I don't think Fed is raising rate soon....

The fed are looking at two main indicators, unemployment rate and inflation. 
"In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. " (source)

The maximum employment occur when unemployment rate reach between 5.0%-5.2% (source), 
which had been reached according to latest unemployment statistic from US bureau of labor statistics (here)

However, core inflation remain low at zero level (source), i believe mostly thanks to collapse in crude oil price and appreciation of dollar. As crude oil price is expected to remain low in foreseeable future (see here), and there is unlikely for dollar to depreciate soon, given all major economies around the world (EU, China, Japan) are still trying to pump liquidity to revive their economy growth pace, the core inflation rate will likely remain low in foreseeable future. 

Even if the inflation rate do climb beyond 2%, the Fed will still likely wait until the trend (inflation) become firm before taking further action, as per below statement: 

"The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."- source

The implication could be that, the longer the Fed hold off in raising rate, the less attractive it is to hold dollar asset, and the more undervalued emerging market asset could reach.

RM5,900 average household income?

One would certainly doubt the figure when the federal minister's claim that malaysian household's make an average RM5900 per month. There is one article who summarize well how the figure derived from and what does it mean here. To summarize short:

- Income not only mean wages and salary, but include investment income from properties, stocks, and probably EPF. 

- "mean" figure means rich people who earn many money will tend to distorted the figure. " median" income is a more realistic assessment. 

- some of the income are imputed, means income are counted even though you consuming self-produced goods and services. For example, if you living on your own house, the survey will assume you will receive an income (rent) from your house with as the amount you will received if rent it out to others in the rental market. If you cook your own meal, the survey will assume you received income (from yourself) on the cooking services that you provided.

What should be interesting, is how the income distribution go, and what can we do about it. 

For example, if you read p29 from 2012 household income survey (here), it can be seen that Malaysia's Gini Index according to household income is about 0.431. This implicates a high income inequality distribution taking place in Malaysia. The sources of the income inequality could be from different in education received, as indicate in table below from Malaysia Salaries & Wages Survey Report (here). It can be seen from the table that, although degree holder generally earn higher salaries and wages (mean = RM4571) from diploma holder (mean RM 2839) and below (mean RM 1721 for SPM holder to RM992 for no cert). Only 12% of current workforce hold a degree. 

Table: Average salaries and wages according to education level , Source: Malaysia Salaries and Wages Survey Report

Few measures i believe can help to ease the inequality in income distribution.

Measures 1 : Increase the coverage of quality higher education. The chances of getting a higher education in Malaysia is increasing thanks to more public universities built, more private college and universities allowed to open, and PTPTN loan. but the quality of education received may not keeping pace. (see here and here for story of graduates jobless or in job mismatch with education received)

Measures 2 :  Restricting the number of foreign workers at low skill category, both legal and illegal. 

As salaries and wages in the market is determined largely by supply and demand, large influx of foreign workers in low skill category will continue suppress the salaries of the locals in that particular category. Thus, restricting their numbers, thus altering the demand and supply in the job market, will be the most effective way to increase the salaries and wages of low income workers compared to minimum wages policy. There are only two problems, first, the small and medium enterprises (and plantations) who heavily relied on cheap labours to remain competitive will not be happy about this, Second, as large number of foreigners had been granted citizenship in Sabah, the supply of low skill workers in job market may still higher than demand, thus keep suppressing wages in this category. 

Measures 3 :  Easing the income inequality through tax and transfer system. More specifically, increase the aid for low income group under BR1M, and fund the increase by taxing the rich. Few of the new taxes targeting rich people that can be introduced include, 

i. Capital Gain Tax

ii. Real property gain tax for second home owned

iii. Estate tax and gift tax

Watching 1MDB (part 2) : Its loan structure and its venture into Energy Business

Lack of Transparency

1MDB financial accounts are reported to be audited by KPMG. However, as it is still privately held company, its annual audited accounts are not available to general public. Thus we can only guess its profit and loss figure through all publicized news.

1MDB Loans

1MDB had at least place three placement of loans,

The first, RM 5 billion , 30 years bond issued at coupon rate of 5.75% around May 2009.

Annual coupon payment = RM287.5 million (Source)(source 2)

The second, USD 1.75 billion, 10 years notes issued at yield of 6%,(source) around June 2012

I am guessing its coupon rate to be somewhat 5% - 5.5% (for different in coupon rate and yield rate, please see my other post if i got time to write about).

This amount to annual coupon payment = 87.5 million to 96.3 million USD or RM 288.3 to 317.1 million.

The third, USD 3 billion , 10 years notes issued at yield of 4.4% (source) around March 2013.

It is not clear whether the 4.4% stated in the news is yield or coupon rate,

I am guessing its coupon rate to be some what 4.5% to 5%.

This amount to annual coupon payment = USD 135 million to 150 million or RM 444.8 to 494.2 million.

This mean, 1MDB need to generate at least RM 1.02 to 1.10 billion just to service its debt, under the circumstance that ringgit do not fall further against USD.

1MDB Energy Business

In total 1MDB had three important power assets

The first, Powertek formally owned by Ananda Krishnan,

1 MDB reportedly paying RM 8.5 billion for the deal (source) which has net asset with face value at RM 3.5 billion (source)

The latest profit after tax and minority interest for Powertek at 2012 amount to RM 456 million.

However, we will be more interesting in cash flow ( please see my other post if i got time to write about regarding different in cash flow and net profit).

With total asset at RM 9.04 billion, i am guessing the annual depreciation charge for Powertek is 452 million (assuming 20 years remaining life).

This brings total cash flow to  RM 908 million.

The second, Genting Sanyen (mainly Kuala Langat Power Station)

1 MDB reportedly paying RM 2.3 billion for the deal. Where the asset is debt free.

Guessing the annual cash flow from the asset could be tricky, i am guessing the figure to be around RM 400 million (from the difference of EBITDA figure between year 2012 and year 2011 for Genting Bhd Power segment).

The third, Jimah Power Plant,

1 MDB reportedly paying RM 1.2 billion for the deal, where the amount is small as the project is actually highly leveraged that, the owner may not see any dividend in the first half of the PPA period (until 2020 perhaps). Source.

Thus, i am guessing, the annual cash flow from all power plant assets to be around RM 1.3 billion at best, this left  RM 200 to 280 million to for repayment of the loan thus far.Not to mention the liabilities originally bear by Power Tek and Jimah (estimate to be RM 10 billion perhaps).

In Summary

If 1MDB do get Track 3B project as speculated, its debt could well be ballooned to over RM 40 billion or remain at RM 30 billion if they go IPO.

The only two major revenue sources for them , would be

i. Tun Razak Financial District Project

ii. 1MDB Power.

Which currently estimated by me can generate enough cash flow to repay 1 % of  1MDB total debt annually.

Watching 1MDB (part 1) - Where Najib's Malaysia Corporation Dream unfold.....

Introduction

1 Malaysia Development Berhad (1MDB) is a strategic development company, wholly-owned by the Government of Malaysia (link). 

It originated from Terengganu Investment Authority (TIA), with the aim of investing billions of ringgit in energy, real estate and hospitality sectors in the country, according to a statement from the Prime Minister’s office (source).

Since the inception of the company, 1MDB had been going through rapid expansion, including purchase of few notable power assets (Powertek, Genting Sanyen, Jimah) and undertake large commercial property development project (Tun Razak Exchange)

The Questions for Us
I didn't know the rationale behind Najib Govt's ambitious Malaysia Corporation Set-up. 
Maybe, 
They believe a sovereign-back company, can obtain lower borrowing cost for fund to finance  big project (like track 3B Coal Fire Power Plant or Global Financial District), thus benefit Malaysians in the end?

Maybe, 
They believe a sovereign-back company, can easily get govt to govt cooperation with other country like Middle East, China, Japan, thus bringing in huge amount of FDI into malaysia? 

Maybe, 
They believe by utilizing govt resource and support (land bank, govt to govt agreement, bond guarantee), they can build a profitable conglomerate, thus creating extra source of income for the treasuries (just like Khazanah)

Maybe, 
It is just a vehicle for Najib to bail out/cash out the cronies? 

But since this is a conglomerate own by Malaysia Govt that getting bigger and bigger, every Malaysian should be concern on the outcome of Najib's Govt Business adventure, especially in the following ways

i. How does the growing of 1MDB influences the private sector business and markets?
Will it crowd out private investment in energy sector?
Will it affects profitability of commercial property market and hospitability market? 

ii. How does the presence of 1MDB affect other Govt policy and Central Bank policy? 
As 1MDB undertake a huge commercial property project code name Tun Razak Exchange, 
Will it make govt and central bank more hesitate when introducing measures to cool off the properties market? 

iii. Can 1MDB achieves profitability not only in accounting term but also in economic term, that eventually govt need not bailing out/ repay their bond / injecting assets? 

iv. When 1MDB is getting bigger and bigger, hows their key management personnels selected and paid? 

The Thought
i don't particularly like Najib's idea of setting up a Malaysia Corporation, the real issue is, when the company is fully owned by Govt of Malaysia, the management of the company get a blank check in trying out all sort of business venture, without careful consideration of whether the business venture can generate adequate profit.

Hence, you see people with lack of experience venturing into the energy industry and commercial properties market, we will see a corporation that growing too big too fast, that its organization structure and good governance dont have enough time to develop, thus causing wastage, and rainfall profit for others doing business with them (like Ananda Krishnan, Goldman Sach and Negeri Sembilan Royal Family)

And when Govt extend its presence in private sector, you will see a government with increasing power,
which is not a good sign when you dont believe they can handle it....