Understanding Our Recent Budget Deficit Numbers

Did you notice that the bean-counters are crying on every roof that our budget deficit is under control at 1.8%? Presenting it as a proof that the so-called reforms have worked. It's quite easy to disagree with that.

Remember that the silliest idea of the reforms was to slash tax rates by half promising that we will grow faster. We know our economy didn't clip the required higher growth rates. In fact the reforms have ushered in a string of persistently low growth rates. So the small deficit numbers didn't come from better growth rates. We know it did not come from reducing wastage either: we just need to read the audit reports to strike this one out. So where did these low deficit numbers come from?

Well that's easy. By not spending budgeted funds and other essential monies that prevent the country from going to the dogs. And by doing other stupid things like keeping oil pump prices at unreal levels so as to pocket billions more in VAT and making us pay for a strange multi-billion-rupee hedging loss at the STC that seemed to get bigger as the toxic bean-counters got craftier.

Think of it this way: for many years hyenas have been trying to make an easy-going tiger run faster but instead of cutting the fat they’ve been taking out the muscles of Panthera Tigris. For personal consumption. And unsurprisingly this has badly crippled the big cat.

Former MK Boss Explains How He Was Fired

This was in an interesting interview which appeared yesterday. He's talking now two years after the event because he is suing his former employer and was bound by a contract clause.

Another interview worth reading is that of former Chief Justice Victor Glover who thinks that Justice Balancy shouldn't give 3-page interviews every 3 weeks.

Any comments?

Balluck Still Trusting Viljoen

At least for the next little while because MK was in a mess before his arrival. Unlike Bizlall who has apparently lost confidence in the CEO's ability to turn the company around. That what Balluck explained to l'Express this morning along with some of the good initiatives -- including the setting up of a fact-finding committee into the hedging debacle -- the small shareholders of our national airline would like management to implement.

Pure common sense. Just listen to it.

Do We Know How To Manage An Airline?

If you look at the fortunes of Air Mauritius over the past few years you are likely to conclude that we don't. That would be a big mistake though because it has not always been like this. There have been some really smart people who have worked there for many many years and who still do. And who knew what managing an airline -- that includes hedging -- is all about.

Besides there are some incredible Mauritians -- sufficiently high enough in the food chain -- who could turn this baby around and make us all proud. So we need to start sending unambiguous signals that we are putting competence first again.

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.

Don't Kick'em When They're Down

So said Xavier-Luc Duval in Parliament this week. He was referring to the outrage that was sparked over the pay packet of the new CFO at MK. What the Minister seems to be forgetting is that an otherwise healthy and strategic company was kicked to the ground by an incompetent CEO and a Chairman that were handpicked by the Prime Minister and a board, which includes Ali Mansoor, that failed to uphold even the basic principles of corporate governance. And ironically that all of these people, save one, are still around to get at least another chance to kick MK while it's down.

Nevertheless, the compassion expressed by XLD this week puts him in a special position to understand the sufferings of the beautiful people of Mauritius who have been brutally thrown to the ground by Mansoor and Sithanen before being relentlessly kicked by these two bean-counters. The latest kick is the accounting gimmick of making us pay for the outlandish Rs3 billion of hedging losses sustained by the STC so that it doesn't show up in his deficit numbers.

Shouldn't FDI Numbers be Adjusted?

The Finance Minister mentioned in a press conference yesterday that FDI for 2008 was Rs11.4 billion. I just wanted to know whether that figure includes money that left the country in relation to the twin hedging mess at Air Mauritius and the State Trading Corporation. If not what is the adjusted number and who signed the cheque and when.

The other thing I don't understand is how come the cumulative inflation rate from July 2005 to December 2008 is 29.85% although he claims we received some Rs30 billion over the same period. Is there some special economic rule that no one but him is aware of that for every Rs1 billion FDI that we receive we should also get 1% inflation?

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.

Nicky Tan Needs to Be Brought Back

I mean if we paid him Rs70 million to investigate a fraud of less than Rs1 billion, shouldn't we bring him back to investigate the multi-billion blunders at both the STC and MK? I am sure we could get a hefty discount per billion squandered investigated especially if we get our top negotiators involved.

Maybe, maybe not. But at least a fact-finding committee should be instituted at each one of these corporations to find out what really happened. And I think we can count on the magnificent statesmanship Navin Ramgoolam has shown throughout his prime ministership for this to happen with lightning speed. After all it's no secret that he likes speed, isn't it? And he did promise before July 3rd, 2005 that he would bring NTan to wrap up some unfinished business.