Malaysia’s debts a potential time bomb, say economists
By Lee Wei Lian
July 18, 2012
Malaysia’s debt levels may limit Najib’s ability to respond to financial crises. — File pic
KUALA LUMPUR, July 19 ― The government’s debt, which nearly doubled since 2007 to RM421 billion, pose a fiscal risk to the country if not managed carefully as it impairs Malaysia’s resilience to economic shocks, analysts and economists have said.
They say that while government debt ― currently at about 54 per cent of gross domestic product (GDP), and the second highest in Asia ― has not significantly impacted the country and its credit standing yet, the volatile nature of global markets may manifest such a risk at any time.
While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is increasing worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure rose to about 65 per cent of GDP last year ― above the comfort level for many analysts.
RAM Ratings chief economist Yeah Kim Leng said that while Malaysia’s debt levels are currently considered moderate, it should still be vigilant against the possibility of debt levels hitting the “tipping point” whereby it could be punished with higher borrowing costs.
“The threshold at which the market sentiment can turn against you is unknown,” said Yeah. “If market sentiment does turn against Malaysia, it could result in very high borrowing costs and capital pull-out.”
The reason we have not had a higher debt burden is because we have a piggy bank called Petronas. — Cheong Kee Cheok, senior research fellow at University of Malaya’s Economics and Administration Faculty.
He added that careful management of debt levels could inject greater resiliency into the economy, which was desirable given the increasing frequency of economic shocks that characterises the global economy today.
“It’s not just about economic growth but also the country’s ability to withstand shocks,” he said.
Figures from the Federal Treasury’s Economic Reports shows that the federal government’s domestic debt almost doubled in the space of less than five years ― from RM247 billion in 2007 to an estimated RM421 billion in 2011 ― far outpacing its revenues which only grew 31 per cent or from RM140 billion to RM183 billion during the same period.
In contrast, 2001 to 2005 saw domestic debt level growing from RM121.4 billion to RM189 billion, or just 56 per cent.
Government-backed loans rose rapidly as well between 1985 to 2010 ― from RM11 billion to RM96 billion ― representing a growth of 8.7 per cent per annum.
Cheong Kee Cheok, a senior research fellow at University of Malaya’s Economics and Administration faculty, said that while Malaysia’s debt level of 55 per cent of GDP is “not an outright disaster” when compared to countries like Greece, he expects the level of debt to continue to rise.
“The rise in this debt level over the past few years is worrying though, and so far, I have not seen any effort to try to rein in spending given that revenue sources have not expanded,” he said. ****“The reason we have not had a higher debt burden is because we have a piggy bank called Petronas.”
Wan Saiful Wan Jan, chief executive of the Institute for Democracy and Economic Affairs (Ideas) said that politics played a role in why Malaysia is grappling with debt.
He said that while deficit spending was “completely wrong”, as long as governments could roll over their debt, there was little urgency to address the issue as politicians rarely look beyond the next election.
Wan Saiful blamed the government’s deficit on pork-barrel politics. — File pic
“Politicians will spend what they need to win elections,” he noted.
He added that his was not a criticism only of the Najib administration as he found Pakatan Rakyat’s many promises even “more reckless”.
“Pakatan Rakyat say that they can pay for spending by removing corruption but if you want to be responsible, you should plug the hole and pay the debts not plug the hole and spend the money,” he said.
The country’s fiscal track record has apparently already affected investor confidence, as evidenced by the weakness in the country’s currency and relatively high yields on government bonds.
Despite Malaysian government securities offering higher yields than either Singapore or the US, investors last week still flocked to the two perceived safe havens over places like Malaysia, sending the ringgit markedly lower in recent weeks.
Countries with strong credit ratings such as Switzerland can even afford to offer negative yields to investors due to their perceived comfort factor while weaker countries, such as Italy and Spain, have a harder time raising funds even when offering vastly superior yields due to the perceived higher risks involved.
While Malaysia is not yet in the category of Spain or Italy, it is notable that investors prefer to switch their money to US and Singapore assets rather than Malaysia’s in times of uncertainty despite the 10-year MGS (Malaysian Government Securities) offering a yield of about 3.4 per cent as compared to less than 1.5 per cent for both 10-year Singapore government bond and 10-year US Treasury bonds.
*****This generally means that investors harbour stronger doubts over Malaysia’s ability to pay back its debts, and outflow of funds led to the ringgit slumping to a 14-year low against the Singapore dollar and also saw the currency lose ground to the greenback.
With both its debt and budget deficit among the highest in Asia as a percentage of GDP, it would be difficult for the government to pare down debts without it either raising taxes or cutting spending, both options which are likely to make it unpopular with the public at large.
The saving grace for the government is that it can tap into the vast savings pool of Malaysians instead of going outside the country and the revenue it gains from oil and gas.
Hydrocarbon income, however, could be under threat this year as petroleum prices have weakened significantly due to the economic uncertainty.
Should another global economic crisis hit, it is unclear how much fiscal space the Najib administration has left to implement stimulus measures given its commitments to reduce its budget deficit and keep a lid on debt.
Another issue is that the RM96 billion in government-backed debts is likely to grow even more in light of an expected raft of rail and road infrastructure projects, which some reports have estimated will cost as much as nearly RM100 billion over the next few years.
Even Malaysia’s National Higher Education Fund Corporation (PTPTN) is going down the route of government-backed debt, recently selling RM2.5 billion of federally-guaranteed Islamic debt as it looks for financing to provide more loans to a growing number of eligible students entering university.
The PTPTN scheme, however, has been a source of controversy as only 84 per cent of students are reported to be repaying their loans as at February this year.
For the moment, investors are still willing to buy Malaysian government bonds used to raise money for the country’s development.
The question is whether falling petroleum prices, stubborn fiscal deficits or rising contingent liabilities could one day shake their confidence. ~~Malaysian Insider
Malaysia recorded a Government Debt to GDP of 52.60 percent of the country's Gross Domestic Product in 2011. Historically, from 1990 until 2011, Malaysia Government Debt To GDP averaged 47.3900 Percent reaching an all time high of 79.5000 Percent in December of 1990 and a record low of 31.8000 Percent in December of 1997. Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields. This page includes a chart with historical data for Malaysia Government Debt To GDP.
Government Debt to GDP Government debt as a percent of GDP, also known as debt-to-GDP ratio, is the amount of national debt a country has in percentage of its Gross Domestic Product. Basically, Government debt is the money owed by the central government to its creditors. There are two types of government debt: net and gross. Gross debt is the accumulation of outstanding government debt which may be in the form of government bonds, credit default swaps, currency swaps, special drawing rights, loans, insurance and pensions. Net debt is the difference between gross debt and the financial assets that government holds. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and more likely the country is to default on its debt obligations.
File photo of protestors fleeing after police fired tear gas on them during the April 28, 2012 Bersih rally in Kuala Lumpur. Bersih supporters held rallies in cities in 51 countries, including Mecca and Medina, which Najib said tarnished the image of the country and Muslims.
KUALA LUMPUR, July 19 — Prime Minister Datuk Seri Najib Razak said today the Bersih electoral reform protest had threatened the haj pilgrimage quota of Malaysia’s Muslims, and tarnished the country’s image.
“We support demonstrations, but only when they are done peacefully and in accordance with our religious principles. When some of them protested in Mecca and Medina, our image as Malaysians, as Muslims, was tarnished.
“The Saudi government even threatened to pull back our quota,” he said.
Najib explained the seriousness of this issue by stating that thousands who have waited even up to 15 years would not have been able to go for their haj pilgrimage.
“Because of Bersih, we could have faced a suspension for this year, or even three years. They are destructive towards the needs of Malaysian Muslims,” he said.
++++He also stated that those who protested for Bersih in Mecca and Medina probably “got less education”.
Bersih held its third and largest protest on April 28 which turned rowdy after police charged at thousands of protesters.
+++++The protest was also joined by smaller groups in 51 other nations.
Leaders from the ruling Barisan Nasional (BN) government, including Najib, have repeatedly painted Bersih’s most recent rally last April 28 as an attempt to oust its democratically-elected government, a charge the movement’s leader Datuk Ambiga Sreenevasan has denied just as frequently.
Bersih has been lobbying the Najib administration to enforce electoral reforms, including cleaning the voter roll of dubious entries, before the next national polls due in nine months.
Putrajaya has pledged to undertake the reforms after last year’s massive July 9 rally garnered negative publicity for the Najib administration around the world, but the authorities have been accused of dragging their feet over their implementation, which the Election Commission (EC) said will take time.
Ambiga also accused the BN coalition of relentlessly “demonising” the electoral watchdog, with the latest incident seeing anti-Bersih flyers bearing the Information, Communication and Culture Ministry’s official logo being distributed around the Klang Valley.
DESIDERATA: Let me state the sections BOLDED by Desi (THUS) in the two articles will be referred to in my comments that follow. I'm asking my ER to find some "linkages" between the TWO ARTICLES because in my creative writer's mind, I believe the PM is sadly mistaken to jump to conlusions that the 428 protest organised by BERSIH3.0 had any "religious" flavour, so he's treading on dangerous grounds relating developments/reactions by the Saudi government. Hey besides Mecca and Medina, ****, overseas Malaysians also held rallies in +++++51 other nations -- so Mr Prime Minister, two out of 52 merely represented about four (4) percent!
Also, Mr Prime Minister, you and your socalled multi-racial BN components must be reminded that Malaysia's populace comprises many ethnic groups and follow various religious faiths, although Desi acknowledges that Islam is predominant in numbers. But please Mr UMNO president, you do not speak from just ONE RELIGIOUS PERSPECTIVE if you truly believe in realising 1Malaysia, OR THIS 1Malaysia is all JUST SLOGANEERING?
The first article showed that to date, your administration oversighted the five-year period when the Debt-toGDP ration GREW SUBSTANTIALLY. So it is the ECONOMIC PERFORMANCE you shgould focus on, NOT INDULGING IN DIVERSION AND POLEMICS because we in the Internet age don't easily getr foooled by you. Maybe your predecessors of 20 years past and before could get away with such "misleading" leadership and the mainstream media acted in cahoots with the ruling government! The journaists in the online media are of a different era and are better informed, so the readers/populace out here are able to DISCERN ISSUES MORE CLEARLY. That dictum promted by a past American president indeed holds truer today than the previous millenium -- You can fool some of the people all the time; you can fool all the people some of the time; BUT YOU CAN"T FOOL ALL THE PEOPLE ALL THE TIME!
From the first MI article, this extract from **** that "...we have a piggy bank called Petronas.” tells us a lot about your government's lack of transparency in terms of what happened/is happening/will happen to our nation's richest natural resource -- oil and gas -- which the national oil corporation is supposed to hold and mange in trust for the people/RAKYAT. I have lamented often in this blog that Petronas' profits -- tens of billion every year, like RM40BILLION to RM60BILLION from the past decade -- have NOT benefited the people directly as MALAYSIA IS A NET PRODUCER AND NET EXPORTER OF OIL, OF PREMIUM GRADE TOO, yet the Rakyat suffer in silence with every round of price increase at the pump leading to rising inflation in tandem!
Oh YES! the following point *****SPEAKS VOLUMES about our citizens' diminishing purchasing power -- in essentially an economy whose salaries or workers' wages are depressed by millions of illegal workers in Malaysia, but this subject deserves another article another time -- and how can the PM preach about growing our economy to a HIGH-INCOME ECONOMY? *****This generally means that investors harbour stronger doubts over Malaysia’s ability to pay back its debts, and outflow of funds led to the ringgit slumping to a 14-year low against the Singapore dollar and also saw the currency lose ground to the greenback.