Monday, 31 October 2016

Of Petrol Price, Managed Float and Ignorance

As I forecasted on Facebook yesterday, RON95 price for November was increased by 15 cents last night.
Unsurprisingly there’s an uproar among some (maybe many) Malaysians on social network blaming the government for the increase in fuel prices.
Some of them said global oil prices were trading below $50 per barrel so government shouldn’t increase the price, some said oil prices were trending lower throughout last month (October) so government is trying to trick the people and squeeze their pocket and some even said it’s increased because government needs the money to pay 1MDB’s debt.
There were some who took extra efforts to prove that fuel prices shouldn’t have increased by uploading oil price charts and they used WTI crude oil chart to show last month’s oil price movement unknowingly that WTI crude which stands for West Texas Intermediate is the benchmark for crude oil price in the United States of America (USA).
First of all let me explain how petrol prices are calculated in Malaysia and how did government arrive to the prices they set every month.
Before 2015, we all know that fuel prices in Malaysia were subsidised by the government; change in internationally-traded crude oil prices didn’t affect fuel prices at pump stations.
After the huge drop in (Brent) crude oil prices in the 3rd quarter of 2014 from around $115 per barrel to as low as $52 per barrel by the end of 2014, government decided to do away with the fixed price-fuel subsidy system and set the fuel prices according to the global oil prices by revising the prices of RON95, RON97 and Diesel EVERY month according to the average prices of those petroleum products in the previous month.
I’m going to focus on RON95 as I believe it’s widely consumed among Malaysians and if you can afford and fill your tank with RON97, I don’t think you care about the changes in fuel price.
Retail fuel prices are determined by using a method called Automatic Pricing Mechanism (APM) which has been used since 1983.
There are 6 components that need to be calculated before government set the fuel prices which are product costs, exchange rate (USD-MYR), alpha, operating costs, oil company’s margin and petrol station dealer’s margin.
Product costs are costs of refined products which are the finished/processed products of crude oil. In Malaysia (and other Asian countries including Australia) we used pricing benchmarks from Singapore (Asian oil trading hub) called Mean of Platts Singapore (MOPS) to calculate the retail price of RON95. The MOPS prices are published (in US Dollar) everyday by the McGraw Hill companies and unfortunately can only be accessed by paid subscribers.
Exchange Rates are used to convert MOPS prices in US Dollar to Ringgit Malaysia. I don’t know which benchmark for USD-MYR exchange rate is used by the government but I use daily USD-MYR rate published by Bank Negara on their website.
Alpha is the difference between the published MOPS prices and the actual price of finished products bought by the oil company which is fixed at 5 cents per liter by the government.
Operating costs include transportation and marketing costs of oil companies of which is set at 9.54 cents for every liter.
Oil Companies’ Margin is fixed at 5 cents per liter.
Petrol Station Dealers’ Margin is guaranteed and set at 12.19 per liter.
Product costs and exchange rates are variable costs which change every day according to the market forces and alpha, operating costs and margins for oil companies and petrol station dealer are fixed costs set by the government.
Total fixed costs of RON95 = Alpha (5¢) + Operating Costs (9.54¢) + Oil Companies Margin (5¢) + Petrol Station Dealers Margin (12.19¢) = 31.73¢ = 32¢ (rounded-up)
MOPS95 price for 31st October 2016 = $62.028 per barrel and USD-MYR exchange rate = 4.1960.
First we need to convert the MOPS95 price from per barrel into per liter, 1 Oil Barrel is equal to 158.987 :
MOPS95 per liter = 62.028/158.99 (rounded up) = $0.39
Then we convert MOPS95 per liter in USD into Ringgit term:
MOPS95 per liter in RM = $0.39 * 4.1960 = RM1.64 (rounded up)
Finally we add the fixed costs of 32¢ to the variable costs (product costs and exchange rate) to get the final price of RON95 on the 31st October of 2016.
RON95 per liter = RM1.64 + RM0.32 = RM1.96 per liter
Yesterday’s actual price for RON95 was RM1.96 while the price of RON95 set by the government for October is RM1.80 per liter meaning we paid less than the actual market price.
Last night the price of RON95 was increased by 15¢ to RM1.95 per liter but how did government arrive to this 15¢ increase?
Under the managed-floating mechanism, government determines the prices of petrol and diesel according to the monthly average prices of the products.
Prices of RON95 for the whole month will be calculated and divided by the number of days in the month (excluding the weekends and public holidays).
Since the MOPS95 data are not publicly available and exclusive only for the paid subscribers I take the liberty to publish the data (my older brother is one of the subscribers) to show you guys how RON95 prices are determined every month.
Below are complete MOPS95 prices and RON95 prices (calculated for you) for August 2016:
MOPS95 and RON95 Prices, August 2016
As you can see RON95 price in August was set at RM1.75 per liter and despite MOPS95 were trending higher throughout the month, the average price of RON95 in August (RM1.69) was lower than retail price of RON95 (RM1.75).
On 31st August 2016, government set the price of RON95 for September 2016 at RM1.70 liter, a decrease of 5¢ in line with the average price of RM1.69 as shown above.
Let’s see the price of RON95 for September and examine why it’s increased by 10¢ at the end of September:
MOPS95 and RON95 Prices, September 2016
Average price for RON95 in September was RM1.82 per liter compared to retail price set at RM1.70 per liter.
By the end of September, RON95 price was increased by 10¢ to RM1.80 per liter for October retail price also in line with the average price RM1.82 per liter (rounded up).
Lastly let’s see the prices of MOPS95 and RON95 in October and comprehend why RON95 price was increased by 15¢ for November last night:
Mops95 and RON95 Prices, October 2016
Average price for RON95 in October was RM1.98 per liter higher than the retail price of RM1.80 per liter.
Last night government increased the price of RON95 by 15¢ from RM1.80 to RM1.95 per liter which again in line with the average price of RON95 in October.
By now I hope you guys understand how RON95 prices are set by the government every month.
Some were asking why fuel prices didn’t change in April-May and July-August.
I’m gonna be blunt and say it’s probably because there were Sarawak state election in May and by-elections in Sungai Besar and Kuala Kangsar in June.
I personally don’t support this kind of policy because I think the government should revise the price every month regardless there’s an election or not in that particular month.
But it’s up to the government and I don’t have the say in it.
Anyway back to the point about 10¢ and 15¢ increase in RON95 prices for the October and November respectively, they were set and determined not without basis.
We should not use the WTI or Brent crude chart to determine the finished product (RON95) price.
Sure you can monitor the movement in WTI and Brent crude prices and deduce whether RON95 price will go up or down next month, but it won’t be accurate.
You cannot just upload the WTI and Brent crude oil charts on FB and Twitter without context and say the RON95 price should be reduced instead of increased and government is stealing from the people.
There are other important factors which are exchange rate (USD-MYR) movements, the cost of the finished products (RON95) itself and fixed costs.
And then there are this group of people who said Malaysia in an oil producer country so we deserve a subsidised lower than market fuel price.
Seriously people?
We produced 740,000 barrels per day last year compared to Saudi (11.9 million bpd), UAE (3.4 million bpd), Kuwait (2.7m bpd) and Qatar (2.053m bpd).
Even Norway which produced 1.958 million barrels per day doesn’t subsidised its fuel price for consumption.
Overall, we are just ranked 25th in the oil producers ranking.
Although we are a net exporter of crude oil, we are a net importer of petroleum products (refined products e.g. petrol, diesel, kerosene etc):
Malaysia Crude Oil Exports and Imports: METS Online
Malaysia Petro-Products Exports and Imports: METS Online
In other words, we consumed petroleum products more than we produced and for that we have to import petroleum products to meet the our own demand.
So this notion of “we should enjoy lower-than-market-subsidised oil price because we are an oil exporter” is a fallacy at best.
We export more crude oil than we import, but we import more refined products than we export.
I hope this writing clears the air and every end of the month, we will be prepared for a revision in fuel prices and stop blaming the Prime Minister, government, 1MDB, donation and whatnot.
Stop the ignorance, be rational and be fair to yourself.

p.s. My response to YB Rafizi Ramli's response on the increase in RON95 prices. Basically he blamed the depreciating Ringgit as the main cause why RON95 price was increased. While USD-MYR exchange rate is among the factors that determine the price of RON95, it's not the main factor for last month. Do read them.


1. USD-MYR Exchange Rate - Bank Negara Malaysia
2. World Oil Producers Ranking - US Energy Information Administration
3. Malaysia Crude Oil and Petroleum Products Exports and Imports - Malaysia External Trade Statistics Online

Sunday, 30 October 2016

Bahaya Terlalu Bergantung Kepada DAP

Kadir Jasin menulis berkenaan lawatan kerja YAB PM ke China dan melahirkan rasa kebimbangan beliau dan kenalan beliau tentang bahaya apabila Malaysia terlalu bergantung kepada China.
Kadir juga berkata bahawa ramai rakyat Malaysia risau tentang kebergantungan negara kita kepada China.
Kadir menuduh bahawa PM menggadaikan masa depan negara dan cucu cicit kita kepada China semata-mata kerana mahu menimbus RM50 billion hutang 1MDB.
1MDB menjual 100% aset kuasa (Edra) kepada China General Nuclear Power Corporation dan 60% ekuiti Bandar Malaysia Sdn Bhd (Bandar Malaysia) kepada sebuah konsortium yang dibentuk oleh syarikat tempatan Iskandar Waterfront Holdings (IWH) dan syarikat China Railway Engineering Corporation (CREC) di mana baki 40% ekuiti masih dimiliki 1MDB.
Kadir menyatakan bahawa 1MDB menjual Edra dalam keadaan terdesak dan menanggung kerugian apabila terpaksa menjual Edra dengan harga lelong berjumlah RM9.2 billion lebih rendah RM3 billion daripada harga belian.
Malangnya Kadir tidak memaklumkan kepada pembaca beliau bahawa dengan penjualan Edra kepada CGN, 1MDB berjaya mengurangkan hutang sejumlah RM14.2 billion yang mana RM7.43 billion adalah hutang yang diwarisi daripada aset-aset penjanakuasa tersebut dan RM6.76 billion adalah hutang yang dibuat untuk membeli aset-aset penjanakuasa tersebut.
Penjualan Edra kepada CGN: Laporan PAC 1MDB
Kadir juga gagal memaklumkan kepada pembaca beliau bahawa RM9.2 billion hasil jualan yang diterima daripada CGN juga telah digunakan untuk mengurangkan hutang-hutang 1MDB lain dan berbaki RM2.32 billion.

Hasil Penjualan Edra: Laporan PAC 1MDB
Penjualan ekuiti Bandar Malaysia sebanyak 60% kepada konsortium IWH — CREC tidak sepatutnya menjadi isu kerana CREC hanya mempunyai pegangan sebanyak 40% di dalam konsortium tersebut dan 60% selebihnya dimiliki IWH yang juga dimiliki oleh Kumpulan Prasarana Rakyat Johor (KPRJ) dan Credence Resources Sdn Bhd dengan nisbah pemilikan 40:60.
Struktur Pemilikan Ekuiti Bandar Malaysia Sdn Bhd
Secara ringkas CREC hanya akan memiliki 24% daripada keseluruhan ekuiti Bandar Malaysia Sdn Bhd melalui pemilikan 40% ekuiti di dalam Konsortium IWH-CREC dan selebihnya dimiliki 1MDB (40%) dan IWH (36%) di mana melalui pegangan ekuiti di dalam IWH, KPRJ yang juga syarikat milik penuh kerajaan negeri Johor memiliki 14.4% dan Credence Resources milik Lim Kang Hoo memiliki 21.6% daripada ekuiti Bandar Malaysia.
Tidak timbul isu kerajaan menggadaikan tanah kepada China untuk menanggung hutang 1MDB seperti yang digambarkan Kadir Jasin di dalam tulisan beliau.
Jika kerajaan ingin menggadaikan masa depan negara dan cucu cicit kita bukankah sepatutnya lebih mudah kerajaan menjual 100% ekuiti Bandar Malaysia kepada CREC?
Kadir mahu dana-dana dan syarikat-syarikat tempatan terlibat di dalam projek pembangunan Bandar Malaysia dan TRX tetapi apakah jaminan bahawa jika dana dan syarikat tempatan terlibat dalam projek Bandar Malaysia dan TRX, kerajaan tidak akan dituduh cuba bail-out 1MDB melalui KWSP, KWAP, PNB, LTH, LTAT dan lain lain?
Sedangkan pembelian sebidang tanah TRX oleh Tabung Haji juga ramai yang menuduh ianya sebagai bail-out apatah lagi jika dana-dana berkaitan kerajaan yang lain terlibat dengan projek pembangunan Bandar Malaysia secara penuh.
Adakah menarik pelaburan dari China sekarang digelar sebagai menjual masa depan negara dan masa depan cucu cicit kita semua?
Sehingga 30 Jun 2016, pelabur-pelabur asing memiliki RM1.575 trillion pelaburan di dalam Malaysia melalui pelaburan langsung, pelaburan portfolio dan derivatif kewangan.

Daripada jumlah pelaburan asing tersebut RM598 billion adalah kedudukan pelaburan langsung liabiliti Malaysia yang bermaksud RM598 billion adalah jumlah stok pelaburan langsung pelabur-pelabur dari luar negara di dalam Malaysia.
Kedudukan Pelaburan Antarabangsa, 2015–2016: Jabatan Perangkaan Negara
Daripada RM598 billion kedudukan pelaburan asing di dalam negara kita, kurang daripada 10% adalah pelaburan langsung daripada China (termasuk Hong Kong):
Kedudukan Pelaburan Langsung Liabiliti Mengikut Blok Negara, 2015–2016: Jabatan Perangkaan Negara
Setakat suku kedua 2016, kedudukan pelaburan langsung China (termasuk Hong Kong) di dalam Malaysia adalah RM49.56 billion atau lebih kurang 8.3% daripada keseluruhan pelaburan asing di dalam Malaysia.
Berbanding pelaburan asing daripada Singapura yang bernilai RM127 billion, Jepun RM75 billion, Belanda RM49 billion, USA RM46 billion yang mewakili hampir 50% daripada kedudukan pelaburan asing di Malaysia, mengapa hanya pelaburan dari China sahaja yang dikira sebagai menjual masa depan dan cucu cicit negara?
Aliran Bersih FDI di Malaysia Mengikut Rantau 2012–2015: Jabatan Perangkaan Negara
Malah aliran bersih pelaburan langsung asing dari negara-negara lain lebih tinggi daripada aliran bersih pelaburan langsung asing dari China tahun lepas seperti Singapura, Jepun, Belanda, UAE, USA tetapi tiada siapa yang menuduh PM dan kerajaan Malaysia menjual masa depan negara dan cucu cicit kepada negara-negara tersebut.
Hanya China yang menjadi perhatian Kadir kerana China melabur di dalam Malaysia dengan membeli ekuiti di dalam Edra dan Bandar Malaysia yang berkaitan dengan 1MDB.
Selain daripada sumber pelaburan China juga merupakan rakan dagangan (eksport-import) utama Malaysia.
Malaysia Total Exports and Imports: MATRADE

Sehingga Ogos tahun ini nilai dagangan antara Malaysia adalah sejumlah RM149.33 billion.
Malaysia menjual barangan kepada China dan Malaysia juga membeli barangan daripada China di dalam perdagangan eksport dan import setiap bulan.
Tak tahulah bagaimana ini dikatakan sebagai menjual masa depan negara kerana Malaysia memang sebuah negara terbuka yang dan mempunyai sektor perdagangan yang amat pesat dengan kebanyakan negara-negara asing bukan China sahaja.
Lawatan YAB PM ke China sepatutnya disambut baik oleh rakyat Malaysia kerana ianya dapat mengukuhkan lagi hubungan pelaburan dan perdagangan antara kedua-dua buah negara.
Lawatan ini tidak bermaksud Malaysia akan mengabaikan negara yang lain kerana banyak lagi negara-negara lain yang mempunyai kepentingan yang lebih besar dari segi pelaburan dan perdagangan di dalam Malaysia.
Berbanding parti politik DAP yang sering memburuk-burukkan nama negara, menegangkan hubungan antara kaum dan pelbagai perkara negatif yang dibawa mereka, pelaburan dan perdagangan di antara Malaysia dengan China membawa banyak manfaat kepada rakyat seperti peluang pekerjaan kepada rakyat dan pembangunan ekonomi negara.
Tidak perlulah Kadir Jasin membandingkan sebuah parti politik pembangkang dengan negara rakan dagangan dan pelaburan Malaysia.
Soal kedaulatan negara berkaitan isu tuntutan sempadan Laut China Selatan memang perlu diberi perhatian oleh kerajaan tetapi ianya tidak berkaitan dengan isu pelaburan, perdagangan, 1MDB atau Bandar Malaysia seperti yang cuba dikaitkan pihak-pihak tertentu termasuk Kadir sendiri.
Hujah-hujah di dalam tulisan Kadir Jasin sejak kebelakangan ini persis hujah-hujah yang dibangkitkan DAP.
Najib jual negara, Malaysia bakal muflis, kerajaan ketiadaan wang dan sebagainya adalah hujah-hujah yang sering diulang-ulang DAP yang kini dibangkitkan oleh Kadir Jasin dan sekutunya di dalam PPBM.
Malaysia tidak terlalu bergantung kepada China seperti yang digambarkan mereka dan tidak ada apa bahayanya bergantung kepada China sebagai rakan dagangan dan pelaburan penting negara kita.
Kepada Kadir Jasin, sebenarnya lebih bahaya bila anda terlalu bergantung kepada hujah-hujah DAP untuk menyerang pentadbiran negara dan UMNO.
Rakyat boleh menilai dan membezakan antara China sebuah negara dan DAP sebuah parti dikuasai kaum cina.

  1. Laporan Jawatankuasa Kira-Kira Wang Negara (PAC) Ke Atas 1MDB
  2. Kedudukan Pelaburan Antarabangsa Malaysia Suku Kedua 2016: Jabatan Perangkaan Negara
  3. Statistik Pelaburan Langsung Asing di Malaysia 2015: Jabatan Perangkaan Negara
  4. Malaysia's Trade Statistics: MATRADE

Monday, 24 October 2016

Tony Pua's (Not So) Hidden Bubble Exposed

I refer to the article written by YB Tony Pua of DAP published in Malaysiakini entitled “Najib’s Hidden Budget Time Bomb Exposed.”
Basically Tony Pua is saying that the government of Malaysia is manipulating the figures for its financial position particularly on expenditure and deficit (expenditure exceeds income) to mislead the investment community and the public.
According to him government has been and will be spending on multi-billion ringgit infrastructure projects through the off-government budget spending via Non-Financial Public Corporations (NFPCs) as he put it:
“In practically every budget in recent years, Najib had announced multiple multi-billion ringgit projects such as the LRT Extension Project, the MRT I and II Projects and soon, the proposed High-Speed Rail and the RM55 billion East Coast Railway Link.
However, these spending were never reflected in the government budget expenditure which showcased the “prudent” budget deficits. Where did these massive spending disappear to?
You will find part of the answer in the Non-Financial Public Corporations (NFPC) Financial Position (Table 6.13 p161 Economic Report 2016/7).”

NFPCs Financial Position: Economic Report 2016/2017

He explained how the deficit of NFPCs had ballooned from RM16.4 billion in 2013 to RM56.9 billion in 2015 which has become larger than government deficit (RM37.2 billion in 2015) itself because government has been shifting its spending to NFPCs to mask the true extent of government deficits.
First of all, NFPCs or formerly called Non-Financial Public Enterprises (NFPEs) have been around in Malaysia for decades.
Prasarana for an instance has been an NFPC since 2003:

List of NFPEs, 2003: Bank Negara 2003 Annual Report

NFPCs have been spending money on development projects (capital expenditures) on behalf of federal government since 1990 (earliest data available):

Consolidated NFPEs Finance: Bank Negara 1997 Annual Report
It’s not true that only recently government has been using NFPCs to spend on developments, in fact government has used NFPCs as early as 1990.
In absolute term NFPCs development expenditure has grown from merely RM13.6 billion in 1995 to as high as RM114.9 billion in 2014 before decreasing to RM89.4 billion in 2015.
But absolute numbers wouldn’t give an accurate assessment of growth so let’s look into the growth in NFPCs development expenditure in relative term to Malaysia’s economic output or better known as GDP:

NFPCs Development Expenditure to GDP Ratio
As you can see from the chart above, NFPCs development expenditure to GDP ratio hasn’t jumped to record high but in fact has been consistent with average ratios for the past 25 years.
But of course Tony Pua wouldn’t highlight this because it wouldn't fit his narrative that the current administration has been shifting development projects to NFPCs.
Tony Pua’s concern is the deficit of the NFPCs on which he said is the biggest time bomb to the Malaysian public finances.
The problem with his assessment is that he didn’t mention the fact that NFPCs has been recording a healthy current balance-operating surplus (revenue minus operating expenditure) and never once recorded a deficit in any year.
Unlike operating expenditure, development expenditure (CAPEX) is a balance sheet item that will become fixed assets in NFPCs book or Fixed Capital Formation in national accounts (GDP).
We can take comfort from the fact that NFPCs current balance is still in surplus and the overall deficits that have been recorded by the NFPCs were because of government investments in crucial development projects such as extension of LRT Line, MRT, HSR and many more.
Tony Pua added that the federal government’s debt service charges have increased every year which is true but as government invests to boost the economy, private sector will join and invest and the economy will grow which in turn will boost government’s revenue in the future.
Besides, part of government’s debt service charges are also flowing (interest payments) to future Malaysian retirees, pensioners and local financial institutions via EPF, KWAP, banks, DFIs etc which are holding almost half of total outstanding federal government debt of RM635 billion (as at 30th June 2016).
If the NFPCs deficit is the biggest time bomb which will explode in the years to come, investors wouldn’t buy or invest in government bonds and it would be reflected in government’s securities yields.
Here are the historical yields for the long term (3, 5, 10-year) Malaysian Government Securities (MGS) since 2013 until today:

Historical Long Term Conventional Malaysian Government Securities Yields: Bond Info Hub
If the time bomb is going to explode in coming years like Tony Pua imagined, why is it not reflected in the long term yields of government securities?
It’s not that the investors cannot access the data for NFPCs deficits, they are published by the MoF and Bank Negara every year.
If the government wanted to mask the true picture of government’s budget, why would they publish the NFPCs financial position and the consolidated public sector account every year? Shouldn’t they make the figures as government secrets under OSA? I don’t know Tony.
Financial investors aren’t as clueless as Tony Pua thought.
I’m pretty sure they are aware of this NFPCs financial positions and have no problem with them.
If they do, they wouldn’t buy any bonds issued by the government.
Even foreign investors have been ploughing into government bonds in recent years despite the negative publicity played by the opposition:

Foreign Holdings in MGS and GII: RENTAS — BNM
Since 2013, foreign investors have added roughly RM70 billion to their holdings in bonds and sukuks issued by the Malaysian government from RM134 billion in January 2013 to RM208 billion last month (September 2016).
They can’t be that shallow to buy more Malaysian government bonds even after the 1MDB fiasco, falling oil prices, Ringgit depreciation and all the bad news played by the opposition right?
All these indicators e.g. government bonds yields, foreign holdings in government bonds etc show that Tony Pua’s deficit and debt scare has been blown out of proportions.
Tony Pua could mislead some of the Malaysians, but he couldn’t fool the investors domestic or foreign.
Government is not hiding anything from the investors or the Malaysians.
If the figures such as NFPCs financial positions are hidden, how did Tony Pua manage to write such misleading article in the first place?
I don’t think there’s a biggest ticking time bomb whatsoever but I know for sure there’s a delusional bubble that Tony Pua lives in that has yet to burst until today.

  1. Najib’s Hidden Budget Time Bomb Exposed – Malaysiakini
  2. Non-Financial Public Corporation Financial Positions – Malaysia’s Economic Report 2016/2017
  3. List of NFPEs in 2003 – 2003 Bank Negara Malaysia Annual Report
  4. Consolidated NFPEs Finance 1997 - 1997 Bank Negara Malaysia Annual Report
  5. Historical Consolidated Public Sector Finance - Economic Planning Unit (EPU)
  6. Historical Long Term Conventional Malaysian Government Securities Yields: Bond Info Hub
  7. Foreign Holding in Malaysian Government Securities: RENTAS - BNM Monthly Statistical Bulletin