Tuesday, February 3, 2009

Basant Roi criticizes Air Mauritius strategy

Nico Panou [L'Express] | 23/01/2009

Ex-Governor of Bank of Mauritius comments the situation at STC, Air Mauritius…

You are said to have driven the MSS and so many others in the business community to go for hedging and urged local banks to provide hedging facilities to them since 1999. How do you view the risk taken by Air Mauritius to hedge its oil purchases at US$105 up to 2010?

Let us be clear. Hedging operations in our banking industry are confined to forward sales and purchases of foreign currencies. Air Mauritius hedges its oil purchases in overseas financial markets with specialized financial institutions. I had collected a good impression of the treasury management at our National Airline from regular exchanges of views on matters relating to treasury management with its former Managing Director, late Nash Mallam Hassam. It now seems that Air Mauritius does neither have responsible market analysts nor dependable prophets. Responsible market analysts and prophetic capabilities are the much needed skills in turbulent markets. I was flabbergasted when the news broke that Air Mauritius had hedged its oil purchases at USD$105. In fact, Air Mauritius is said to have gone into a straight swap transaction with a swap life of two years but without a margin call. Whatever be the case, the decision is utterly stupid. No wonder the big shots at Air Mauritius are crying with mouthful of missing teeth.

Paul Krugman, the latest Nobel Prize Winner in Economics, recounted a Wall Street joke about margin calls last year amidst the turmoil that brought to knees a number of giant financial institutions. ‘Who is that Mr Margin that keeps calling me?’ was the joke before the collapse of a number of financial institutions. Contrarily, the tragedy with Air Mauritius is that it did not take a margin call in the swap transaction. Air Mauritius could have been the Mr Margin calling the other party.

Several questions instantly come to mind though: ‘who is or are the guys who decided to go on the futures market for a period of as long as 2-years in such a disorderly market? Why the Board of Air Mauritius seems to be unaware of the swap without a margin call for such an operation that runs in billions of rupees? What motivated the chaps who decided to go for the swap transaction not to opt for a margin call? Why the Chairman should get personally involved in such operation thus defying the basic principle of corporate governance? Where are the Consultants and Advisers to the treasury of Air Mauritius?

Are these boys really that stupid to stake billions of rupees in just one throw of the dice? Sounds more moronic than what economists would call ‘rational ignorance’? It’s strange coincidence that the STC also is suffering from the same viral infection. Have they been in the same swimming pool? With justification, it makes one really wonder whether there may be more than what meets the eye.

It’s not a secret that several airline companies in 2008 had decided not to swim in the futures market for oil for more than one year. The MCB/NPF irregularities was said to be the scandal of the century. But taxpayers’ money was not in anyway at stake in those irregularities. This one is no less than a colossal blunder in the history of Mauritius begging for taxpayers’ intervention.

Was it foreseeable that the price of oil would not have risen to US$200 per barrel?

Of course, yes. Oil must be a staggering item of recurrent expenditure in the balance sheet of Air Mauritius. One would ordinarily have expected those boys at Air Mauritius to be constantly monitoring the evolution of the oil market, more so at a time when the market was so rife with speculation. Foreign exchange dealers in the banking industry monitor foreign exchange markets minute by minute. They have their eyes glued to the Reuters or Bloomberg screen. There is no reason why those fat cats must not be doing the same. I still have my old habit of casting a glance from time to time at the evolution of commodity markets, particularly the Chicago futures market for commodities, the NYMEX and the UK Brent oil index.

There was a clear indication that the price of oil was about to decline. A little more than six months ago Mexico sold oil in the futures market at US$70 when the prevailing price was US$130. A turning point in the price of oil was around the corner.

This turning point was confirmed when, quite a few months ago, Saudi Arabia decided on its national budget. Since the world price of oil is the single most important factor that determines the size of the Saudi Arabian budget in any given year, the implicit assumption made by Saudi authorities regarding the price of oil is anxiously scrutinized by players in the market. Last year Saudi Arabia – the country that has a domineering position in OPEC – worked its budget on the basis of a price of about US$45 per barrel. Since the days of Sheik Yamani, the Petroleum Minister of Saudi Arabia, in the 1970s and early 1980s serious market analysts have used the implicit oil price in the Kingdom’s budget as a clue for decision making. Several of the oil-exporting countries had their respective budgets based on a pegged price for oil that was far below US$100. These are deep-fried facts about oil prices well known in oil markets.

What I want to stress upon is that an imminent decline in the price of oil was clearly visible to all those who monitor the futures market for oil. That the fat cats at Air Mauritius did not foresee this turning point is very puzzling indeed and disturbing too.

What in your opinion Air Mauritius ought to have done?

It’s simple. Any buyer or seller of oil who regularly goes out to minimize risk by some kind of hedging operations knows pretty well that potentially he stands to make a gain or a loss in the deal. No gain or no loss is a rare event in such transactions. It was recently gloriously reported in the press that Air Mauritius did make massive gains out of its hedging operations over many years in the past. The figures were proudly thrown up to impress readers. Where are the gains? Distributed to shareholders as dividends? Distributed to employees as productivity bonuses? Or were they distributed to taxpayers?

In this game of hedging you cannot make a gain all the time, unless you have oracular powers. For the common mortals losses come as a package in this game. One does not have to have common sense to an uncommon degree to realize that the risk of a potential loss in hedging operations, particularly in a turbulent oil market, is always clear and ever present. It’s my personal view that an efficient management and a responsible board of directors would have built a reserve out of the gains made from hedging in past years thus providing for a solid reserve cushion in its balance sheet for meeting unexpected losses in the future. It’s common practice to have a buffer in the balance sheets of institutions that is in the business of risk taking. To build a good cushion of reserve out of which non-performing loans are offset is a common practice in banking. We understand that there used to be a highly respected world class banker in the Board of Air Mauritius for many years. If Air Mauritius has been taking that much of risk, I believe it ought to have invented a shock absorbing mechanism to neutralize a turn of the tide in financial markets. Smart pedestrians used to betting at Champ de Marches knows how best to protect their bottoms.

It definitely looks like Air Mauritius has all the time been hedging its oil purchases but has never cared to hedge itself, as an enterprise, against the risk of adverse tides in financial market. Either greed or managerial ineptness seems to have prevailed over all other considerations.

What do you actually mean by this?

I cannot help but say it as a citizen of this country. We have all read about the numerous financial and non-financial institutions in the US and in the UK that are incurring losses in the wake of the financial crisis and the resulting economic recession. Most of them, including even the performing enterprises, have foregone their end of the year bonuses in December last. Here in Mauritius Barclays bank, though not affected by the crisis, decided to do without its traditional end of the year party for its staff. You know the story about Air Mauritius. It smacks of infectious greed. Taxpayers will now finance their bonuses, if the airline is not sold to guys in the private sector. This reminds me of the defunct MCCB. The bank had run out of its capital and had no legal right to exist as a banking enterprise. Yet the staff was desperately lobbying for a substantial increase in salaries! It was the height of recklessness and irresponsibility – the raping and looting of ailing institutions. That same greed is the root cause of the international financial crisis today.

How would you react to the idea of Air Mauritius being disposed of to interested parties in the private sector here in Mauritius or overseas?

One should be out of his mind to ever dare think along this line. Air Mauritius has been a silent but major contributor to the economic success of the country. The thinking minds in the EPZ and in the tourist industry know best the reasons. I do not need to elaborate on the basic economics of having a national airline. Without Air Mauritius we would have been at the total mercy of foreign airlines, as banana republics the origin of which goes back to some Latin American countries that were totally at the mercy of American multi-national companies. I would view such a decision as treasons against the Mauritian economy. Just for the sake of a simple illustration let me share with you an anecdote. Years ago I had a chat with the Governor of the Bank of Uganda in Kampala. The Ugandan economy was in the process of recovering from the morass of underdevelopment. Uganda, having a comparative advantage in horticulture, had just started exporting roses to Amsterdam. Uganda could not exploit its full export potential. You know why? Because foreign airlines were aware that only one foreign airline could fly to Amsterdam and only once a week, the freight charges were set at prohibitively high levels thus sapping the export performance of Uganda. Having a fully or partially Government owned airline is not only a question of national pride. It’s sort of a market-friendly Government intervention. It has a countervailing force in air transport industry and as such it is an effective economic tool and does have a valuable economic significance. Air Mauritius in the hands of the private sector will of course serve exclusively private interests and certainly not our national economic interest.

What in your opinion would be the way forward for Air Mauritius?

I recall in the 1960s when Commonwealth countries were about to become independent, three priorities got an overriding consideration: a National Flag, a National Airline and a Central Bank to issue the national banknotes and coins. I think it was in late 1968. Behind the statue of Queen Victoria at the Government House, were standing in a group Sir A R Mohamed (and his young son Yousouf Mohamed next to him), Sir Kher Jagatsing, Sir Harold Walter and Dayanundlall Basant Rai (my brother and I next to him). On that day, I guess the bill on our National Airline was debated. I had overheard one of the MLAs say ‘bonhomme la (i.e Sir S. Ramgoolam) pas pe faire erreur, ca. Maurice pou capav meme achete avion?’ The next day some bloke had ridiculed the idea of having Air Mauritius in the press.

This anecdote speaks of a vision – a vision beautifully realized. And a realization that was a pride of Mauritius in the late 1980s and early 1990s. Air Mauritius has had a great past. The airline has known the pinnacle of success.I listened to Hon Allan Gannoo in one of the radio talks.

He aptly said Air Mauritius is our national pride. The airline has to be kept afloat. The airline can re-emerge and win back its losing glamour provided Government willingly conducts a thorough cleaning up of the cavities with a touch of excellent dentistry.

It would be overly presumptuous of me to claim to be an expert in rescuing ailing enterprises, even if all the operational information was made known. Air Mauritius case has to be comprehensively studied before anyone can come up with authoritative proposals for rescuing the enterprise. However, I may authoritatively say that as is done in banking and non-banking businesses, should an ailing enterprise be, to use a politically more correct word, rescued the first principle is to start by booting out all the guys from the topmost level down to the senior management level. A rescue package for such an enterprise with so much of excess baggage with it is certainly not a Chinese restaurant menu card from which you pick and choose. Such a package has to be comprehensively implemented, forgetting the kiths and kins. But we know, faithful to Mauritian spirits and folklores, this is unlikely to happen. Taxpayers will be fleeced and will bleed in the process. That would be a monumental cost for upholding a dented national pride. The ultimate concern is whether the people of Mauritius will get the bang for the buck. It’s also true that the more you finance helplessness the more you get helplessness.

What if, just for the sake of argument, the price oil resurges?

I would not discard this possibility. Let me explain. In the 1980s the cost of producing a barrel of oil was much less than USD10. Today, with a significantly depreciated US dollar, the cost of producing a barrel of oil, inclusive of sweet and shale, is estimated to be in the range of USD30 to USD40. The average cost of producing one barrel of oil taking into account all exporting countries is now reported to be in the region of USD36. It goes to say that whatever happens, the price of oil, despite the economic recession, is not likely to below USD40.

Even if it does, that would be a random and short-lived event. That is why several of the oil-exporting countries lesser endowed with the black gold and experiencing current account deficits have been successfully pushing for a reduction in the supply of oil. On the basis of the present trend in the developments in the oil market, I would not be surprised if the price of oil would eventually rise to at least USD80 by the year end. That would eventually put Air Mauritius in a relatively better stead but will certainly not leave it unscathed for its gross incompetence.

Let alone the dreadful loss in rupee terms. It’s a pity that at a time when private capital flows to emerging markets like Mauritius is thinning out, the country would be foregoing foreign exchange equivalent to the size of this mind-boggling lost of USD270 million, thanks to the incompetence of a band of fat cats in Air Mauritius.