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Saturday, January 21, 2012

Yong’s flawed ‘new hope’ economic plan


Former Chief Minister Yong Teck Lee's derison of Sabah government's RM544 million bond is 'as imaginary as the tale spun by George Lucas in Star War'.
COMMENT
By Guan Hong Lee
Former Chief Minister Yong Teck Lee’s promises for Sabah is not too unlike the fiction weaved by  George Lucas’ in his epic masterpiece Star Wars.
In fact, Yong’s Sabah Economic Plan bears the same title – New Hope – of Lucars’ Episode IV of the series.
The issue at hand highlighted by Queville To’s article “Bringing new hope and a better Sabah” here was in regards to the State Government’s RM544 million bonds, which SAPP has vehemently said is harmful to state finances.
However a deeper look into the matter reveals statements made by Yong are as imaginary as the Star Wars spin.
It can be contended that Lucas and Yong do in fact have a similar vision for their audiences  - both try to introduce us to a whole other universe of IMAGINARY creatures, lifestyles and history!
Albeit to varying degrees of success.
To put bluntly, Yong’s proclamations are fanciful, but arbitrary at best when it comes to the real world.
Declaring that “the bond is like spending tomorrow’s money today” exemplifies SAPP’s ignorance of economic theory and the party’s failure to understand the financial markets.
RAM endorsement
The State Government of Sabah raised and issued its bonds with the approval of the Federal Government and in accordance with the requirements of the Constitution of Malaysia.
The bonds also achieved the highest long-term Issue Rating assigned by RAM (Rating Services Bhd), whis is the AAA.
This ‘endorsement’ indicates the bonds issued by the State Government of Sabah have “superior safety for payment of financial obligations”.
SAPP and the purveyors of their ‘Sabah Economic Plan’ conceivably fail to comprehend the financial benefits of such a bond issue, let alone the complex world of economic transactions and financial instruments.
At a fixed coupon rate of only 4.58% per annum, the Sabah Government has been granted an inexpensive form of financing that will allow it to optimise available financial resources for the implementation of the state’s long-term development plans.
For Yong to say that Sabah requires ‘huge reserves’ to be economically prosperous reflects the ignorance and shallow understanding of a lawyer’s perspective on the management of the state’s financial affairs, since ‘huge reserves’ can only be generated from real economic activities.
That is to say, if the current administration under the leadership of Chief Minister Musa Aman continues, Sabah without doubt will accumulate ‘huge reserves’ as shown by the historical performance of a “balanced economic growth strategy through fiscal prudence” implemented by Musa since 2003.
Cheap federal loan
In June 2011, at the launch of ‘The Report: Sabah 2011′ prepared by the Oxford Business Group (a global publishing, research and consultancy firm), it was highlighted that:
“Sabah’s economy would continue to out-perform other Malaysian states with GDP capita increases, helping to drive rural and urban development across the state with new growth sectors coming on stream in the next five to 10 years.”
This is attributable to Musa’s sound financial policy and management creating an investment climate that is conducive for growing streams of investment flowing into the state.
The layman on the street will raise simple and valid questions: “Why not use Sabah’s own money if the state is so financially prudent? Why borrow and pay back with interest?”
The answer lies within a counter-question: “Why should Sabah use its own cash when it can borrow at a cost low enough to be offset by economic returns from the generation of NEW economic activities?”
Job creation, new businesses and vibrant trading will generate revenue, thus contributing to the coffers of the Sabah state many times over compared to the relatively small cost of 4.58 %  annual payment in bond coupons.
Sabah’s wealth of natural resources brings with it a strongly driven primary sector and positions the state at a pivotal point for the nation in terms of crude palm oil (CPO) and crude-oil production.
This robust attainment, among other things, has been fundamental to the rise in the Sabah state’s consolidated reserves in recent years (despite adverse global market conditions) to the RM3 billion mark.
Motives in support of bonds do not end here.
What is debatably even more crucial for the successful governance of Sabah lies within the tacit benefits derived from the issuance of rated debt instruments; namely scrutiny and transparency of public information.
How exactly do bonds help in providing information for governance?
Is Yong naive?
Well, it’s no secret that the majority of civil servants and government workers do not personify the very picture of diligence and pride in what they do.
As a matter of fact, dealing with their bumbling systematic and personal inadequacies is a sluggish and unpleasant affair experienced by almost every Malaysian at some point in life.
This leisurely existentialism is kicked out the window once responsibility of providing data to rating agencies examining the creditworthiness of a bond issue is brought under watch.
In order for rating agencies to express their credit opinions, they typically undertake rigorous examination of the ratee’s track record; hence, the state of Sabah’s economic and financial data will have to be current, consistently updated and readily available.
And all this data will come from the civil servants who are now forced to facilitate efficiency in information collection and capture.
Another crucial objective worth mentioning here is the bigger plan for Sabah’s economy – opening up to foreign direct investment.
The lead arranger of the bonds, in this case CIMB Investment Bank Berhad, promotes the bonds to not only local investors, but also to key players of the global capital markets located in the region.
Since the rating process provides a free flow of information to global investors, there is a greater likelihood for their future re-investment in Sabah, particularly given the confidence instilled from the State’s bonds being ‘AAA’ rated.
This allows for sources of economic growth beyond just the scope of Sabah and Malaysia.
With the local market size as shallow as it is and Sabah’s GDP being dependent on trade through export-oriented output from its primary sector, Yong must be either intentionally misdirecting information or simply naïve enough to believe that Sabah must be entirely self-reliant.
Contrary to SAPP’s belief in their Sabah Economic Plan, down-breeding the state’s financial management into an internalized barter trade system can only end antagonistically for the people of Sabah.
This is an excerpt which first appeared in Sabahkini.com. The writer is an ex-banker

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