Kozelidir's Free Guide to Bank of Mauritius Issues

Just click here so that you can make up your own mind about the issues at the Bank of Mauritius and ways out of them. You may also wish to read a more in-depth piece.

Happy reading!

MK's Attitude is Grotesque

They want Rs300,000 from Awadh Balluck, a representative of our airline's small shareholders' association, to include his common sense motions on the agenda of the July 22 meeting. These motions include that the CEO's salary be brought to Rs1,000 per month until MK returns to profitability, a reduction in the number of board members to seven with one from the small shareholders' group, directors getting 2 free tickets per year only while serving the company, that a hedging specialist be hired and that a commission of inquiry be instituted to find out about the hedging scandal. These are very reasonable motions consistent with basic notions of corporate governance.

The funny thing is that a couple of years ago he didn't have to pay anything for similar motions. Hmm, what's exactly is going on here? Here's one way out of this. Get the NPF to pay the Rs300k for corporate governance's sake - a bit like what CalPers has been doing for ages. The Prime Minister, of course, has to share some responsibility in this given that he pulled the CEO out of his hat.

Stupid Before the Event

For sure if the price of oil had hit USD200 a barrel and stayed there for most of the duration of the derivative contract MK got itself into it would have made tons of money. If we assume the instrument involved has a symmetrical payoff -- we'll know for sure when a fact-finding committee is set up -- it is not difficult to estimate that amount given that Air Mauritius now stands to lose about Rs5.5 billion if oil prices stay about USD65 lower than their USD105 contract price till June 2010. I am getting something like Rs4 billion per year for 2009 and 2010. Does that sound about right to you?

And depending on how the CEO is compensated, he could have taken home a bonus that would have made his outrageous close-to-a-million-a-month earnings pale in comparison. This in turn could explain why it seems that he and the board acted in a way that a prudent person wouldn't by forgetting to ask a very basic question that would have avoided if not mitigated this mess: How much do we stand to lose?

Bigger Than the Madoff Scandal

Yeah. The STC hedging loss of Rs2.9 billion translates into about 1.1% of our GDP which stood at Rs263 billion at the end of 2008. That a percentage of the US economy would be worth about USD158 billion or if you prefer 3.16 times larger than the USD50 billion Madoff scam. Besides, the STC didn't have to do any oil hedging given that all price increases inclusive of the unfair 15% VAT are passed to us as have been the case for the past three and half years now. Which makes it all the more urgent and necessary to find out how this really happened and why.

We also have to find out precisely what led to the hedging mess at Air Mauritius which is the equivalent of almost 6 Madoffs. Explanations offered so far by both MK and its biggest shareholder have been far from satisfactory.

Hedging Mess Could Exceed Rs10 Billion

If oil prices go where they seem to be going: $20 for a barrel or less. How did I get that huge number which is as big as our average capital budget -- announced but not actually spent -- of the past few bean-counting years? Well, I started by adding the Rs5.47 billion expected loss at MK with the Rs2.9 billion one at the State Trading Corporation (STC). That should give you Rs8.37 billion, right? Then I grossed up MK's loss by one third which is by about how much it should grow to if the distance I am expecting oil to travel over the next little while is indeed covered. So the number I get is Rs10.2 billion.

This is a conservative estimate because I haven't grossed up the STC loss. By the way, I am not buying that part -- there are other parts I'm not buying either -- of the last press conference of the PM that his finance minister didn't know about the hedging mess. Are you?

Did You Say Cathay Pacific?

And that was supposed to put some perspective into the hedging mess at MK. Bad move. That's because unrealised losses of Air Mauritius through 2010 are estimated at Rs5.47 billion (EUR 129.5m) or some 64.4% of its shareholders' equity of Rs 8.49 billion (EUR 201m) whereas the paper losses for Cathay Pacific are Rs31.66 billion (USD 980m) on shareholders' funds of a little less than Rs213 billion. In other words the paper loss for Cathay barely represents 15% of its equity.

More importantly, these unrealised losses can be easily met by the strong balance sheet of the Hong-Kong-based airline which at Dec 31, 2007 stood at close to half a trillion rupees. No, they won't be seeking support from the authorities.

You may also wish to know that Cathay had 159 planes vs. 12 for MK and that it transported over 23 million people in 2007 compared to the 1.3 million for Air Mauritius. Finally its depressed market capitalisation was close to Rs150 billion a couple of weeks ago or about 300 times that of MK's.

Thanks George, But I Think We'll Pass

I am referring to what looked like an assurance given by the economist and MEXA boss this afternoon on a private radio about the apparent prudence with which the National Pension Fund (NPF) invests workers' money. He was up against Ashok Subron who knows infinitely more about how the economy of Mauritius works than Sithanen and his university buddy, Mansoor, lumped together.

Indeed, standard corporate governance practice suggest that the people of this country be provided with all the information and given the opportunity to make that determination by themselves. That should be relatively easy for the Financial Secretary, who chairs the investment committee of the NPF, to do: the cost of disseminating information is close to zero nowadays. 

Besides, there's a moral obligation for the government to rapidly become more transparent in this and some other areas given that the MCB-NPF scandal is still fresh in everyone's mind. There are also so many great models for pension fund governance. Click here and get ready to say Wow!