In other words, talk is cheap - GST or no GST

The Fitch rating agency has finally said what we, the commoners of Malaysia, has been saying all along :

Fitch was reported to keep the rating outlook at negative despite all the announcement, as reported in The Star newspaper

KUALA LUMPUR: Fitch Ratings hailed the proposed move to lower the Malaysian Government deficit and the introduction of the Goods and Services Tax (GST) as potentially constructive steps, but said it was keeping the sovereign credit rating on Negative Outlook, pending “a track record of budget management”.

Well, I guess i do not want to have to say I told you so, but i kinda did, here. Our government needs to address the management of expenses before start talking about taking our subsidies.

Good luck to us all.

Is GST fair?

The budget is out and the just about everyone has made it clear about what they feel, their opinions,  with regards to the budget. Opinions, someone used to tell me, is like an asshole - everyone has one.

Of course, the most sensational parts of the budget are the taxes.It almost dominates all conversations and reports on the budget. Politician and their supporters from all side came out with their arguments supporting or disagreeing on the taxes.

Well now that since almost all important people has made their statements, it is about time this not-so important guy state his views. I do not work for the government so my loyalty would not force me to look it from a completely positive view, neither am I a professional bodies beholden to the government. I am certainly not in the  opposition, hence my views should not have the default view set to negative.

1. GST and the Sales and Services taxes

GST of 6% is said to replace the existing sales and service taxes which is between 6% to 10%. Some, especially pro-government, might have the impression that this is a good thing; replacing the higher tax with a lower tax.

The thing is GST is supposed to increase the amount of tax revenue to the government to firstly replace the Sales and Service taxes AND secondly the reduced income tax haul. Mathematically speaking, this means that the GST is going to cover more products and services than the existing sales and service taxes. As an individual, you will definitely end up paying more under GST compared with the Sale and Service taxes.

2. Fairer tax collection system?

The question would be is whether, if you are currently a tax-payer, would you be paying more tax (Income tax plus the GST) under the new GST regime or less? If more then that sucks and does not make sense. If the purpose of broadening the tax net is to create a fairer tax collection system, where those who used to evade tax are no going to get taxed, making the existing tax-paying citizens forking out more money under GST is not fair at all. It is status quo made worse.

But in order for us to assess this, we need to look at the new income tax (IT) structure and the GST amount that is slapped on a typical 'basket of goods'. We cannot accept that GST is fair just because the textbook says so and it is parroted by the accountants and the economists.

To put it in perspective, it is reported that our inflation rate is less than 3%. For the purpose of argument, lets assume that I expect that the GST may then add on additional 3% to 5% to the inflation rate in 2015, because some items which was not taxed before would now cost at least 6% extra - in the first year. If that is the case, existing tax-payers must see an increase of at least 3% to 5% in their disposable income after income tax for them to be better off, compared to before the GST regime. Remember, the additional income must come from revision in IT alone, not from pushed up salary/income.

View and comments are welcomed :-)

GST, Income Tax and the accountants

When I completed  my (then) SRP, I pondered what to do next? I chose Accounts stream despite being eligible for the science stream. Why? I love the calculations.  After My SPM I had to make another decision , the degree course. I chose Accounting & Finance. Why? Back then, being the firstborn, you wanna get a job more than anything and in 1990, the buzz was for accountants. Hence there I was, bundled up into an air plane and for the next 5 years I had to learn the ways of the accountant.

What happened at the end? Well I graduated and vowed never will I become an Accountant? Why? I like the maths, but could not seem to agree on the principles and the strict adherence to the same.

13 years on, I am glad I made that move.

Don't get me wrong. There is absolutely noting wrong about accountants. They are (or rather were) almost beyond reproach, until Enron and Goldman-Sach showed us otherwise. They are still considered a bunch of intelligent number crunchers, an elite group.

But I just find it that sometimes they rely too much in the numbers.

Yesterdays, the the newspaper, the top achelons of the accounting group in Malaysia came out, calling to hasten the implementation of the GST in Malaysia.  Citing that it is the only cure for our malaise of continuous government deficit and in impending doom of the Fitch rating downgrade.

Firstly the government deficit is a two way street, namely Income and Expenditure; the street has a nasty back-alley called "Leakages and Corruptions". It baffles me when the accountants keeps harping about the income side of the street, without touching on expenditure and the back-alley of leakages (which is a pretty wide alley in our case). The silence was indeed deafening.

As I have said it before, I don't mind giving up my portion of subsidy or paying higher tax IF the government has done all they can to be efficient and close the back-alley of leakages. I had that conversation with the taxi driver this morning and the nice man shared the same view. He sees the logic behind it: If the government have shown they have done all it can do on its part, then we will gladly give up what we have for the country. It is not rocket science.

And as I do get it. I get that GST is a much better and fairer way of taxing the wealth/income of the population. GST should be accompanied by a reduction of the overall income tax on the individuals. And that would be great news to me and  other tax paying citizens. Apparently our income tax system is not that efficient, resulting in a lot of people able to evade paying tax (which is one of the reason they are calling for the implementation of the GST). Some of us are only getting a little of seventy cents to very dollar we earn. It is a heartache we gladly bear for the benefit of the country. We do get that.

The problem is that you guys don't get it when we talk about better expenditure management and actually addressing the AG's report about leakages.

Instead what we see is a systematic (typical) news reports from so called professional bodies expounding the virtues of GST and how it would be the saviour of our impending woes. Bullshit.

Gone are the days where we, the people, would follow blindly the words of the professionals. Especially after Enron and the likes. We know what are in it for you guys.

I am sure you accountants are independent in their views, but imagine this. GST is a new taxation system so there will be shitloads of new taxation consultation jobs. Wohoo more income.

We also know that a lot of government bodies and all GLC needs an auditors - you gotta manage the relationship there.

We get that and we therefore understand why you might be saying so. But that still does not make it right and deep down I think you know it too.

Trying to make sense of our country's debt and downgrade threat

I always believe that finance and economics, no matter how complex it might be, must makes sense - common sense. So when I stumbled upon an article from Bloomberg about Malaysia, debt ceiling, its rating and 1MDB (I post the article at the end of this blog), I found myself trying to make sense of certain issues.

First let's start which what I understand, things that make sense first.

1. Rating is important if you (issuer/borrower/Government/1MDB) have an outstanding floating rate loan. Rating is an indication of riskiness hence the lower the rating the more interest you would need to pay on your debt.
2. If you have issued fixed rate bond, then rating does not really matter because your interest payment is fixed.
3. If you plan to borrow some more, then rating matters because lower rating will cause you to pay/agree to pay  more on your future debt in terms of interest/coupon.
4. If you are a TRADER of bonds (for example institutions that bought and are holding the 1MDB bonds from Goldman Sachs), rating matters because if the rating of any bond that you are holding goes down, the value and price of that bond will go down. That means you would incur a loss in the value of the bond (unless you are holding to maturity). In this case, rating matters to the Issuer/Borrower if he plans to borrow some more by issuing debt to the Traders. If the existing rating goes down, and the traders LOSES money on the existing bonds, they might not be so keen to buy the new bonds or asks for much higher interest payment for the new bonds that the issuer plans to issue.

Now to the part which I cannot make sense:

1. Fitch is threatening to lower the Government's debt rating because of, amongst others, high debt to GDP ratio. Why we have high debt? Well it is because the government have been running on deficits since 1998. Deficit, which happens when the government spends more than it earns, would cause the government to borrow. In a growth situation this is perfectly fine as the deficit is to finance growth which will later cause the economy to grow, increase tax income and other government revenues and then we have a surplus.

2. But what if the debt is not because of the income? What if the deficit is mainly because of mismanagement, leakages and corruption? The recent AG's report has plenty on that, for years! If that is the case, trying to reduce deficit by raising revenue (taxes and such) will be like "mencurah air ke daun keladi"...kerja sia sia. If we raise revenue without plugging the hole first, we will just sink faster. It like speeding up a leaking boat, you will just let water in faster.

3. According to the PM, the rating should not really affect the government much as most of its debts are held locally by local institutions. That is true since most MGS (Malaysian Government Securities ) are in Ringgit and they are all mopped by our banks because we have so much liquidity. If that is the case, then why the adamant effort to stop the downgrade in rating; taking away subsidies and increasing taxes. I am for reduced subsidies but you got to show me you can manage the extra money first.

4. Coincidentally, 1MDB seems to have USD denominated bonds - USD6.5 billion of it. Being a 'sovereign fund' their bonds would be affected by rating movements if was a floating rate. If it is fixed rate, then the holders of its bonds would suffer losses if the rating goes south. (and on this note, I also cannot understand why borrow in USD when you are purchasing assets in ringgit? Why the currency risk?).

In the end, what really keeping me perplexed, puzzled and befuddled is are we doing all this risk-downgrade avoidance actions (subsidy cuts etc) to mainly save a  particular bond / issuer rather than the real economy as a whole? If that is the case, then we have to really think back on the strategy of affecting the whole to maintain a few.

But if we are looking at this downgrade threat as a mean to make our cash management better - then excellent! But we have to look at the leakages first, spending is a must, but leakages are not.

REPRODUCED FROM BLOOMBERG

Najib Sees Malaysia Escaping Fitch Rating Cut: Southeast Asia

By Barry Porter & Chong Pooi Koon - Oct 14, 2013 8:59 AM GMT+0800

Prime Minister Najib Razak said he believes that Malaysia can avoid a cut to its credit rating while the government will try its “level best” to prevent a breach of its self-imposed sovereign debt ceiling.
“We will manage it,” Najib said in an Oct. 11 interview in Putrajaya, the country’s administrative center near Kuala Lumpur. “We’re very closely monitoring how we manage our macro position as well as our fiscal and debt to make sure that we will not be downgraded.”

Enlarge image

Malaysia's Prime Minister Najib Razak speaks during a panel discussion at the Asia-Pacific Economic Cooperation CEO Summit in Nusa Dua, Bali, Indonesia, on Oct. 7, 2013. Malaysia has run annual budget deficits every year starting in 1998. Photographer: SeongJoon Cho/Bloomberg

2:14

Oct. 14 (Bloomberg) -- Malaysia Prime Minister Najib Razak talks about the prospects for the country's economic growth and government policies. He spoke Oct. 11 with Bloomberg News in Putrajaya, the country’s administrative center near Kuala Lumpur. (Source: Bloomberg)

Najib raised subsidized fuel prices for the first time since 2010 and said he’d delay some public projects after Fitch Ratings cut Malaysia’s credit outlook to negative in July, citing rising debt levels and a lack of budgetary reform. The country, which has a long-term foreign-currency denominated rating of A- at Fitch, has run annual budget deficits every year starting in 1998.
At 53.3 percent, Malaysia’s debt-to-gross domestic product ratio is the highest among 12 emerging Asian markets after Sri Lanka, according to data compiled by Bloomberg. Moody’s Investors Service said last month the budget gap may exceed Najib’s target of 4 percent of GDP this year and warned fiscal targets will become “increasingly out of reach” unless further measures are taken. Moody’s rates Malaysia government bonds A3 with a stable outlook.
The government will further cut state subsidies, broaden its tax base and manage spending “prudently,” said Najib, 60, who is also finance minister, without elaborating. Cabinet will meet before the 2014 budget is released Oct. 25 to decide if there’s enough public support to introduce a goods and services tax, he said.

Taxing Challenge

“We are quite positive on Malaysia,” Enrico Tanuwidjaja, a Singapore-based economist at Nomura Holdings Inc., said by phone yesterday. “They are on a fiscal consolidation path and they will boost the revenue base if the government can push through the GST in the coming budget. A sub-3 percent fiscal deficit could happen in 2016, if not in 2015 as per the official aim.”
The ringgit has fallen 4 percent this year, the fifth worst performer among 11 most traded Asian currencies tracked by Bloomberg. The currency could gain over time if the nation’s fundamentals remain strong, central bank Governor Zeti Akhtar Aziz said in an Oct. 12 interview with Bloomberg News in Washington.
“We believe that, over the medium term, yes, it should reflect underlying fundamentals, and if the underlying fundamentals remain strong, then over time it should be an appreciating trend,” said Zeti, predicting stronger economic growth in 2014.
The government earlier planned to introduce a 4 percent GST by 2011. It hasn’t said what the rate may be if it now goes ahead.

‘Level Best’

“We are one of the very, very few countries in the world which doesn’t have a GST,” said Najib, who was returned to power in a general election in May with a reduced majority as his coalition lost the popular vote for the first time. “But there are challenges. Anything to do with any new form of tax, like consumption tax in Japan, carbon tax in Australia, these are big issues that cannot be easily decided.”
The government will “try our level best” not to go beyond its debt ceiling of 55 percent of GDP, said Najib, a U.K.- educated industrial economics graduate. If Malaysia can achieve 5 to 6 percent GDP growth “we should be able to manage the debt ceiling,” he said. “The weakening external global economy is of concern to us.”
Southeast Asia’s third-largest economy withstood faltering overseas demand in the past year as Najib gave handouts to voters and boosted investment ahead of the May vote. GDP expanded more than 4 percent in each of the 15 quarters through June 2013.

State Guarantees

“This year we should be able to get somewhere between 4 to 5 percent” growth, the prime minister said. “I think probably slightly beyond 4.5 percent. That’s the best estimate that we have currently.”
With state guarantees added to public debt the government’s credit exposure was 70.2 percent of GDP as of the end of the second quarter, up from 66.6 percent a year earlier, Bank of America Corp said in a report on Sept. 17.
“It’s not so much the level of debt, it’s the ability to pay,” said Najib. “Fortunately, most of our debts are long-term debts and are domestic debts, so we think we will be able to manage it.”
1Malaysia Development Bhd., a sovereign wealth fund better known as 1MDB, has accumulated total bonds and outstanding loans of about 30 billion ringgit ($9.4 billion) since it was formed four years ago, according to data compiled by Bloomberg.

Goldman Fees

The Kuala Lumpur-based fund has acquired 12 billion ringgit of energy assets in the last two years. It is also building a new financial district in the capital called Tun Razak Exchange, named after Najib’s late father, Malaysia’s second prime minister.
“It has borrowings, but its total assets exceed its borrowings,” Najib said of 1MDB. “We’ve got a few projects and programs in mind that will really strengthen 1MDB.”
The fund is talking to potential U.S. investors about venturing into solar energy, said the prime minister, who is chairman of the fund’s advisory board.
1MDB came under scrutiny in parliament in July after hiring Goldman Sachs Inc. to help manage $6.5 billion of bond sales to fund expansion. The U.S. bank made about $500 million in commissions and trading gains, a person familiar with the matter said May 9.
“If you talk in terms of international scale of fees, I think that’s within a margin,” said Najib. “Goldman Sachs have got certain ability and name in the market and they are able to deliver what’s been required. In terms of that relationship, 1MDB is quite happy with what Goldman Sachs has done.”
To contact the reporters on this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net; Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net
To contact the editors responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net; Stephanie Phang at sphang@bloomberg.net

GST, the economist and the economic sense

The Star reported that some economist are in favor of the GST and that it should be implemented quickly.

Well, indeed GST is an revenue source which is more equitable, IF and only IF
1. You reduce the income tax accordingly and
2. You apply the right subsidy assistance to the right group of people.

But Malaysia does not a have a problem in collecting money - it is rich. The problem is handling money.

There is absolutely no use of generating more revenue for the government's coffers when we do not address the inefficiency and leakages completely. If we do not address these holes before we open the GST tap, we will find ourself back in deficit, back in the same problem - very fast.

And what happens then? Raise the income tax back to pre-GST level? Remove more subsidies?

The problem is not the money people, it is the use (or rather misuse) of it.

Below is the excerpt from the Star Newspaper

Economists urge Govt to implement goods and services tax

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KUALA LUMPUR: The sooner the better. That’s how economists feel about the goods and services tax (GST), whose unveiling is widely anticipated in Budget 2014.
Kenanga Research economist Wan Suhaimi Saidie said a comparative study on the broad-based tax in Australia, Singapore and Thailand showed a positive wealth effect, with the three countries experiencing three- and even four-fold increases in gross domestic product (GDP) per capita post-GST.
“It’s basic economic theory. As the system becomes more efficient across the supply chain, wages, prices and wealth can be distributed more evenly,” he said at a briefing yesterday.
Wan Suhaimi cited Singapore as having the best model for the GST implementation, which saw the city-state substantially reducing corporate and income tax, tripling per capita income and attracting large investments and human capital.
Kenanga Research is expecting an initial GST rate of between 4% and 7%, with 5% being the most likely.
The consumption-based tax, on which basic necessities would be exempted, could be introduced next July at the earliest or January 2015, the local research outfit said.
But Wan Suhaimi suggested that a quick implementation was crucial if the Government intended to stick to its deficit reduction target of 3% by 2015.
Rating agencies, which have been keeping close tabs on Malaysia’s debt situation and dwindling current account surplus, are also in favour of the Government cleaning up its fiscal house, rather than being fixated on growth, which should come naturally with the recovery in external demand, Wan Suhaimi said.
Kenanga Research said a January 2015 timeline for the GST would result in an end-2015 deficit of 3.5%, off the Government’s target by 0.5%.
If the tax took effect next July, however, then the fiscal deficit is likely to be pared down to 3.1% by the end of 2015, its numbers show.
The GST introduction might even lead to a rally on the local bourse, if the stock markets of Australia, Singapore and Thailand were any indication, Kenanga head of research Chan Ken Yew said.
Their benchmark indices soared shortly before the tax came into effect, as consumers hoarded goods and services to avoid paying higher prices, giving markets a short-lived sugar rush.
On his outlook for the market, Chan said he was adopting a “cautiously optimistic” approach, advising clients to buy on weakness – especially if the FTSE Bursa Malaysia KL Composite Index plunges below 1,745 points – and be selective in their stock picks.
And despite the impending pullback of the US Federal Reserve’s easy money policies, which fear-mongers said would drive an unprecedented exit of foreign capital from emerging markets, Chan is taking a contrarian view.
“Foreign investors are returning to Bursa Malaysia. They turned net buyers again recently,” Chan said, noting that the still near-zero interest rates in most Western countries were a boon to monetary expansion.