Petronas spe­cial div­i­dend should be a spe­cial pay­out

The Star Malaysia - StarBiz - - Viewpoint - The al­ter­na­tive view

THE spe­cial div­i­dend of RM30­bil by Petro­liam Na­sional Bhd (Petronas) that was an­nounced in Bud­get 2019 was a sur­prise.

It caught rat­ings agen­cies by sur­prise. Moody’s In­vestors Ser­vices main­tained Petronas rat­ing at A1 but with a neg­a­tive out­look on con­cerns that the gov­ern­ment could con­tinue to tap on the cof­fers of the na­tional oil com­pany to fund its short­fall in rev­enue.

Petronas will pay out the reg­u­lar div­i­dend of RM24­bil and spe­cial div­i­dend of RM30­bil in 2019.

The amount to be paid next year is the high­est in re­cent years. Not since 1998 has Petronas paid out spe­cial div­i­dends in ad­di­tion to the reg­u­lar div­i­dends to the gov­ern­ment.

This year, Petronas will pay reg­u­lar div­i­dends of RM26­bil com­pared to RM16­bil that was paid out in 2016 as well as 2017.

Ac­cord­ing to Moody’s, Petronas’ net cash po­si­tion was RM97­bil as at end-June 2018. It was RM42.8bil in De­cem­ber 2016.

Af­ter pay­ing out the spe­cial div­i­dend, Petronas’ net cash po­si­tion is es­ti­mated to re­main at RM75­bil to RM80­bil over the next two to three years. This is based on oil price at US$50 to US$70 per bar­rel in 2019.

Co­in­ci­den­tally, the spe­cial div­i­dend comes just a few weeks af­ter the sud­den de­par­ture of Petronas group chief fi­nan­cial of­fi­cer Datuk Ge­orge Rati­lal.

In a sud­den an­nounce­ment on Oct 8, the Prime Min­is­ter’s Of­fice an­nounced Price­wa­ter­house­C­oop­ers Malaysia (PwC Malaysia) part­ner Tengku Muhammad Tau­fik Tengku Aziz as the Petronas group chief fi­nan­cial of­fi­cer ef­fec­tive Oct 15.

Not many were ex­pect­ing Rati­lal to leave sud­denly. And the sec­ond sur­prise was that the an­nounce­ment came from the Prime Min­is­ter’s Of­fice when such an­nounce­ments nor­mally come from the na­tional oil com­pany it­self.

Petronas has al­ways main­tained that it can­not con­tinue to pay the gov­ern­ment hefty div­i­dends.

How­ever, con­sid­er­ing that it has cash of al­most RM100­bil and oil price is un­likely to drop below US$60 per bar­rel next year, it should be able to give out the div­i­dend with­out im­pact­ing the fi­nances.

Valid con­cerns only arise if the gov­ern­ment con­tin­ues to tap on Petronas to fund its ex­pen­di­ture.

On this score, would the one-off spe­cial div­i­dend be a reg­u­lar fea­ture?

It should not be. The new gov­ern­ment was elected on the plat­form of bet­ter gov­er­nance and trans­parency in pub­lic in­sti­tu­tions and funds.

To­wards this end, Petronas is one of the key in­sti­tu­tions and its fi­nances are al­ways watched care­fully.

Both Moody’s and Fitch has ex­pressed cau­tion on Malaysia’s new debt lev­els and its re­liance on in­come from Petronas to fund its ex­pen­di­ture.

Moody’s did not down­grade the rat­ing of Petronas, which com­mands a rat­ing of two notches higher than Malaysia it­self. But it gave a warn­ing of a neg­a­tive out­look on fears that the Pakatan Hara­pan gov­ern­ment would rely more on Petronas to meet its ex­pen­di­ture.

How­ever, both Moody’s and Fitch cred­ited the Pakatan Hara­pan gov­ern­ment for be­ing trans­par­ent in its pub­lic fi­nances and stated that the ben­e­fits of im­proved gov­er­nance would start to ma­te­ri­alise in the longer term.

Both rat­ing agen­cies felt that the im­prove­ments in gov­er­nance and trans­parency would even­tu­ally sup­port Malaysia’s credit rat­ing, which is now below “A”.

What does this recog­ni­tion by rat­ing agen­cies means?

Viewed from an­other per­spec­tive, the rat­ing agen­cies ac­knowl­edge the pre­vi­ous gov­ern­ment was not trans­par­ent in its dis­clo­sure of pub­lic fi­nance num­bers. Nor was it se­ri­ous in en­hanc­ing the stan­dard of gov­er­nance and re­duc­ing cor­rup­tion in the pub­lic sec­tor.

Both Moody’s and Fitch ex­pressed con­cern on the bal­loon­ing fed­eral gov­ern­ment’s fis­cal deficit, which has been re-set at 3.8% of the econ­omy this year and 3.4% next year. By 2020, the fis­cal deficit is ex­pected to come down to 3%.

The con­cerns raised by Moody’s and Fitch on the new fis­cal deficit num­bers do not hold wa­ter be­cause the pre­vi­ous num­bers were dis­puted.

Un­der the for­mer gov­ern­ment led by prime min­is­ter Datuk Seri Na­jib Tun Razak, the of­fi­cial fis­cal deficit num­ber was trend­ing down and sup­posed to hit 2.8% in 2019.

How­ever, the growth was funded largely by debt. In­ter­est ser­vice charges in­curred by the fed­eral gov­ern­ment in­creased grad­u­ally to 13.1% of GDP by 2018.

Rat­ing agen­cies knew all along the fed­eral gov­ern­ment debts car­ried through gov­ern­ment en­ti­ties such as Prasarana and DanaIn­fra were not stated as part of the of­fi­cial debt num­bers.

The rat­ing agen­cies are also well aware that the gov­ern­ment steps in when its en­ti­ties fail to ser­vice its obli­ga­tions, as seen in the case of 1Malaysia De­vel­op­ment Bhd (1MDB).

It was not a cause for con­cern then. Why should it be a cause for con­cern now?

Rat­ing agen­cies and strate­gists have ex­pressed con­cern on the fis­cal deficit of 3.4% next year and that the fall­ing oil prices would im­pact gov­ern­ment cof­fers.

While it is true that the volatile oil price does not help boost sen­ti­ments for the ring­git, the gov­ern­ment scores points on its trans­parency in the han­dling of pub­lic funds.

For in­stance, Petronas’ spe­cial div­i­dend would go to­wards pay­ing off RM35­bil in in­come tax ar­rears and goods and ser­vices tax re­funds that the fed­eral gov­ern­ment owes to busi­nesses and in­di­vid­u­als.

It is a huge cash in­fu­sion into the sys­tem when the global econ­omy is slow­ing down. It is not money go­ing into hugely in­flated rail project or a gas pipe­line to nowhere or into draw­ers and bank ac­counts of in­di­vid­u­als.

M. SHANMUGAM star­biz@thes­tar.com.my

Cash re­serves: A worker is seen at a con­struc­tion site, with the Petronas Twin Tow­ers in the back­ground. Ac­cord­ing to Moody’s, Petronas’ net cash po­si­tion was RM97­bil as at end-June 2018.

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