has on its identity.

Though the country has a variety of food, festivals and religious buildings, but beneath the surface, the country is polarised by racial, religious and socio economic conditions. In fact, the reason why race-based parties have done so well is because the communities do not see anything else substantive in common with their other fellow citizens.  Apart from the similarities in the appearance of the Identity Card and Passport, the different communities are so far apart that they might as well have come from different countries. (And some may remark hat the last statement is perhaps stating the obvious.)

Interestingly, this divide has an increasingly geographic bias. The rural Malay communities, be it from the historical towns like Pasir Salak, or settlers from a Felda scheme, have been the defacto “power broker” within the context of national politics. Their undivided and united support has seen the ruling Barisan Nasional win every single election since independence as the rural belt makes up the bulk of seats in Peninsular Malaysia.

For a long time they have been largely been left out of the national conversation. Their well being and continued support was the responsibility of a host of Government departments in the Prime Ministers Department, such as JASA, KEMAS, Seranta (Felda) and Government linked companies such as Felcra, Felda, Risda, Mardi and the like. So long as those departments and entities did not collectively mess up at the same time, and that too on an unprecedented scale, rural Malay support for the Government was assured. In fact, with PAS seeking ‘peace overtures’ with UMNO, the traditional political rivalry has been turned upside down and the rural folk are no longer identifiable by UMNO villages and PAS outposts.

However, beneath this coalescing between rival political factions lies the emergence of a deeper more sinister divide.

For only the third time in history, the first being the Opposition to the Malay Union in 1946, the second being the racial riots of 1969 , this group made their voices known through Himpunan Solidariti Rakyat, or colloquially known as the “Red Shirts Rally” , which has held in September 2015.

From the embers of this rally, a new movement was born, called the “Baju Merah”, “Red Shirts” or “Anti Bersih”, led by the mercurial Dato Seri Jamal Yunos, the UMNO Division leader for Sungai Besar. Similar to the Sturmabteilung, the Brown shirts who served as the initial paramilitary wing of the Nazi party, the members of the red shirts are almost rural Malay men, and the members view themselves as ultra nationalists entrusted to defend the wider race, religion and community from the incessant demands of the Non-Malay dominated Opposition or their associates. Their recent confrontation with the Bersih 5.0 convoy has catapulted Dato Seri Jamal’s motley crew into a legitimate political paramilitary movement or militia, which by itself gives him tremendous amounts of legitimacy and political mileage.

Red Shirt protesters attacking a Bersih supporter in Selangor

The Opposition leaning latte sipping public should not be deluded into thinking that all the negative publicity behind the Red Shirts has in any way lessened their appeal. In contrast, all this publicity only serves to entice disenfranchised Malay youths, who may be enticed to become members, the local UMNO division chieftains who crave their muscle power or the wider rural community, who seem more and more eager to engage their “enemies” in a less than civil fashion.





Ringgit’s delinking with Oil


The Ringgit today briefly touched a level not seen for some time when it was briefly quoted at RM 4.200 to the US Dollar. This compared with the momentary rally we saw in  July which saw the Ringgit briefly strengthen past the RM 4.00 handle to the US Dollar.

This drop has surprised many observers as it coincided with a strong rally in Oil Prices, that saw the Benchmark Brent Crude Oil price surge to the highest levels in over a year.

The Government has often blamed Ringgit weakness in the commodity price and have thus been unable to explain this round of weakness, in spite of the bull market in Oil.

The reason we think is several fold.

The most important has to do with the shrinking current account balance. This was talked about at length in our post over here. The current account balance in the second quarter was less than US$500m, a far cry from the heady days of the commodity bull market in 2010  when it was in excess of US$8,900m. Furthermore, the rally in oil prices happened to late for it to affect the 3rd quarter current account balance, which may not see substantial improvement as oil prices tended lower and LNG prices remained under pressure.

The second has to do with the increasing Government debt, both on-balance sheet and off-balance sheet. Total Government debt was over RM 650 billion and the external debt increased by RM 20 billion quarter on quarter to RM 231 billion as of the end of the 2nd Quarter.  This has since retreated to RM 208 billion, indicating a net portfolio outflow over the last quarter.

However, the Government debt figure understates the true Government contingent liability in terms of guarantees to funds such as Danainfra, which recently kicked off an RM 50 billion financing program. When you add to that the cost of the Pan-Borneo highway, where a group of banks were appointed to fund the inititial cost of RM 13 billion, the numbers begin to look staggering. Add to that, the cost of 1MDB, which could easily be another RM 20 – 30 billion in contingent liability, and we are looking at a “true” picture of contingent liabilities well in excess of the last reported figure of RM 178 billion.

The third is a divergence in monetary policy. In July of this year, Bank Negara cut the OPR to 3%.  At the same time, talk is that the Federal Reserve will resume a tightening cycle as early as in December this year. This divergence in interest rates puts further pressure on the Ringgit due to effects in the forward market.

The fourth has to be the fallout from 1MDB and the recent corruption investigations. These scandals has been so widely reported that almost every fund manager interested to invest in Malaysia has to accept that there is a higher country risk due to the perception of corruption. This issue is also made worse by the sometimes erratic flows of money out of Malaysia that appears under the “Statistical Omissions” column in Malaysia’s Balance of Payments. For example in 1Q16,  the Statistical Omissions column amounted to a whopping RM 38 billion outflow that was unaccounted.  In 2Q16, it was a  bit better at an outflow of RM 3 billion.

Personally, with the rally in oil prices lasting slightly longer than fundamentals would dictate, the currency should find some near term support. The risk is that this rally were to fizzle out towards the end of the year, the Federal Reserve were to raise rates at the same time, making it for a very volatile first quarter of 2017.

Race to the bottom and avoiding political suicide

Sorry to spoil the party but this nonsense needs to be resolved.

Malaysiakini columnist, Ms Mariam Mokhtar, did not mince her words when she argued that current Government policy is pushing the Malays to attain “rock bottom standards.” She based this argument on the call made by Rural and Regional Development Minister, Dato Seri Ismail Sabri Yaakob, who wanted Malay-owned businesses to be excluded from the strict requirements of obtaining a halal certificate.

Dato Seri Ismail Sabri based his call on the fact that Malay businesses start with limited capital, and invariably, Jakim’s stringent requirement may mean additional costs to the businesses. The costs entailed could involve operating costs or one-time costs to hire consultants to help Malay businesses through the process.

Technically, I do not see an issue out of Ismail Sabri’s call. The issue of the “Halalness” of a product involves the consumer behaviour of the majority Malay Muslim community. If Ismail feels that the capital could be better spent on other elements, such as procuring quality machinery or reducing operating costs, then this should not be viewed as “relaxing” the standards.  He has identified a cost savings approach and should be applauded for offering practical ideas to help Bumiputera businessmen.

Ultimately, it will be the Malay Muslim consumers who decide whether they are happy to frequent Malay establishments with a relaxed Halal requirement or not.   From a consumer behaviour point of view,  adding a “Halal” emblem to a Malay Muslim business does not add much to the brand equity of the business.  It is more important that the business maintain clean premises, friendly staff and efficient service.

But even though I disagree with Ms Marian on citing Dato Seri Ismail Sabri’s call to support her case, I do in general agree that there seems to an agenda which may result in Malays attaining rock bottom standards.

The key issues surrounds integrity involving money, a basic lack of decency, lying to the hilt and engaging in crass stupidity, with the hope that everybody else becomes as stupid as you.

With the revelation of 1MDB and the attempts by the Attorney General of Malaysia to cover up what is an “open and shut” case of corruption, questions may now be asked whether this is symptomatic of a larger “could-not-care-less” attitude with regards to integrity when handling money. The perpetual non-stop lying many had engaged in when trying to defend 1MDB has made may foreign investors shake their heads in disgust.

Now, this is an extremely serious perception defect that may further strengthen the arguments currently being used to exclude Malays from the Multinational Corporation. This is not helped by the many corruption cases being splashed about in the papers.

The duty of either correcting or further cementing this perception lies with the current leadership, from Dato Seri Zahid Hamidi to UMNO Youth Chief, Khairy Jamaluddin.  No doubt, politically amongst the Malay voters,  the 1MDB issue may count for zero.

However this issue has more or less destroyed any modicum of trust foreign companies may have had about appointing Malays to senior position, unless it was out of sheer necessity, and that with the proviso that the Financial Controller was a Non-Malay.

The issue is similar to a classic MBA marketing case about a brand executive at Moët & Chandon, who was aghast to find crates of Dom Pérignon, the company’s flagship brand of champagne lying about in at the bottom of aisle in a Sam’s Club , with the bold price tag : “2 for $99.”

Like the current crop of Ministers who are unable to voice out their displeasure at the Prime Minister, the brand executive could not say a thing about the undignified way her company’s premium product was being displayed. After all Sam’s Club accounted for sizeable percentage of North American revenue.

The answer is that the Brand Executive should just ignore the undignified way in which the product was being placed in Sam’s club but make sure there is enough spending in the US to promote the brand in the appropriate way and setting.

Similarly, even though it is impossible to mention those four letters, UMNO leaders should go on the offensive and talk up cases of integrity among the Malays. UMNO leaders must pressure the PM to bring back businessmen with ethics, like the Tan Sri Hassan Merican, to counteract the negative publicilty.

By keeping quiet and allowing perceptions to generate, these may cause many to lose confidence with the community.


Red Shirts and Deutsche Bank



On the surface, the “Red Shirt”, a movement of ultra-nationalistic Malays led by Datuk Seri Jamal Md Yunus, has virtually nothing to do with Deutsche Bank, Europe’s largest Global Systemically Important Bank (GSIB).

The “Red Shirts”, a counter reactionary movement was formed as a result of Malay angst at the Berseh demonstrations, an annual affair in which thousands of mostly Non-Malay “Yellow” shirted protestors descend onto Kuala Lumpur. In recent years, social media has played up images of these protestors mocking images of the Prime Minister, Dato Seri Najib Tun Razak, which has caused consternation among the majority Malays, who view this as an affront to their leader.

The Rembau Times is unafraid to say that the Bersih strategy is a failed strategy. It only draws participation from Non-Malays and further accentuates the racial polarisation in the country. In order for the Opposition to win, they have to first come up with a Malay led policy, or if not, a “sell approach” that shows the benefits of an Opposition led Government rather than confront the current Government endlessly and without gaining any strategic advantage.

Neither do we condone the “Red Shirt” movement. This movement is adopting increasingly hostile and violent tactics, the latest incident in Sabak Bernam saw two Berseh supporting motorcyclists physically and verbally assaulted by a much larger group of “Red Shirts.”

The Prime Minister has been silent on this.  This is unsurprising as Datuk Seri Jamal enjoys a close relationship with Sri Perdana and was recently seen amongst the UMNO Hoi-Poi during the occasion celebrating Najib’s 40 years in politics.

However, the risk is that the national conversation gets dragged about the “Red Shirts” versus the “Yellow shirts”, akin to the situation that engulfed Thailand a few years back.  Here is where, The Rembau Times feels that there will be a new colour for the country to deal with – the Blue of Deutsche Bank.

Literally crossing the wires as our article goes to print is news that the bank has failed to reach a deal with US Justice Department with regards to the fines over the banks actions in the lead up to the 2008 Global Financial crisis.  This may be seized upon by Hedge Funds to launch a speculative attack against the bank that could result in a deep selloff in US Equities over the next week or so.

We have always argued that the risk to Dato Seri Najib likes more in the economic side rather than in any politically led issue. The key risk facing Dato Seri Najib is a collapse of the Ringgit beyond RM 4.80 to the US Dollar, something that seems likely should there be another round of stock market volatility followed by the markets view that the oil situation is grossly oversupplied.

While the oil situation is temporarily helped by the supply disruptions due to Hurricane Matthew, concerns are beginning to emerge about the OPEC “cut”.  After all, Saudi Aramco has decided to widen its discount for sale of its key products into China, a move that analysts see as trying to retain market share from competitors like Iran and Iraq.

But if the situation involving Deutsche does take a turn for the worse this week, expect investors to flee from risky assets into safe havens. That means selling down foreign holdings of Ringgit bonds, which may take the Ringgit a little bit closer to the all-important RM 4.80 psychological mark, a development that the “Red Shirts” can do nothing about.

Corruption and Getting Caught

The Malaysian AG clearing the Prime Minister of corruption by brandishing the money trail

Yet another day, yet another story of civil servants being caught by the MACC for corruption.

But the good news is that the MACC recognises that in order to get the headlines, they need to nab people with a story to tell.

With the new Director in charge, the MACC nabbed a ‘Dato Seri’ (the only one) attached to the DBKL. Today they have gone one further with a raid in Sabah that literally netted hundreds of millions of Ringgit.

In the case in Sabah, it involved senior officials from the State Water department, who were caught with hundreds of millions of cash Ringgit in their homes. They have been remanded for several days, and the Dato Joseph Pairin Kitingan, who is the State Minister, in charge of the water department has been left bemused and befuddled.

Interestingly, it was not some time ago that Mr Michael Chia, a Sabah resident, was arrested in Hong Kong with RM 40 million in cash. He managed to evade any further prosecution on the case by claiming that the money was intended as a donation for Sabah UMNO.

The question then is asked – why is it acceptable for Michael Chia to have RM 40 million in cash, Dato Seri Najib to have RM 2.5 billion in his accounts but for the Sabah civil servants to be nabbed with hundreds of million in cash.

This is an existential question for those seeking to engage in corruption. The chances of getting nabbed, is it one out of ten or one out of a hundred. The official intending to be corrupt also has to be smart – if he were to be on the take and his superior is not making his cut, then he may be caught out.  That is why it is interesting that in the case of the Sabah Water department, the MACC arrested both the top two officials.

But is corruption all that is made out to be.

After all, corruption is rampant and institutionalised in the Malaysian setting. The general public may moan about it individually, but collectively, the public has consistently voted to endorse corrupt practises by the elite in return for defending “race” and “religion.”

Corruption seems to relegated to that of a person’s individual choice – to be corrupt or not. If a person intends to be corrupt and not get caught, they must go to great lengths to conceal it. This means to engage the help of other officials around them, avoid leaving a banking trail, which then leads to an issue on where to hide the paper money, don’t own too many properties and never drive flashy cars.

It seems those most dexterous at engaging in corruption will always fail at one of the above. They may not own flashy cars, but they will own a lot of houses. They may not have a banking trail, but they leave money lying around their houses. It always seem that they will fall short in one way or another, allowing them to be arrested with plenty of incriminating evidence lying conveniently around.

Petronas gassy missteps means it is time to engage with social media.


In recent years, Petronas made several multibillion dollar gas investments, which currently are underwater.

This included the purchase of the equity in Pacific Northwest LNG for $C5.5 billion, investment in a Floating LNG platform, called FLNG 1, estimated by the Rembau Times at US $4.5 billion and purchase of 27.5% equity interest in Gladstone LNG for US$2.0 billion. For the Gladstone project, the  the total investment includes a further US $5 billion, as part of Petronas 27.5% interest to develop the project, making the total investment at a whopping US $7 billion.

As it stands, the total investment, without taking into consideration of the off-balance sheet liability due to the off-take agreement with Santos, those four investments have cost about $18 billion US. Interestingly, Santos itself has taken an A$1.5 billion against its own 30% investment in GLNG in the 2nd Quarter of 2016.

But this is not the worst.

The fear is that the price Petronas pays for the offtake of LNG from the Gladstone project, which averaged at US $5.70 per MMBtu for the first half of 2016, is greater than the price Petronas can receive by selling LNG on the international market, which was US $4.9 per MMBtu in Aug ‘16.

Petronas Quarterly profits are shrinking fast
Petronas Quarterly profits are shrinking fast

The fear is that this shortfall in terms of price paid and price received will be borne by the Malaysian consumer, regardless of race, religion or political affiliation.

As we have revealed earlier, the public is currently paying much more for gas, at US$6.40 per MMBtu, much more than the cost in US , which is less than $3 and in Japan, which is about US$4.90.

This makes it incredibly unfair to consumers, and the question that is asked is whether the public is being used to subsidize the extra offtake from Gladstone?

In the case of the losses sustained, the Rembau Times urges Petronas to write down the investment in Petronas Northwest LNG to ZERO. The project is too complex, the environment risk too high, the argument that propane will be a cash cow, debunked, and the hope that LNG prices are going to suddenly take off, delusional at best.

Figure 1

Gas prices have collapsed as supply glut and re-starting of nuclear production in Japan crimps demand

In the case of Gladstone, the Rembau Times demands Petronas seek a renegotiation on the purchase price, similar to renegotiation that took place late last year between RasGas, the Qatari National Gas Company and PetroNet, India’s largest LNG importer.

It will not be fair if Petronas workers and the public have to pay for these investment missteps.

Petronas can no longer  ignore engaging with the social media. The decisions made by Petronas can have a massive political effect and Petronas can no longer assume that the social media is unaware or un-clued on their business.

A full frank discussion, involving senior members of management and senior social media practitioners must take place as soon as possible in order to get a full understanding of the current picture and prevent other parties from capitalising on these issues.

Matters involving Petronas Advertising & Promotion spending should also be tabled to ensure that more spending can be diverted through the social media channels, which not only have a cost savings but offer better value for money, as opposed to the current policy of “prospering the Opposition media”.

Through this smart partnership, it is believed that Petronas can navigate the current stormy weather and not end up as an election or political issue closer on to General Election.

Shrinking Current Account Balance should be cause for concern


Shrinking Current Account Balance vs. USD Ringgit Exchange Rate

The above chart should give many policy makers in Malaysia a cause for concern.

It shows the Current Account Balance (Right Hand Side) for each quarter since 2010 against the Average USD:Ringgit exchange rate.

The Current Account Balance is measured as Exports of Goods and Services less imports, less the Primary and Secondary Incomes.  For a developing country like Malaysia, a strong Current Account Balance is linked to a strong Exchange rate. When the Current Account Balance weakens, then the exchange rate almost invariably weakens as well, as showed in the chart above.

From touching a peak of more than US$8,900m in 1Q10, buoyed by high prices for Petroleum, Natural Gas and Palm Oil, the Current Account Balance has crashed to under US$ 500m in 2Q16.  This is a reduction of almost 95% from recent peaks.

Most analysts are quick to blame the collapse in the price of Oil for this effect.

As shown in the chart below, the major categories to register a significant drop in exports over the last 2 years would be exports of Petroleum products, which consist of finished products like Motor Gasoline, and semi finished products like Gas Oil, but more so due the drop in the exports of Liquefied Natural Gas, or LNG.

For the first half 2016, the export of Crude and Petroleum products registered a decline of about 11% from US$9.2b in 1H15 to US$8.2b in 1H16.  However, at the same time, LNG exports fell by a massive 45% from US$6.9b in 1H15 to US$3.8b to 1H16.

From 2013 to 2016, the export price of LNG collapsed from $765/tonne to $265/tonne. In MMBtu, which is another way in which LNG is priced, the collapse is from US $14.90/MMBtu to US$4.92 /MMBtu, or a drop of 67%.

Even though the Prime Minister may not appear to be sweating about this, events in Algiers, almost 10,000 km away may provide to be a huge benefit.  The Rembau Times believes that the market is significantly under pricing an unexpected supply cut by OPEC that will send Crude up to about $58 per barrel. This will almost certainly overcome the drop in export value for Crude and Petroleum products. Natural gas, which is increasingly being priced on a spot basis versus an oil linked basis, may rally to about US $6 – US$7, but only temporarily.

If the market is correct and talks in Algiers fails to materialize to any substantial cut in OPEC production, expect a violent swing in Oil prices down to the early $30s. What is worse is that increasingly, Malaysia’s exports of Petroleum Products will have to compete against exports of products from China and the United States. For LNG, the situation is even more dire as an additional 115.8 MTPA of new LNG production capacity in Australia and the United States is expected to come on-stream by 2020. This is equivalent to an increase of 47% on current LNG imports of 250 MTPA.

To understand this, imagine if by 2020, there suddenly emerged the Oil Producing capacity of the entire Middle East in some part of the world. No doubt, the effect will be to crash the market down to perhaps even lower than the US gas pricing hubs such as Henry Hub, where Natural gas is trading at US$3.10 per MMBtu.

If such a situation were to materialize, it coincides with the Malaysian Government sustaining massive federal deficits, both on and off balance sheet to fund infrastructure projects and the potential of a trade deficit. This will cause severe pressure on the Ringgit exchange rate, leading some to even speculate that it may only be a matter of time before it is seen trading above 5 to the US Dollar.


Is “Offense” the PM’s best defence against a weakening economy


From university undergraduates to British civil servants, from Proton employees to Indonesian TV viewers – all have witnessed the Prime Minister Najib and his close allies step up the attack on ex-Prime Minister Tun Dr Mahathir.

In fact, The Rembau Times has counted 8 different occasions in August 2016 alone where the Prime Minister has resorted to using the public forum to attack Tun Dr Mahathir. These attacks were mostly made through speeches delivered when officiating UMNO division gatherings, officiating inter-governmental meetings, statements from his personal blog and even when addressing undergraduates from local universities at locations. These attacks average about one in every four days.

Date   Title Media Location Audience Link
27-Aug Former national leader quarrelsome Borneo Post


Cameron Highlands UMNO Division

(Cameron Highlands)

21-Aug Najib: Dr M is a ‘control freak’ The Star Kepala Batas, Penang Umno division
(Tasek Gelugor)
20-Aug Un-Islamic’ to cross the line, Najib tells Dr M The Star Tumpat, Kelantan Umno division
19-Aug Malaysian PM Najib takes new dig at Mahathir Straits Times
Putrajaya Civil Servants from Commonwealth countries Link
18-Aug Najib: I won’t criticise my successor openly Bernama Putrajaya Undergraduates from local public / private universities Link
12-Aug They called Dr M ‘head of thieves’, Najib notes similarities Malaysiakini From Personal Blog Mainstream Media Link
08-Aug Bukan Mahathir tentukan kedudukan saya Utusan Melayu Seri Manjung, Perak Umno division
06-Aug Dr. Mahathir mahu saya jadi PM yang ikut arahannya – Najib Utusan Melayu Jakarta, Indonesia Interview with MetroTV Link
25-Jun Najib sacks critics, cuts funding to Mahathir Nikkei Asian Review Media Report Mainstream Media Link
14-Jun Najib: Proton’s golden era will be restored without Dr Mahathir The Star Putrajaya Launch of 4th Gen Proton Perdana Link
07-Apr Najib: $14.5b not missing as claimed by Dr Mahathir AsiaOne From Personal Blog Mainstream Media Link
15-Apr Najib aide: Saudi confirmation proves Mahathir’s allegations are false AsiaOne Statement by DS Tengku Shariffudin Mainstream Media Link
23-Mar Lawsuit shows Dr M out of ammo, says Umno minister Malay Mail Statement by DS Salleh Said Keruak Mainstream Media Link


These attacks mark a “surge” in Najib’s offensive against one who was much respected by the Malay community and the UMNO grassroots. It is perhaps most likely designed to systematically deconstruct Dr Mahathir amongst the UMNO grassroots by equating Dr Mahathir’s criticisms of Dato Seri Najib’s personal scandals to that of a retired politician seeking to retain control over affairs of state.

However, even though public criticism of Dato Seri Najib amongst ranking UMNO members is virtually non-existent, this strategy of attacking a once highly respected statesman has neither been accepted nor endorsed by senior Cabinet colleagues.

In fact, one of the hottest rising stars of the Cabinet, the Second Finance Minister, Dato Seri Haji Johari Abdul Ghani, went so far as to offer disapproval to this strategy, albeit obliquely, when he openly declared “Who does not love Tun Mahathir?” when officiating the Cheras UMNO Division meeting.

Image result for johari abdul ghani

Malaysia’s Second Finance Minister openly declared his admiration for Tun Dr Mahathir

Dato Seri Johari or “Abang Joe” as he is called in UMNO circles certainly has a point.
Tun Dr Mahathir was a strong leader for the Malays and pursued the Malay agenda for almost the entire period when he was Prime Minister. As a result, many Malays were able to advance leaps and bounds through opportunities through tertiary education, civil service employments and business contracts. In fact, Dr Mahathir’s period of leadership marked the high points of Malay pride as their leader was feared domestically and commanded respect from many nations, especially from the Southern Hemisphere and the Middle East.

With the recent announcement by United States Attorney General, Lorreta E. Lynch on the use of the Kleptocracy Asset Recovery Initiative (KARI), Tun Dr Mahathir’s accusations against 1MDB are now factually correct. In fact, once high profile 1MDB CEO, Mr Arul Kanda Kandasamy, who in 2015, used to be quoted almost every other week, has this year been largely excluded from any media coverage.

However, even though the Prime Minister’s image has been heavily tarnished, his hold on power remains strong as ever. The roots of the Prime Minister’s power lies in the effective use of the “bogeyman” in the form of the DAP as a threat to Malay dominance in politics, a disjointed Opposition without any fresh ideas, vast resources available to the Prime Minister at his disposal, the established culture of patronage within UMNO and the civil service, the swift purging of critics from within the ruling party and the emasculation of public institutions, which ostentatiously took place during Tun Dr Mahathir’s 22 year reign as Prime Minister and a larger society polarised by race and religion. In fact Michael E. Porter, the renowned Management Consultant famous for introducing the “Porter 5 Forces” model in explaining economic profiles of industries would conclude that the combination of factors present in modern day Malaysia indicates that Najib current position as virtually unassailable.

In fact, not only has the Prime Minister achieved unrivalled power through the Malaysian power structure, he even demonstrated his “win-ability” at two recently concluded by-elections which were held in the Malay Heartlands and some suspect, the last barometer before a general election.

However, as is often the case in traditional UMNO attack politics, the risk is that continuing to attack Dr Mahathir over and over again, as Dato Seri Najib is currently doing, may stir discontentment. In fact, the public may perceive the Prime Minister as lacking in any fresh ideas and failing to articulate a national vision, and instead resorting to Bantuan Rakyat 1 Malaysia (BRIM) to win support.

Even though currently it seems a certain win for UMNO and Barisan Nasional if the elections were held today, there are larger issues of governance and economic headwinds that have not been addressed. The current account balance for the second quarter of 2016 fell 63% to RM 1.8 billion from RM 5.0 billion a quarter ago. Capital outflows may accelerate on the back of renewed volatility in oil prices which could further put pressure on the Ringgit. And further cost cutting by Petronas may lead to credit deterioration in the bank loans to the Oil and Gas sector, which could crimp credit creation and lead to increased bankruptcies elsewhere. The Government under Dato Seri Najib appears to have “hands off” policy with respect to the economy, preferring instead to focus only on the political agenda and ignore these looming threats. Given the volatility already seen in 2016, a sharp deceleration in the domestic economy may yet prove to be disastrous politically.