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Five reasons why Malaysia’s rising debt should concern us

The Edge, 8 January 2018

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As we head to the polls, Anil Netto looks at the state of Malaysian finances – and it isn’t a comforting story.

Here are five reasons why we should be concerned about the Malaysian government’s debt and expenditure levels.

1) Federal government debt has been growing by >10% annually over the last decade

Take a look at the rising government debt level and the projections into the future.

2007 – RM267bn
2017 – RM687bn (end-September, 51.1% of GDP)
2021 – RM1 trillion (estimated)
2028 – RM2tn (est)
2032 – RM3tn (est)

So far, the government has been careful to keep the debt level below 55% of GDP, but this figure does not capture the full picture, as we shall see below.

2) Government-guaranteed debts have risen from RM187bn to RM227bn in a year

These reflect the government’s exposure to the debts of government-owned or government-linked entities in case they default on their debt.

In 2016, the government had provided guarantees for debt totalling RM187bn.

This includes RM5bn from 1MDB but excludes the government’s ‘letter of support’ for a US$3bn bond taken out by 1MDB, though some believe this should be included.

It also reportedly excludes RM18bn that should have been in the Public Sector Home Financing Board LPPSA and a RM25bn EPF loan to PFI Sdn Bhd.

Looking at the breakdown of this RM187bn, the largest (rounded up to the nearest billion) amounts reveal some interesting names:

RM40bn – PTPTN student loans
RM30bn – SME Bank
RM19bn – Prasarana
RM18bn – Khazanah
RM13bn – PAAB (water management special purpose vehicle)
RM11bn – Plus
RM7bn – Jambatan Kedua (Second Bridge) – how did this get so high?
RM7bn – Bank Pembangunan
RM5bn – Turus Pesawat
RM5bn – 1MDB (though 1MDB borrowings maturing until 2039 total RM29bn)
RM5bn – Govco Holdings
RM4bn – Felda
RM4bn – SRC International

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In the first nine months of 2017, the total debt guaranteed by the government ballooned from RM187bn to RM227bn (17% of GDP).

So federal government debt (51% of GDP) plus government-guaranteed debt (17%) would add up to 68% of GDP, which is at a relative high level.

3) Not surprisingly, debt service charges have risen correspondingly

Check out how these charges (interest payments, etc) have been rising:

1997 – RM6bn (9.8% of government revenue)
2007 – RM13bn (9.2%)
2017 – RM29bn (12.8%)
2018 – RM31bn (13%)(estimated)

What this means is that, thanks to our rising debt, precious government funds have to be allocated for interest payments.

In fact, 78% of the government’s deficit is due to financing charges. According to the Edge, this debt service charge money could have used to hand out RM964 in cash to all residents of Malaysia or build 36 modern hospitals.

The debt service charges are almost as high as the income tax collection of about RM32bn and about 71% of the GST collection of RM44bn (estimated for 2018; up from RM42bn in 2017).

This means that if our government debt had not been so huge, we would not have had to collect so much GST (ie RM42bn, compared to Brim payments of RM7bn) to pay for interest etc amounting to RM31bn.

The old Sales and Services Tax might have sufficed.

4) Fiscal deficits are much higher than over a decade ago

The rising debt service charge, corruption, excessive spending and wastage are mainly responsibly for the government rising fiscal debt. (Fiscal deficit is the shortfall in government revenue compared to government expenditure.)

READ MORE:  Debt ceiling: Prospects vs hazards

Check out the rising level of fiscal deficits:

1997 +RM8bn (surplus)
2003-2007 – about RM20bn per year
2008 -RM34bn
2009 -RM44bn (6.1% of GDP)
2015 -RM35bn
2017 -RM40bn (3%)
2018 -RM40bn (2.8%)

While the fiscal deficit as a percentage of GDP is falling slightly, what is worrying is that expenditure has grown by an average of 5.2% per year over the last decade, while revenue has grown by only 4.9% per year.

5) Most of the government revenue goes to operating expenditure

This is the most disturbing: 98% of government revenue goes to paying operating expenditure. In fact, it has been over 95% of revenue since 2008. And operating expenditure is growing by 6% per year – faster than revenue growth. Just look at the spending of the Prime Minister’s Department.

This leaves little government revenue left over to finance development expenditure to build or improve schools and hospitals.

Looking at these rising levels of government debt, operating expenditure and debt service charges, we clearly cannot go on at this rate. If we do, there will be more pain than gain in the future.

The leadership has failed to control its spending. Instead, its only solution appears to be removing subsidies and stepping up GST collection, both of which are hurting the rakyat.

Malaysians should bear this in mind when they head to the polls.

Al figures from The Edge, 8 January 2018

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