THE thousands of Malaysians who use the light rail transit (LRT) lines, and soon the mass rapid transit (MRT) network, daily to move about in Kuala Lumpur have a lot to thank for. So do the thousands of students a year who take loans from the National Higher Education Fund Corp (PTPTN), for which the money borrowed allows them to pay for the expensive tertiary courses they take.
Infrastructure such as the rail lines and also facilities to give out study loans are part of the Government’s efforts to lower the cost of living. Allowing students to continue studying opens an avenue for them to progress in life.
But the cost of doing that is not something many see but is having a telling impact on future government finances.
In recent years, the Government has relied on what is called contingent liabilities, or off-the-books debt, to fund major development projects. Big-ticket items such as the rail lines cost billions of ringgit, and with Government debt close to its self-imposed ceiling of 55% of gross domestic product, the use of special-purpose vehicles (SPVs) that take the debt burden off the Government’s books has been almost the preferred way of funding such mega projects.
Cumulatively, contingent liabilities amount to RM178bil worth of guaranteed debt by the Government. With government debt at RM630.5bil at the end of last year, the off-the-books debt that is guaranteed by the Government is worth 28% of the public sector’s total debt.
The growth of such liabilities is not slowing down. SPVs will be used to fund future big projects such as the high-speed rail, line two of the MRT project, the Pan Borneo Highway and the east coast rail.
“The amount of contingent liabilities is likely to rise in the future,” says Socio Economic Research Centre executive director Lee Heng Guie.
Problem with rising debt
The use of off-the-books debt to finance development projects has been a favoured method by the Government in recent years and has resulted in the boom in such liabilities.
As the Government cannot borrow money to fund its operating expenditure, it has no constraints doing that when it comes to spending on development.
Structuring debt in such a way is by design, according to economist Datuk Dr R. Thillainathan, who is the former president of the Malaysian Economic Association.
“The question is how well are they managing that funding?” he asks.
On a paper, Thillainathan points out that the use of off-the-books debt has been utilised differently by the three most recent Prime Ministers in varying degrees, but the cumulative amount has a telling implication on what the debt levels means in the future.
He says the use of contingent liabilities and implicit liabilities – both debt deemed guaranteed by the Government – has been rising and with the pace it is at now, the amount signals trouble over the horizon.
He says that given the Government’s current debt load versus the level at the start of previous economic crises, Malaysia is now likely to be close to or at the danger zone.
“The removal (almost wholly) of fuel subsidies and the imposition of the goods and services tax (GST) may have come just in the nick of time to avert (at least for the present) a government debt-induced crisis,” his paper says.
What Thillainathan is concerned about is total debt.
His worry stems from the total indebtedness of the Government. His calculations show that the Government’s debt load exceeds 77% of the gross national product (GNP) if the implicit debt is taken into the books of the Government.
Judging from history, he points out that in 1984, before the mid-80s economic crisis, the Government’s debt load in terms of GNP was just under 70%. There was no case then of contingent or implicit liabilities.
In 1997, the year before the full impact of the Asian Financial Crisis was felt, the Government’s overall debt load was only 48% of GNP, of which contingent and implicit debt was at 7.8% and 10%, respectively.
In 2008, the year before the Global Financial Crisis’ impact was felt in Malaysia, the Government’s overall debt load was around 56%, of which contingent liability was 11.7% and implicit debt 7.5%, which is an estimate.
“Going by our estimates of the Government’s total debt load in pre-crisis years, it appears that our current debt load is close to or in the danger zone,” he says in his paper.
Trends from the past indicate that as those periods of economic stress had hit Malaysia, the automatic response was a rise in government debt as a percentage of the GNP to boost growth.
But the current total amount of debt, including contingent liabilities, has never been higher in periods before any economic problems had beset Malaysia.
Thillainathan says the Government under Prime Minister Datuk Seri Najib Tun Razak has managed to fatten up public-sector finances by slashing subsidies and imposing the GST. He says those moves may have averted a Government debt-induced crisis.
Thillainathan points out that the current tax structure also makes it cumbersome for the Government to improve its finances, and the cut in petrol subsidies and the imposition of the GST had helped government tax revenue greatly, that was lumbering from the underperformance of direct taxes from what he says is an indiscriminate expansion of income tax breaks to promote investment.
“With the collapse in the oil price from end-2014, these changes came just in the nick of time. If not, the fiscal position would have been a lot worse,” he says.
The risk of contingent liabilities
As the Government is funding mega-infrastructure projects with off-balance sheet debt, there is concern on how that money is being spent.
Critics argue that open tenders should be used to lower the cost of those projects, and in turn, that will lower the exposure the Government has to contingent liabilities.
Many of those infrastructure projects are not being questioned, and even though contingent liabilities are not on the books of the Government, it can be if things go wrong.
The one example is 1Malaysia Development Bhd (1MDB), which has been absorbed by the Finance Ministry and poses a risk given the size of its debt, and should it lose the arbitration case it is involved in with International Petroleum Investment Company or IPIC. The Government’s contingent liability for 1MDB is around RM5bil, but its implicit guarantee is many times that judging by the debt that is owed by 1MDB.
The other is PTPTN. It was reported that the amount owed and unpaid by students was RM5.4bil by 661,262 students as of end-February. But blacklisting borrowers has seen the monthly repayments rise to RM200mil a month from between RM50mil and RM60mil a couple of years ago.
The lingering concerns of contingent liabilities is the worry that if something goes awry, then the Government has to shoulder repaying that obligation.
With the debt-servicing cost now estimated to cost RM26.6bil in 2016 from RM24.4bil last year, that amount is more than 10% of government revenue.
“If you look at the trend, it is slowly increasing. This is expected because the outstanding debt is getting larger,” says Lee.
“It’s not on the high side, but the Government is trying to keep it within a certain level.”
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