Wednesday, July 11, 2007

Borrowing from China?

I read another very confusing article in TheStar today. According to the article, our government had recently signed an agreement to secure a loan of US$ 500 million from China for the construction of the Penang Second Bridge. This is the largest loan ever given to a foreign country by China.

I'm very very very confused.

According to our government, with plenty of reassurance, our country's economy is doing very well. We have long since weathered the 1997 economic crisis and have come out stronger than ever before. Our country's economy, although not burning quite as brightly as pre-1997, was still strong and doing fairly well. If that is the case, give me a reason for borrowing money from a foreign country to finance a public project. I assume that there should be enough money in our country to finance the project. I AM NOT AN ECONOMIST/BANKER. That's why I'm soooo confused.

I was quite happy to hear that one of the many reasons that we had managed to weather the 1997 economic crash better than many other countries, was because we had very little foreign debt as compared to the rest. I have always been taught by my parents, to have little debt and to pay off any debts that I have as soon as possible. I had always take this to be very sound economic advice. So, I'm really confused that our government had decided to take on RM 1.73 billion in foreign debt, without even consulting the rakyat in any way. Someone has to pay for this debt.

According to the company managing the Penang Bridge, the daily traffic volume can reach over 100,000 vehicles. That gives us a number to work on. Let's do a little bit of simple, first order, math:

Assumption #1: Toll rate will be the same as the existing bridge. If it was too expensive, nobody would use it.
Assumption #2: Current traffic will be split between the two bridges and all traffic are cars.
Assumption #3: This is a 0% interest rate loan. It most certainly isn't but it simplifies calculations.
Assumption #4: 100% of the toll collected is used to repay the loan, ie. there are no operational overheads.

We can work out how much toll is collected a month, which is RM 10.5 million. From there, we can work out:
RM 1.73bil / RM 10.5 million per month = 13.7 years.

Now, if we extend it to a second order calculation:
Assumption #3a: This is a 10% annual interest loan, with monthly re-payments.
Assumption #5: The loan period is 30 years.

Working out the sums using an online calculator tells us that the monthly installments need to be RM 15.2 million. That's 50% more than the total monthly collected toll, disregarding operational costs. Even if we extend the load period to 100 years, the installments still amount to RM 14.5 million.

This simply means that the island of Penang would not be able to fund the repayments. So, all the rakyat (regardless of whether they use the bridge or not) will all have to pay for this debt. This simply means that this project is not a viable project and taking out foreign debt, is not a good idea. It leaves us entirely at the mercy of our foreign creditors.

Smart move, my dear government. Smart move!


koln_auhc said...

Well, I think you missed out on the importance of building that bridge in the first place and this leads you to concluding that the sum of paying back the loan seems crazy.

2 bridges means smoother traffic. (Assuming they don't build layers and layers of toll booth la)

Less wastage of resources (time and petrol, name it)

This has a kind of stack on effect on other industries. Perhaps the goods from Bayan Lepas Industrial Park can be transported faster to the Penang international airport? More exports? More foreign earnings? More factories being set up?

Maybe the visitors coming in to Penang don't face the nightmare traffic jams at the bridge and, hence, manage to visit places like Kedah or other places. More money spent in Malaysia? What about penang island residents wanting to make a local trip somewhere in the mainland? More circulation of money expands our economy.

The more you think about it, the better the bridge be built.

About the loan, my idea is that because China has one of the world's largest foreign reserves, it has/can spend money outside of China. This money can be loaned out to gain diplomatic support, return economic gains to mainland.. and so on.

It seems quite foolish for them to support an electronics competitor such as Penang but I think that stronger competition from Penang can push China industries into upgrading its skills and technologies.

Everyone benefits. Economics. :)

KC said...

Transparency...transparency...I AM ALSO NOT AN ECONOMIST/BANKER. I'm ALSO soooo confused...We can go on debating or guessing if it is a right move or not (all of us non-experts and with no insider information) but IF ONLY...IF ONLY...the Government can try to be more least some experts out there can tell us if it's a right move? Hey I have a right to know too...right? I am taxpayer, thus I am a shareholder of this company named MALAYSIA. AGAIN, I am no expert :(

Shawn Tan said...

KOLN: I am an engineer, so I do not have the luxury to ASS-U-ME. Everything that you say, can possibly happen. But it's also possible for the exact opposite things to happen as well.

Let me give u an example of a negative assumption. Many of the Bayan Lepas tech companies are increasingly moving their factories to China. There's no point having better traffic if there are no people/goods to move.

I'm not saying that what you say won't happen. I'm just saying that it's also likely for the opposite to happen. I cannot predict the future. So, I try not to do it.

In order to pay the loan with the toll, the amount of traffic would need to increase by an enormous amount, which sort of negates the affect of the bridge anyway.

Shawn Tan said...

KC: Yes, I do think about the transparency issue. I'm not sure if the government had presented the figures to the people on how they intend to fund the bridge. It's good to have a bridge, if we can afford it. But this is not like a game where we can have a cheat code to add money. Plus, it's important for everyone to find out where the billions are actually going.

koln_auhc said...

The economic benefits may go anyway as you have mentioned but this is how the world economy works. No one is ever sure of whether something is beneficial. It's always based on assumptions and predictions.

(Anyway, the good thing is that the bridge is going to be built. Something which everybody agrees on fundamentally)

Transparency is something all governments lack. It's a matter of how much. US and Malaysia. How screwed are our politicians compared to theirs? Hey, Bush get to lie and send the country to war.

(Ok, that sounds very bias because we have different set of problems compared to them, but anyway, politicians are, well, just politicians.)

Sigh, I am going to start my engineering course soon. *clap clap.
(No economists for me)

Need do 1+1 liao.

Shawn Tan said...

Hehe. I try not to compare our country with the US. I'd like to believe that, at least, our country can still be saved!

Woo, welcome to the world of engineering, where 1+1=3 is correct!

KC said...
This comment has been removed by the author.
KC said...

Koln: Why compare? Shouldn't we strive to improve? You seriously think u dun need to do 1+1 in economics, only in Engineering? Also, you spoke like u r an expert in economics...hmpss...then again I guess, you would have done badly in Economics..haha...Welcome to the engineering world, I can just hope I will not be using the bridge you build coz you might just say, 'this is how the engineering world works!' when....ehem...CRasHHHH...

koln_auhc said...

kc: I just got a heavy dose of politics, history and economics just before I start to become an engineer.
Explains why I tend not to think too scientifically.

Oh ya, I never learn economics in class. Hahaha...that's how reliable my economics is. 1+1 anyone?

Me being engineer? ..mmm...perfect disaster.