How Serious Is Malaysia’s RM1 Trillion Debt?


Let’s get the facts straight; Malaysia has financial obligations amounting to RM1.087 trillion ringgit, as at December 31, 2017. This includes Federal Government Debt, Government Guarantees, and lease payments for Public Private Partnership (PPP) projects such as construction of schools, hostels, rental, maintenance of roads, police stations, hospitals, etc. The official Federal Government Debt of RM686.8 billion equates to 50.8% of GDP, and the total debt and liabilities amounting to RM1.087 trillion is 80.3% of GDP.

1 Trillion Ringgit. That is 12 zeroes! Most regular calculators can’t even take 12 zeroes. Where do these numbers come from? What does this mean for us? Is there a need to panic? Well, we’ve broken it down into easy-to-understand points so you can have a clearer picture of what this all means.

One important point to note, government debt and external debt are 2 different debts. Malaysia’s external debt includes external offshore loans, public enterprises and the private sector (that report in to Bank Negara Malaysia). It was reported that our external debt rose to RM883.4 billion as at end-December 2017.

Malaysia Federal Government Debt and Liabilities
Debt and Liabilities Amount (RM)
Official federal government debt
Bank Negara Malaysia (BNM) breakdown can be found here
686.8 billion
(50.8% of GDP)
Government guarantees
The committed government guarantees would include entities such Danainfra Nasional Bhd (RM42.2 billion), Govco Holdings Bhd (RM8.8 billion), Prasarana Malaysia Bhd (RM26.6 billion), Malaysia Rail-link Sdn Bhd (RM14.5 billion) as well as an estimated RM38 billion for 1MDB.
199.1 billion
(14.6% of GDP)
Lease payments for public-private partnerships
The lease commitments which were designed specifically to circumvent the Federal Government guarantee and debt limits. These include including rental, maintenance and other charges for a whole list of “Public Private Partnership” (PPP) projects such as the construction of schools, hostels, roads, police stations, hospitals etc.
201.4 billion
(14.9% of GDP)
Total federal government debt and liabilities
(debt-to-GDP ratio)
1,087.3 billion
(80.3% of the GDP)

The debt-to-GDP ratio is a critical metric for evaluating a country’s fiscal health. The internationally accepted norm for a country’s debt-to-GDP ratio is 55% or below. The key points to understanding debt-to-GDP are:

  • The debt-to-GDP ratio is an equation that shows a country’s economy produces and sells goods and services have enough to pay back debts without suffering further debt.
  • A high debt-to-GDP ratio isn’t necessarily bad, as long as the country’s economy is growing, since it’s a way to use leverage to enhance long-term growth.
  • Countries can run into problems with debt-to-GDP ratios in several ways, including unexpected slowdowns, demographic changes or excessive spending.
  • There are several ways to deal with a higher debt-to-GDP ratio, including less government spending, encouraging growth, or increasing tax income.

Where do we stand on a global scale?

World Public & Private Debt Hits Record USD$164 Trillion <– Click here for more details

 

Singapore has a 112.2% debt to GDP ratio and Japan’s government debt accounted is at 239% of the country’s GDP!. Australia’s debt is at a low 39.6% of their GDP and the United Kingdom’s government debt is similar to ours at 85.3% to their 2017’s GDP.


What is a good or bad debt-to-GDP ratio?

A high debt-to-GDP ratio isn’t necessarily bad, as long as a country’s economy is growing. Credit Rating Agencies gave Japan’s debt-to-GDP ratio very little attention, but Greece’s 160% got analysts predicting its collapse. The reasons for these differences vary, but can include:

  • Buyers of the Debt – A higher debt-to-GDP ratio is acceptable when the buyers of the debt are either domestic investors (citizens) or repeat buyers that have a reason for buying. For instance, Japan’s buyers are domestic and the U.S.’s buyer (China) purchases debt to keep a favorable trade balance with its largest consumer.
  • Economic Growth – A higher debt-to-GDP ratio is acceptable when an economy is rapidly growing because its future earnings will be able to pay off the debt more quickly. For instance, a country projected to grow 5% next year will automatically see the ratio decline, whereas a country projected to contract will see it grow.
  • Plan of Action – Countries with a viable plan to address a high debt-to-GDP ratio may receive some leniency from rating agencies. But those without a plan often face sharp downgrades and criticism. For example, Greece in 2011 did not have a viable plan of action and faced harsh criticism from rating agencies.

Common solutions to a high debt-to-GDP ratio:

  • Cut Government Spending – Governments with a high debt-to-GDP ratio can cut spending to reduce their debt burden. However, the trick to successfully cutting spending is not to deter growth and undermine the GDP portion of the equation.
  • Encourage Growth – Central banks can encourage growth by cutting interest rates, which (in theory) leads to easier commercial lending. Higher growth increases the GDP end of the equation and lowers the overall debt-to-GDP percentage.
  • Increase Tax Income – Governments can increase taxes as a way to pay off debt. But again, the trick is to increase taxes in a way that does not affect GDP growth and undermine the denominator in the equation.

“Let me emphasize that the fundamentals of the economy remain strong. The financial sector is stable, the banking sector is well-capitalised and there is sufficient liquidity in the market. We believe that with the new administration focused on CAT (competency, accountability and transparency), investor confidence will only be strengthened over time. Together with the commitment of the new Government as well as the support of Malaysians all over the country, we will definitely succeed in saving our country,” – Finance Minister Lim Guan Eng (24 May 2018)

Monetary policy and sovereign debt are complex topics. You can get an advanced degree in this stuff, and still not quite understand it. So unless you yourself are economically savvy, it’s best left to the experts to scrutinise the decisions of government’s new action plan. Life is complicated enough already.

 

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