Malaysia’s debt ceiling is again being discussed in social media with blogger Economics Malaysia claiming it is now at 77 per cent of Gross Domestic Product (GDP).
That is a whopping 22 per cent above the self-imposed federal debt ceiling of 55 per cent of GDP.
Economics Malaysia wrote:
"Analysts say Govt’s contingent liabilities likely to rise
...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.
...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....
...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....
...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....
...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."
Wait! Hold your horses! “With government debt at RM630.5bil at the end of last year …” - Am I reading or seeing this right?
Has everyone forgotten what the then International Trade and Industry Deputy Minister Muhkriz Mahathir told Universiti Utara Malaysia (UUM) students at their convocation in 2009?
Yes! That’s 2009 and it is now 2016 - almost seven years later and saddled with the 1Malaysia Development Berhad (1MDB) -linked alleged global multi-billion-ringgit money laundering international probe.
Also, let’s not forget about the Ringgit’s severely weakened forex exchange that is now about RM4 to US$1.
As deputy minister, Muhkriz then had access to the country’s financial figures and he was quoted by The Edge financial weekly as saying the country’s federal debt was at RM800 billion!
It was claimed that Muhkriz had unwittingly let the cat out of the bag when the federal government was then claiming the debt ceiling at RM520 billion.
Perhaps, Muhkriz’s figure included cumulative contingent liabilities. It is highly unlikely that Muhkriz was lying or made a mistake with what he said then.
What No News Is Bad News is concerned with and Malaysians should demand to know is Malaysia’s real current federal debt standing, including cumulative contingent liabilities.
The damning question: Has it surpassed RM1 trillion?
The mounting federal debt has taken a toll on the rakyat (people) and country. And that is the reason why Malaysians are today paying Goods and Services Tax (GST) every second of the day and also resulting in multiple payments of taxes over the same processed goods or commodity.
The worrying question is whether Malaysia is heading towards the way of Greece – bankruptcy.
And, being described by Transparency International as one of the most corrupt countries in the world is cause for concern as it rattles the confidence of both local and foreign investors.
And Economics Malaysia laments further:
"The thing is, by my estimation, Malaysia’s implicit liabilities are far higher. First and foremost is deposit insurance, though truth be told this is technically considered to be under BNM. PIDM’s Annual Report 2015 has the details (pg 78) – total deposits insured amounted RM483.7 billion in 2015, compared to a insurance fund sizes of Rm1.3 billion (pg 100: Islamic plus Conventional), relative to a GDP of RM1.157.1 billion (latest DOS GDP release). That roughly equates to an implicit liability of 41.8% of GDP.
Of course, actually expected loss would be far, far lower than total insured deposits (roughly a maximum RM3.7 billion, again pg 100 of the PIDM report), which nicely illustrates why just adding up government guarantees and implicit liabilities to government debt just doesn’t make any sense. Guarantees and implicit liabilities (which may or may not be required to be paid, and whose value is uncertain) are very different in nature to government debt (which does have to be paid).
There are also big differences between different categories of implicit liabilities, which is a nice segue into the other big implicit liability the government carries – pensions and gratuities under the civil service.
To be honest, I don’t have the exact figure here, though I knew what it was a few years ago. As a rough lower bound I’d optimistically call it at about 20% of GDP, though its likely to be higher – changes to the scheme of service, increasing longevity, and a sheer increase in numbers means pension payouts will likely grow faster than economic growth.
Or not, as changes to any of the parameters (or the calculation methodology) would change the total amount of liability (for an example of what I mean, see pg 82 of this paper). That uncertainty is why pensions are considered an implicit liability, rather than just tacked on to government debt.
If you’ve a mind to, adding all those together with government debt and we have a figure somewhat north of 100% of GDP (cue, alarm bells ringing).
But really, that’s hardly outside the norm. Many countries have contingent liabilities in that ballpark, or even higher (check out the US numbers or Europe’s). If you want to see something really scary, read this paper, where the author estimates the EU has an unfunded gap of 8.3% of all future GDP. Put another way, this is the equivalent of from 244% of annual GDP (Spain) to 1550% of GDP (Poland), all in 2004 terms, which means the gap has grown even larger after the collapse of interest rates after the 2008-2009 recession. Now that’s what I’d call a problem. - http://econsmalaysia.blogspot.my/"
And now, what No News Is Bad News wants to know is how/who is going to settle Malaysia’s debt, given the globally depressed oil prices and commodities?Of course it is the the people who pay GST every second of the day! But for how long can the people shoulder the Barisan Nasional government’s debt?
And below is a Jan 14, 2014, article posted by online news portal theantdaily reproduced for No News Is Bad News readers to ponder whether Malaysia should be in such financial dire straits:
Blessed with oil money, but why is Malaysia in huge debt?
Posted on 14/01/2014 - 09:30
OUTSPOKEN: Can any oil producing country in the world make all her citizens millionaires via prudent management and savings?
Norway achieved that on Jan 8, 44 years after striking oil in the North Sea in 1969. But it only set up its oil sovereign wealth fund (SWF) in 1990, meaning it took the Norwegians only 23 years to be millionaires.
According to a Reuters report, everyone in Norway became a theoretical crown millionaire on Jan 8 in a milestone for the world’s biggest sovereign wealth fund that has ballooned thanks to high oil and gas prices.
The fund owns about one per cent of the world’s stocks, as well as bonds and real estate from London to Boston, making the Nordic nation an exception when others are struggling under a mountain of debts.
A preliminary counter on the website of the central bank, which manages the fund, rose to 5.11 trillion crowns (US$828.66 billion or RM2.7 trillion), fractionally more than a million times Norway’s most recent official population estimate of 5,096,300.
It was the first time it reached the equivalent of a million crowns each, central bank spokesman Thomas Sevang said.
Not that Norwegians will be able to access or spend the money, squirreled away for a rainy day for them and future generations. Norway has resisted the temptation to splurge all the windfall since its oil strike.
Finance Minister Siv Jensen told Reuters the fund, called the Government Pension Fund Global, had helped iron out big, unpredictable swings in oil and gas prices. Norway is the world's number seven oil exporter.
“Many countries have found that temporary large revenues from natural resource exploitation produce relatively short-lived booms that are followed by difficult adjustments,” she said in an email.
The fund, equivalent to 183 per cent of 2013 gross domestic product, is expected to peak at 220 per cent around 2030.
“The fund is a success in the sense that parliament has managed to put aside money for the future. There are many examples of countries that have not managed that,” said Oeystein Doerum, chief economist at DNB Markets.
Note the key word: Parliament. In Malaysia, only the prime minister has access to national oil producer Petronas’ funds and accounts.
Malaysia is the 27th largest oil producer in the world, rolling out 693,700 barrels/day. Only 114 countries were listed as at 2009 and 2010. Norway rolls out 2,350,000 bbl/day.
What’s the financial position of Malaysia? A federal debt of up to RM800 billion! (as revealed by then Deputy International Trade and Industry Minister Datuk Seri Mukhriz Mahathir at end of 2012).
And do we have such an oil SWF to save for rainy days for the rakyat and country? None.
According to a written reply in Parliament by Prime Minister Datuk Seri Najib Razak, Petronas had contributed RM3 billion to the National Trust Fund (or Kwan, the acronym for Kumpulan Wang Amanah Negara) as at June 2011.
He also said the money had been invested in various financial instruments and that Kwan’s fund currently stood at RM5.43 billion.
Just a measly RM5.43 billion compared with Norway’s RM2.7 trillion!
The administration and management of the trust is handled by Bank Negara with a panel under Kwan monitoring the collection of funds.
And, digest this moronic joke: Najib said Kwan was set up to ensure that revenue from dwindling natural resources would benefit future generations.
After 39 years (Petronas was founded in 1974), all we have today is a federal debt of at least RM800 billion, and the international reserves of Bank Negara Malaysia stood at RM441.7 billion (equivalent to US$134.9 billion) as at Dec 31, 2013.
Now, it is clear why the Umno-led Barisan Nasional government is cutting down on subsidies. Its federal debt is so high that it cannot continue to borrow to serve the rakyat as before or Malaysia will go bust like Greece.
It’s time for Malaysians to take stock of the federal government’s lack of transparency and accountability in its financial management of the country’s wealth.
It’s utter nonsense and a disgrace for the 24-year-old Kwan to have a paltry savings of RM5.43 billion, unless Najib now wants to claim that the figure was erroneous and blame it on a scapegoat who prepared the written reply in Parliament.
What can RM5.43 billion (US$1.9 billion) do to help Malaysians and Malaysia during rainy days, like when our oil wells run dry?
Why is there no oil-based SWF for Malaysia?
Petronas is today a global player in oil and gas exploration.
Why is the government just satisfied with an annual RM100 million contribution to Kwan since 1988?
Where has Petronas’ hundreds of billions of ringgit in revenue over the past 38 years gone to?
Did Petronas’ oil and gas exploration presence in 32 countries outside Malaysia also contribute or help facilitate the bulk of the RM1.08 trillion in capital flight in the last decade?
Why avoid establishing an oil-based SWF for the people and country? Is it because financial transparency and accountability would be a pain?
Crude oil and natural gas are Malaysia’s two most abundant resources but their sustainability is being questioned with the country projected to become a net oil importer in a few years.
Now, let’s take a more detailed look on why other oil producing countries are doing better in terms of oil-based or non-commodity-based SWF management:
Kuwait (10th at 2,494,000 bbl/day), Libya (17th at 1,790,000 bbl/day), Kazakhstan (18th at 1,540,000 bbl/day), Algeria (15th at 2,125,000 bbl/day), South Korea (64th at 48,180 bbl/day) and Singapore (82nd at 10,910 bbl/day).
Malaysia’s non-commodity Khazanah Nasional, founded in 1993, is ranked 23rd with US$34 billion (RM110 billion) in assets and a Linaburg-Maduell Transparency Index (LM-TI) of 5.
The world’s largest SWF, Norway’s Pension Fund Global, was in 2009 registered with assets worth US$664.3 billion (RM2 trillion) with a perfect 10 LM-TI.
UAE-Abu Dhabi’s oil-based Abu Dhabi Investment Authority, established in 1976, is ranked second with US$627 billion (RM2 trillion) and a 5 LM-TI.
At third spot, China’s non-commodity SAFE Investment Company, which was founded in 1997, now manages assets worth US$567.9 billion (RM1.8 trillion), with a 4 LM-TI.
That’s the top three SWFs in the world. Now, let’s focus on our neighbours.
Singapore’s non-commodity Government of Singapore Investment Corporation, which was set up in 1981, is ranked 8th with assets at US$247.5 billion (RM802 billion) and a 6 LM-TI.
Following at 9th rank is another Singapore non-commodity SWF, Temasek Holdings, which was established in 1974. It has US$157.5 billion (RM510 billion) in assets and a perfect 10 LM-TI.
Even countries like Kuwait, which was severely damaged by Iraq’s bombing and brief occupation, Libya, Kazakhstan, Algeria and South Korea, which were far poorer than Malaysia in the 60s, 70s and 80s, are all managing their country’s wealth better than Malaysia.
Malaysia’s economic and financial standing is baffling, don’t you think so?
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