Tuesday, November 01, 2011

How Can This Be Possible?

Idris Jala says it again HERE. If we don't prepare and don't watch out we will slip into the red in 10 years, which ironically coincide with our planned vision to become a developed nation. Imagine if this happens, in 2020 instead of becoming developed, Malaysia becomes BANKRUPT instead.

Most of us see bankruptcy as distant as we see the impact of a 7 billion human population on us. Do you think that if the government runs the country to the ground it will not affect us citizens DIRECTLY? Of course it will.

Let's take a parallel scenario. A company is incorporated with an authorized and paid up capital of RM100 million. The money comes out of the shareholders pocket who trust on the board of directors and the management of the company to operate the business profitably and declare dividends to them in due course as just rewards from their investments.

Now the company cannot rely only on the shareholders equity to run a proper business. It needs loans for capital expenditures and working capital (operational expenditures) to cover the amount over and above the equity. Loans are costly as lenders issue them at risk of non-performance so charge high interests apart from holding a lien on the assets as well as demanding corporate and personal guarantees to secure repayments. To ensure loans are justified, the cost of loans must be more than offset by the profits the business can earn by using such loans. It is illegal to use loans for non-productive expenditures such as buying luxury cars for the top management or offsetting another non-performing loan. Hence loans are justified if:

1. It is used for capacity expansion that result in higher revenue and profits which more than offset the cost of the loans taken
2. It is used to tide over short term working capital overrun until profits narrow the deficit.

A good business should attempt to grow self-funded from its reserves and not raise additional capital either from taking excessive loans (over-gearing) or raising additional equity from the shareholders. But when a business runs out of cash it rely on the following options to stay afloat.

1. Raise additional loans by using other collateral or future goodwill
2. Raise additional capital from shareholders
3. Increase sales revenue by raising the price of good and services sold which reduce its competitiveness
4. Delaying or restructuring its debt settlement thus buying time hoping for better days and opportunities

A well run business have the following characteristics.

1. Steady and repeated profit performance year after year
2. Regular declaration of dividends
3. Retaining part of profits as reserve for both future expansion plans and for unplanned contingencies such as recession or currency depreciation
4. Business prudence in spending within its means and growing capacity gradually
5. Trustworthiness in the professionalism and expertise of its directors and management teams.
6. Respect and strong leadership within the industry it operates in.

Several of the above observations can be used in the administration of a nation. Unfortunately we have seen how badly managed Malaysia is judging from the serious mismanagement of the funds it receives from Petronas, Inland Revenue Board and other sources. Using the comparison of a company, it can be said that:

1. The government is not professional or dedicated to make the country financially strong. It has not developed a capable civil service to administer the nation well.
2. By having deficit budgets for the past few years it suggest that our reserves are depleting, or if increasing then our foreign debts increase as well to a point that we are unable to service our debt repayment and then risk being declared a bankrupt nation.
3. The government is not managing the financial leakages and abuse of authority that corruption is becoming rampant and little efforts are taken to arrest its malignant growth.
4. The citizens, equivalent to shareholders, are told lies that we are doing alright and that the government should be re-elected at every general election as 'it knows best' after running the nation for 54 years.
5. Cost remain high. Citizens still pay high taxes, receive no dividends (meaning lower taxes)
6. Inefficiency and propagation of a low productivity culture lead to a bloated and an under-performing workforce (civil service) which makes the nation generally expensive to live in and operate from.
7. Poor work culture that arises from internal bickering, gossiping, lying and cheating to get things done. The top management is either blissfully unaware or deliberately overlook this misdemeanor for fear of rocking the boat.
8. Indiscipline sets in and the corporate Malaysia seeks to be self serving rather than planning for national prosperity and that of its people (shareholders).

It is very possible that Idris Jala is right. He may sound like a prophet of doom, a sheep boy who cry wolf, or someone who raises the tsunami alarm. Will we listen and act to stop this plundering and rape of our national resources? I think if we take a simple example of how an opposition run state can turn around the deficit budget into a surplus after taking over for just 2 years then it is timely for the entire nation to be run by a new and more capable team. We certainly don't wish to hand over the country to our children in a state poorer than what we received from our forefathers.

In the corporate world, mismanagement will result in service termination and replacement by a more effective team. Do we have the courage to act through our ballots? Or wait for another 5 years to see if things will improve? Time is certainly not on our side.

How will bankruptcy affect us directly? Firstly our ringgit will be badly depreciated as it will have no international value or demand. The immediate impact is all foreign related expenses like import of consumable goods, machinery and services will be very expensive. Oversea travel will be very costly. Malaysian made goods may be cheaper but lower value ringgit means we will see a sudden increase in cost of food, goods and services which make production cost higher, not lower. Ironically we will be a high income society, but in ringgit that has lost its intrinsic value. Workforce will be demotivated to perform which reduces productivity. Stress arising from inability to cope with a debilitating economy will cause public protests, demonstrations and even destruction of public properties out of anger and frustrations. Crime rates will rise as some people take the easier route to solve their woes. Foreign workers may leave in droves as Malaysia become unattractive to work with a heavily depreciated ringgit, creating massive shortages in labor supplies, unskilled and skilled, which gravely affect our dependability in fulfilling our commitments to clients abroad, affecting our credibility and goodwill. Further brain drain may occur although less students can afford to study abroad due to higher exchange rates. Corruption will increase and the police will become very ineffective in dealing with rising crime, compromising security of the citizens. Negative developments as predicted above will lead to people taking over the control of the government and how it is to be run.

Reminds me of AGMs where the shareholders sack the entire board for incompetence and vote in a new board. See a likely scenario happening at national level?


Anonymous said...

Dear Peter,very interesting topic,but for me as i only know the end result,when things not working out whether its a country or a company its time to change and stop the rot,cut of the hand before the cancer spreads to the body before its too late. The leader of that organisation has to be accountable for the situation.No 2 ways about it.The beauty of it is we can do something about it and why are we not doing anything its a mystery to me.regards and God Bless AL mal.

Peter Yew said...

Hi Al, why we ain't doing anything? Firstly we were too lackdaisical, too comfortable, too easily blinded, unwilling to face the truth, afraid of change, and until lately, no viable alternative to consider. But now events have caught up and it has become very critical for change since developments over the past 3 years actually deteriorated to the point that promises can no longer be trusted anymore.

Some people still prefer to wait hoping that a miracle can happen within the incumbent government. That is a long shot. Today Anwar declared a Malaysian Spring at the 13GE. Is it possible? It is desirable? Or do we want an interim stage of a very unstable government within razor thin majority to encourage further party hopping, buyouts and internal bickering? Can we face a very unpredictable global economy with a government with no clear cut mandate? Can we afford to remain status quo?

It is time for us to be courageous to face challenges to secure survival for our future generations. If 13GE is 2012 and 14GE in 2017 we are close to the time Idris predicted a bankrupt nation if we fail to reform now. Ironically he is implicating we must change. Peter.


Related Posts Plugin for WordPress, Blogger...