Weighed by huge debt burden

MALAYSIA has long had to contend with the issue of rising public debt in recent years.

As at end-August 2023, the total federal government debt stood at RM1.15 trillion or 62% of gross domestic product (GDP), below the stipulated debt ceiling of 65% of GDP.

The amount was largely denominated in ringgit, with a share of 97.4% of the total debt, while the remaining 2.6% was in foreign currencies.

It is, however, estimated that Malaysian government debts and liabilities have risen to about RM1.5 trillion. This implies an increase in debt servicing charges and a narrowing of fiscal space to implement new projects or prepare for economic shocks.

Under Budget 2024, debt service charges alone are expected to account for about 16%, or RM50bil of the total operating expenditure this year, as compared to about 15%, or RM46bil, of total operating expenditure in 2023.

Be that as it may, economists in general are not so concerned about the government debt level, pointing out that it remains manageable at current point and any associated risks appear to be well contained.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, for one, argues that the government debt level is still sound, as the bulk of its debt is raised internally. As such, the government should be able to service its own currency debt almost seamlessly.

He adds: “The existence of large institutional investors such as the pension funds, banks, insurance, fund managers and foreign investors will ensure that every government securities issuance will be fully taken up, and in fact, it will be oversubscribed.”

He tells StarBizWeek that addressing the debt issue is not so much a matter of urgency but rather it is to give the government more fiscal space to address the needs of the nation and to showcase its financial discipline, which will boost market confidence.

Cost load

Meanwhile, Malaysia University of Science and Technology economics professor Geoffrey Williams says the current government debt rate is less likely to be risky.

In fact, he tells StarBizWeek that the government debt has actually decreased, and that in spite of many people’s worries, Malaysia’s debt-to-GDP ratio is actually quite low as compared to many other nations, including Singapore.

Sharing Afzanizam’s opinion, Williams says the majority of government debt is held by Malaysians or Malaysian institutions, which explains why the debt is not at a risky level.

“So, there is no particular risk exposure to overseas lenders,” he adds.

However, Williams says, the issue of concern is the high debt service costs, totalling about RM50bil this year.

“These take up a great portion of the operational expenditure from the government, which could be better used on health, education, and social protection,” he explains.

Having said that, Williams says good fiscal management is essential to cut wastage, leakages and corruption, as he believes there is more significance in keeping the nation’s debt number from rising as compared to finding ways to bring it down.

Focus on growth

AmBank Malaysia Bhd chief economist Firdaos Rosli adds to the point as he says its crucial to note that Malaysia had a far greater debt level in the past, peaking at 103.4% of GDP in 1986.

He says despite this high level of government debt, Malaysia saw fast development following the “Volcker shock” crisis in the mid-1980s, with the nation’s growth rate averaging 9.3% yearly from 1987 to 1997.

“Therefore, I believe the bigger question about debt levels is not how much or the level of debt itself but how much growth an economy can generate from debt accumulation. In other words, what we do with the debt matters, not the debt level,” he adds.

According to Firdaos, deficit control may slow growth even further, thus it is important to reevaluate if the move is worth pursuing.

“In my view, we could highlight areas where we can generate higher growth, such as decentralisation, liberalisation or a greater push for mega projects in areas with the greatest economic multipliers,” he says.

On the question of whether the government has done enough in addressing the issue, Afzanizam says the passing of the new Public Finance and Fiscal Responsibility Bill 2023 shows that the government is serious about fiscal consolidation.

He continues by stating that the execution and impact of the government’s efforts to reduce the nation’s mounting debt is the most crucial factor to take into account.> see page 11“More importantly, how all these initiatives will be communicated to the general public in order to get their full buy-in” he says.

Under the Public Finance and Fiscal Responsibility Law that was passed last October, the government has outlined a series of targets that needs to be achieved within three to five years. Among these are keeping the total federal government debt levels at 60% of GDP or less, lowering the fiscal deficit to 3% of GDP or less.

Contingent liabilities

In addition to the higher budget allocation for 2024, Williams says that higher revenue forecast of RM307.6bil, lower deficit and debt ratios, as well as the rescheduling of several projects, is sufficient for the time being, as the government attempts to address the national debt situation.

In spite of that, he says contingent liabilities carry greater risk, especially in the case of the National Higher Education Fund Corp (PTPTN), which has an RM67bil contingent liability.

“The government is not doing enough to deal with this. PTPTN is a significant risk because the repayments have not kept pace with the loans issued, and it has been short of funds,” he says.

Williams believes that in order to solve this issue, the government must make higher education free to stop the debt rising, and pass the debt to the Debt Management Office in the Finance Ministry to oversee debt recovery and lower risk.

Separately, Firdaos believes that Malaysia has elbow room to accumulate debt for growth.

“A developing economy such as Malaysia must take the necessary actions to ensure that the economy grows faster, irrespective of the level of debt.

There is no quick fix to address this issue, as moving the supply side of an economy is usually arduous, complex and slow. More importantly, it requires a tremendous amount of political will,” he says.

Hence, he believes boosting growth rates and putting less emphasis on debt levels is the wisest course of action.

Number matters

Budget 2024 has allocated RM393.8bil for total expenditure, of which RM303.8bil will be for operating expenditure and RM90bil for development expenditure.

With revenue collection expected to be RM307.6bil, fiscal deficit in 2024 is expected to moderate to 4.3% of GDP from about 5% in 2023.

In a recent report, Hong Leong Investment Bank Research estimated that under a baseline scenario, where there is a gradual reduction of primary deficit as a result of fiscal consolidation efforts, Malaysia’s debt-to-GDP ratio could trend down to below 60% in 2028 from about 63% in 2023.

In an alternative scenario, however, where there are no fiscal reforms, the debt-to-GDP ratio is projected to reach the debt sustainability analysis threshold of 70% in 2028, surpassing the federal government statutory debt limit of 65% starting 2025.

Maybank Investment Bank Research estimated that as at end-September 2023, the federal government statutory debt, comprising the Malaysian Government Securities, Malaysian Government Investment Issues and Malaysian Islamic Treasury Bills, stood at 60.4% of GDP.

The brokerage projects that the federal government total debt would hover around 64% of GDP by end-2024, mainly for financing strategic development projects under the 12th Malaysia Plan, including flood mitigation programmes, central spine road, Pan Borneo Sabah and Sarawak highways, Rapid Transit System Link project between Johor Bahru and Singapore as well as National Fiberisation and Connectivity Plan or currently known as Pelan Jalinan Digital Negara.

CGS-CIMB Research concurs, noting that despite a better fiscal deficit number for 2024, the government’s total debt ratio is projected to worsen to 64% of GDP this year against 62% of GDP estimated for 2023.

Similarly, it notes, debt service charges will likely worsen to around 16% of revenue in 2024, climbing higher from 15% in 2023, thus breaching the internal guideline of 15% of revenue as set by the Finance Ministry.

“Worse, growth in debt service charges at 8% year-on-year surpasses nominal GDP growth of 6.5%, implying an ongoing struggle with debt affordability. The rising interest rate environment and pandemic ‘debt scarring effect’ played a part in the ballooning costs,” CGS-CIMB Research points out in its report about Budget 2024.

The brokerage acknowledges that the marked improvement in fiscal deficit from 5% of GDP in 2023 to 4.3% of GDP in 2024 is a welcome development.

However, the worsening debt metrics, especially the rising debt service charges and government debt, does not ease concerns, CGS-CIMB Research says.

Meanwhile, AMRO Asean+3 Macroeconomic Research Office in a recent report highlights that to minimise the financial stability risks of public debt, some economies should implement fiscal consolidation to stabilise or manage the ongoing rise in public debt, which was exacerbated by the pandemic fiscal stimulus programmes.

It notes that a wealth of research shows that elevated government debt not only can slow economic growth but also can heighten the risk of fiscal crises.

“As such, determining the optimum size of public debt is a critical decision that considers the needs for more fiscal spending on infrastructure investment and other important social needs and the long-term negative impacts of excessive borrowing. Possible solutions include boosting revenue, optimizing expenditures, and adopting fiscal rules,” it explains.