Sunday, October 4, 2009

2010 Budget - a tough balancing act ?

Most investors will look forward to budget announcement to trade(punt for a few quick bucks). But, this is a non-event to me because I don't see any long-term fundamentals improvement(yet)- still keeping my fingers crossed. This will certainly affecting us all in the long-term.

Running a government budget, like running a family budget, it's quite simple. Two things: income and expense. If our expense exceeded our income for a long time, we are surely looking for troubles. Our government has been running for fiscal deficit for 12 years. While it's necessary to keep the current stimulus, the promise to unwind has to be kept!

When we run into deficit - the obvious solution is either working harder or working smarter to raise our income or cut our expenses like hell. We can register ourselves in a Harvard MBA(human capital) and land ourselves as CEOs of big companies, our incomes suddenly will swell by 3-5 times(productivity - high income nation). This will surely wipe out our deficit very fast despite of big tuition fees(investment or net development expenditure). After the reversal of bad fortune, we can suddenly buy a bungalow and a big car(better quality of life). However, if we spend a fortune but ended up as CEOs in small companies that pay lesser than our current job, we will be in trouble - big time.

Our Malaysia government situation was a bit worse than what I described - refuses to enrol in a Harvard MBA and keep giving money to siblings(a.k.a corruptions and cronies) generously. Income is deteriorating(see the downtrend of GDP growth since 2007). Luckily we have a rich grandfather(Petronas) that gives us RM 45 billion a year(oils income).

If our income continues to stay stagnant(low/declining GDP growth) and expenses keep growing at 15%/year and grand-pa funds is depleting at an alarming rates!; soon the only way left is to borrow. When our creditworthiness(sovereign credit rating) declining by days, like many others, we will be forced to dip into credit card that charge us 18% interest rate per annum.

We are still quite lucky as we still can borrow from our fama(father and mother-domestic debt). If left unchecks, fama bank will soon runs out money and we will have no choice but to turn to foreigners. The end game of that will be bankruptcies when nothing works. While I don't think traffic light is flashing red but certainly not a green - yellow may be. I pray hard that we don't run into this scenario during my lifetime(which Americans are facing now - high fiscal deficit, low growth, high external debts - IOUs and negative current account deficits).

No comments: