Washington’s unsustainable deficit hangs over global economy

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With the widening US budget gap, it is no longer a secret that such a high level of federal spending is unsustainable and the resulting debt burden has become a worry for the global economy.

According to data from the US Treasury Department, the federal budget deficit went on the rise in 2019, hitting $1.02 trillion and marking the first calendar year the deficit has exceeded $1 trillion since 2012. Given the country's tax revenues, government spending is obviously on an unsustainable path. While total government receipts grew 5 percent in 2019, federal spending increased at a faster pace of 7.5 percent.

More worryingly, as the economy slows amid headwinds, it is basically impossible for the US government to make ends meet by raising tax revenues. So based on the current trend, it will probably become a norm for the annual federal deficit to top $1 trillion in the future.

Undoubtedly, massive fiscal deficits will prompt a steady rise in public debt. According to data released by the Treasury Department on November 1, the US national debt surpassed $23 trillion for the first time in history. The figure is equivalent to about 110 percent of the country's GDP.

Of course, it should be acknowledged that US Treasury bonds are still considered safe-haven assets in the current uncertain global markets as they are seen as secure due to their strong ratings. Treasury securities held by foreign holders amounted to $6.78 trillion as of the end of October 2019, up $580 billion compared with a year earlier, according to Treasury data issued on December 16, 2019.

In the meantime, however, the share of US debt held by foreign holders has fallen from a peak of 34.1 percent in July 2012 to about 29 percent today. The decline also reflects the accelerated expansion of US debt issuance.

So far there is no sign of any sort of sustained plan for narrowing the US deficit to at least rein in its debt expansion. Nor does the government show any sign of urgency on this issue. Maybe the only response from the Trump administration is to pressure the Federal Reserve to cut rates, a move that could help lower its interest payments on debt and devalue its currency to ease the debt burden.

Such surge in irresponsibility could be attributed to two factors - its high creditworthiness and the financial supremacy of the US dollar. Since a collapse of the US economy may cause an economic disaster around the world, the US government could be better off counting on the world to pay the bill.

Sadly, there is no way out under the current circumstances, and the only hope now is that Americans will take some concrete measures to reverse the trend before a debt crisis truly breaks out.

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Middle class malady

Struggling and frustrated: Most aid goes to the B40, leaving the M40 feeling adrift and on their own.

 The economic future of the country looks scary, and if the young bankrupts and imminent retires are not atteended to soon, we could be in truly tough times.

THE economy is the most talked about topic among Malaysians, with issues including the increasing cost of living, shrinking ringgit, continuing weak economy and sadly, the endless politicking.

While attention has been cast on the Bottom 40, or the group known as B40, as they make up the lowest earners, the middle class, the Middle 40, or M40, shouldn’t be forgotten either.

Malaysians are categorised into three different income groups: Top 20% (T20), Middle 40% (M40), and Bottom 40% (B40).

To be in T20, a household’s monthly income should at least be RM13,148, while the M40 and B40 groups have raised their bars to RM6,275 and RM3,000 respectively.

We don’t need a survey to know that the people in the bottom half of M40 and B40 are barely making ends meet and struggling to maintain a decent lifestyle.

At the lowest end, 70% of these poorest are the bumiputeras, while the rest are Chinese and Indians, which proves the poor comprises all races.

The M40 – which forms 40% of Malaysia’s population – includes mostly wage earners, in both public and private sectors.

The bulk of their income goes to paying the car and housing loans, rent, and groceries. After deductions from the essential bills, such as phone, Astro, petrol, and children’s education, there’s barely anything left to save.

It’s harder for those who need to take care of their ageing parents, a noble endeavour which naturally includes settling healthcare bills, and even expenses for care takers.

And since the majority of the M40 lives in the cities, the household income of RM6,275 is almost negligible, and they can hardly be faulted for feeling that their standard of income has dipped drastically while the cost of living has increased.

The M40 essentially comprises the most frustrated lot since most aid goes to the B40, leaving the former feeling adrift and on their own.

Most of them don’t have alternative revenue streams besides their monthly wages, and they are dependent on corporate performances, so the overall economy is key.

They are unlikely to care that the Department of Statistics’ Household Income and Basic Amenities survey indicated that the mean income of households in 2016 reached RM6,958, a 6.2% annual appreciation from RM6,141 in 2014.

The survey also revealed the incidences of poverty decreased from 0.6% of the population in 2014 to 0.4% in 2016. Compared with the population of 30.7 million in 2014 and 31.7 million in 2016 (from the same portal), the numbers also decreased from 184,200 to 126,800 from 2014 to 2016.

The 11th Malaysia Plan (2016 – 2020) Mid-Term Review stated that the mean household income is predicted to reach RM8,960 by 2020.

The term “middle class” has different meaning and measurement to economists and academics from those classified in the M40 category.

As one analyst rightly pointed out, a household of four living in the Klang Valley with an income of RM4,000 per month, would be classified as urban poor due to the higher cost of living. However, that income would be comfortable to live in Pasir Mas or even Taiping.

It won’t be wrong to suggest that at RM4,000, that’s only enough for a single person to live in the Klang Valley.

We need to understand that the key people driving the country’s economy are the middle-income and top earners, many of whom feel they have fallen between the cracks of progress.

At every Budget, they seem to be the forgotten Malaysians, and each year, they hope for lower level tax bands for themselves, so they can have extra disposable income, but that never happens.

Khazanah Research Institute’s (KRI) State of Households 2018 revealed a steady increase in the income gaps between the Top 20% (T20), M40 and B40 groups since the 1970s. In 2000, the estimated real mean household income differences between T20 and M40, M40 and B40, and T20 and B40, were RM6,000, RM2,000 and RM8,000 respectively.

By 2016, however, it increased to RM9,000, RM4,000 and RM13,000.

These figures show that T20 households are gaining wealth at a faster rate than the rest.

Despite the improvement in mean household income figures, the gap between income groups continues to rise, and the survey added that “the escalating cost of living has put financial pressure on the M40 and B40 groups.”

“With income growing at a slower pace compared with the cost of living, the M40 and B40 groups are experiencing an abridged disposable income, which could be detrimental to future consumption, activity, emergency or debt services.”

Combining data from the Department of Statistics’ Household Income survey (2016 and 2014) and KRI household reports (concerning population increase), it’s clear that the percentage of households living under the 60% median grew from 2014 to 2016 by 41.8% to 43.5%, with an estimated 2.8 million households in 2014 and three million households in 2016.

The increase also suggests that more M40 households have slipped into the B40 category – and this is where the alarm bells go off.

In the 11th Malaysia Plan (2016-2020), targeted subsidies, cash handouts, healthcare benefits, education, along with employment and entrepreneurship opportunities, include the usual strategies to ease the burden of B40 households.

One of the major concerns among the young M40 family is that they can no longer afford to buy a “middle class” home, and the difficulties have been aggravated by how they need to live relatively close to their workplace.

As much as the government expects housing developers to build affordable houses, let’s not forget that most of these developers have bought land at premium prices, and as private concerns, they still need to make profits.

But homes in Malaysia have become “seriously unaffordable” by international standards, and there’s no need to point fingers at developers when the governments have basically failed to do the job, unlike Singapore’s Housing Development Board (HDB), which builds and upkeeps flats that don’t degenerate into urban slums.

Their HDB flats are so well-designed and maintained that they can pass off as high-end apartments by Malaysian standards.

Bank Negara reported that from 2007 to 2016, house prices grew by 9.8% while household income only increased by 8.3%. While developers blamed rising construction costs – including labour outlay – and stagnant salaries for the increase in house prices, all this means nothing to the M40, because ultimately, they still can’t buy houses.

The rent-to-own scheme which the B40 has enjoyed from the low cost houses, needs to be extended to the M40, so they, too, can enjoy the same benefits, and while such help is expected to come via PRIMA Corp, a federal government-linked developer which supposedly caters for M40, it’s still falling behind schedule.

While it could be easy for the M40 to request more support, including allowances for school-going children, and even free student passes for public transport, it’s time that financial literacy be introduced at school level. A study by S&P Global Literacy Financial in 2014 showed that the financial literacy rate in Malaysia is only at 36%, compared with 59% in developed countries.

“The low financial literacy rate is among the factors that has contributed towards high levels of debt – including worrying bankruptcy problems – among the youth.

“Between 2013 and 2017, a total of 100,610 Malaysians were declared bankrupt, of which 60% were between 18 and 44 years old,” according to Finance Minister Lim Guan Eng.

Apart from the youth, Lim noted that older Malaysians are also facing serious financial challenges, particularly when it comes to their retirement.

Based on estimates by the Employees Provident Fund (EPF), he said that as of 2019, an individual requires savings of at least RM240,000 by age 55 to retire comfortably.

However, based on the EPF 2017 Report, active contributors aged 54, have average savings of only RM214,000 in their accounts.

“What is even more worrying is that two-thirds of contributors aged 54, only have RM50,000 and below in their EPF accounts in 2015,” he reportedly said, adding that this was well below the recommended amount for savings.

Lim noted tha the low amount of savings was inadequate and estimated it to run out within five years of retirement, although the average life-span of Malaysians is 75.

Basically, the B40, M40 and, our young and old Malaysians, are all either grappling with financial problems, don’t know how to handle their money, or don’t even earn enough in the first place.

This is unlike the situation for the T20, which has disposable income where their wealth encourages investment and wealth creation, the main principles of the T20 group.

But of all people, politicians should know the importance of the people wanting to have money in their pockets and feeling well heeled.

Easier loan payments, good refinancing packages and transport allowances should be considered to help the M40.

If the market continues to slide, there will be many unhappy people, and the resentment will translate to protest votes. For them, it simply means the government is doing a lousy job, and they couldn’t care less for the reasons, however valid they may be.

Wong Chun Wai

Wong Chun Wai began his career as a journalist in Penang, and has served The Star for over 27 years in various capacities and roles. He is now editorial and corporate affairs adviser to the group, after having served as group managing director/chief executive officer.

On The Beat made its debut on Feb 23 1997 and Chun Wai has penned the column weekly without a break, except for the occasional press holiday when the paper was not published. In May 2011, a compilation of selected articles of On The Beat was published as a book and launched in conjunction with his 50th birthday. Chun Wai also comments on current issues in The Star.

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When Will the U.S. Dollar Collapse?

https://youtu.be/N8IyDSrMY3w

By Kimberly Amadeo

Updated October 28, 2018

A dollar collapse is when the value of the U.S. dollar plummets. Anyone who holds dollar-denominated assets will sell them at any cost. That includes foreign governments who own U.S. Treasurys. It also affects foreign exchange futures traders. Last but not least are individual investors.

When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar-denominated assets, and no one wants to buy them. This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.

Two Conditions That Could Lead to the Dollar Collapse

Two conditions must be in place before the dollar could collapse. First, there must be an underlying weakness. As of 2017, the U.S. currency was fundamentally weak despite its 25 percent increase since 2014. The dollar declined 54.7 percent against the euro between 2002 and 2012. Why? The U.S. debt almost tripled during that period, from $6 trillion to $15 trillion. The debt is even worse now, at $21 trillion, making the debt-to-GDP ratio more than 100 percent. That increases the chance the United States will let the dollar's value slide as it would be easier to repay its debt with cheaper money.

Second, there must be a viable currency alternative for everyone to buy. The dollar's strength is based on its use as the world's reserve currency. The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.

Note:  The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.

China and others argue that a new currency should be created and used as the global currency. China's central banker Zhou Xiaochuan goes one step further. He claims that the yuan should replace the dollar to maintain China's economic growth. China is right to be alarmed at the dollar's drop in value. That's because it is the largest foreign holder of U.S. Treasury, so it just saw its investment deteriorate. The dollar's weakness makes it more difficult for China to control the yuan's value compared to the dollar.

Could bitcoin replace the dollar as the new world currency? It has many benefits. It's not controlled by any one country's central bank. It is created, managed, and spent online. It can also be used at brick-and-mortar stores that accept it. Its supply is finite. That appeals to those who would rather have a currency that's backed by something concrete, such as gold.

But there are big obstacles. First, its value is highly volatile. That's because there is no central bank to manage it. Second, it has become the coin of choice for illegal activities that lurk in the deep web. That makes it vulnerable to tampering by unknown forces.

Economic Event to Trigger the Collapse

These two situations make a collapse possible. But, it won’t occur without a third condition. That's a huge economic triggering event that destroys confidence in the dollar.

Altogether, foreign countries own more than $5 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse. China owns $1 trillion in U.S. Treasury. That's because China pegs the yuan to the dollar. This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasurys. It also wants to keep the yen low to stimulate exports to the United States.

Japan is trying to move out of a 15-year deflationary cycle. The 2011 earthquake and nuclear disaster didn't help.

Would China and Japan ever dump their dollars? Only if they saw their holdings declining in value too fast and they had another export market to replace the United States. The economies of Japan and China are dependent on U.S. consumers. They know that if they sell their dollars, that would further depress the value of the dollar. That means their products, still priced in yuan and yen, will cost relatively more in the United States. Their economies would suffer. Right now, it's still in their best interest to hold onto their dollar reserves.

Note: China and Japan are aware of their vulnerability. They are selling more to other Asian countries that are gradually becoming wealthier. But the United States is still the best market (not now) in the world.

When Will the Dollar Collapse?

It's unlikely that it will collapse at all. That's because any of the countries who have the power to make that happen (China, Japan, and other foreign dollar holders) don't want it to occur. It's not in their best interest. Why bankrupt your best customer? Instead, the dollar will resume its gradual decline as these countries find other markets.

Effects of the Dollar Collapse

A sudden dollar collapse would create global economic turmoil. Investors would rush to other currencies, such as the euro, or other assets, such as gold and commodities. Demand for Treasurys would plummet, and interest rates would rise. U.S. import prices would skyrocket, causing inflation.

U.S. exports would be dirt cheap, given the economy a brief boost. In the long run, inflation, high interest rates, and volatility would strangle possible business growth. Unemployment would worsen, sending the United States back into recession or even a depression.

How to Protect Yourself

Protect yourself from a dollar collapse by first defending yourself from a gradual dollar decline.

Important:  Keep your assets well-diversified by holding foreign mutual funds, gold, and other commodities.

A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable. Update your passport, in case things get so bad for so long that you need to move quickly to another country. These are just a few ways to protect yourself and survive a dollar collapse.

US Trade Deficit With China and Why It's So High

The Real Reason American Jobs Are Going to China 

By Kimberly Amadeo 

Updated November 21, 2018

The U.S. trade deficit with China was $375 billion in 2017. The trade deficit exists because U.S. exports to China were only $130 billion while imports from China were $506 billion.

The United States imported from China $77 billion in computers and accessories, $70 billion in cell phones, and $54 billion in apparel and footwear. A lot of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.

In 2017, China imported from America $16 billion in commercial aircraft, $12 billion in soybeans, and $10 billion in autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods. 

Current Trade Deficit

As of July 2018, the United States exported a total of $74.3 billion in goods to China. It imported $296.8 billion, according to the U.S. Census Bureau. As a result, the total trade deficit with China is $222.6 billion. A monthly breakdown is in the chart.

Monthly U.S. Trade Deficit With China From January to July 2018

NOTE: All figures are in millions of US$

Exports Imports Balance

US$211.1

Jul 18

US$202

Jan 18

US$205

Feb 18

US$210

Mar 18

US$210

Apr 18

US$214

May 18

US$213

Jun 18

US$211

Jul 18

Chart: The Balance Source: United States Census Bureau

Causes

China can produce many consumer goods at lower costs than other countries can. Americans, of course, want these goods for the lowest prices. How does China keep prices so low? Most economists agree that China's competitive pricing is a result of two factors:

1. A lower standard of living, which allows companies in China to pay lower wages to workers.
2. An exchange rate that is partially fixed to the dollar.

If the United States implemented trade protectionism, U.S. consumers would have to pay high prices for their "Made in America" goods. It’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics, and clothing, even if it means other Americans lose their jobs.

China is the world's largest economy. It also has the world's biggest population. It must divide its production between almost 1.4 billion residents. A common way to measure standard of living is gross domestic product per capita. In 2017, China’s GDP per capita was $16,600. China's leaders are desperately trying to get the economy to grow faster to raise the country’s living standards. They remember Mao's Cultural Revolution all too well. They know that the Chinese people won't accept a lower standard of living forever.

China sets the value of its currency, the yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to support it. In 2016, China began relaxing its peg. It wants market forces to have a greater impact on the yuan's value. As a result, the dollar to yuan conversion has been more volatile since then. China's influence on the dollar remains substantial.

Effect

China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest. As of September 2018, the U.S. debt to China was $1.15 trillion. That's 18 percent of the total public debt owned by foreign countries.

Many are concerned that this gives China political leverage over U.S. fiscal policy. They worry about what would happen if China started selling its Treasury holdings. It would also be disastrous if China merely cut back on its Treasury purchases.

Why are they so worried? By buying Treasurys, China helped keep U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise. That could throw the United States into a recession. But this wouldn’t be in China's best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying almost as many Treasurys as ever.

U.S. companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. Many businesses reduce their costs by outsourcing jobs to China or India. Outsourcing adds to U.S. unemployment. Other industries have just dried up. U.S. manufacturing, as measured by the number of jobs, declined 34 percent between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace
.

What's Being Done

President Trump promised to lower the trade deficit with China. On March 1, 2018, he announced he would impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. On July 6, Trump's tariffs went into effect for $34 billion of Chinese imports. China canceled all import contracts for soybeans.

Trump's tariffs have raised the costs of imported steel, most of which is from China. Trump's move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines. China has become a global leader in solar panel production. The tariffs depressed the stock market when they were announced.

The Trump administration is developing further anti-China protectionist measures, including more tariffs. It wants China to remove requirements that U.S. companies transfer technology to Chinese firms. China requires companies to do this to gain access to its market.

Trump also asked China to do more to raise its currency. He claims that China artificially undervalues the yuan by 15 percent to 40 percent. That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People's Bank of China to strengthen the yuan's value against the dollar. It increased 2 to 3 percent annually between 2000 and 2013. U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration.

The Trump administration continued the talks until they stalled in July 2018.

The dollar strengthened 25 percent between 2013 and 2015. It took the Chinese yuan up with it. China had to lower costs even more to compete with Southeast Asian companies. The PBOC tried unpegging the yuan from the dollar in 2015. The yuan immediately plummeted. That indicated that the yuan was overvalued. If the yuan were undervalued, as Trump claims, it would have risen instead.

Source: The Balance

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TUN Dr Mahathir Mohamad has appealed to China for its understanding on Malaysia’s fiscal woes, as uncertainty hovers over the China-backed infrastructure projects back home.

The Prime Minister, who is on a five-day visit to China, also hoped Beijing could lend a helping hand to solve the problems plaguing Putrajaya.

“We hope to get China to understand the problem faced by Malaysia today and believe it would look sympathetically towards the problem we need to resolve.

“And perhaps help us resolve some of our internal fiscal problems,” he said.

Dr Mahathir was speaking at a joint press conference with his Chinese counterpart Li Keqiang at the Great Hall of the People here yesterday, following the official welcoming ceremony and a closed-door meeting.

While Dr Mahathir had stopped short of specifying the problem, the Pakatan Harapan government had said that the country’s debt is now above RM1 trillion.

The new administration was also critical of the “lopsided” deals with China and moved to suspend projects with Chinese investment, such as the East Coast Rail Link, the Multi-Product Pipeline and the Trans-Sabah Gas Pipeline.

During this visit, Dr Mahathir had stressed that Malaysia was not against any Chinese firms and that he welcomed Chinese businessmen to invest in Malaysia.

At the press conference, Dr Mahathir said Malaysia had much to gain from China and believes that Chinese investment could bring down the unemployment rate in the country.

“Malaysia has a policy of being friendly to every country in the world irrespective of its ideology. This is because we need to have a market for our produce,” he said while expressing hope that Malaysia would become a South-East Asian hub for new technology being developed in China.

“China has great entrepreneurs with innovative ideas in doing business that Malaysians can learn from.

“China has got a lot that will be beneficial to us. It is a big and rich market created by very dynamic people,” he said.

Asked about his views on the trade war between China and the United States, Dr Mahathir said Malaysia would support free and fair trade.

He said he did not want to see this trade war becoming a new form of colonialism.

Dr Mahathir’s trip, which ends today, is his first official visit to China since his return to helm the country.

Ministers joining him on the trip are Foreign Affairs Minister Datuk Saifuddin Abdullah, Primary Industries Minister Teresa Kok, International Trade and Industry Minister Ignatius Darell Leiking, Agriculture and Agro-based Industry Minister Datuk Salahuddin Ayub, Minister in the Prime Minister’s Department Datuk Liew Vui Keong and Entrepreneurial Development Minister Mohd Redzuan Md Yusof.

Meanwhile, Dr Mahathir also had a closed-door meeting with Chinese President Xi Jinping yesterday evening at the Diaoyutai State Guest House.

Accompanied by his wife Tun Dr Siti Hasmah Mohd Ali, he later attended a dinner hosted by Xi and his wife Peng Liyuan.

Bernama reported that Dr Mahathir gave the assurance to Xi that there would be no changes in policy towards under the new Malaysian government.

He told Xi that he was impressed with the level of development achieved by China.

“We see China as a model for development,” he said.

Credit: Beh Yuen Hui The Star

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Debt problems remain in oil & gas industry, cast a large shadow on its Malaysian peers, Alam Maritim

Some oil companies that piled on too much debt won't make it in today's world of $40-$50 oil.

THE near-demise of Singapore-listed oilfield services company Swiber Holdings Ltd has cast a large shadow on its Malaysian peers who are facing similar mounting debts, a lack of new tenders and a depleting cash pile.

With oil prices still in a bear market for the second year running, smaller offshore services firms may continue to underperform as high debt obligations will continue to eat up existing cash reserves, say analysts.

Swiber had initially filed for liquidation on July 29 but had subsequently sought judicial management in an attempt to restructure the company’s existing businesses. The firm, which has 51 vessels in its fleet, has a prominent presence in Southeast Asian waters in a variety of jobs.

The effects of the two-year slump in oil prices were clearly seen in Swiber. Its capitalisation had fallen by 90% from its 2013 peak prior to the stock’s suspension last week.

Over the same period, its cash pile has been depleted by a series of debt repayments, which is a recurring theme for companies in the industry that tend to be highly leveraged.

The company’s predicament has put the spotlight on its Malaysian peers. Alam Maritim Resources Bhd, which has two joint ventures with Swiber, will now have to proceed without its partner.

As the joint ventures are vital cash generators for Alam, it is unlikely that the firm will dissolve them following Swiber’s exit. But it is now faced with the choice of buying out Swiber’s stake or finding a new partner, said Maybank IB Research in a note.

“The two JVs, which comprise a pipelay barge and a ship operator, are doing fine. The ventures could generate a combined net profit of RM8-RM10mil, of which Alam’s share is RM4-5mil,” said the research house, which nonetheless remained bearish on Alam with a ‘sell’ call and a target price of just 11 sen.

At the moment, the need to preserve cash flow continuity is of utmost importance in order to service existing debts. According to AllianceDBS Research, domestic contract flow in the oil and gas industry hit its lowest point in nearly four years during the second half of this year (2Q16).

“With utilisation rates at and charter rates at multi-year lows, there are few immediate bullish catalysts in the industry at present. To give just one example, talks of the possible mergers or consolidation in the oil and gas industry have largely fizzled out as there is no extra cash to be spent.” explains one oil and gas sector analyst.

To illustrate the debt load situation, a check on Bloomberg data reveals at least seven companies listed on Bursa Malaysia whose net debts currently exceed their entire market capitalisations.

The companies include SapuraKencana Petroleum Bhd (SapKen), Bumi Armada Bhd, Wah Seong Corp Bhd, and Icon Offshore Bhd, among others.

Meanwhile, at least twelve oil and gas companies have net debt-to-earnings ratios of at least three times, which far exceeds the benchmark FBM KLCI’s ratio of 1.17 times currently.

This financial metric is typically used to measure a company’s ability to service existing debts relative to its earnings performance.

UMW Oil and Gas Corp and Barakah Offshore Petroleum Bhd are among the highest with ratios of 13.71 times and 12.52 times respectively, according to Bloomberg data.

While large cap companies such as SapKen has successfully refinanced a large part of their debt load, the oil and gas industry as a whole remains highly leveraged even now.

Some 20% of Bursa Malaysia listed corporates showed below average debt coverage levels while another 8% were aggressively leveraged, said RAM Ratings in a commentary on Aug 2.

Oil and gas companies are among those with weaker credit indicators and will be most vulnerable to economic stress, it added.

The current abundance of crude oil supply and inventory means that the occasional rallies in the market were short-lived this year.

After hitting a year-to-date high of US$52 per barrel in early June, Brent crude prices have declined by 15% in a month to US$44 on Aug 4.

Supply from the Organization of the Petroleum Exporting Countries (Opec) also rose to a record high of 33.41 million barrels per Aday (bps) in July, which could further dampen any upside potential in the commodity’s price, Reuters reported. - by Afiq Isa The Star/Asian News Network

Alam Maritim on Swiber impact

Azmi says contribution from JV with company not substantial

PETALING JAYA: Alam Maritim Resources Bhd will not feel the heat from financial troubles of its partner, the Singapore-listed Swiber Holdings Ltd.

In fact, Alam Maritim is considering taking over the stake of the troubled-oil and gas (O&G) firm in a project that the companies are working on.

“There is only one project directly contracted with Swiber which is almost fully-completed namely engineering, procurement, construction, installation, commissioning of SK316 development job worth US$76mil,” Alam Maritim group managing director and group chief executive officer Datuk Azmi Ahmad told StarBiz.

The SK316 project is the development of a huge gas field located offshore Sarawak.

The other option for Alam Maritim is to find a new partner to take over Swiber’s role.

He said Alam Maritim had two JV companies with Swiber,

The first is Alam Swiber Offshore (M) Sdn Bhd which is equally owned by Alam Maritim (M) Sdn Bhd and Swiber Offshore Construction.

The second is Alam Swiber DLB 1 (L) Inc, which is 51% owned by Alam Maritim (L) Inc and 49% by Swiber Engineering Ltd.

“The impact is minimal to us as the contribution from the Alam-Swiber JV is not substantial to the Alam Maritim group,” he said.

Swiber, the Singapore-based oilfield services firm was reported to be in talks with its creditors for a possible debt restructuring exercise.

The stock had slumped by nearly 90% since mid-2014, taking its market value to just S$50mil, while the company had flagged delays in orders, raising concerns and sparking demands for cash.

From just 10 vessels in 2006 when it was listed, Swiber had expanded to own and operate a fleet of 51 vessels with more than 2,700 employees across South-East Asia and other countries, according to its website.

Its shares surged after listing, pushing its valuation to S$1.5bil in late-2007, but the stock fell sharply in recent years.

Smaller firm Technics Oil & Gas Ltd was placed under judicial management this month, and analysts said other firms could face difficulties.

Energy and offshore marine companies in Singapore have bonds totalling nearly S$1.2bil due to mature over the next year-and-a-half, with S$615mil due over the next five months, according to IFR, a Thomson Reuters publication.

Alam Maritim, too is facing a challenging period.

On the O&G support services industry, Azmi said the impact of Brexit on the fragile global economy might slow down the recovery of the crude oil prices affecting overall demand and pushing out the rebalancing of the oil market.

“During this challenging period, we are aggressively and continuously embarking on various cost and asset optimisation initiatives to weather the storm,” he said.

Azmi added that Alam Maritim’s vessel utilisation rate was 56%.

“As at June, our order book stood at RM470mil, tender book at RM2.6bil,” he said.

Alam Maritim fell into the red with a net loss of RM19.2mil in the first quarter ended March 31 compared with a net profit of RM8.6mil a year ago.

Its revenue for the quarter shrank to RM48.6mil from RM73.7mil in the corresponding quarter last year.

According to Maybank Kim Eng, the low oil price has resulted in a swift response to cost reduction or renegotiating of contracts, cash conservation due to delayed projects and debts refinancing as well as strategic collaboration exercises.

“It also opened a window of opportunities to exploring mergers and acquisition options.

“About 69 North American exploration and production companies were declared bankrupt between January 2015 and April this year. “Uncertainties and differences in valuation expectations between buyers and sellers are the greatest hurdles. There is currently a buyer-seller mismatch in terms of expectations,” said Maybank Kim Eng in a June report on the sector.

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Swiber to wind up, biggest Singapore casulty of oil slump; banks hit with crushing debts

Swiber Holdings

SINGAPORE - Singapore oil field services firm Swiber Holdings Ltd filed an application to wind up the company and said a Singapore court had appointed provisional liquidators, making it the biggest local name to fall victim to the slump in oil prices.

In a statement to the Singapore Exchange, Swiber said the hearing to wind-up the company has been set for August 19. Swiber, which operates a fleet of 51 vessels, did give any specific reason for the move but said it was facing letters of demand for US$25.9 million (S$34.9 million) and had warned earlier this month of delays in raising US$200 million in preference shares.

Local oilfield services companies have been burdened by weak oil prices, which have strained their liquidity, with charter rates tumbling and clients either delaying or cancelling projects. "If highly leveraged offshore and marine companies are unable to raise capital from equity markets, then they will be left with very little other options other than to file for liquidation or for judicial management," said Joel Ng, an analyst at KGI Fraser Securities.

Over the next year-and-a-half, bonds totalling nearly S$1.2 billion from energy and offshore marine issuers in Singapore will mature, with S$615 million due over the next five months, according to IFR, a Thomson Reuters publication.

Another firm, Technics Oil & Gas Ltd, and its unit were placed under judicial management this month.

Investors had turned more positive on Swiber after it redeemed two bonds in June and July totalling S$205 million.

Swiber said this month a preference share sale agreement for US$200 million had been delayed and that it was seeking legal advice. But a flood of letters of demand, including statutory demands, had flowed in since Monday, claiming a total US$25.9 million, as of July 26, adding more pressure on the company.

Swiber said some of its executive directors, including its chief financial officer, had resigned.

From just 10 vessels in 2006, Swiber has expanded to own and operate a fleet comprising 38 offshore vessels and 13 construction vessels. It has more than 2,700 employees across Southeast Asia and other countries, according to its website.

Swiber's longest dated bond due 2018 started falling sharply in mid-March. The provisional liquidators of the company, which has a market value of S$50 million, have asked for trading in Swiber's shares to be suspended.

The High Court of Singapore appointed KordaMentha Pte Ltd's Cameron Lindsay Duncan and Muk Siew Peng as the joint and several provisional liquidators of the company.

Sources: Reuters

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Swiber to wind up, biggest Singapore casualty of oil slump | Reuters

Private bank clients may lose big amid Singapore's oil and gas credit woes

Slump in oil prices affects S’pore lenders

Feeling the heat: OCBC’s total oil and gas exposure was US9.32bil, nearly half of which to the offshore oil services segment. – Reuters

Banks hit by poor demand for loans from oil and gas sector

SINGAPORE: Two of Singapore’s top banks flagged mounting concerns about loans to the oil and gas sector, on the same day that a prominent local oilfield services firm announced it was winding up, under the weight of crushing debt.

The dour outlook from Oversea-Chinese Banking Corp and United Overseas Bank, Singapore’s second- and third-largest lenders by assets, respectively, came as Swiber Holdings said it had filed for liquidation, making it the biggest local name to fall victim to the slump in oil prices.

OCBC and UOB, along with Singapore’s No.1 lender DBS Group Holdings, have long maintained prudent lending standards and adequate capital levels to become some of the safest banks in the world.

But oil’s 60% slump over the past two years is beginning to impact them, as the lenders’ main activity is centred on South-East Asia, a region for which oil and gas is a key industry. Banks are being hit by both poor demand for loans from the sector and by more loans turning sour.

“The loan demand is very weak,” OCBC CEO Samuel Tsien told a quarterly earnings briefing, adding that the oil and gas services sector continues to be under pressure.

“Our distressed indicators for this portfolio continue to deepen, but have not broadened,” Tsien said.

Over the next year-and-a-half, bonds totalling nearly S$1.2bil (US$881mil) from energy and offshore marine issuers in Singapore will mature, with S$615mil due just over the next five months, according to IFR, a Thomson Reuters publication.

OCBC’s total oil and gas exposure was S$12.6bil (US$9.32bil), nearly half of which to the offshore oil services segment.

UOB expected that over the next one to two years the key concern for the bank would be companies in the oil and gas sector, its CEO Wee Ee Cheong told a briefing,

OCBC posted a 15% drop in quarterly profit, hit by lower insurance income, though UOB surprised with a 5.1% jump in earnings on higher trading income.

However, net interest income was weak at both banks, which also saw bad-debt provisions climb.

OCBC said its customer loans contracted 2% from a year ago due to lower trade loans and reduced offshore borrowings of Chinese companies due to more favourable onshore borrowing rates in China.

Shares of UOB were down 1.6% in late afternoon trade, while OCBC fell 0.6 percent. Shares of DBS, which will report results on Aug 8, were down 2.6%. – Reuters

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