AS a country that has faced budget deficits for over two decades amid efforts to turn surplus, Malaysia has consistently relied on borrowings to finance its revenue shortfalls.
About two years after the former Pakatan Harapan government raised the alarm on the country’s “RM1 trillion” debt dilemma, concerns on Malaysia’s elevated debt levels has yet to come to an end.
The reliance on debt has become more pronounced in 2020 as the government introduced four economic stimulus packages all in just five months, with an unprecedented cumulative value of RM295bil.
About RM45bil or slightly over 15% of the stimulus packages will come from the government’s direct injection. Of the amount, RM35bil will be financed through debt, as mentioned earlier by Finance Minister Tengku Datuk Seri Zafrul Aziz.
Economists who spoke to StarBizWeek agree that Malaysia’s self-imposed domestic debt limit of 55% to the gross domestic product (GDP) will be breached as a result of the increased borrowings.
Wellian Wiranto, OCBC Bank economist, expects the country’s debt-to-GDP ratio to tick up above 55%, and inch closer to 56% of GDP by year-end.
“With that possibility, the government might have to ask the parliament for approval in amending or suspending the 55% statutory cap on the debt-to-GDP ratio, ” he says.
AmBank Group chief economist and member of the Economic Action Council secretariat Anthony Dass says the debt-to-GDP ratio could hit around 57% to 59%.
This is on the basis that the country’s budget deficit to GDP is projected to hover around 5.8% to 6.0% in 2020, as compared to 3.2% predicted during the tabling of Budget 2020 last year.
Meanwhile, Socio-Economic Research Centre executive director Lee Heng Guie points out that the debt-to-GDP ratio has already exceeded the 55% limit as at end-March 2020.
He says the federal government direct debt stood at RM823.8bil or 58.8% of GDP as at end-March 2020. Including the contingent and other liabilities, the country’s total debt level has reached RM1.104 trillion or 78.8% of GDP, according to him.
With the introduction of the four stimulus packages, Lee says the debt amount could increase further by RM35bil.
“Despite exceeding the administrative limit of 55%, it should not be a cause for alarm in the current moment. From a historical perspective, we have had a far higher debt-to-GDP ratio between 60.1% and 93.1% during 1982-1991.
“A debt-to-GDP ratio of 60% is quite often noted as a prudential limit, suggesting that crossing this limit will threaten fiscal sustainability. Nevertheless, the limit cannot be interpreted as being the optimal level of public debt, taking into consideration the future growth and revenue path as well as the capacity to repay during the possibility of adverse shocks, ” he says.
Dass believes that it is necessary for the government to raise its debt ceiling to support the economy.
“There is a need to increase the public debt amid the challenges posed by the Covid-19 pandemic that has already spiked the unemployment to now at 5%, with more upside to the figures and more downside to the economic growth. Risk of a ‘second wave’ of the virus is still on the plate, ” he says.
For perspective, Malaysia’s debt limit was set at 40% in April 2003, revised to 45% in June 2008 and subsequently 55% in July 2009.
Moving forward, it is inevitable that the country’s debt position will be higher than pre-pandemic levels.
This raises concerns on Malaysia’s debt affordability or its ability to repay its borrowings without the fear of defaults.
It is worth noting that Moody’s Investors Service has warned earlier in 2020 that Malaysia’s debt affordability is weaker than other countries with similar ratings.
In 2019, the federal government’s interest payments account for about 13% of its revenue, significantly higher than the A-rated median of 4%.
The rating agency also said that the government’s debt burden remains higher than similarly-rated countries, pointing out that “Malaysia’s high debt burden is a significant constraint on the rating”.
An estimate by Lee on the interest payments to be paid for the RM35bil borrowings for the stimulus packages shows that the government may have to fork out RM910mil annually.
This is assuming that the government borrows RM35bil via the issuance of Malaysian Government Securities with an average interest rate of 2.6% per annum and maturities of three to 10 years.
Lee pointed out that the government’s debt service charges (DSC) have been growing rapidly by 8.6% per annum from RM15.6bil in 2010 to RM32.9bil in 2019, pushing DSC share of total revenue to 12.5% in 2019 from 9.8% in 2010.“In Budget 2020, the DSC-to-revenue ratio is projected to reach 14.3% and it will rise higher, given the expected lower revenue growth amid lower interest payment, thanks to the declining interest rate environment.
“In terms of operating expenditure (OE), DSC made up 12.5% of total OE and had risen progressively over the years from 9.7% in 2010. In Budget 2020, the ratio is estimated to increase to 14.5% of total OE, ” he adds.
The government’s fiscal stability framework has set an administrative rule that DSC must be kept below 15% of revenue or operating expenditure.
Dass notes that there will be an uptick in the DSC share of total revenue.
However, he expects the uptick to remain manageable, especially since the borrowings will come from domestic sources as mentioned by Tengku Zafrul earlier.
“As a very large chunk of the financing cost comes from the market debt instruments with a small percentage exposed to project loans, the weighted average interest rates on the outstanding market debt instruments will be low.
“The average coupon rates for the debt papers will be attractive due to the current low interest rates with the door still wide open for more monetary easing, high liquidity which will not raise concerns of ‘crowding out’ between public and private borrowings and good appetite from investors, ” he says.
Despite the continued increase in Malaysia’s debt levels, OCBC Bank’s Wellian thinks that the market remains relatively sanguine about the country’s debt servicing capabilities.
“We continue to see the MGS yields staying relatively subdued at around 2.9% now for the benchmark 10-year instrument, ” he says.
Wellian is asked whether there are chances for the government to take up more off-budget debt such as guaranteed liabilities to pay for the stimulus packages and other expenditures.
In response to this, he believes that the possibility exists, although it may not be the first course of action for the government for now.
“Thus far, the various stimulus packages have roped in help from government-linked companies (GLCs) and major private companies such as telcos to help share the burden.
“If there is indeed a need to introduce more stimulus in the coming year – which is possible if the economic momentum starts to weaken again in the third quarter despite the best of hopes and encouraging initial data – then a similar cooperative arrangement will likely be adopted once again, ” he says.
Lee tells StarBizWeek that in financing the stimulus packages, the government’s options are not limited to seeking borrowings.
Among the relevant options are the disposal of assets, raise additional non-tax revenue such as higher investment income from Petronas, Khazanah Nasional and other GLCs as well as government-linked investment companies.
“A reordering of expenditure programmes that are non-critical to support those programmes that needed the most during the economic crisis could also be done, ” he says.
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