Investigate Malaysia's debts now
Written by Pak Sako Thursday, 21 February 2013 11:34
ContributorsFormer prime minister Mahathir Mohamad claimed last week that Malaysia's current debt level is “healthy” compared with Greece's.
But the debt-to-GDP percentage Mahathir relied on tells next to nothing about the full extent of Malaysia's debts; the nature of these debts; or what can happen next.
The real devil lies in the details, namely:
(i) the trend in the debt level.
How has it changed in the recent past? Is there momentum in a certain direction? The federal government's debt had doubled in just four years from 2007 and 2012. Will it stop growing, or will the trend and absolute totals continue their upward rise?
In the last decade, our finance ministers have repeatedly pledged to reduce the budget deficits. This has not happened. Instead, deficits have ballooned and the federal government's debt has mounted.
(ii) the causes of debt.
For what are the borrowings and for whom? Are these borrowings for worthwhile investments that benefit the public? Are these liabilities being used to cover government operating costs or to prop up failing crony companies or the stock market? Is the use of costly loans for projects with low or no rates of return justified?
Almost a trillion ringgit was recently whisked out of the country in the form of illegal outflows. This is capital flight. It is conclusive evidence that our economy is 'leaking out' wealth.
Capital flight explains what the crony private sector and other rent-seekers are doing with their ill-gotten gains: they are squirreling these away in offshore accounts in Swiss banks and tax havens such as the Cayman Islands.
It is no wonder that private-sector investment in Malaysia is dismal. To make up for foregone domestic investment and job creation, environmental standards and taxes are lowered to lure foreign investors such as Lynas.
(iii) the types of debt, both known and “hidden”.
How much of the debt is borrowed from the savings of citizens (internal debt)? How much is borrowed from foreign lenders (external debt)? How much of these debts is government debt, and how much is private?
A big chunk of Malaysia's debt, RM467.4 billion as of September 2012, is internal debt (Bank Negara Malaysia, Quarterly Bulletin, Third Quarter 2012).
This is the portion of debt that is popularly spoken about — the debt-to-GDP percentage of 53% involves almost entirely this debt.
This is money borrowed domestically from the savings of citizens. It is money belonging to individuals taken from the Employee Provident Fund (EPF), Tabung Haji, pension funds and other social security organisations and institutions (see 'Debt growing but manageable, says MOF', The Malaysian Insider, 28 September 2012).
At what rates of return are Malaysians being compensated for this borrowing? Will they recover their savings at all? Will they be fraudulently 'compensated' with funds coming from the liquidation of oil and forest assets; in other words, from the public's own pockets? Or will a Ponzi scheme be devised to borrow more to honour commitments that come due?
Wholly separate from internal public debt is private external debt — money borrowed from foreign lenders. This is a portion of debt that is hardly spoken about.
The government's external debt is RM17.3 billion as of last September, according to Bank Negara. But this is the tip of the iceberg.
We should also be very interested in the private sector's external debt.
Because when private companies borrow from foreign lenders, the government is obliged to pay off these debts if the companies fail to do so. Simply put, citizens might have to pick up the tab. That is what happened in the debt crises in the West.
That is why this category of external debt is called 'publicly guaranteed debts'.
Beyond these, there is the 'non-guaranteed' debt obligation of the private sector. These affect the overall creditworthiness of the nation and also cannot be ignored.
Bank Negara says Malaysia's total external debt was RM257.8 billion at the end of September 2012.
How much of this is publicly guaranteed debt held by private corporations?
It is alleged that one Malaysian tycoon and his group of companies owe RM34 billion ('Syed Mokhtar's debts raising fear of future bailout, says Tony Pua, The Malaysian Insider, 27 September 2012). How much is publicly-guaranteed? What about other Malaysian corporations?
More disturbing are the claims that the Malaysian government has large hidden debts.
These are “contingent liabilities” and “off-balance sheet” borrowings, which are said to have amounted to RM117 billion in 2011 (see ''Hidden debt'' edges M'sia beyond 55pct limit', Malaysiakini, 27 September 2012).
There is also little knowledge about annual interest payments and the due dates of debts.
Any meaningful public discussion of Malaysia's debt situation must consider all of the above.
Neither the Ministry of Finance nor Bank Negara give a full picture of all of the above.
Mahathir Mohamad said nothing about any of the above.
He told Malaysians not to worry about debt because our foreign reserves are strong.
But foreign reserves or public wealth are not for settling the illegitimate debts accumulated by corrupt regimes. They are not to be used as collateral to pile on new debts or service existing ones.
The size of the foreign reserves gives false comfort. During the 1997 East Asian crisis the government devalued the total stock of ringgit using a currency peg. Foreign reserves took the hit and shrunk.
Mahathir Mohamad's comments lull Malaysians into a false sense of security. These comments should however serve as a wake-up call. Malaysians should demand for clarification about Malaysia's total debt and its consequences. The Ministry of Finance and Bank Negara should respond. - cpi
Malaysian government's debt to approach RM1 trillion by 2020
Written by Pak Sako Monday, 25 February 2013 14:53
This is the second part of a three-part CPI series on Malaysian debt. The first part, entitled, 'Investigate Malaysia's debts now' , surveyed the overall debt situation.
This part examines the trend in government debt. The upcoming part will concern Malaysia's total debt.
Statistics reveal that in the last 15 years, the Malaysian government's debt increased at an unprecedented rate.
The graph below shows the statistics for the government's combined domestic and foreign debts from 1991 till the present. Forecasts are provided up to the year 2017.
The figure shows the government's borrowings from the savings of domestic citizens and from foreign creditors.
Here we ignore private debt, even though it adds to the government's debt burden, because a portion of private debt is publicly guaranteed. We also ignore other unrevealed debts.
What the statistics are saying
During the 1990s, the reported debt level was mostly flat. It declined slightly towards the end of the decade. At the close of 1991 it was RM99 billion, and by the end of 1996 it was close to 91 billion.
After 1997, the government's debt began to steadily climb until 2007. In those 10 years, the debt level rose from RM91billion to RM274 billion. This is an increase of RM183 billion, or an annual average addition of debt of RM18.3 billion.
From 2008 onwards, the borrowings escalated exponentially.
In 2008 alone, an extra RM43 billion of debt was amassed. From RM274 billion at the start of that year, the debt level rose to about RM502 billion by the end of 2012 — an increase of RM228 billion in five years. The average increase in debt in this period was RM45.6 billion per year.
The IMF forecast the debt level for the years 2013 to 2017. The annual increase in debt is predicted to be higher, at a yearly RM55.4 billion. The projected debt level for 2017 is RM779 billion.
This assumes that there is still plenty of domestic funds available to carry the borrowing up to that level (the lion's share of government debt, is after all, domestic debt).
If not, debt would have to be secured from external sources.
The assumption is also that the government will continue to borrow. This is likely to be true. As we have seen, the trend suggests that the government's appetite for debt has been growing, not abating.
The annual increases in debt are substantial sums: a single year's borrowing can dwarf a decade's worth of inward foreign direct investment.
There has been no sign of the debt accumulation reducing or levelling out since the East Asian economic crisis of 1997.
Large government deficits were first incurred in the aftermath of this crisis. Then-prime minister Mahathir Mohamad justified this as part of government spending in commercial enterprises to stimulate the economy.
In reality, the loan proceeds were allegedly used for questionable purposes, such as to fund large-scale projects awarded to crony capitalists and to bail out their failing companies.
The federal government's borrowing shifted into higher gear from 2008, the year the Barisan National coalition lost its two-thirds parliamentary majority.
The deficit expenditures have been justified as a short-term tool. But they have continued for almost a decade and a half; they have become a permanent feature of the government’s financial policy.
The government's financial imprudence is therefore a primary cause of the country's indebtedness.
What this means for the average citizen
It is pertinent to ask whether at this rate Malaysia will attain in 2020 the so-called high-income status envisioned by the New Economic Model.
In the graph, we can see that the government's debt could come close to RM1 trillion by that year.
The actual debt level might, of course, fall well short of that.
Even so, the strain of the debt load on the people is likely to be significant.
Consider the amount of interest payable every year for the current debt of RM502 billion, or for RM779 billion in 2017. Information on this needs to be disclosed and put into the public realm.
Undertaking debt on this scale is unsustainable for a country of our size and economic potential. The World Bank has said that the Malaysian economy is likely caught in a 'middle-income trap'. Economic growth in the years ahead is projected to be slower. Other contributing factors include Malaysia's wide income and wealth disparities.
When we are compelled to push our land and labour resources to new limits to produce economic growth in the attempt to surmount large debts, there will be damaging social and environmental consequences. We will have to rapidly liquidate our oil and other resources at the expense of the wellbeing of future generations.
The average citizen could be taxed more.
To free up cash to service debt, there could be cost-cutting in the provision of public services, such as healthcare. This might already be happening; recently there were shortages of medicines and blood tests in the public hospitals and health clinics. Workers might also face longer working hours for the same or lower income.
A more devious method may also have to be deployed to deal with domestic debt.
This is when the borrowing government increases money supply by printing money to devalue the debt. The lending citizens lose out. Inflation speeds up and the currency will weaken.
In summary, a 'new normal' of a lower standard of living is probable, given:
(i) the increasing scale of government debt and the repayments required for these, and
(ii) the country's comparatively limited earning potential, bearing in mind the 'false' economic growth being attained by irresponsibly depleting natural resources, polluting the land and squeezing greater 'productivity' out of the workforce.
Tackling debt ought to be a major subject of political discourse in Malaysia. - cpi