Corporate Rescues and Covid-19: The Way Forward

The current battle with COVID-19 has created stress points for many companies. Fears of business slowdown or going under, or just to survive are issues.

Restructuring is a mechanism designed to rescue and rehabilitate distressed corporations. Restructuring allows valuable time for viable companies to realign their practices and customer demands

Source: https://m.facebook.com

In the current situation, companies are likely to face losses. This in turn may well lead to a position of insolvency i.e. unable to pay their debts as and when they fall due. Whilst no company can be truly insulated from the effects of a downturn in the economy, the added dilemma presented is COVID- 19. 

Companies facing liquidity issues but otherwise commercially viable or have assets that are of sufficient value to attract potential investors could employ or adopt one of the corporate rescue mechanisms that are available.

Before determining what is best, it is useful for the company to consider the following:

• review the financial position of the business;
• identify the key factors for financial distress;
• analyse the future viability of the business e.g. cash flow projections and estimated profits/losses;
• review the short term and long term options available to the company; and
• develop a viable plan to rescue and rehabilitate the business.

This can be done by engaging a Corporate Finance Advisor licensed by the Securities Commission.

Rescue Options

A. Corporate Debt Restructuring Committee (CDRC)

Companies that intend to resolve their debt obligations through CDRC must fulfill the following broad criteria:

1. aggregate indebtedness of RM10 million or more;
2. at least two financial creditors;
3. not in receivership or liquidation, except for those where receivers have been appointed only over certain specified assets and the directors remain in control over the companies’ overall operations;
4. experiencing difficulties in servicing their debt obligations but may not have already defaulted, provided they meet criteria (1) and (2).

OR

Any company listed on Main Market or ACE Market of Bursa Malaysia (“Bursa”) that has already been classified as a PN17 or GN3 company respectively.

The expectation is that companies are viable as a going concern post-restructuring in all cases undertaken under the auspices of the CDRC.

This mechanism is only applicable for creditors who fall within Bank Negara Malaysia’s (“BNM”) jurisdiction. Where there are a combination of different types of creditors including those within BNM’s purview, the company may have to consider whether to adopt the CDRC route combined with another rescue mechanism. 

B. Companies Act 2016 (CA)

Scheme of Arrangement

Whilst not limited to only insolvent companies, section 366 CA does provide a mechanism by way of a scheme of arrangement that is quite often used by insolvent companies. This mechanism is driven by the company. Companies undertaking this scheme may obtain the benefit of court-supervised restraining orders against recovery and enforcement proceedings. Assuming the requisite voting majority is achieved, and the court approves the scheme of arrangement, the terms of the scheme can be imposed on dissenting creditors and/or members.

Corporate Voluntary Arrangement (CVA)

The CVA is more recent to the corporate landscape having only been introduced via legislation on 1 March 2018. However, unlike schemes of arrangement, the CVA mechanism excludes the following:

• public companies;
• licensed institutions or operators of designated payment systems regulated by BNM;
• companies subject to the Capital Markets and Services Act 2007; and
• companies that have created a charge over its property or any of its undertaking.

These exclusions, particularly the fourth, severely limit the application of this mechanism. 

Judicial Management (JM)

This is another recent feature introduced by legislation on 1 March 2018.  The High Court is now empowered to appoint a judicial manager to manage an insolvent company that fulfills the statutory conditions. The pivotal conditions are that the High Court must be satisfied:

• there is a reasonable prospect of preserving all or part of the business of the company as a going concern; or
• there is a likelihood that an approval under section 366 for a compromise or arrangement can be achieved; or
• the interests of creditors would be better served by JM rather than by being wound up.

Certain companies are excluded from utilising this mechanism but the exclusions are not as extensive as in the case of a CVA. They are:

• licensed institutions or operators of designated payment systems regulated by BNM; and
• companies subject to the Capital Markets and Services Act 2007.

A distinguishing feature of the JM compared to the other mechanisms discussed earlier is that the process is “managed” by a judicial manager, a qualified insolvency practitioner, appointed by the court. 

Practice Note 17 (PN17) or Guidance Note 3 (GN3) Companies

Companies regulated under the Main Market Listing Requirements and the ACE Market Listing Requirements once classified as distressed are provided time to put together a regularisation plan.

A listed company is considered distressed if among others:

• Its shareholder equity is 25% or less of its share capital, and its shareholder equity is also less than RM40 million. This triggering condition applies to both Main Market and ACE Market.
• For ACE Market, there are additional triggers including a situation where a company suffers loss equal or greater than the amount of its shareholder equity and such shareholder equity is not more than ½ of its share capital; or aggregated loss over two financial year period exceed shareholder equity, loss in the second year is double the first year, and shareholder equity is not more than ½ of its share capital.

C. Pre-emptive M&A

An M&A transaction to pre-empt a potential distressed status, with valuation remaining on a going-concern basis, could also be a viable way forward. This is especially so where a company is already considering:

• expansion to seek strategic investors to share its risks and rewards, or
• to remove its non-core assets so that it becomes leaner to be able to excel at what it does best.

Each corporate rescue mechanism has its challenges to overcome and requirements to satisfy. Each mechanism is designed to apply to companies in varying states of economic distress. The key is to take the first step to analyse your situation with a Corporate Finance Advisor.

Reference:

Corporate Rescues and Covid-19: Tackling economic distress and emerging stronger, Zico Law, 13 June 2020 (https://www.zicolaw.com )

MySejahtera Debacle: Who Appointed Them?

It now seems that the Government is confronted by a major confusion as to who appointed KPISoft Sdn Bhd to develop the MySejahtera app in April 2020. There was no formal contract inked between the Government and KPISoft Sdn Bhd aside from a non-disclosure agreement (NDA) signed between the National Security Council (MKN) and KPISoft on the data collected via the app.

Source: https://en.wikipedia.org

That was the essence of what was expressed by Public Accounts Committee (PAC) Chairman to the media. The PAC called in representatives from three agencies under the Prime Minister’s Department, namely the National Security Council (MKN), the Malaysian Administrative Modernisation and Management Planning Unit (MAMPU) and the National Cyber Security Agency. Both the Health and Finance Ministers were called in to testify on the same issue.

The procurement process was not handled well. Because in normal circumstances, the Government will either have direct negotiations with the vendor or have an open tender or a limited tender. The big confusion is ‘who made the appointment and what was the justification’.

Why pay the developer for MySejahtera when in fact, the initiative started as a corporate social responsibility (CSR) exercise.

The issue of intellectual property rights (of MySejahtera app) as claimed by MySJ Sdn Bhd is supported by the sale of shares and licensing agreement at a sum of over RM300 mil. The PAC investigation was sparked by revelation that MySejahtera’s developer Entomo Malaysia was in a five-year licence agreement with its nominee’s subsidiary MySJ for the transfer of the MySejahtera app to the latter for a RM338.6 mil price tag.

There is still some way to go before PAC is able to furnish its final report on the MySejahtera procurement given it still needs to vet through documents and evidence.

Meanwhile, who is responsible for this debacle? The Health Minister? The Finance Minister? A civil servant? Or, none of the above. More likely in this objective test, the last answer is correct one in Malaysia. And will we learn? Not likely, the civil service and political leaders are good at repeating history! 

Reference:

MySejahtera debacle: Whatever will be, will be but not at all surprising, Cheah Chor Sooi, Focus Malaysia, 22 April 2022 (https://focusmalaysia.my)

Comparing Different Schools of Economics

 Like some religious order, Economics has generally nine different schools of thought and a brief scope of them is shown below:

The Neoclassical/Austrian school has been instrumental in promoting “free” markets; minimal government regulation and privatisation of national assets. This is the legacy of the Reagan era. Now largely discredited with the 2008 meltdown. But many are still heavily focussed on econometric model building that has little to do with reality.

For developing economies, the developmentalist is most suited and there is a great need for more research and findings on issues, challenges and solutions for developing countries. Neoclassical school reigned supreme over last 40 years with abstract models and views.

Reference:

9 Schools Of Economics Explained On A One-Page Cheat Sheet, Tyler Durden, Zero Hedge (https://www.businessinsider.com)

EPF: RM40 Billion Withdrawn!

The Employees’ Provident Fund (EPF) has received 5.3 million applications amounting to RM40.1 billion under the Special Withdrawal facility, just two weeks after opening for applications.

The pension fund said payments are to be made in batches, with the first set to commence on April 20. The number of applications received represented 44% of the 11.95 million members eligible to withdraw their savings under the facility. By wage groups, this represented 55% of eligible B40 members (those earning less than RM1,700), 59% of M40 members (RM1,701-RM4,900), and 39% of T20 members (those earning more than RM4,900).A further 29% of informal and inactive members had also applied.

Source: https://ms.wikipedia.org

EPF said Bumiputera Malays made up the bulk of applicants at 63%, followed by Chinese (12%) and Indians (7%) while the remaining 17% were non-Malay Bumiputeras from Sabah and Sarawak and non-Malaysians. The three top reasons for applying included reduction in income/wage (24%), to assist affected spouse/family members (23%) and to increase sources of income (14%). Of this, 40% said it will be for the purpose of supplementing daily/monthly essential expenditure, settling outstanding debts (26%), increasing emergency fund (8%) and assisting affected family members (7%). The remaining 19% said it was for other purposes such as paying for children’s education, non-essential expenditure and investment.

EPF said it has put in place measures to prevent irresponsible third parties or scammers from making fake submissions.

The Special Withdrawal facility will be closed on April 30.

There is only a 10-day window to withdraw one’s savings built-up over years. The key problem is the need for Government assistance for the disadvantaged. This (withdrawal) is not Government assistance. When EPF members are using their own money to sustain themselves, it is not a Government scheme. The bigger question is how they will replenish their retirement nest. No clue. So too is the Government – clueless!

It need not come to this. The Government could have formulated a “loan” scheme through EPF for members to settle by way of dividends from EPF or PNB. Was that too difficult?

Reference:

5.3mil EPFmembers apply to withdraw RM40 bil under special scheme, Bernama, FreeMalaysiaToday, 16 April 2022

Is Our Property Bubble Forever?

The National Property Information Centre recently released statistics on the performance of the Malaysian property market for 2021 (reported by Pankaj C. Kumar, Starbiz, 16 April 2022).

While the headline numbers showed the number of transactions surpassed the 300,000 unit threshold level, up by 1.5% year-on-year(y-o-y), the data is still below the pre-pandemic level when the number of transactions hit 328,647 units in 2019.

The 2021 total transacted units were also lower than the 2017 and 2018 data points when total transactions were well above 300,000 units. However, transaction value in 2021 was significantly higher at RM144.87bil, up 21.7% y-o-y and the at the highest level since the 2016 total value of RM145.41bil.

Compared with a year ago, the number of overhang units increased by 11.0% in units and 7.2% in value.

What is more compelling is to look at the data at the end of 2017 and 2021 for comparison.

It is rather concerning that even as far as early 2018, market watchers were out with the red flags, and today, from the level we were four years ago, the market’s overhang in terms of volume has doubled, while in terms of value it is up by almost 120%.

An interesting point from this data is that the overhang within the high rise segment (which includes residential high rise, commercial service apartments, and Soho units) is now at a new record high of 44,800 units worth some RM33.32bil. Overall, this translates to 70.6% of the overall market overhang in volume and almost three-quarters of the total value. Imagine, seven in ten properties in Malaysia that are unsold today are high-rise units.

For the residential segment by state, the key overhang is in Selangor, Johor, and Penang as they account for 48% of total overhang units, worth some RM10bil or 43.9% of total overhang value in the residential segment.

Despite the massive amount of overhang, developers remain optimistic to build even more and future supply is expected to be more than the current inventory. In terms of states, the key states with massive future supply especially within the Soho and service apartments sub-segment are Selangor (for the expected increase in the number of Soho units), Kuala Lumpur (for the expected increase in the percentage of Soho units and the expected increase in service apartment in the number of units) and Penang (for the expected increase in the percentage of service apartments units) as seen in figure 4.

From Sydney to Singapore, from New York to New Zealand, the property market is booming across the globe but not in Malaysia.

The sheer overhang that the market is experiencing plus the avalanche of new product launches that we see in Malaysia has resulted in those wanting to buy only looking at new products and thus leaving stale products unsold for a considerable period.

It took just four years for the overhang to double in the market and with the value of those under construction at 150% of overhang, simple arithmetic seems to suggest that we may see the market experiencing an unprecedented amount of unsold properties by 2030.

As the pace of overhang and unsold properties remains on an upward trajectory and if the increase  remains at about 10% a year in the number of units and 8% in value, we will see total overhang and unsold under construction hitting 436,000 units by 2030 and valued at about RM222bil, more than double than where we are today.

Shouldn’t we be concerned? Are bankers not worried? Have they provided fully? Is pricing, location or quality the issue? Or, is it sheer volume in the wrong segment the issue – when there are so many looking for affordable housing? Or, are we targeting foreigners when they are restricted by the new MM2H?

Reference:

A bubble that never pops, Pankaj C. Kumar, The Star, 16 April 2022

The Chinese ‘Debt Trap’ Is it a Myth?

China, we are told, persuades poorer countries into taking out loan after loan to build expensive infrastructure that they can’t afford. The end goal of Beijing is eventually to take control of these assets from its struggling borrowers. As states around the world pile on debt to combat the coronavirus pandemic and bolster flagging economies, fears of such possible seizures have only amplified.

Source: https://asiapowerwatch.com

China’s internationalization—as laid out in programs such as the Belt and Road Initiative—is not simply a pursuit of geopolitical influence but also, a weapon according to some. Once a country is weighed down by Chinese loans, like a hapless gambler who borrows from the Mafia, it is Beijing’s puppet and in danger of losing a limb.

The prime example of this is the Sri Lankan port of Hambantota. As the story goes, Beijing pushed Sri Lanka into borrowing money from Chinese banks to pay for the project, which had no prospect of commercial success. Onerous terms and feeble revenues eventually pushed Sri Lanka into default, at which point Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.

The Trump administration pointed to Hambantota to warn of China’s strategic use of debt. Former Vice President Mike Pence called it “debt-trap diplomacy”—a phrase he used through the last days of the administration.

But many Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country. That includes the port of Hambantota.  The city of Hambantota lies at the southern tip of Sri Lanka, a few nautical miles from the busy Indian Ocean shipping lane that accounts for nearly all of the ocean-borne trade between Asia and Europe, and more than 80 percent of ocean-borne global trade. When a Chinese firm secured the contract to build the city’s port, it was stepping into an ongoing Western competition.

It was the Canadian International Development Agency that financed SNC-Lavalin, to carry out a feasibility study for the port. The study, concluded in 2003, confirmed that building the port at Hambantota was feasible. SNC-Lavalin recommended that it be undertaken through a joint-venture agreement between the Sri Lanka Ports Authority (SLPA) and a “private consortium” on a build-own-operate-transfer basis.

The Canadian project failed to move forward, mostly because of Sri Lankan politics. But the plan to build a port in Hambantota gained traction during the rule of the Rajapaksas—Mahinda Rajapaksa, who served as president from 2005 through 2015, and his brother Gotabaya, the current president and former minister of defence—who grew up in Hambantota. They promised to bring big ships to the region, a call that gained urgency after the devastating 2004 tsunami pulverized Sri Lanka’s coast and the local economy.

A second feasibility report, produced in 2006 by the Danish engineering firm Ramboll, also made similar recommendations to the plans put forward by SNC-Lavalin. 

Armed with the Ramboll report, Sri Lanka’s government approached the United States and India; both countries declined. But a Chinese construction firm, China Harbor Group, had learned about Colombo’s hopes, and lobbied hard for the project. China Eximbank agreed to fund it, and China Harbor won the contract.

This was in 2007, six years before Xi Jinping introduced the Belt and Road Initiative. Sri Lanka was still in the last, and bloodiest, phase of its long civil war, and the world was on the verge of a financial crisis. China Eximbank offered a $307 million, 15-year commercial loan with a four-year grace period, offering Sri Lanka a choice between a 6.3 percent fixed interest rate or one that would rise or fall depending on LIBOR. Colombo chose the former, conscious that global interest rates were trending higher during the negotiations and hoping to lock in what it thought would be favourable terms. Phase I of the port project was completed on schedule within three years.

In Hambantota, instead of waiting for phase 1 of the port to generate revenue as the Ramboll team had recommended, Mahinda Rajapaksa pushed ahead with phase 2, transforming Hambantota into a container port. In 2012, Sri Lanka borrowed another $757 million from China Eximbank, this time at a reduced, post-financial-crisis interest rate of 2 percent. Rajapaksa took the liberty of naming the port after himself.

By 2014, Hambantota was losing money. Realizing that they needed more experienced operators, the SLPA signed an agreement with China Harbor and China Merchants Group to have them jointly develop and operate the new port for 35 years. China Merchants was already operating a new terminal in the port in Colombo, and China Harbor had invested $1.4 billion in Colombo Port City, a lucrative real-estate project involving land reclamation. But while the lawyers drew up the contracts, a political upheaval was taking shape.

Steep payments on international sovereign bonds, which comprised nearly 40 percent of the country’s external debt, put Sri Lanka’s government in dire fiscal straits almost immediately. Sri Lanka owed more to Japan, the World Bank, and the Asian Development Bank than to China. Of the $4.5 billion in debt service Sri Lanka would pay in 2017, only 5 percent was because of Hambantota. The Chinese finance in general, was not the source of the country’s financial distress.

The notion of “debt-trap diplomacy” casts China as a conniving creditor and countries such as Sri Lanka as its credulous victims. On a closer look, however, the situation is far more complex. China’s march outward, like its domestic development, is probing and experimental, a learning process marked by frequent adjustment.

Over the past 20 years, Chinese firms have learned a lot about how to play in an international construction business that remains dominated by Europe: Whereas China has 27 firms among the top 100 global contractors, up from nine in 2000, Europe has 37, down from 41. The U.S. has seven, compared to 19 two decades ago.

Chinese firms are not the only companies to benefit from Chinese-financed projects. Perhaps no country was more alarmed by Hambantota than India, the regional giant that several times rebuffed Sri Lanka’s appeals for investment, aid, and equity partnerships. Yet an Indian-led business, Meghraj, joined the U.K.-based engineering firm Atkins Limited in an international consortium to write the long-term plan for Hambantota Port and for the development of a new business zone. The French firms Bolloré and CMA-CGM have partnered with China Merchants and China Harbor in port developments in Nigeria, Cameroon, and elsewhere.

The other side of the debt-trap myth involves debtor countries. Sri Lanka—or, for that matter, Kenya, Zambia, or Malaysia—are no stranger to geopolitical games. And the Americans are irritated by Chinese initiatives. 

The events that led to a Chinese company’s acquisition of a majority stake in a Sri Lankan port reveal a great deal about how the world is changing. China and other countries are becoming more sophisticated in bargaining with one another. And it is a pity if the U.S. fails to learn to work better to secure deals.

So, is it a myth? Yes, if we understand geopolitics and international competition. But that does not remove the need to be circumspect in negotiating “fair” deals with China or any other party.

Reference:

The Chinese “Debt Trap” Is a Myth? Deborah Brautigam and Meg Rithmire, Feb 6, 2021 

https://www.theatlantic.com 

Yuan vs. Renminbi: Which Is It?

There had been a consensus among economists that the Chinese currency has been undervalued in the 15% to 40% range for many years.  However, the International Monetary Fund (IMF) stated that the Chinese currency was no longer undervalued against the dollar given its recent appreciation.

Chinese money, however, comes by two names: The Yuan (CNY) and the people's renminbi (RMB). The distinction is subtle: while renminbi is the official currency of China where it acts as a medium of exchange. 

Source: https://en.wikipedia.org

Today, the U.S. dollar remains the numeraire for most commodity prices. Denominating commodity prices in the U.S. dollar standardizes the price as the USD is the most traded and liquid currency in the world. For example, companies that engage in oil transactions can easily convert payments or receipts in a timely manner since the price of oil is denominated in USD. 

With Beijing looking at the internationalization of its currency, one question continues to perplex many: Does China have two currencies? Does it use the yuan (¥), the renminbi (RMB), or both?

Renminbi is the official currency of the People's Republic of China and means "people's currency" in Mandarin. The yuan is a unit of the currency. Renminbi and yuan are often used interchangeably.  The communist party established the People’s Bank of China and issued the first RMB in December 1948.

Yuan is the unit of account. The largest banknote is 100 yuan, followed by 50-yuan, 20-yuan, 10-yuan, 5-yuan, 2 yuan and 1 yuan. One yuan can be further divided into jiao and fen. There are 10 jiao in a yuan (think dimes in a dollar) and 100 fens in a yuan.  The central bank has issued both coins and notes for jiao and fen, though notes for fen denominations are rare. 

For years, the Chinese yuan renminbi (CNY) had never been close to being considered an international currency because of the Chinese government's rigid controls. However, this then began to change. According to a 2015 report by Standard Chartered Bank, usage of RMB for international trade expanded 21-fold since 2010, and it expected that almost half of China's goods trade would be invoiced in RMB by 2020.

In October 2016, the renminbi was added to the list of the top-five most-used currencies, in addition to the U.S. dollar, euro, yen, and British pound, making it part of the IMF’s Special Drawing Rights Basket—an international reserve asset that the IMF created as a supplement to member countries’ official reserves.

However, data reported by Swift, the global inter-bank system, revealed that only 1.6% of domestic and cross-border payments in December 2017 were denominated in renminbi. 

The growth of Chinese currency is often a roller coaster. China has increased its attempts to back its currency, including promoting free usage of the renminbi. Whether you know it as a yuan or renminbi, what matters is that the currency from China remains a part of the currency conversation on the global stage.

Reference:

Yuan vs. Renminbi: What’s the difference, Christina Majaski, 29 April 2021, 

https://www.investopedia.com 

Escape the Rat Race?

Do you remember when you first started school? What was the goal? To make it in Standard One? Then it was to get into Standards 2, 3, 4 etc. until you reached secondary school. That’s when the real pressure was put on! Not only good grades but do well enough in SPM to get accepted into your college of choice.

And then what happened during university? You start going step by step to either go out into the real world or a professional school. After putting in a lot of hard work to start the career you’ve always wanted, now comes another struggle, one for success.

Source: https://soul-inspired-leadership.com

And again, there seems to be a ladder before you in which you’re reaching all the time. Then you wake up one day staring at a 60-year-old person in the mirror… but you feel cheated. At this point you think you should have already “arrived” but you feel the same as you’ve always felt. 

You’ve thought during all of these working years you were going to get somewhere but you’re in the same place you started. Why? It’s because all along you’ve been in a race that can’t be won….the Rat Race. The “real” rat race is someone that is living on the financial edge, working a day job and being one paycheck away from broke. 

This person feels as though the moment money enters their life, it immediately disappears. And the more responsibilities they have, the more dangerous this relationship becomes.

Their entire financial position could turn upside down with:   

• the loss of a job    

• unexpected health accident    

• any other “financial emergency”

If any of these issues happen, their job no longer becomes an option. It becomes a necessity in order to keep funding their lifestyle. They don’t know what to do.

The first step to escaping the rat race starts with something a Michael Jackson song instructs us to start with… the “Man in the mirror.” Specifically, it begins with reflecting on our personal relationship with money. 

Financial gurus such as Dave Ramsey teach many to calculate monthly expenses such as:    

• food    

• transportation    

• housing    

• entertainment    

• utilities

This will enable a budget being created and each month decide how much you can spend within each category. If you don’t take control over your behavior as a consumer, getting your financial life together will be impossible. 

Once you get your mind made up that you’re going to exit the rat race, starting an emergency fund should be on the top of the list. Dave recommends saving 3-6 months of expenses in a checking or savings account. The idea is that if you have a financial emergency, use funds from this account instead going into further debt.

If you truly care about exiting the Rat Race, unfriend/unsubscribe to the Joneses channel ASAP. 

It’s reaching financial independence (“FI”) as quickly as possible.  An important thing to do as your goal is to replace monthly expenses with passive income.

Robert Kiyosaki’s 3-step formula to achieve FI:    

1. Buy assets that generate cash flow (i.e. rental properties/stocks/bonds)

    

2. Use the passive income from the assets to pay for living expenses

    

3. Once monthly cash flow from assets is equal to or greater than monthly living expenses, you’re financially independent.

Reference:

Escape the rat race: what school failed to teach you about money, Dr. Jeff Anzalone

(https://www.dentaltown.com )

Oil Price Increase: Is it to Malaysia’s Benefit?

In Budget 2022 presented in November 2021 by the Finance Minister, the crude oil price forecast was based on price of US$67 (RM281.40) per barrel for Government revenue projections. Based on this forecast, the government was expected to collect some RM43.9bil in terms of petroleum-related revenue. The bulk of this is in the form of the annual dividend from Petroliam Nasional Bhd (Petronas) amounting to RM25bil, the Petroleum Income Tax (or PITA) of RM12.4bil and other forms of petroleum-related revenue of RM6.5bil.

At the same time, the government was also expected to spend a considerable sum in the form of subsidies, especially those related to the retail price of petrol. Based on data that was provided in the Budget 2022, some 5.2% of the total planned expenditure goes towards subsidies and social assistance, which translates to about RM17.4bil.

The forecast petrol subsidy based on a crude oil price of US$67/barrel was probably just about RM4.4bil for 2022 based on Star columnist Pankaj C. Kumar’s estimate.

Hence, with the consumption of approximately 22 billion litres of subsidised petrol/diesel per year, the government was prepared to subsidise approximately 20 sen per litre based on the RON95 market price of RM2.25 per litre against the controlled market price of RM2.05 per litre.

The Minister also commented that the price of RON95 is presently subsidised as much as RM1.65 per litre based on a fair market price of RM3.70 per litre.

Assuming a similar RM1.65 per litre subsidy is also accorded to diesel, the government is set to subsidise close to RM3bil per month (based on the consumption of 1.83 billion litres of petrol/diesel per month multiplied by RM1.65 per litre). In essence, the government subsidies for petrol and diesel are highly correlated to the global crude oil prices and for every US$10 (RM42) price change, the government’s fuel subsidies changes by approximately RM610mil per month or RM7.3bil per year.

With the higher oil prices, the government’s revenue is set to improve and this could be both in the form of Petronas’ dividend and other petroleum-related taxes and payments. This is estimated to be about RM7.8bil for every US$10 (RM42) change in the Brent crude oil price.

Hence, on a net basis, the government will still be able to afford these subsidies, but the nation loses out in terms of revenue when subsidies are extended fully.

Judging from the data in the table (above), one can see the vast disparity in Asean countries with a median and mean price of RM5.54 and RM5.39 respectively. In fact, Malaysia’s fuel prices are so low that we are presently ranked 12th cheapest in the world.

The vast price differential among Asean countries is due to taxes being imposed by the respective governments to curtail consumption and encourage consumers to switch to more affordable public transportation.

Malaysia too has a taxation mechanism in its fuel calculation as the automatic pricing mechanism (APM) adopted by the Government which calls for a tax of 58.62 sen per litre for petrol and 19.64 sen per litre for diesel. However, this is not imposed when the government steps in to fix the price at a certain level, which is what we have today for RON95 at RM2.05 per litre.

RON97 takes the full impact of oil price increase and that in a sense reflects on those who could afford it. To get rid of subsidies all together will trigger higher inflation as many items will be impacted by a rise in transport costs. There is no easy solution, between “market” forces and controlled price increases. For the B40 and M40 it is necessary that costs are tempered by subsidies, otherwise they face further depletion of their disposable income. Anyway with GE15 seemingly soon, the Government will restrain any increase in the price of RON95 and diesel in the foreseeable future.

Reference:

Malaysia’s boon and bane, Pankaj C. Kumar, The Star, 19 March 2022

Have a good rest!

 

Have  a good rest!

(Source: http://2integrity2017.blogspot.com)

War Crimes: Is America Really That Innocent?

It may not seem like it, but wars do have rules. These are contained in the Geneva Convention and beyond. Serious offences like murder, rape or mass persecution are known as “crimes against humanity”.

The International Criminal Court (“ICC”) is the world’s first permanent war crimes tribunal. The U.S., Russia, China and Ukraine are not members of the ICC. Meanwhile, the ICC has focused its work on African dictators.

Source: https://www.npr.org

Biden has called Putin a war criminal. But what about the U.S.? More recent U.S. war criminals include George W. Bush, Dick Cheney, Donald Rumsfeld and many others. Then there is Tony Blair from the U.K. and a host of other Europeans! Historically, those who were prosecuted for war crimes were the Nazis, the leaders of Japan (WW2), Liberia, Chad, Serbia and Bosnia because they lost the war and were adversaries of the U.S. There will be no prosecution of Saudi Arabia for war crimes committed in Yemen or the U.S. military and political leadership for war crimes in Afghanistan, Iraq, Syria, Libya, Vietnam, Korea amongst others.

If we demand justice for the Ukrainians then shouldn’t 1 million people killed by the U.S. in Afghanistan, Iraq, Syria and Yemen deserve the same outcome? This collective hypocrisy makes a rules-based world which abides by international law some form of utopia.

Civilians in every war have been considered legitimate targets. In the summer of 1965, then-Secretary of Defence Robert McNamara called the bombing raids north of Saigon that left  thousands dead an effective means of communication with the government in Hanoi. McNamara, six years before he died, had the capacity for self-reflection. Interviewed in the documentary, "The Fog of War," he was repentant, not only about targeting Vietnamese civilians but about the aerial targeting of civilians in Japan in World War II, overseen by Air Force Gen. Curtis LeMay.

Industrial killing defines modern warfare. It is impersonal mass slaughter. It is administered by vast bureaucratic structures that perpetuate the killing over months and years. It is sustained by heavy industry that produces a steady flow of weapons, munitions, tanks, planes, helicopters, battleships, submarines, missiles and mass-produced supplies, along with mechanized transports that ferry troops and armaments by rail, ship, cargo planes and trucks to the battlefield. It mobilizes industrial, governmental and organization structures for total war. It centralizes systems of information and internal control. It is rationalized for the public by specialists and experts, drawn from the military establishment, along with pliant academics and the media.

Industrial war destroys existing value systems that protect and nurture life, replacing them with fear, hatred and a dehumanization of those who we are made to believe deserve to be exterminated. It is driven by emotions, not truth or fact. It obliterates nuance, replacing it with an infantile binary universe of us and them. It drives competing narratives, ideas and values underground and vilifies all who do not speak in the national cant that replaces civil discourse and debate. It is touted as an example of the inevitable march of human progress, when in fact it brings us closer and closer to mass obliteration in a nuclear holocaust. It mocks the concept of individual heroism, despite the feverish efforts of the military and the mass media to sell this myth to naïve young recruits and a gullible public. It is the Frankenstein of industrialized societies. War, as Alfred Kazin warned, is "the ultimate purpose of technological society." Our real enemy is within.  

War is never the answer. No one is right. And might is not right. There must be a mechanism for legitimate arbitration. And all nations must accept its decision and are members of the court. After over 200,000 years on the planet we still behave like barbarians! We are allowing the military industrial complex to dictate our destiny. Should we allow this?

References:

The dangerous myth of American innocence: only our enemies commit “war crimes”, Chris Hedges, March 24, 2022 (https://www.salon.com).

What is a war crime and could Putin be prosecuted over Ukraine? Dominic Casciani, BBC News.

How could Vladimir Putin be prosecuted for war crimes, www.theguardian.com, 4 April 2022.

Ha-Joon Chang: Myths of Capitalism

There are many books that claim to explain the global financial meltdown of 2008. Not many are written by economists. Ignorant of history, most economists failed to forecast the crash. Many are mesmerised by the spurious harmonies of their mathematical models. What could economists have to say today that would be of any interest to anyone?

Source: https://pediaa.com

Anxiously defending their turf, many economists have objected that they never claimed to predict the future. But as Ha-Joon Chang writes: "Economists are not some innocent technicians who did a decent job within the narrow confines of their expertise until they were collectively wrong-footed by a once-in-a-century disaster that no one could have predicted." Far from being an inward-looking, hermetic discipline, economics has been a hugely powerful – and profitable – enterprise. It has shaped the policies of governments and companies throughout much of the world. The results sometimes have been little short of disastrous. As Chang puts it: "Economics, as it has been practised in the last three decades, has been positively harmful for most people." (Chang is a development economist based in Cambridge University).

In his 2008 book, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Chang mocked one of the central orthodoxies of his profession: the belief that global free trade raises living standards everywhere.

In 23 Things They Don't Tell You About Capitalism  economic orthodoxy is assaulted on a much larger front. Each of Chang's 23 propositions may seem counterintuitive, even contrarian. But every one of them has a basis in fact and logic, and taken together they present a new view of capitalism.

Chang may be the best critic of capitalism, but he is far from being any kind of anti-capitalist. He recognises the failings of centrally planned economies, and rightly describes capitalism as "the worst economic system except for all the others". At the same time he is confident that capitalism can be reformed to prevent crises. Making markets more transparent is not enough. "If we are really serious about preventing another crisis like the 2008 meltdown," Chang writes, "we should simply ban complex financial instruments, unless they can be unambiguously shown to benefit society in the long run." He is aware that he risks sounding extreme, but argues that the ban he proposes is no different from those that have been enforced on other dangerous products. And the derivatives market is several times larger than global GDP with no known regulation in place.

Capitalism is not only about creating wealth, it is also about power – and western power is waning. Economic energy is shifting to the emerging countries, while in the west economies stagnate and politicians continue to worship at the altar of the free market (not least in Britain, where the coalition seems bent on pursuing neo-Thatcherite policies more extreme than those of the 80s). Rather than reforming itself, free-market capitalism looks set simply to decline. 

Anyone with a rudimentary knowledge of economics, will tell you that there is no such thing as a “free” market. It is a utopia that some economists indulge for the benefit of their capitalist masters. But it has prevailed since the Reagan era of the 80s. We need some common sense driving a responsible or progressive capitalist system. After all economics is all about common sense or is it?

Reference:

23 things they dont’ tell you about capitalism, Ha-Joon Chang (https://www.theguardian.com)   

Pandemic’s Effect on Graduates Mean Monthly Salary and Wages

 

The Graduates Statistics 2020 survey by the Department of Statistics of Malaysia (DOSM) showed the mean monthly salaries and wages received by graduates was RM4,489. This is lower than the RM5,020 received in 2019.

Meanwhile, graduates aged 24 and below received a mean monthly salary and wages of RM1,949 in 2020 compared to RM2,367 in 2019. The reason cited was the lack of work experience.

In 2020, the 25-34 years age group received mean monthly salaries and wages amounting to RM3,371. This is lower than the mean monthly salaries and wages for this group in 2019, which amounted to RM3,955.

However, DOSM notes that the monthly mean salaries and wages for graduates in all sectors exceeded RM3,000 in 2020 with the highest being in the Mining and Quarrying sector (RM6,962) followed by Services (RM4,621) and Construction sectors (RM3,990). The mean monthly salaries and wages for graduates in Manufacturing and Agriculture sectors were RM3,889 and RM3,229 respectively.

A similar situation was observed for graduates aged 25 to 34 years whereby mean monthly salaries & wages received in all sectors was above RM3,000. The highest was in Mining & Quarrying sector followed by Services and Manufacturing sectors.

The data also showed that graduates aged 35 and above received higher mean monthly salaries and wages between RM4,000 to RM10,000 in line with the longer work experience.

There are several reasons why salaries remain low for graduates and others. We always tout ourselves as a low-cost economy. Employers are also resistant to higher salaries because revenue streams are restricted in the current market environment. Skill sets are more for the old economy and there is little appreciation for new fields of science for example. If you have a master’s in medical physics from UCL, your starting salary is still around RM 3000, same as someone from a local university with a first degree. Why? Employers and clients don’t really appreciate the foreign exposure. In addition, other medical professionals don’t see this route as any better or useful. In fact, local doctors don’t see them as professionals but mere technicians for the devices they use for their diagnosis or operation. That’s not the case in a more developed economy. Hence, you are focused on just getting by with no real hope of a great future--- developing new devices or methods in your field. Alas, that’s the sad state in Malaysia. So, many leave for Australia, Singapore or the U.S. and we have the temerity to ask why? If you remain, then you could follow the Kelantan Government’s advice!!    

Reference:

Lower mean monthly salary and wages for graduates during the pandemic, Focus, The Star, 10 April 2022 (https://cdn.thestar.com.my)

Sri Lanka Crisis: Lessons for Malaysia?

 Sri Lanka’s exclusionary model of development may have some lessons for Malaysia. Few would have expected the Sri Lankan government to collapse despite the high degree of ethnic Sinhala nationalism or extremism. 

It is a lesson for other countries that high degree of racial and religious nationalism does not necessarily beget sound economic and financial management. The entire Sri Lankan cabinet resigned en bloc leaving the country to be administered by the president. Whether the country would be able to administer itself with heavy doses of financial assistance from the International Monetary Fund (IMF) and countries like China and India is left to be seen. 

Extreme Sinhala ethnic Buddhist nationalism was defined against the Tamils in the country. Sri Lanka may have gone too far with this model of governance in administering the country.  While Sinhala ethnic nationalism was able to defeat the Tamil forces, such a methodology was not transferable to the economic management of the country. 

The family that ran Sri Lanka as though it was their personal property was the Rajapaksas (sounds like “Raja Paksa” for our context) 

In the last few decades of so, the brothers of the present president Gothabaya Rajapakse ran important ministries. The defeat of the LTTE was the reason for the rise in the popularity of the Rajapaksa family in general and Mahinda and Gothabaya in particular. However, success in the war was unfortunately not translated in the governance of the country. 

Over the period from the defeat of the LTTE until the present, the economy has deteriorated. The drastic reduction in the reserves of the country from over US400 billion to US2 billion was something catastrophic! 

More than this, currency devaluation, sharp fall of tourism revenue, slash in VAT, heavy debts to China for infrastructure projects, the cancellation of chemical fertilisers, lack of fuel  and the shortage of essential food supply brought the residents to the streets. Then there is endemic corruption and nepotism.

To what extent the IMF can rescue Sri Lanka from its own inflicted wounds is difficult to predict.  The fact that Sri Lanka sought to avoid the IMF by going to China for assistance might be damper on the degree of Western assistance to Sri Lanka. 

India might allow some credit assistance to Sri Lanka, but the country’s indebtedness to China might be a problem from a geopolitical angle.

Sri Lanka has seven major lessons for the world-:

(i) You cannot borrow and live happily ever after – sustainable debt is the key to survival;

(ii) Domestic consumption without too much borrowing matters;

(iii) When you can’t print the dollar as the US can, you descend en mass into poverty. (Fashionable liberal ideas like organic farming and pandering to Islamic terrorism doomed the country);

(iv) Corruption, nepotism and extreme nationalism speeds up the process to a “failed” state;

(v) Forex reserves help ameliorate any economic downturn;

(vi) Cutting taxes (VAT) is a populist choice but difficult to balance a budget; and

(vii) Having adequate food and fuel reserves will prevent street protest. 

Sri Lanka collapsed under its own weight, but Malaysia still has time to avoid the major and most excruciating pitfalls of a largely exclusionary model of development.

References:

Sri Lanka’s exclusionary model of development: some lessons for Malaysia, Prof Ramasamy Palanisamy, Focus Malaysia 5 April 2022

Sri Lanka’s nosedive into economic chaos holds global lessons, Ninad D Sheth, Deccan Herald, 2 April 2022

Will Everyone Win With ALR’s Takeover Offer?

The toll industry has been in a flux for some time. A suitable solution to alleviate the Government of Malaysia (GoM) from their burden of paying toll subsidy annually is the issue. For 2021 it was RM2.25 billion.

ALR’s proposed solution and offer is supposed to address this and it suggests the following:

(i) ALR’s concession toll rate would be maintained at the present rate until the end of concession, i.e., no more toll hikes — significantly benefiting the motoring Rakyat;

(ii) The GoM no longer needs to pay any toll compensation subsidy either, since ALR’s new concession rate is equal to the present toll rate — thus saving GoM RM4.3 billion (net of tax waiver).

(iii) This valuable savings can then be further spent on other urgent development expenditure. 

The savings to the motoring rakyat of the highways are [as underlined in table 1]. (as based on TheEdge Report on Apil 6, 2022)

For example; a KESAS user only pays RM2 instead of RM3 at each of Toll Plaza. Saving of RM1or 50% savings. Similarly, a SPRINT (Pantai) user only pays RM2.50 instead of RM4.50; a saving of RM2 or 80% savings.

ALR’s total enterprise value is lower than the 2019 offer by RM720 million. The primary reason for the difference is because ALR’s offer is dated two years after the previous offer. The cash flows from those two years would not be included in ALR’s discounted cash flow valuation.

ALR’s proposal has no recourse to the GoM, i.e. there is neither a GoM guarantee nor any implied financial undertaking by the GoM, to the providers of funds to ALR.

ALR is obligated to redeem its funding (Sukuk) as soon as it can and must return all the four highway concessions back to the GoM.

Higher actual traffic achieved will reduce actual extension.

The offer is valid until April 30, 2022 and will be fully financed by sukuk. Post-acquisition,

the highways will not see future toll hikes, but the concession period will likely be extended by five to 10 years for the concessionaires except for SMART, whose concession period may be shortened.

According to PublicInvest Research, Gamuda’s equity value of RM2.33 billion is considered fair and in line with the research house’s valuation of RM2.28 billion for the four highways, although slightly lower than Pakatan Harapan’s RM2.36 billion offer in 2019.

Who is ALR Bhd? In an announcement by Gamuda Bhd, which owned four highway concessions, ALR Bhd is described as a “not for profit” entity. Is this a social or “charity” organisation?

Neither the government announcement nor the ALR website states how the selection was done. That is the problem! Transparency for a RM5.5 billion transaction is missing. Then how do they make any money? How are they going to raise Sukuk? No equity outlay? Can an independent financial advisor confirm matters?

References:

Gamuda says everyone wins with ALR’s takeover offer, Mohammed Rashdan Mohd Yusof, TheEdge CEO Morning Brief, April 6, 2022

RM2.3 bil cash from highway sale seen handy for Gamuda infra bids, Syafiqah Salim,  TheEdge CEO Morning Brief, April 6, 2022

Kiniguid: Who is ALR, how will it take over 4 Klang Valley highways? Aidila Razak, Malasiakini, April 5, 2022

Economy or Language?

The Prime Minister’s desire to make Bahasa Malaysia as the lingua franca of ASEAN took a nosedive with Indonesia’s Education, Culture, Research and Technology Minister Nadiem Makarim (April 5) suggesting Bahasa Indonesia instead.

Also, the former CEO of Go-Jek backed his claims as to why Bahasa Indonesia merit to be the superior choice. Through his assessment, Nadiem said the reach of the Indonesian language extends to 47 countries around the world.

Source: https://m.facebook.com

Bahasa Indonesia for Foreign Speakers or Bahasa Indonesia Untuk Penutur Asing (BIPA) has been offered by 428 institutions, both facilitated by his Ministry’s Language Development and Development Agency as well as those conducted independently by BIPA activists, governments and institutions around the world.

If you have economic dominance, people will crawl – if they need to – to master your language. That’s why English is dominant and maybe Mandarin is useful as well.

The former International Trade and Industry Minister Tan Sri Rafidah Aziz argued that the focus on “dignifying” Bahasa Melayu is a backward move that does not help Malaysians to progress in today’s modern world. It is not just language but rather what you express and communicate that is important according to her.

Malaysia was once a breeding ground for non-native English speakers on par with India.

The so-called push for Bahasa Malaysia’s supremacy poses several setbacks given that the Government has overlooked the strengthening of Malaysia’s economic resurgence after Covid-19.

Malaysia tends to have ideas such as how more young people could take up trishaw trade in Kelantan while the world has moved on to AI, digital and other new technologies. Even if trishaws are battery or solar-powered it is not something graduates would like to do. The Kelantan state government has offered to provide free trishaw repair services. How exciting?

Reference:

Prosper the Malaysian economy first and Bahasa Malaysia will blossom naturally, Cheah Chor Sooi, Focus Malaysia, 6 April 2022

Is Malaysia Household Debt Unsustainable?

Malaysian households have nearly RM1.38 trillion worth of debt, exceeding what the federal government owes to its creditors (based on Starbiz report of 6 April 2022). Between 2018 and 2021, the household debt in Malaysia increased by almost 17%, raising concerns about the country’s debt-servicing ability. In addition, most Malaysian households have low buffers for saving.

According to Bank Negara, 76% of households have savings that can only cover less than three months of living expenses. The situation is worsened by the increasing cost of living factor and imprudent lifestyle choices. The low-income bottom 40% (B40) households are the worst affected. The B40 group has a net income of RM230 per month in 2019 after accounting for expenditures and financial obligations, according to Bank Negara. The middle 40% and top 20% households, on the other hand, have a monthly net income of RM1,127 and RM4,081, respectively.

With inadequate saving buffers, most Malaysians have no proper “safety net” and it is not surprising that many had to tap into their retirement funds as they were hit by salary-reduction and job-loss over the past two years.

The high household debt is also a problem when it comes to Malaysians seeking house loans. Bank Negara points out that 65% of borrowers already have either car or personal loans. This may constrain the prospective borrowers’ capacity to take on a housing loan, it adds.

The total household debt is contributed by hire purchase and personal loans, as well as credit card debt which stood at 28%.  It is noteworthy that about 55% of household debt is contributed by housing loans. Within the region, Malaysia has one of the highest household debt-to-gross domestic product ratios at 89%, compared with 9.9% in the Philippines, 17.2% in Indonesia, 69.7% in Singapore and 89.3% in Thailand.

The lack of cheaper housing options, despite projects announced by the federal and state governments, are causing Malaysians to take on high mortgage loans. Malaysia needs an economic strategy that aims at generating sound, investment-led growth and containing inflation by decreasing the quantity of money in circulation. That improves exchange rate and imported inflation.

With gaining urbanisation, owing a home becomes a priority for many. And so too having a car or a credit card. But when wages remain low, affordability is impacted even if liquidity in the system provides opportunities for asset acquisitions.

Although household debt to GDP is a broad ratio, a better way is to examine asset values to loans and also gross impairment of loans, especially to that of household borrowings. Household debt to GDP is not a great measure to determine if we are at risk in a downturn.

Reference:

High debt, low pay, Ganeshwaran Kana, The Star, 2 April 2022 

(Https://www.thestar.com.my )

Sapura Energy Berhad (“Sapura”): What Went Wrong?

Sapura had total debts of RM16 billion at one point. It has since reduced this to about RM10 billion. This was largely after an injection of RM4 billion by PNB in 2019. The debt load is still too hefty for it to survive.

Under a debt restructuring plan, the 9-10 banks who are owed a total of RM10.3 billion are asked to take a 75% haircut. The banks seemingly exposed to Sapura include: Maybank, CIMB, AmBank, RHB, UOB, Exim Bank, ING Bank, Sumitomo, Standard Chartered and First Abu Dhabi Bank.

How did it get to this?

Source: https://en.wikipedia.org

The question is not whether you can win bids but whether you can mitigate risks for delivery of the services. It is not the bid or order book that matters but onerous difficult terms to deliver. Foreign markets, unfamiliar customers and difficult environment are all cited as the reasons for its huge losses.

So, what can  it do?

Divest assets; re-negotiate contracts; negotiate haircuts with creditors; and secure a new strategic investor with cash injection for new projects. All of these are not easy but the new Board/Management are capable to put things in better shape.

Almost all the O&G service providers were over-geared and suffered losses when the crash of 2014 took place. Many had sought help of CDRC while some did not survive e.g. Perisai Petroleum.

None of the reasons cited by a politician merit Government intervention. But then there is PNB! So, it may warrant a re-look at some support level on a sustainable debt level going forward, i.e. a Danajamin guarantee for the proposed restructured debt. What do you think? Market forces or Government intervention?

References:

A mammoth task for Sapura Energy, Intan Farhana Zainul, The Star, 2 April 2022

Cover Story: What went wrong at Sapura Energy, Jose Barrock, Adam Aziz and Kathy Fong, The Edge Malaysia, 11 November 2021

Poverty: Is Growth or Negative Growth That Matters?

It is widely accepted that countries are poor because their economies did not manage to grow sufficiently. The converse is more accurate. Countries are poor because they shrink too often. 

Comparing development in Taiwan with that in Venezuela (see graph below) illustrates the point. In 1950, the Gross Domestic Product (GDP) per person in Taiwan was only about an eighth of Venezuela’s. By 2016, the tables had turned and the fortunes of both countries had been reversed. By then, the GDP per person in Venezuela was only a third of that in Taiwan.

This has very little to do with Venezuela’s inability to grow. With substantial natural resources, Venezuela can create growth and has done so. Indeed, the average per person growth rate during the years that the country’s economy did expand was 4.13%.

Over the same period, Taiwan had a per person growth rate of 5.62% during its own growth years. But this 1.5% difference cannot explain the enormous difference in the two relative levels of prosperity in the two countries. So, if the difference cannot be explained by growth, perhaps it can be by the frequency with which the two economies shrank. Since the 1950s, the Taiwanese economy shrank only three times, while the Venezuelan economy shrank 31 times – almost every second year.

In the 1950s and 60s, many other low income countries in Latin America, sub-Saharan Africa and Asia were experiencing shrinking economies with roughly the same frequency (see graph below). From the 1970s to the 1990s, however, countries in Asia managed to reduce their incidences of shrinking while countries on the other two continents started to shrink more and more often. In the countries of sub-Saharan Africa, for instance, economies shrank, on average, every other year.

Again, in growth years, the Asian economies had an average annual growth rate per person that was only about 1-1.5% higher than that during growth years in Latin America and Africa. But the Asian economies overall made much greater gains over the period.

Again, this shows that all countries can create growth but only a few can reduce the number of years they experience shrinking. These patterns are also in line with what new research in economic history is showing: that it is the ability to reduce economic shrinking that explains why the West grew rich and the rest of the world did not.

The growth process very seldom is linear. True, especially in low income countries. Leading development economists have for some time complained that standard theories of economics might be relevant for understanding why economies grow, but are of little use for understanding why economies are different in terms of their ability to limit economic shrinking. Theories of economic growth performance are geared towards explaining accumulation, allocation and perhaps innovation – but not shrinking or negative growth.

Inclusive societies with a more equal distribution of income, assets and economic opportunities are more likely to experience sustained growth. Economies are probably also more stable and less prone to shrink if their governments are impartial, can stand free from the influence of vested interest groups, and deliver goods and services in a fair and efficient way.

Textbooks and policy agendas are filled with ideas about how to get growth going, but you’ll rarely read about what countries should do to avoid regular shrinking.  We must learn from economies that have gone from frequent shrinkers to infrequent ones. If we know more about what those countries managed to accomplish, there are grounds for optimism in an economically less divided world.

Malaysia needs a more inclusive, impartial, merit-oriented strategy to lessen the impact of any downturn. Otherwise growth will alternate with negative growth leading to political and economic instability. But has this Government the gumption to change the framework?

Reference:

Poverty: what low-income countries need is not more economic growth, it’s less shrinking, Martin Andersson, Nov 28, 2019 (https://theconversation.com)