View Full Version : Economy: Malaysia Illicit Outflow & Debt - Sinking deeper and deeper
21st November 2011, 04:40 AM
**Sinking deeper and deeper (http://malaysia-today.net/mtcolumns/special-reports/44637-malaysia-insight-sinking-deeper-and-deeper)* *
*By S. JAYASANKARAN, KL CORRESPONDENT
Business Times (Singapore)
*MALAYSIA should take heed of the problems – the public anger, the social unrest – posed by the solutions offered to tackle rising sovereign debt in Europe. God forbid that we head that way!*
*The Auditor-General’s recent report pointed out that Malaysia’s national debt rose 12.3 per cent to over RM407 billion (S$165 billion) in 2010. The amount is equivalent to 53.1 per cent of gross domestic product. It’s the second straight year that the national debt has exceeded 50 per cent.*
*The figure is a reflection of the spending spree the country went on to mitigate the effects of the 2009 global financial crisis. At its peak that year, the budget deficit rose to 7.6 per cent of GDP, the highest in two decades.*
*It has since come down to 5.4 per cent of GDP and the government projects that it will decline further to 4.7 per cent of GDP next year. But that may be overly optimistic.
* Everyone knows why the debt has piled up: persistently high budget deficits over 14 years. But it is the pace of the rise that’s alarming. Standout statistic: in the space of six years, total federal government debt has actually doubled from 2004. That way lies folly.*
*Malaysia’s debt position is close to breaching legislative levels set a long time ago by Parliament. According to the Auditor-General’s report, public debt from domestic sources rose RM41.76 billion to RM390.36 billion last year, while loans from foreign sources rose to RM16.75 billion, or up RM2.96 billion.*
*But the Loan (Local) and Government Investment Act caps the domestic debt ceiling at 55 per cent (of GDP) for the government, while the External Loans Act 1963 limits foreign loan exposure to RM35 billion. According to the report, the domestic debt level at end-2010 stood at 51 per cent of GDP.*
*The great irony of the situation is that it need not have come to that. The Auditor-General’s report revealed a litany of financial abuse in several government agencies. Leakages and wastage of appalling proportions were laid bare.*
*Marine binoculars being purchased at 25 times cost? Over RM5 million to buy horses? If all the wastage was cut and proper procedures observed all the way down, one suspects that Malaysia would be a budget-surplus country.*
*Nor is national debt going to fall any time soon. Next year, it’s estimated that the debt will breach RM455 billion – almost 54 per cent of GDP.*
*The danger for Kuala Lumpur is another recession stemming from the West’s economic woes. This time it cannot afford to spend its way out of it, ike
it did in 2009. On top of that, subsidies on fuel and other essentials like cooking oil, milk, rice and sugar remain intractably high at RM32 billion this year.*
*And the hits just keep on coming. According to the country’s central bank, the national debt as at June 30, 2011 has risen to RM437 billion, with domestic debt amounting to RM421 billion and foreign debt at RM16 billion. **
http://blog.limkitsiang.com/2011/11/02/sinking-deeper-and- (http://blog.limkitsiang.com/2011/11/02/sinking-deeper-and-deeper/)deeper/ (http://blog.limkitsiang.com/2011/11/02/sinking-deeper-and-deeper/)
21st November 2011, 12:56 PM
This article may be useful to prepare ourselves on our future.
5th December 2011, 01:42 PM
National debts: the screw, screwing and screwed (http://wangsamajuformalaysia.blogspot.com/2011/11/national-debts-screw-screwing-and.html)
By Lee Wee Tak at 11/08/2011 07:56:00 PM
Malaysia’s growing national debt is a matter of concern for many but it also baffles many. We know the amount is huge but what exactly caused it and what it is really about. What will happen to us if the debt becomes unmanageable?
APA ITU NATIONAL DEBT?
I dwelled into Ministry of Finance’s Q2 2011 report for some answers.
If a person spends more than he earns every year, he will owe a lot of money to a lot of people. Our national debts go on the same principle but just a little bigger in scale and consequence.
The BN administration has spent more than the taxes collected (and they collect a lot – company tax, personal tax, service tax, sales tax, customs, petroleum tax etc). If expenses is more than government income, then the government will issue bonds to local and foreign lenders.
In a nut shell, annual deficits are mainly due to
* the oversized and under-delivering civil service,
* huge subsidies on petrol (which I would blame it on a certain individual’s misplaced emphasis on developing national car over public transportation system) ;
* unchecked waste of tax money over stuff like project overruns (PKFTZ, Istana Negara , fantastic by election budgets, crazy defense spending etc) and routine expenses (read the AG’s report and sob).
“MACC: No graft involved in purchase of binoculars”
From finance ministry’s website, the debt is getting bigger and bigger.
So the amount of repayment we have to pay is also getting bigger and bigger.
MALAYSIA IS FULL OF CASH AND DEBTS
On page 129 of the MOF report, it read,
“Federal Government gross borrowings are projected to increase significantly in 2011 mainly on account of higher redemptions, loan repayments and deficit financing requirements. Given the ample liquidity in the financial system, the Government will continue to source its borrowing from domestic sources”
Basically the mumble jumbo above means – government is going to borrow more money because they have to
1) pay back old loans and
2) pay for more wastage of funds.
Since Malaysia has a lot of cash (you might yell ‘where got?” read on….), the government will take more of those funds from local sources instead of asking from foreigners who are more demanding & powerful creditors.
Further down below on the same page, the report stated that
“Total gross borrowings for the year are expected to amount to RM96.6 billion. Of this, RM90.2 billion or 93.3% constitute domestic borrowings while RM6.4 billon is from external source. Of the gross borrowings, RM51 billion is for repayments of existing debts while the balance, RM45.6 billion will be used to finance the deficit.”
Basically it means that Najib’s MOF will increase total debts by another 1/6; more than half of the new debt is to pay old debt, and even though we have not cleared the old debts, the government is going to pile up some more debts.
So the question where is the “ample liquidity in the financial system” comes from?
If you look at the debt trend, the borrowings from foreigners goes up and down, meaning the foreigners do get paid backbut when you look at the Hutang Persekutuan Dalam Negeri, the figures only go one way – which is higher and higher, meaning the rakyat who are supposed to be diutamakan really did not get paid. We as rakyat have no way to tell the BN administration to pay us back like a foreign creditor.
So really we are lending more and more to the fellow who recently propose to change the tax laws to say IRB can charge us any amount of tax the IRB thinks we should be paying*. And we cannot take those bureaucrats to court to dispute them.
*(I am talking about the proposed S107D of the Income Tax Act. You might get a lower court to rule this section as unconstitutional but the government can always appeal all the way to federal court)
We also gadai away........
Foreigners enjoy security over Malaysians bonds they subscribe, take a look at this recently issued USD2billion debt on Islamic finance principle of Wakala (http://www.islamicbanker.com/EducationArticles/Sukuk-Al-Wakala):
Wakala principle roughly means that the borrower can fix a percentage of “profits” to the lenders, anything on top of that return, goes to the borrower as his/her profit/incentive/reward.
Note that in order to borrow from foreigners, the kerajaan has gadai some schools and a renounced medical institution, so next time when you pay your fees, the higher fees is explained by the need to pay “profits” and “incentives” to both borrowers and lenders.
Note that the Finance Ministry’s report, which read more like a “high five myself” advertisement, celebrate us borrowing more and more. Something does not feel right here. Who feels proud to have bigger debts?
How does Malaysia look like when we hit bankruptcy?
With the debt getting bigger and bigger, one day we will go burst like any yuppie who charge more to his credit card than his salary.
So, this is my prognosis in the event of a bankrupting/bankrupted Malaysia:
1. Cutting of expenses – fuel and food subsidies will go first and we will see higher cost of living. Welfare to the poor might go too. The standard of public utilities will get worse and worse, e.g. doctors with no medicine.
2. Risks of not able to honour withdrawals. The “high liquidity” i.e. our savings in banks, EPFs and unit trusts like amanah saham wawasan etc are tied up in loans to the federal government. In the event of sovereign bankruptcy,we can’t withdraw and use our savings earned over the years of hard labour and sacrifice.
3. The government will try to get more taxes in – whether from GST, imposing laws like section 107(D) which can mean “IRB tell you to pay whatever amount they want no matter what your accountant explain to the IRB and you can’t take the IRB to court” kind of thing. We are already hidden borrowers by letting the IRB collecting personal and company taxes in advance. Businesses will be forced to raise the prices of goods and services, adding on the cost of living and flogging citizens more. People on reduced welfare would really have a hard time.
4. The government will be reluctant to reduce/remove civil servants despite the auditor’s general report but as compromise, will take in less to bolster their voters’ bank
5. The foreigners will insist on getting their money back first, so they may take over the pledged assets, like the schools above or Institute Jantung Negara, and collect directly from paying customers/selling the assets off
6. Foreigners will lose confidence on ringgit and insist us to pay for imports in other currencies and our ringgit would devalue further and further and the cost of imported items will be more and more expensive. Although Malaysian has fertile land and great weather, we still have to import rice and vegetables, and more than half of cost of production of chicken is depended on imported chicken feed made from corn, cost of living takes another beatingand RM3 1Malaysia meal might consist of 1 spoonful of white rice with diluted ikan kembong curry.
7. Companies suffering from high cost of business and loss of purchasing power of its customers will have to close shop. Default by debtors will lead to businesses closing down, domino effect will come in and we will have many people out of jobs. Banks, ah longs and old mother and fathers will not get their loans back. Properties would get repossessed or defaced (depends who you borrowed from)
The non-financial impact would be some blame game by certain quarters who are most eager to deflect responsibility (a most normal human nature) and try to blame it on other countries/any race but mine or manufactured some other irrelevant crises to shift the rakyat's focus from the real issues and brewing up some more tension.
Well, can you imagine how this “satu lagi projek kerajaan barisan nasional” will turn out? Bye now as I am tuning into that intriguing documentary series, “life after people”
15th December 2011, 05:24 PM
Malaysia rises in illegal money chart, RM150b lost in 2009 (http://www.themalaysianinsider.com/malaysia/article/malaysia-rises-in-illegal-money-chart-rm150b-lost-in-2009/)
UPDATED @ 03:49:35 PM 15-12-2011
By Shannon Teoh
December 15, 2011
KUALA LUMPUR, Dec 15 — Malaysia lost RM150 billion in illicit outflows in 2009, the fourth highest in the developing world, says US-based watchdog Global Financial Integrity (GFI).
According to its report on illicit financial flows from developing countries released today, Malaysia lost a total of US$338 billion (RM1.08 trillion) over the first decade of the century.
File photo of people looking at exchange rates on a board in Kuala Lumpur. According to a report, Malaysia has lost a total of RM1.08 trillion in illicit financial outflows over the first decade of the century. — Reuters pic
“This report should be a wake-up call to world leaders that more must be done to address these harmful outflows,” GFI director Raymond Baker said in a press release.GFI had reported in January that RM930 billion flowed out of Malaysia from 2000 to 2008, growing to RM218 billion per year from an initial RM71 billion in that period.
It said the increase was “at a scale seen in few Asian countries.”
“The volume of illegal capital flight from Malaysia has come to dwarf legitimate capital inflows into the country in recent years,” it said earlier this year.
Today’s report titled “Illicit Financial Flows from Developing Countries Over the Decade Ending 2009” sees Malaysia maintaining its fifth place in the world in terms of total illicit outflows since the turn of the century.
In March, Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz said the Money Business Services Act would be tabled this year to enable the central bank to address the outflow of funds from the country.
The Act came into force on December 1.
The new law supports the development of a more dynamic, competitive and professional money services business industry, while strengthening safeguards against money laundering, terrorist financing and illegal activities, according to Bank Negara.
It said the new law introduces strengthened prudential requirements, focusing particularly on ensuring the effective oversight and control of the conduct and operations of licensed entities to safeguard the integrity of, and confidence in the money services business industry.
The GFI report, penned by economists Sarah Freitas and Dev Kar, a former senior economist at the International Monetary Fund, saw China maintain its position at the top with US$2.5 trillion in illegal outflows.
Malaysia’s closest-ranked regional neighbour was the Philippines, in 13th spot at US$121 billion.
Others like Zimbabwe (79th) and Myanmar (83rd) recorded US$3.9 billion and US$3.05 billion respectively in the list of 116 countries that GFI had full data on.
The Finance Ministry had said early this year that Bank Negara was probing the matter.
But the central bank has yet to make any statement on the progress of its investigations despite GFI offering its assistance.
16th December 2011, 08:12 AM
M'sia hit by RM150bil in illicit outflows in 2009
12:50PM Dec 15, 2011
EXCLUSIVE Malaysia saw a whopping RM150 billion (US$47 billion) in illicit money siphoned out of the country in 2009, making it the top four countries suffering the highest illicit capital flight.
This amount is in addition to the staggering loss of RM927 billion (US$291 billion) over a period of nine years - between 2000 and 2008 - says the latest report by Washington-based financial watchdog Global Financial Integrity (GFI).
http://media1-cdn.malaysiakini.com/422/e631ae96fa6b9dbfaba8a6309844b4b2.gifIn January, GFI sparked an uproar when its ground-breaking report (http://malaysiakini.com/news/153932), ‘Illicit Financial Flows from Developing Countries', ranked Malaysia at No 5 among the countries with massive outflow of illicit capital.
In an update to its earlier report - this time supplemented by figures from 2009 - GFI said Malaysia, which has suffered a cumulative lost of RM1,077 billion (US$338 billion) over the past decade, maintains its No 5 spot.
Thttp://media1-cdn.malaysiakini.com/323/b287b448c001516a9ad119b029a8dba1.jpghe rankings of the top four countries remain relatively the same - China (with a loss of US$2,500 billion) is ranked No 1, followed by Mexico (US$453 billion), Russia (US$427 billion) and Saudi Arabia (US$366 billion).
The latest GFI report, ‘Illicit Financial Flows from Developing Countries Over the Decade Ending 2009', is penned by economists Sarah Freitas and Dev Kar (right), who is a former senior economist at the International Monetary Fund.
Bribery, theft, kickbacks, tax evasion
According to the authors, the estimates are based on balance of payments, bilateral trade and external debt data reported by member countries to the IMF and the World Bank.
"Unrecorded capital leakages through the balance of payments capture illicit transfers of the proceeds of bribery, theft, kickbacks and tax evasion," says the report.
http://media1-cdn.malaysiakini.com/422/490b4eb563e0205dddca3032d94af52b.gifAsia accounted for almost half the global share of illicit financial outflows (45 percent), driven largely by China and Malaysia.
However, GFI found that there was a dip in illicit capital outflows in 2009, but this was attributed to the global financial crisis instead of systematic improvements in governance or economic reform in these countries.
"This is a breathtakingly large sum at a time when developing and
developed countries alike are struggling to make ends meet," said GFI
director Raymond Baker.
"This report should be a wake-up call to world
leaders that more must be done to address these harmful outflows."
GFI pointed out that the financial flows from Malaysia have more than tripled from US$22.2 billion (RM71 billion) in 2000 to US$68.2 billion (RM218 billion) in 2008.
"This growth rate, seen in few Asian countries, may be a result of significant governance issues affecting both public and private sectors," it lamented.
Bank Negara launches probe, but...
Following the release of the report in January, Prime Minister Najib Razak, who is also the finance minister, pushed the ball to Bank Negara's court (http://malaysiakini.com/news/153932), saying that it would provide an explanation on the findings.
"There can be many reasons, but let Bank Negara provide more specific comments on that," Najib told journalists when quizzed about the matter.
Soon after, Deputy Finance Minister Donald Lim announced that Bank Negara has launched a probe (http://malaysiakini.com/news/154371).
But to date, Bank Negara has yet to announce the result of its investigations nor explain the massive illicit capital flight, despiteoffers of help (http://malaysiakini.com/news/154721) from top GFI economists.
http://media1-cdn.malaysiakini.com/255/3c1eeeee86f03560ac798e26cf409c59.jpgHowever, Deputy International Trade and Industry Minister Mukhriz Mahathir (left) has dismissed GFI claims as "bizarre" (http://malaysiakini.com/news/154503).
"We do not see the need to look into it. If you go through the report, they have made quite a few bizarre claims against several countries," Mukhriz said.
"Going by Bank Negara's figures, we know how much exactly is going out, so you can hardly consider those figures (from GFI) as factual."
Capital flight: Errors and omissions
Capital flight: Ball in Bank Negara's court (http://malaysiakini.com/news/153994)
Najib: Bank Negara to comment on illicit outflow (http://malaysiakini.com/news/154254)
Anwar: Impossible to hide RM208b in illicit outflows (http://malaysiakini.com/news/154200)
Weak ringgit due to massive illicit outflows (http://malaysiakini.com/news/154249)
Donald Lim: Illicit fund outflows probe launched (http://malaysiakini.com/news/154371)
Call for multi-agency probe into capital flight (http://malaysiakini.com/news/154487)
Mukhriz dismisses GFI claims as 'bizarre' (http://malaysiakini.com/news/154503)
Illicit outflows: GFI ready to help Bank Negara (http://malaysiakini.com/news/154721)
Will Bank Negara take up GFI offer? (http://malaysiakini.com/news/154806)
16th December 2011, 12:32 PM
Friday, 16 December 2011 08:50
Maclean Patrick, Malaysia Chronicle
For the first decade of the new century, Malaysia has lost a
staggering RM1.08 trillion (US$338 billion) in illicit outflows which is
the fourth highest in the developing world.
In the period 2000-2009, China lost US$2.74 trillion in illicit
financial outflows and was the developing country with the largest
illicit outflows, according to a country ranking published in the
report. Mexico ranked second, with US$504 billion and Russia third with
US$501 billion while our closest-ranked regional neighbour is the
Philippines, who at 13th place lost US$121 billion.
Illicit outflows can be taken as a benchmark or indication of the
scale of corruption. This means Malaysia has the most corrupt set of
leaders in Southeast Asia, who are also the 4th most corrupt in the
world, stashing the massive amounts of money they plunder overseas.
The Global Financial Integrity (GFI) reported in January that RM930
billion flowed out of Malaysia from 2000 to 2008, growing to RM218
billion per year from an initial RM71 billion in that period. Malaysia
lost RM150 billion in illicit outflows in 2009. The report elaborated
further by stating that the increase was “at a scaled seen in few Asian
countries” and continued added, “The volume of illegal capital flight
from Malaysia has come to dwarf legitimate capital inflows into the
country in recent years.”
Bribery, theft and kickbacks
The warning bells were sounded as early as January 2011 by the likes
of Opposition Leader Anwar Ibrahim, who questioned the apathy shown by
the government towards the problem of illicit outflow via corruption and
tax evasion practices.
Corruption – bribery, theft and kickbacks – accounts for the other
half of illicit flows and dominate the Middle East, North Africa and
developing Europe, the report said.
The falsification of import/export invoices, known as trade
mispricing, accounts for just over half of all illicit financial flows
and is particularly prevalent in Asia and the West.
To stem the tide, Bank Negara Governor, Dr Zeti Akhtar Aziz, tabled
the Money Business Services Act in March; an act that has since came
into effect on December 1st. The new law supports the development of a
more dynamic, competitive and professional money services business
industry, while strengthening safeguards against money laundering,
terrorist financing and illegal activities, according to Bank Negara.
Yet, the Act seems too little too late, since it is a mere knee-jerk
reaction to a decade old problem. After a decade where Malaysia has lost
RM1.08 trillion, in-action by the Barisan Nasional government has cost
us dearly. This is a governement that has been bleeding money for the
longest time and is prime for an economic implosion that would default
With inflation clocking in at 3.4% in September after touching a
27-month high of 3.5 per cent in June, food inflation remains the
biggest concern, increasing to 5% year-on-year in September from 4.6 per
cent in August. Malaysians are headed for hard times with less value
for the ringgit in their pockets as opposed to the cost of living. And
what has been the Finance Minister’s response to this?
Not a sound, only grandiose announcements from Najib
Instead, we have had a grandiose announcements to make Malaysia a
high income society and the further abuse of public funds to sponsor
failed projects such as the NFC, a national cattle livestock project.
The sudden rush to have a revision of the public service pay-scheme is a
veiled attempt at soliciting more tax money yet at the same time to
secure the civil service as the “fixed-deposit” for the upcoming 13th
General Election. The arresting measures that were rushed into place
have merely been a means to secure an election win, whilst the whole
country steams towards default.
The fact that annual illicit outflows from Malaysia has grown from
RM71 billion to RM218 billion per year points to the ineffective
counter-measures placed by the Finance Ministry and Bank Negara to stem
the problem. Put bluntly, the measures failed. Prime Minister Najib
Razak, who is also the Finance minister, has nothing to show for his
time in office, despite having taken over the top job in April 2009.
The silence of the Finance Minister is telling. One cannot help but
ask if Najib, the person responsible for the financial health of the
nation, is on top of things. Is it a priority of the Finance Minister?
Is the Barisan Nasional government working hard at fixing the financial
state of the nation?
Such issues concerning Malaysia’s financial state only enforces the
notion that Malaysia is truly heading towards default much like Greece,
and as forecast by Minister in the PM's Department, Idris Jala, who
predicted bankruptcy by 2019 due to inability to service ever growing
22nd December 2011, 07:41 PM
Bank Negara did not contact us, says GFI
7:53AM Dec 21, 2011
Washington-based think-tank Global Financial Integrity dismisses remarks by Deputy Finance Minister Donald Lim that it is in touch with Bank Negara.
http://media1-cdn.malaysiakini.com/424/4ccdda714e2e2bc989e9dc233b39ba30.jpgThe Global Financial Integrity has dismissed remarks by a deputy minister that the Washington-based think-tank is working with Malaysia's central bank on the issue of the nation's staggering illicit capital flight.
"While I wish that I could say that we'd been in touch with Bank Negara, it is not true. They have not reached out to us, and we have not spoken with them," said GFI communications director Clark Gascoigne (left) in an email response toMalaysiakini.
On Saturday, Deputy Finance Minister Donald Lim told Malaysiakinithat GFI had been in touch with Bank Negara (http://malaysiakini.com/news/184421) to work on the matter.
He said that RM150 billion reported by GFI to have flowed illicitly out of Malaysia in 2009 was "not a new issue" and measures were already being taken to plug the leak.
http://media1-cdn.malaysiakini.com/422/490b4eb563e0205dddca3032d94af52b.gifLim's statement echoes police chief Ismail Omar, who last Friday put the blame on money laundering activities and said that action was being taken to freeze the assets of those involved in such organised crime.
According to GFI last Thursday, Malaysia saw a whopping RM150 billion in illicit money siphoned out of the country in 2009, making it the top four countries (http://malaysiakini.com/news/184199) with the highest illicit capital flight.
This amount is in addition to the loss of RM927 billion over a period of nine years between 2000 and 2008. In total, Malaysia has suffered a cumulative lost of RM1 trillion over the past decade.
Still willing and ready, says GFI
In the wake of a previous GFI report in January, Prime Minister Najib Razak said that Bank Negara would provide an explanation on the findings.
http://media1-cdn.malaysiakini.com/421/05708d77a52cae78a5a540a7b345d417.jpgSoon after, Lim (left) announced that Bank Negara, which is headed by governor Zeti Akhtar Aziz, hadlaunched a probe (http://malaysiakini.com/news/154371).
But to date, Bank Negara has yet to announce the result of its investigations nor explain the massive illicit capital flight, despite offers of help from top GFI economists.
Gascoigne reiterated that if Bank Negara is interested, GFI would be happy to work with Bank Negara and the Finance Ministry to address the problem of illicit capital flowing out of the country.
"We stand by the op-ed (http://malaysiakini.com/news/154721) from our lead economist, Dr Dev Kar, from this past January: We're willing and ready to collaborate with the Malaysian government, if we're invited to do so.
"However, as of yet, we have not been invited to do so," he said.
29th December 2011, 01:05 AM
Illicit outflows: MNCs not the only culprits
Adrian Ng (http://malaysiakini.com/author?l=en&c=news&n=Adrian Ng)
1:11PM Dec 28, 2011
http://malaysiakini.com/news/185121 Two weeks ago, the Global Financial Integrity, a US-based watchdog released the ‘Illicit Financial Flows From Developing Countries Over The Decade Ending 2009’ study where it estimates that developing countries around the world lost a massive US$8.44 trillion.
On a local context, Malaysia was placed fifth in the world on cumulative total illicit financial flows (IFF) since 2000.
For 2009 alone, IFF (non-normalised) amounted to approximately US$46.86 billion (about RM145billion at an exchange rate of RM3.1 = US$1) and over the cumulative nine years, total IFF amounted to a massive US$350.47 (about RM1,086.46 billion).
Even on a more conservative estimate, Malaysia lost US$337.87 billion over the same period (about RM1,047.4 billion).
Two methods of estimations were used in the study, one being the World Bank Residual model (using the change in external debt, or CED), and secondly, trade mispricing (using the Gross Excluding Reversals method, or GER).
Through the balance of payments (a component of CED), it captures unrecorded capital leakages, i.e. illicit transfers of the proceeds of bribery, theft, kickbacks, and tax evasion. Meanwhile, outflow of unrecorded transfers due to trade mispricing was captured under the GER method.
Based on the study, Malaysia’s nine-year average normalised, i.e. conservative IFF amounted to US$14.17 billion (42 percent; RM43.9 billion) due to CED, while GER accounted for US$19.62 billion (58 percent; RM60.8 billion).
Meanwhile, average non-normalised IFF was US$15.43 billion (44 percent; RM47.5 billion) due to CED and US$19.62 billion (56 percent; RM 60.8billion) due to GER.
Malaysia is the only country where both channels of IFF, CED and GER, are roughly in comparable portions.
Definition of Illicit Financial Flows
Under the notes on methodology of the IFF, the Global Financial Integrity has detailed out the following:
“Illicit flows involve capital that is illegally earned, transferred, or utilised and covers all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in contravention of applicable capital controls and regulatory frameworks.
“Hence, illicit flows may involve capital earned through legitimate means such as the profits of a legitimate business.
“It is the transfer abroad of that profit in violation of applicable laws (such as non-payment of applicable corporate taxes or breaking of exchange control regulations) that makes the outflows illicit.”
A more layman interpretation is IFF involves cross-border movement of money that is illegally earned, transferred, or utilised.
IFF generally involves the transfer of money earned through illegal activities such as corruption, transactions involving contraband goods, criminal activities, and efforts to shelter wealth from a country’s tax authorities.
What’s in the law?
The Malaysian Transfer Pricing Guidelines (TP Guidelines) was introduced in July 2003 by the Inland Revenue Board (IRB).
The TP Guidelines provide guidance to taxpayers on the application of arm’s length principle, which is espoused through the anti-avoidance provisions of the Income Tax Act 1967.
With the introduction of the TP Guidelines, a specialist group was set up within IRB to deal with transfer pricing issues. Desk audit and field audits were rigorously carried out since its set-up.
The statutory law that governs transfer pricing is provided under the anti-avoidance provision in Section 140 of the Income Tax Act; where it provides the power to the IRB director-general to disregard transactions that are deemed not arm’s length and make necessary adjustments to revise or impose additional tax liabilities.
Section 140 has been used widely by the IRB for local and cross-border transactions, adjusting any transfer pricing abuses.
The arm’s length definition was not defined in the Income Tax Act; however the concept and its application were provided under the TP Guidelines.
Under self-assessment system, the burden of proof lies with taxpayers to justify such transactions.
The IRB further introduced a new section, Section 140A, which came into effect on Jan 1, 2009, that empowers the IRB director-general to make adjustments on transactions of goods, services or financial assistance between related companies based on the arm’s length principle.
Additionally, all related parties’ transactions are required to be submitted, under Section N of the Form C, where the categories of related party’s transactions consist of:
Total sales to related companies in/outside Malaysia;
Total purchases from related companies in/outside Malaysia;
Other payments to related companies in/outside Malaysia;
Other payments to related companies in/outside Malaysia;
Loans to related companies in/outside Malaysia;
Borrowings from related companies in/outside Malaysia; and
Receipts from related companies in/outside Malaysia.
There is no specific provision for non-compliance or not having transfer pricing documentation in place under the TP Guidelines.
However, where transfer pricing adjustments are made, any additional taxes resulting from such adjustments will be subjected to additional penalties of as high as 45 percent.
MNC’s transfer pricing
As detailed above, Malaysia has in effect the necessary laws and guidelines in place to deal with transfer pricing and money laundering activities.
So it was rather surprising when our learned Kota Belud MP Abdul Rahman Dahlan suggested that multinational companies (MNCs) are largely the cause of such massive amount of IFF, basing on Global Financial Integrity director Raymond Baker’s speech and certain parts of the study.
Perhaps, the question to ask is why despite having such laws in place; there is still a massive amount of IFF out of the country.
Instead, our learned MP has suggested that MNCs’ under/over transfer pricing under Western global financial system is to be blamed and chose to downplay the effect of corruption.
So what is the MP trying to imply? Is he suggesting that the likes of Intel, Agilent, Western Digital, and a whole host of Japanese and other MNCs, are involved in transferring IFF? Let’s just not be too quick to point fingers.
Having been in the transfer pricing environment for close to a decade, I must say that transfer pricing has been the one of the most scrutinised subject by the IRB since the TP Guidelines were introduced, where transfer pricing desk audits and field audits were conducted.
Even during routine tax audits, transfer pricing has been one of the hot subjects.
Transfer pricing is not cast in stone. A lot factors are considered to arrive at certain pricing, where different pricing strategies are adopted taking into account both quantitative and qualitative considerations, i.e. business strategies, characteristics of services, functions performed, and economic conditions.
For example, companies may go on a low pricing strategy of certain products, as they are able to recover profitability based on volume (economies of scale).
Or they could also be the need to maintain low margin products where profitability can be recovered through high margin products. The numbers do tell a story.
Something wrong in monitoring system
However, having said that, not all are fairy tales. There is no denying that MNCs do get their transfer pricing wrong at times, and from my years of experience, it is rather that companies have got their projections wrong or made bad business decisions.
And in some cases, as a consequence, transfer pricing adjustments running into hundreds of millions in additional taxes were paid. Not to mention, penalties as well.
More likely than not, where there are cases of transfer mispricing, MNCs would always step forward and rectify the situation.
This is so because being in the corporate and business environment, getting caught by authorities in doing illegal activities will most likely cause serious damage to business integrity and reputation.
Compliance is one of the most stringent as far as I understand from a corporate culture perspective, or at least for cases I have seen.
The Kota Belud MP also suggested that there was not enough information disclosed by MNCs, hence it is hard to trace IFF due to transfer mispricing. I beg to differ.
There are actually considerable amount of information disclosed in the Form C for monitoring and triggering transfer pricing or tax audits.
In addition to related companies’ transactions that need to be disclosed as explained earlier, companies will also need to disclose details of main shareholders in Part P of the Form C if it is a controlled company.
Similarly, the related party’s transactions and details are disclosed in the notes to profit and loss accounts; and disclosure requirements are even more stringent if it is a public-listed company.
The Kota Belud MP has brought out the point where MNCs were using tax havens as a conduit for the IFF.
I do not deny this happening, but based on experience, a lot of MNCs have a strong requirement in terms of substance over form and more often than not, IRB is able to pick up these structures in the first instance.
Let us not forget that our very own Labuan, an international financial centre, is deemed a tax haven by other foreign jurisdictions. It would be interesting to know how much financial transactions flow through Labuan.
Perhaps, the question to ask is what is wrong with our current monitoring, enforcement and implementation system that despite having the necessary laws and conducting rigorous audits, there are still such leakages. This is something that the Kota Belud MP should look into.
Local conglomerates and GLCs
While I have mentioned that MNCs are subjected to more scrutiny on its cross-border transactions, the same cannot be said for local conglomerates and government-linked companies (GLCs).
Based on past experience, local conglomerates and GLCs have not been the main focus of IRB and I have not seen as much transfer pricing audit being carried out (perhaps this has changed).
Mind you, local conglomerates and GLCs have a lot of cross-border dealings and transactions as well.
http://media1-cdn.malaysiakini.com/422/490b4eb563e0205dddca3032d94af52b.gifOnly a few days ago, Prime Minister Najib Razak announced that an additional RM22 billion (US$7billion) of tax was collected for 2011 to plug leakages.
Let’s us then theoretically apply the same collection amount to the 2009 figure, taking into account half - i.e. 50 percent is caused by the GER - and it still leaves US$16.43 billion (RM50.9 billion) unaccounted for.
Could all this amount due to transfer mispricing caused by MNCs? How much of this unaccounted amount can be apportioned to local conglomerates and GLCs? Do they also have some form of tax haven structures in place as well? And I have not yet mentioned dealings of the rich and powerful individuals.
This is something I would love to find out and I do agree with the Kota Belud MP on this with regards to a more detailed analysis on Malaysia.
Bribery, theft and kickbacks
Interestingly, what has not been pointed out by the Kota Belud MP is that Malaysia’s IFF was also caused by CED, which relates to illicit transfers of the proceeds of bribery, theft, kickbacks, and tax evasion.
It is pointed out in the study that Malaysia is the only country where IFF is caused by a comparable portion of CED and GER.
So what does this mean? It is effectively saying that an IFF totaling US$21.47 billion (RM66.6 billion) in 2009 alone was due to the activities of involving bribery, theft, kickbacks and tax evasion.
The comparable size of 50 percent to transfer mispricing is definitely an alarming cause of concern itself, would it not?
It is not known what proportion relates to bribery, theft, kickbacks and tax evasion.
So far, where tax evasion is concerned, there has not been any reported case where large MNCs were caught in such an act, which carries a fine and/or imprisonment with an additional penalty of 300 percent on amount undercharged.
And the inspector-general of police has openly acknowledged that such IFF is not something new and is aware of such leakages. So my question would be what has been done to address this?
This is extremely worrying as there are no accounts or methods to track such IFF, as these outflows are not available to public eyes.
Instead of trying to just point fingers to the MNCs, I believe efforts should be channeled by the government to work on addressing these issues. I rest my case.
ADRIAN NG is a transfer pricing specialist and has worked with multinational companies across various industries ranging from manufacturing, trading, electronics, automotive, property development, construction, power, oil and gas, amongst others.
2nd February 2012, 06:19 AM
Good! More supply contracts for scanners. More commission. What about cars driving out of the country? Do we need car-scanners as well like those used in the ports?
M'sia uses scanners to stem money smuggling (http://malaysiakini.com/news/188024)
8:21PM Feb 1, 2012
Malaysia is installing scanners to detect bank notes at airports and border crossings to curb illegal money outflows believed to be in the hundreds of billions of dollars over the past decade.
The move comes after Washington-based watchdog group Global Financial Integrity said in a recent report that Malaysia lost US$338 billion (RM1.03 trillion) between 2000 and 2009 to such outflows, ranking it fifth in the world.
http://media1-cdn.malaysiakini.com/319/711383da95b5be02a3a0540936ff35d3.gifThe Star daily quoted customs deputy director-general Zainul Abidin Taib as saying seven such scanners were already operating at KL International Airport and the rest would be installed by the end of the year.
A customs official confirmed the report to AFP.
Prime Minister Najib Abdul Razak announced in December a special task force to check the illegal flight of funds.
He has come under fire from the political opposition which accuses his government of massive corruption, incompetence and inefficiency that is costing the country dearly.
Global Financial Integrity said Malaysia was fifth behind China, Mexico, Russia, and Saudi Arabia in illicit outflows.
Its report did not specify the causes of the Malaysian outflows but a earlier report by the group said possible causes were corrupt business practices and the large population of about 2 million illegal foreign workers in the country.
2nd February 2012, 09:34 AM
Breaking up wealth concentration (http://www.freemalaysiatoday.com/2012/02/01/breaking-up-wealth-concentration/)
Lim Teck Ghee (http://www.freemalaysiatoday.com/author/lim/)
February 1, 2012
The time is right for a national discussion on what are the pros and cons of the current economic system which encourages the concentration of wealth and its illegal outflows.
The past year has seen the government and the opposition unveil their respective economic reform policies. Even if these reform policies and their attendant programmes are implemented they will not be able to resolve the country’s economic problems. This is because the policies advocated by both sides of the political divide are merely palliative. They do not address the root or fundamental cause of the problem of structural deformation of the country’s economy.
How has this deformation come about? What are its characteristics? And what can be done to bring about a reversal or correction of the deformation so that we have a really transformed economic system that can live up to its full potential?
First we need to recognise that wealth in any country – and Malaysia is no exception – is created by economic activity engaged in by individuals or enterprises that bring profits or gains to the entrepreneur. Much of this wealth creation and subsequent accumulation is legitimate. It is based on material reward arising from work (or gift) and is socially and ethically acceptable. It comes from risk-taking and from the social utility and superiority of the products and services generated by the individual or enterprise.
Wealth generated and accumulated by individuals through legitimate means and conforming to the norms of justice and fairness is not only desirable but beneficial to society and the economy.
But what about wealth that is created or amassed by less than legitimate or illegitimate or illegal means? Is it a minor or non-issue and do we just ignore it as is the case with the Barisan Nasional government?
Outflow of massive illegal wealth accumulation
One important clue to the massive wealth capture by illicit means in Malaysia was exposed recently by the Global Financial Integrity, a US-based watchdog.
In its study on “Illicit Financial Flows from Developing Countries” it estimated that Malaysia was fifth in the world on cumulative total illicit financial flows (IFF) since 2000.
For 2009 alone, IFF (non-normalised) amounted to approximately U$47 billion (approximately RM145 billion at the exchange rate of RM3.1 = US$1) and over the cumulative nine years, total IFF amounted to US$350 (approximately RM1,086 billion).
Two methods of estimation were used in the study, one being the World Bank residual model (using the change in external debt or CED), and secondly, trade mispricing (using the Gross Excluding Reversals method or GER).
Through the balance of payments (a component of CED), it captures unrecorded capital leakages i.e. illicit transfers of the proceeds of bribery, theft, kickbacks, and tax evasion. Outflow of unrecorded transfers due to trade mispricing was captured under the GER method.
Based on the study, Malaysia’s nine-year average normalised i.e. conservative IFF, amounted to US$14.2 billion (42%; RM43.9 billion) due to CED while GER accounted for $19.6 billion (58%; RM60.8 billion). Meanwhile, average non-normalised IFF was US$15.4 billion (44%; RM47.5 billion) due to CED and US$19.6 billion (56%; RM60.8 billion) due to GER.
MNCs and Illicit Financial Flows
According to the study, “illicit flows involve capital that is illegally earned, transferred, or utilised and covers all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in contravention of applicable capital controls and regulatory frameworks. Hence, illicit flows may involve capital earned through legitimate means such as the profits of a legitimate business”.
If taxes were levied on the illegal outflows, the country’s finances would have benefitted to the tune of close to US$100 billion. When the GFI’s findings were made public recently, the finger of blame for the massive outflows was placed by the MP for Kota Belud, Abdul Rahman Dahlan, on multinational corporations (MNCs). Indeed, MNCs have been a convenient scapegoat for transfer pricing woes in developing countries where they have major operations.
One local observer – a specialist in transfer pricing – has demolished this accusation for Malaysia. According to his letter of Dec 27, 2011 to Free Malaysia Today, “transfer pricing has been the one of the most scrutinised subjects by the Malaysian Inland Revenue Board since the Transfer Pricing Guidelines was introduced .”
He has argued that “more likely than not, where there are cases of transfer mispricing, MNCs would always step forward and rectify the situation. This is so because “getting caught by authorities in doing illegal activities will most likely cause serious damage to business integrity and reputation.”
He concluded that “compliance by MNCs is one of the most stringent as far as I understand from a corporate culture perspective, or at least for cases I have seen.”
So if MNCs are not the culprit for the illicit financial outflows, who are the real culprits?
The Global Financial Integrity study has noted that besides transfer pricing outflows – MNCs alone are not to blame for this; local conglomerates and GLCs also play the same game with greater insider knowledge – IFF was caused by illicit transfers arising from the proceeds of bribery, theft, kickbacks, and tax evasion.
Malaysia is in fact the only country where IFF is caused by a comparable proportion of transfer and non-transfer pricing transgressions.
Real culprits in illegal wealth accumulation
While the study has been helpful in providing some hard data on the quantum of the illicit financial outflows, it does not provide much assistance on other key details such as who are responsible for the outflow; the countries of fund relocation; etc.
At this stage, we can only hazard a guess as to the likely individuals or parties involved in the non-transfer pricing illicit outflow. The most likely culprits are those who have been able to accumulate enormous wealth and who for various reasons find it expedient or necessary to conceal their wealth accumulation as well as to diversity their wealth havens and assets away from Malaysia.
The GFI study does not cover the illicit wealth accumulated locally and not yet remitted to foreign shores. The size of this locally retained illicit wealth is likely to be several if not many times more than that sent abroad.
A crude estimate of the extent of legal wealth concentration in the country can be obtained from the 40 individuals identified by Forbes as the richest billionaires for Malaysia. Collectively this group was worth $62.5 billion in 2011. In addition there must be many other extremely wealthy individuals who have avoided making the list through their ability to conceal their wealth and others who though not making the top 40 list still possess enormous wealth.
The most widely rumoured name not making the Forbes list has to be Taib Mahmud, the chief minister of Sarawak, who together with his family is reputed to have shares in more than 330 companies in Malaysia alone and more than 400 companies around the globe worth several billion US dollars.
Various quarters have questioned the legitimacy of the wealth accumulation engaged in by the chief minister. A recent article in the blogsite Sarawak Headhunter provides in-depth details into what is alleged to be the income stream of the chief minister’s financial vacuum machine.
Income from timber licences
Surcharge on timber exports
Kickbacks from timber shipping companies
Agency and other fees levied on shipping companies
Privatization of government companies
Illegal logging receipts
Federal government contracts
Alienation of state land to plantations
The chief minister has refuted these claims and has argued that that his daughter’s considerable property empire was amassed through the daughter and son-in-law’s business acumen in investing wisely the gratuity which Taib earned from his earlier service in the federal government.
This may well be true but if so, it needs to be substantiated by an opening of the financial records and bank accounts of the family and the companies owned or controlled by the family in Malaysia and abroad. Only then can the authorities and public determine the truth of the allegations of financial and political impropriety.
That the chief minister and his family own an extraordinary amount of wealth – held locally and abroad – at least is not denied. Some idea of the enormous size of the Taib family wealth emerged when Taib’s daughter-in-law filed a RM400 million claim on her estranged husband, Mahmud Abu Bekir Taib, in court recently, including what she claims is her share of property worth RM300 million.
These tantalizing details of the extraordinary wealth accumulation by Taib and a small group of Malaysians show a common pattern. Firstly, they have all been beneficiaries of the BN government and its policy aimed at working with an elite few individuals in driving the economy forward.
Many if not all of the names that appear on the Forbes list are regarded as cronies of past prime ministers Dr Mahathir Mohamad, Abdullah Ahmad Badawi and the present Prime Minister Najib Tun Razak, and are widely perceived as owing their considerable wealth to their political loyalty to BN.
All the business empires of the former “Sugar King” Robert Kuok, Genting Highlands’ late Lim Goh Tong, Public Bank’s Teh Hong Piau, YTL’s Yeoh Tiong Lay, Astro’s Ananda Krishnan, Air Asia’s Tony Fernandez and the rising Syed Mokhtar Al-Bukhary – deservedly or undeservedly – are seen as built on government preference and patronage. This connection is what has provided them with head starts and privileged monopolies without which their enterprises could never have come about, let alone flourish.
Getting to the bottom of how the business empires of our richest Malaysians have taken shape may be a useful way of dealing with the thorny question of how wealth concentration – whether legitimately derived or under a cloud of illegitimacy – has occurred.
We should have no illusions about the obstacles that lie ahead of such investigative efforts. We should also be mindful that in countries where illegal wealth accumulation by the leaders of impoverished countries has drawn national and international ire, attempts at recovery of the wealth, much of which has been spirited abroad and stashed in overseas banks and assets, has been a long-drawn and difficult process.
Admittedly the hope for any confiscation of illicit or illegitimate wealth is distant and dim. The time may not even be ripe to insist on a full-blown opening up of the records and having the truth come out on how the crème de la crème of our business and political leaders have accumulated their fortunes.
But there may be need for public scrutiny in a few special cases in Malaysia despite the concern that such efforts may be construed as an anti-capitalist or anti-BN witch hunt.
National discussion on wealth accumulation
The time is right at the least though for a national discussion on what are the pros and cons of the current economic system which encourages the concentration of wealth and its illegal outflows on such a systemic basis, and whether this is the right economic model for the country.
The time is also right to focus on sectors and processes which have been the main playgrounds of unfair or illicit wealth accumulation; and to implement actions aimed at decisively containing or neutralising them.
Best practice examples are readily available for example, in the natural resource sector of countries with the same natural wealth as us. These countries such as Norway have been able to avoid the mistakes that we have made in exploitation of our mineral and forest resources which have permitted opaque policies and procedures, and condoned corrupt or shady businesses that have reaped windfall illicit gains.
For the national discussion on wealth concentration and outflows to take place, we need to break the conspiracy of silence by our political elites that have befitted from the system and that have collaborated in the accumulation of illicit wealth and wealth generated from dubious means.
We need the professionals to play their role. We need more studies by academics and civil society to uncover where illicit and less than legitimate accumulations are taking place and what can be done to plug up leakages and bring to justice the offenders and culprits. We need more whistle blowers to step forward.
Discussion needs to be followed by action, whether by the Barisan or Pakatan government.
This action needs to be more than just the tweaking of economic policy as envisaged by the Pakatan parties. It needs to be a fundamentally new paradigm of development based on the de-concentration of wealth and its more equitable distribution.
New paradigm of development
The radically new paradigm of development that puts the spotlight on the wealth of the country (within and outside) as well as on the wealthy, and with a major focus on the eventual breaking down of wealth concentration – beginning with illicit wealth – is needed for three reasons.
Firstly, it is a superior approach to the narrowly race-based New Economic Policy model that has dominated the country’s economic life and which is based on a simplistic caricature of affirmative action policy.
Secondly, our oil wealth is rapidly depleting and our treasury is depleted. Going after wealth that has been illegally accumulated or rightfully belongs to the state will provide the country some breathing space until we get our act together on the other pieces of the bigger economic transformation jigsaw.
The final reason is that the primary cause of poverty and stunted development in Malaysia is an economic system that promotes excessive concentration of wealth. So long as the excessive concentration of wealth exists, our poverty and deformed development problem will remain unresolved.
It has been said that economics is not only about production and wealth creation. It is also about morality, and the first moral principle is that the strong owe a duty towards the weak. It is the role of government to ensure that the strong and wealthy fulfil their duty and not to encourage them in wrongdoing in their obsessive wealth accumulation.
[I]Lim Teck Ghee is the director of Centre for Policy Initiatives.
Illicit outflows: Investigate Malaysia’s heavy losses
Malaysia’s illegal capital outflow tripled in last decade
22nd May 2012, 10:37 PM
Hutang Negara Malaysia 2012 (RM456.1 Bilion) : 2 Syarikat RATINGS AGENSI ANTARABANGSA Beri Amaran Kepada Malaysia!!
by Staff Berita Semasa on May 9, 2012
in Berita Ekonomi (http://beritasemasa.com/category/berita-ekonomi)
Apabila pemimpin politik menasihatkan rakyat jangan risau, memang kita mesti risau sebab masaalah besar akan wujud kelak.
http://beritasemasa.com/wp-content/uploads/2012/05/Hutang-Malaysia-2012.jpg (http://beritasemasa.com/hutang-negara-malaysia-2012/hutang-malaysia-2012-2)Ketika ini hutang negara berada pada paras RM456.1 bilion di mana bersamaan 53.5 – 54 peratus daripada Kadar Dalam Negara Kasar daripada had yang telah ditetapkan Kementerian kewangan (MOF) setakat ini iaitu pada paras 55%. Walaubagaimanapun jawatan balas Timbalan Menteri Kewangan (Datuk Seri Awang Adek) di Dewan Rakyat (http://beritasemasa.com/hutang-kerajaan-malaysia)menasihatkan rakyat Malaysia tidak perlu risau.
Tahap hutang negara yang tinggi untuk tempoh yang berterusan, sebenarnya boleh memberikan kesan ekonomi dan kewangan negara dalam tempoh jangka panjang. Keadaan ini akan bertambah buruk jika wang yang telah dipinjam dibazirkan untuk tujuan projek-projek mega yang sebenarnya tidak perlu pada masa sekarang, tetapi diperuntukkan semata-mata untuk “mengenyangkan” suku-sakat dan kroni.
Tetapi dalam pada masa yang sama, tiada satu iltizam yang benar-benar menunjukkan keyakinan kepada semua yang Malaysia sedang berusaha mengatasi kadar hutang negara yang tinggi ketika ini
Akhirnya, kita akan terus melihat kadar hutang negara terus bertambah daripada tahun ke tahun selama 15 tahun lamanya
Jika kerajaan tidak melakukan pelan pengurangan fiskal yang mampu memberikan keyakinan kepada semua, implikasi yang jarang-jarang kita diajar dan dididik di kaca televisyen & di akhbar arus perdana, di mana Malaysia bakal menghadapi risiko penurunan gred penarafan kredit.
Terkini semakan kami kepada laporan berita daripada Channel News Asia bertajuk (Malaysia faces credits rating cut (http://www.channelnewsasia.com/stories/economicnews/view/1197885/1/.html)) yang dimuatkan di ruangan perniagaan menunjukkan telah terdapat beberapa syarikat-syarikat RATINGS AGENSI ANTARABANGSA yang telah memberikan “peringatan dan amaran awal kepada Malaysia”. Antaranya ialah seperti:
Standards & Poors
Moody’s Investors Service
Kedua-dua agensi ini telahpun memberikan amaran kepada kerajaan Malaysia bahawa “RATINGS” bagi BON-BON TERBITAN KERAJAAN PUSAT di arena antarabangsa besar kemungkinan akan diturunkan daripada :
“Rating ( A- ) diturunkan kepada ( BBB )”
Ini semuanya berpunca daripada HUTANG NEGARA yang terkini sudah mula mencecah kepada paras 54% daripada KDNK (Keluaran Dalam Negara Kasar). Tetapi, persoalannya apa implikasinya kepada Malaysia jika rating tersebut diturunkan?
Sekiranya ia terus berlaku tanpa perubahan yang radikal daripada sekarang, antara implikasinya ialah :
Nilai matawang ringgit di pasaran antarabangsa akan mula jatuh dan jumlah hutang luar negara merujuk kepada ekonomi Malaysia secara keseluruhan akan menjadi lebih sukar untuk dibayar. Ini kerana kadar pertukaran wang asing menjadi lebih tinggi dan sektor import akan mengalami kerugian yang teruk
Apabila nilai matawang ringgit mula jatuh dan kita boleh mengalami kegawatan ekonomi yang serius disebabkan kekurangan “KECAIRAN” dalam SISTEM KEWANGAN di Bank-Bank tempatan, sehingga boleh menyebabkan kadar faedah pinjaman di Bank-bank tempatan melonjak tinggi. Kesannya akan berbalik kepada rakyat Malaysia juga
Akhirnya, ia akan turut mengakibatkan banyak sektor-sektor lain mengalami kemelesetan kerana IMPORT UTAMA dari negara-negara maju oleh kebanyakan negara membangun seperti Malaysia yang menggunapakai TEKNOLOG TINGGI yang digunakan di sektor-sektor pembuatan seperti perkilangan dan lain-lain
Seterusnya., ada kalangan anda di sini mahu berkongsi maklumat?
Video Laporan Berita Channel News Asia : Keadaan Hutang Negara Malaysia Terkini
22nd May 2012, 10:54 PM
Malaysia faces credit ratings cut
By Melissa Goh | Posted: 27 April 2012 2051 hrs
MALAYSIA: Concerns have been raised about Malaysia's high national debt, which currently stands at 54 per cent of its gross domestic product (GDP).
International ratings agencies Standard Poor's and Moody's are warning of a possible credit rating downgrade if Kuala Lumpur does not rein in its federal government debt.
Continuous government spending to gain public support ahead of the upcoming general election may have put Malaysia at risk of a credit downgrade.
A rating cut would be its first in 15 years.
However, Malaysia's central bank has brushed aside that concern.
It said the national debt level at 54 per cent of GDP is manageable, given Malaysia's sound economic fundamentals, improved foreign direct investment (FDI) inflows, and growth of a forecast four to five per cent this year.
Bank Negara also noted more than 90 per cent of the debt is domestically funded, which means Malaysia's external exposure is very minimal.
Bank Negara Malaysia governor Zeti Akhtar Aziz said: "The government external indebtedness is only two per cent so it's very low.
"Very often, countries have problems because foreign borrowing is very high. For us, the borrowing in mainly domestic, our financial system has been able to absorb this."
Still, there are concerns the government's spending spree ahead of a general election may drive federal government debt level to above 60 per cent.
Observers said the next cabinet voted into power must seriously take concrete steps to reduce its huge subsidy bill exceeding US$10 billion as well as to introduce a hugely unpopular goods and services tax to shore up the government's revenue.
While a credit rating downgrade will hurt investor confidence, a weak mandate at the polls means the government will find it difficult to push through some of its tough structural reforms.
Malaysia must call its next election before May next year.
19th July 2012, 02:15 PM
Malaysia’s debts a potential time bomb, say economists (http://www.themalaysianinsider.com/malaysia/article/malaysias-debts-a-potential-time-bomb-say-economists/)
By Lee Wei Lian
July 18, 2012
http://www.themalaysianinsider.com/images/uploads/2011/march/27/budget0718.jpgMalaysia’s debt levels may limit Najib’s ability to respond to financial crises. — File pic
KUALA LUMPUR, July 19 ― The government’s debt, which nearly doubled since 2007 to RM421 billion, pose a fiscal risk to the country if not managed carefully as it impairs Malaysia’s resilience to economic shocks, analysts and economists have said.
They say that while government debt ― currently at about 54 per cent of gross domestic product (GDP), and the second highest in Asia ― has not significantly impacted the country and its credit standing yet, the volatile nature of global markets may manifest such a risk at any time.
While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is increasing worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure rose to about 65 per cent of GDP last year ― above the comfort level for many analysts.
RAM Ratings chief economist Yeah Kim Leng said that while Malaysia’s debt levels are currently considered moderate, it should still be vigilant against the possibility of debt levels hitting the “tipping point” whereby it could be punished with higher borrowing costs.
“The threshold at which the market sentiment can turn against you is unknown,” said Yeah. “If market sentiment does turn against Malaysia, it could result in very high borrowing costs and capital pull-out.”
The reason we have not had a higher debt burden is because we have a piggy bank called Petronas. — Cheong Kee Cheok, senior research fellow at University of Malaya’s Economics and Administration Faculty.
He added that careful management of debt levels could inject greater resiliency into the economy, which was desirable given the increasing frequency of economic shocks that characterises the global economy today.
“It’s not just about economic growth but also the country’s ability to withstand shocks,” he said.
Figures from the Federal Treasury’s Economic Reports shows that the federal government’s domestic debt almost doubled in the space of less than five years ― from RM247 billion in 2007 to an estimated RM421 billion in 2011 ― far outpacing its revenues which only grew 31 per cent or from RM140 billion to RM183 billion during the same period.
In contrast, 2001 to 2005 saw domestic debt level growing from RM121.4 billion to RM189 billion, or just 56 per cent.
Government-backed loans rose rapidly as well between 1985 to 2010 ― from RM11 billion to RM96 billion ― representing a growth of 8.7 per cent per annum.
Cheong Kee Cheok, a senior research fellow at University of Malaya’s Economics and Administration faculty, said that while Malaysia’s debt level of 55 per cent of GDP is “not an outright disaster” when compared to countries like Greece, he expects the level of debt to continue to rise.
“The rise in this debt level over the past few years is worrying though, and so far, I have not seen any effort to try to rein in spending given that revenue sources have not expanded,” he said. “The reason we have not had a higher debt burden is because we have a piggy bank called Petronas.”
Wan Saiful Wan Jan, chief executive of the Institute for Democracy and Economic Affairs (Ideas) said that politics played a role in why Malaysia is grappling with debt.
He said that while deficit spending was “completely wrong”, as long as governments could roll over their debt, there was little urgency to address the issue as politicians rarely look beyond the next election.
http://www.themalaysianinsider.com/images/uploads/2011/march/27/wansaiful0718.jpgWan Saiful blamed the government’s deficit on pork-barrel politics. — File pic
“Politicians will spend what they need to win elections,” he noted.
He added that his was not a criticism only of the Najib administration as he found Pakatan Rakyat’s many promises even “more reckless”.
“Pakatan Rakyat say that they can pay for spending by removing corruption but if you want to be responsible, you should plug the hole and pay the debts not plug the hole and spend the money,” he said.
The country’s fiscal track record has apparently already affected investor confidence, as evidenced by the weakness in the country’s currency and relatively high yields on government bonds.
Despite Malaysian government securities offering higher yields than either Singapore or the US, investors last week still flocked to the two perceived safe havens over places like Malaysia, sending the ringgit markedly lower in recent weeks.
Countries with strong credit ratings such as Switzerland can even afford to offer negative yields to investors due to their perceived comfort factor while weaker countries, such as Italy and Spain, have a harder time raising funds even when offering vastly superior yields due to the perceived higher risks involved.
While Malaysia is not yet in the category of Spain or Italy, it is notable that investors prefer to switch their money to US and Singapore assets rather than Malaysia’s in times of uncertainty despite the 10-year MGS (Malaysian Government Securities) offering a yield of about 3.4 per cent as compared to less than 1.5 per cent for both 10-year Singapore government bond and 10-year US Treasury bonds.
This generally means that investors harbour stronger doubts over Malaysia’s ability to pay back its debts, and outflow of funds led to the ringgit slumping to a 14-year low against the Singapore dollar and also saw the currency lose ground to the greenback.
With both its debt and budget deficit among the highest in Asia as a percentage of GDP, it would be difficult for the government to pare down debts without it either raising taxes or cutting spending, both options which are likely to make it unpopular with the public at large.
The saving grace for the government is that it can tap into the vast savings pool of Malaysians instead of going outside the country and the revenue it gains from oil and gas.
Hydrocarbon income, however, could be under threat this year as petroleum prices have weakened significantly due to the economic uncertainty.
Should another global economic crisis hit, it is unclear how much fiscal space the Najib administration has left to implement stimulus measures given its commitments to reduce its budget deficit and keep a lid on debt.
Another issue is that the RM96 billion in government-backed debts is likely to grow even more in light of an expected raft of rail and road infrastructure projects, which some reports have estimated will cost as much as nearly RM100 billion over the next few years.
Even Malaysia’s National Higher Education Fund Corporation (PTPTN) is going down the route of government-backed debt, recently selling RM2.5 billion of federally-guaranteed Islamic debt as it looks for financing to provide more loans to a growing number of eligible students entering university.
The PTPTN scheme, however, has been a source of controversy as only 84 per cent of students are reported to be repaying their loans as at February this year.
For the moment, investors are still willing to buy Malaysian government bonds used to raise money for the country’s development.
The question is whether falling petroleum prices, stubborn fiscal deficits or rising contingent liabilities could one day shake their confidence.
23rd July 2012, 08:09 PM
Malaysia lost RM893b in illicit outflows, research show (http://www.malaysia-today.net/mtcolumns/newscommentaries/50729-malaysia-lost-rm893b-in-illicit-outflows-research-shows)
Monday, 23 July 2012 Super Admin
Clara Chooi, The Malaysian Insider
A colossal RM893 billion was siphoned out of Malaysia’s economy into tax havens abroad between 1970 and 2010, a London-based research has revealed, placing the country among the top 20 nation in the developing world labelled as “losers” of capital flight.
The sum is more than triple that of Malaysia’s national debt total, which amounted to RM257.2 billion in 2011, according to previous media reports.
In the study commissioned by Tax Justice Network (TJN), a London-based organisation of professionals including economists and tax consultants, Malaysia is now ranked 12th on the list, two rungs above Singapore’s RM533 billion outflow and three below Indonesia’s RM1 trillion.
According to researcher James Henry in UK’s The Guardian today, the “offshore economy” is large enough to leave a major impact on the estimates of inequality of wealth and income in any nation, as well as the estimates of national income and debt ratios.
“Most importantly ― [it would] have very significant negative impacts on the domestic tax bases of ‘source’ countries,” Henry was quoted as saying in the daily.
The former chief economist at consultancy McKinsey, in preparing the research report titled “The Price of Offshore Revisited” for TJN, had perused data from the Bank of International Settlements (BIS), the International Monetary Fund (IMF) and private sector analysts to conclude that over the past four decades, an alarming estimate of RM66 trillion or possibly RM100 trillion has flooded out of their home countries across the globe to seep into “the cracks of the financial system”.
According to The Guardian, this was even larger than the size of the entire American economy.
The paper noted that the sheer scale of hidden assets abroad by those seeking to evade taxes suggests that the official Gini coefficient of a country suffering from capital flight would not reflect a true picture.
“Standard measures of inequality, which tend to rely on surveys of household income or wealth in individual countries, radically underestimate the true gap between rich and poor,” The Guardian reported.
TJN member John Christensen told the daily that this meant that inequality was likely to be “much, much worse” than official statistics have sho
“But politicians are still relying on trickle-down to transfer wealth to poorer people.
“This new data shows the exact opposite has happened: For three decades, extraordinary wealth has been cascading into the offshore accounts of a tiny number of super-rich,” he was quoted as saying.
In December last year, US-based watchdog Global Financial Integrity reported that Malaysia had lost RM150 billion through capital flight in 2009 alone, the fourth highest in the developing world.
The watchdog also found that Malaysia had lost a total of US$338 billion (RM1.08 trillion) over the first decade of the century while RM930 billion had left the country between 2000 and 2008, growing to RM218 billion per year from an initial RM71 billion in that period.
The federal opposition has long railed against the ruling Barisan Nasional (BN) over its alleged fiscal irresponsibility, claiming its relentless spending and massive illicit capital outflow would soon plunge the country into a debt crisis.
25th July 2012, 05:03 PM
Wednesday, 25 July 2012 08:48
M'sia's national debt & Umno crony Syed Mokhtar: CLEAR-CUT MISGOVERNANCE (http://malaysia-chronicle.com/index.php?option=com_k2&view=item&id=37075:the-national-debt-umno-crony-syed-mokhtar-how-to-short-the-two?&Itemid=2)
Written by Sam Chee Kong, Malaysia Chronicle
The Income Inequality have always been a thorny issue for the past few thousand years. During the Middle Ages in Europe, they have the bourgeois (higher class includes the Church) and the proletariat (ordinary folks). In ancient China they too have different class with the merchants and the artisans, court officials, laborers and etc. Needless to say the bourgeois and the merchants controlled most of the wealth.
Even during the ancient Babylonian days they also do have this problems. In George Clason's 'The Richest Man in Babylon', it describe how those who know how to accumulate Gold succeeds while the rest are mere laborers. To find the answer to the puzzle on why ordinary citizens don't know how to accumulate Gold, King Sargon summoned Arkad, who is the richest man at that time and accumulated the most Gold. Arkad disclosed to the King on how he managed to accumulate so much gold through 'Seven cures for a Lean Purse'.
The following are the Seven cures for a lean purse.
1) Start thy purse to fattening
2) Control thy expenditures
3) Make thy Gold Multiply
4) Guard thy Treasures from loss
5) Make of thy dwelling a profitable investment
6) Insure a future Income
7) Increase thy ability to earn
The above are the classic guide on how to be Financially Independent. It has been proven to this day after more than a few thousand years in existence.
The question is how can we measure Income Inequality? Fortunately it can be measured with a statistical approach known as the Gini Coefficient.The Gini Coefficient was developed by a statistician named Corrado Gini, and it is a measure of the income distribution of the population in a country. It range between 0 and 1 with 0 being in perfect equal and 1 being highly unequal. It helped define the gap between the rich and poor nations. The income distribution of a nation can also be represented graphically with the Lorenz curve below.
https://lh4.googleusercontent.com/9neAuLih1e56ZP8FPiHhldXzV3ugfYC7QSYaWJji0yNcyvLzGf aFUdESegzfLx7hdrhx8yqGxnFf2nTCydjjUwBrTAhpXAiUmbg8 pAQh-hKnNqPlX1Q
The upward sloping 45 degrees sloping line represents the equal distribution of wealth. An example will be the intersection point of the 20% of the income distributed and the 20% of the population. On the y-axis (vertical) you have the income distribution as expressed in decimals and on the x-axis you have the wealth of the nation. The area that is shaded in red represents the ‘area of inequality’ in income distribution. So the flatter the Lorenz curve the bigger will be the 'area of inequality' and hence income distribution.
An example of unequal distribution is where the 11% of income intersects with the 40% of the population on the Lorenz curve. This shows that 11% of the income is distributed to 40% of the population.
How Malaysia compared to the rest?
Anyway as of 2009 Malaysia is ranked 102 out of 136 countries surveyed by the CIA for the most unequal income distribution. The following is the income distribution of different ethnic in Malaysia and also its Gini coefficient from 1995 till 2009.
GINI Coefficient Of Malaysia
Source : Economic Planning Unit 2009
The performance of Malaysia’s Gini Coefficient from 1995 – 2009
https://lh6.googleusercontent.com/QJCi470GvFQB1_oh1aq_my3N2b29sG6sJLN2c5JblSNvo0X1D9 KZZQAJIknb5efo6V9fyvVDhiJ1BJcrxFeMY62ZDn9Tz_S6Ajhc s43VF-anktDHbsc
Source : Department of Statistics Malaysia
According to World Bank, Malaysia was one of the few East Asian countries that reverse its income inequalities over the past decades but unfortunately reverses its direction since the 1990s. In other words policies drafted by policy makers since then are not effective.
This may be due to the bias policies that are drafted to the benefit of the ‘Bumiputra’ community while neglecting others and also the emergence of a new ‘ruling class’ that are make up of political cronies. This new group are given special treatments and are encouraged by the ‘powers to be’ to gobble up much of the nations strategic and big businesses in order to make up what they called the ’30 percent Bumiputra quota’.
Needless to say the end result is the re-emergence of the old Colonial type of ‘Rent Seeking’, businesses where being the monopoly or duopoly is the order of the day. As we know being in a position to monopolize any sector of the economy will only resulted in being contented. No incentive for being innovative and competitive made these conglomerates being redundant and badly managed and in the end left to decay.
Good examples include MAS, PERWAJA STEEL, PROTON and Bank Bumiputra just to name a few.
What are the Consequences?
Effects on economic Growth
1. High inequality in income will have negative effects on economic growth.
One study done by economist Andrew Berg and Jonathan Ostry of the IMF recently found that the countries with higher inequality of income tends to have a shorter spell of economic growth than those that with more equality.
Getting the economic growth going is easier than maintaining or sustaining it. This is because there are many economic policy tools that can start an economic growth like embarking on a loose monetary policy and expansionary fiscal policy. However maintaining a sustainable economic growth for a certain time period say 10 years is a task not to be taken lightly because after a certain time period certain economic policies tend to run its course and boom will be followed by bust.
To maintain the level of exports in an export oriented economy during economic downturns, policy makers normally will have to devalue their currencies against their competitors or reduce the interest rates in the domestic banking sector. The problem is how much interest rate can you reduce? Even economies like Japan and the U.S that are running close to ZIRP (Zero Interest Rate Policy) but yet still failed to increase its exports and turnaround their economies. In the case of Japan, it is worse off as its economy went into a tailspin and pushed its economy into a deflation mode.
Coming back to the IMF study, they found that in order to reduce income inequality by a certain percentile say 10% then the number of years of sustainable economic growth will have to be doubled. It can be shown by the following graph.
https://lh4.googleusercontent.com/OMkd1tH7KBrlb2pCOp5gIx0xexfvT7sefpZEQrckGsxgd6TFdM wS2LyjJ0I9rz1BqNTYJgrr85KnkpRELncChx9S86ubsDK1trhM 8wqSJbF_n2OdOJQ
The Vertical axis is the number of years of sustain growth and the horizontal axis is the Gini Coefficient. As you can see if you want to reduce the Gini coefficient from 48 to 44 you have to increase the years of sustainable economic growth from 5 to 10 years. So if a country have a high Gini coefficient then it is very difficult for it to reduce its income inequality because it will need a prolong sustainable economic growth. This can explain why Malaysia’s income inequality remains high throughout the last 20 years because it is very difficult to maintain a high economic growth rate for many years. Moreover its economy had been experiencing a few boom and bust cycles for the past decades.
2. Due to income inequality the wealth of the nation will be concentrated to a few individuals which constitute the top 1% of the population.
As a result more people are forced to borrow more and more to meet ends need. With the top 1% controlling most of the country’s wealth it is no surprise to see the mean income remained low or unchanged for the past decades. As a result since most of the population are in the lower end of the income spectrum it will be difficult to see any increase in spending to uplift the economic activity that is needed to drive economic growth.
A good example will be the amount of wealth held by some of the political cronies such as Syed Mokhtar. He is the favored crony of UMNO (United Malay National Organization) party and is said to have his hands into almost every major business in the country. He controlled a few public listed companies such as Tradewinds, MMC, Bernas and etc in the KLSE.
Through many Mergers and Acquisitions with Proton (the National Car) being the latest addition to his stable of companies, he managed to accumulate debts to the tune of RM34 billion. It is said that his borrowings are equaled to 10% of all loans that are made by all banks in Malaysia. However, it is only backed by about RM 7.8 billion in cash and assets.
Is Syed Mokhtar Highly Geared?
To find out we shall use the following formula.
Gearing Ratio = Debt/Equity
Gearing Ratio = 34/7.8 = 4.35
As for the gearing ratio, anything above 3 is considered high and 4.35 is what I called ‘Highly Geared’. It is quite impossible to maintain such high gearing during trying economic times like now. Any further downturn in the economy will cut into the operating profits and will severely affects his group of companies cash flow. In addition he will also need cash to service his debts regardless of how bad the company is doing.
The end result will be another bailout by the government and we will see a rerun of the 1998 Asian Financial Crisis saga where the government bailout many of its political cronies business empires. This will represent another attempt by the Government to use taxpayer’s money to artificially prop up uncompetitive companies. It is another classic case of throwing good money after bad money. A good example will be Halim Saad’s Renong Group of Companies which is a diversified conglomerate that is worth to the tune of more than RM 20 billion. Although initially being bailed out by the government however eventually it still failed to survive the crisis.
In view of the impending collapse of the Syed Mokhtar’s empire, how can we take advantage of the situation?
How to go 'short' on Syed Mokhtar?
There are two possibilities whereby it can cause the collapse of the Syed Mokhtar Group of Companies.
One, it is the expected defeat of the current ruling coalition or Barisan Nasional (National Front) in the soon to be held election this year.A good example will be the former Premier Badawi's son counter Scomi and his crony's Equine. During his tenure both are high fliers but today they are no where to be seen.
Two, it will be the current ongoing global financial crisis. With such high gearing you don’t even need the collapse of the Global Financial Crisis to push it over the cliff. It will collapse eventually because most of his businesses are not ‘cash rich’ and recession proof in nature unlike a casino. Other than rice distribution and toll operations, his other businesses in ports, car manufacturing, hotels, manufacturing and etc are not only ‘cyclical in nature’ but also 'capital intensive' and will be influenced by the ups and downs of the global economy.
So when either of them happens then we shall do the ‘Syed Mokhtar Short’. First you need to sell off your stocks in the KLSE and then load up the short contracts on KLCI futures in KLOFFE. In other words we perform a short selling on the KLCI futures. A word of caution though because such maneuver is only for those in the know or the professionals. If you have no experience in the Futures market then we suggest the best strategy is to cash out and wait for the downturn to run its course and this may take 6 months to 2 years depending on how severe is the downturn. After that then you load up on the stocks.
3. There will be class warfare
It will create what we call the ‘Elites’ which belongs to the 1% and ‘the rest’ and there will be tensions among them. The Government will find it difficult to get the support of ‘the rest’ group to follow its policies such as to promote savings or spending because they afraid in the end it only benefits the ‘Elites’. A good example is the Government’s recent launch of its recent Bon Malaysia which pays a 5% yield. Although it pays higher than the commercial bank’s term deposit rate of about 3.2% on average but it is still under subscribed because the population believed that the funds raised will be channeled to unproductive ventures like bailing out crony companies, coming election campaign funds, paying for subsidies and etc.
Another unintended consequence arising from this class warfare is ‘distrust’ of the lower income group in the Government’s effort to reduce income inequalities either through taxation or salary redistribution (minimum salary). For any income redistribution system to work, the government must ensure that those people enlisted to such responsibility should be competent, trustworthy and transparent in their process. If this can be accomplish then people will not mind policy makers taking a portion of their money through taxes for the greater good and in this case a rebalancing of the income inequality in the society. If not then people will be less willing to part with some of their money by under declaring their taxable income.
4. Effects on Health
Due to the big disparity in the income distribution needless to say those belong to the lower rung in the income distribution table can least afford better healthcare. Those who belong to the top 5% in the income distribution can afford better private healthcare and hence life expectancy. By relying on public healthcare it will further burden the government by allocating more funds to build more hospitals, employ more nurses and doctors and hence less funds can be diverted to other development projects.
With Malaysia’s high Debt to GDP of about 53.5% in 2011, it will be a difficult task for it to reduce its debt because the growth of debt will always be faster than economic growth. Why is this so? This is because Debt servicing in the form of interest rate grows exponentially through what we called ‘compound interest’ while economic growth only grows organically due to the boom and bust cycles. Economic growth can be likened to the shape of the Sine Wave or S curve below.
The following graph depicts the difference between the growth of Money or Debt versus the growth of the real economy.
From 53.5% Malaysia's debt can easily shoot to 70% SOON
As can be seen from the above, once the growth between compound interest and the real economy (GDP) starts to diverge then the gap between them will start to widen. This implies that once our Government’s debt reaches a certain level to GDP then its ability to pay back its debt will very difficult if not impossible.
From empirical evidence in the last few years from the ongoing financial crisis in Europe, whenever a country’s Debt/GDP reaches above the 70% threshold then there is a very high probability that its economy will go into a tailspin in the next few years. This is because once the Debt/GDP ratio increases it will decreases the country’s ability to service its debt because more money will be needed to repay its interest and hence less will be directed towards the real economy that will help generate more income.
Moreover when a country’s Debt/GDP ratio increases, its Sovereign ratings risk being further downgrade by Ratings Agencies. Whenever a country’s Sovereign ratings being downgraded then its ability to raise funds in the international market will be dampen because its cost of funds has increased. Bond holders will need to be compensated for holding the higher risked Sovereign Bonds now and hence the yield (interest rate) will be higher.
With Malaysia’s Debt/GDP being 53.5% and without any real effort to address this problem, it will soon shoot up to the 70% threshold. If left unchecked then in a few years time Malaysia will be heading towards the path taken by Ireland, Greece, Portugal, Spain and the soon to join the club Italy.
Again another key area that the government needs to do is to gain the Trust of its people. Since most of the government revenues are raised from taxes and if it wants to collect more then it will need to give them the assurance that the money will be spend wisely and on projects that will further improve their life in the future.
A corrupted government like Malaysia will find it tougher to achieve such a goal because it first needs to overhaul its political system to make it more transparent in order to win the trust of its people. Further increases in taxes will be countered with more revolts as people felt more burdened by increase in their cost of living.
The bottom line is that like Syed Mokhtar, Malaysia too is in a precarious position due to its high gearing. Financial collapse is inevitable unless steps are take to tighten the belt and pare debt.
Idris Jala: National debt still MANAGEABLE, only 53.8% not yet 55% (http://malaysia-chronicle.com/index.php?option=com_k2&view=item&id=37047:idris-jala-national-debt-still-manageable-only-538-not-yet-55&Itemid=2)
CLICK HERE TO FOLLOW SAM CHEE KONG (http://samcheekong.blogspot.com/)
25th July 2012, 05:48 PM
Donald Lim: Capital outflow study just 'for reference' (http://www.malaysiakini.com/news/204476)
1:03PM Jul 24, 2012
(Admin: He said that the figures may not be correct. He did not say they are not correct.)
Deputy Finance Minister Donald Lim has dismissed the finding of Tax Justice Network that Malaysia is among the top 20 countries in the world with the highest capital flight to tax havens from 1970 to 2010.
"Foreign media or institutions have the freedom and right to present and publish their reports. We can't stop them. These are just for reference," Chinese daily Oriental Daily News today quoted Lim as saying.
According to the report, Lim said the Treasury and Bank Negara have been closely monitoring the inflow and outflow of capital.
The reports by foreign research institutions are just their views and may not be correct, the senator said.
Bank Negara, according to Lim, has a rigorous mechanism and monitoring system for it to collect the relevant statistics.
"We are a free and open economy with high trade with foreign countries. We are also one of the major trading nations in the world."
Lim was responding to the report by London-based Tax Justice Network's researcher James Henry that an estimated US$283 billion (RM892 billion) has been transferred out (http://www.malaysiakini.com/news/204342) of Malaysia to tax havens from 1970 to 2010.
In comparison, the amount is three-and-a-half times more than Malaysia's foreign debt of RM257.2 billion in 2011 and is second to Nigeria's US$306 billion (RM964 billion).
8th August 2012, 05:46 PM
Malaysia’s finances facing added squeeze, says Fitch Ratings (http://www.themalaysianinsider.com/malaysia/article/malaysias-finances-facing-added-squeeze-says-fitch-ratings/)
By Lee Wei Lian
August 08, 2012
The agency said further increases to the debt ceiling would affect Malaysia’s credit rating. — File pic
KUALA LUMPUR, Aug 8 ― Already weaker than its similarly rated peers, Malaysia’s finances could come under further strain and experience increasing drag on its profile, Fitch Ratings said today.
The global ratings agency also said that the rising negative fiscal pressures may eventually offset the country’s credit strengths unless structural weaknesses in public finances are addressed.
Fitch said that revenue collections have been “muted” even as the size of its debt has grown and interest payments are expected to equal 10 per cent of revenues in 2012, which restricts the government’s ability to allocate fiscal resources to sectors that could support Malaysia’s long-term growth, and potentially arrest the sustained increase in the debt-to-GDP (gross domestic product) ratio.
“Fitch is concerned that the authorities may seek to raise the debt ceiling rather than implement austerity measures to remain within the existing fiscal framework,” said the report. “Thus, alterations to the current debt ceiling would be viewed as a credit negative.”
The report said that federal government debt is expected to rise through to 2016 if there is no material fiscal reform but is still expected to remain below the existing federal debt ceiling of 55 per cent of gross domestic product (GDP) until 2014. Putrajaya has been spending money on a slew of programmes for various demographics ahead of the Budget 2013 to be tabled next month.
It added, however, that the federal debt ceiling was raised from 45 per cent to 55 per cent of GDP in July 2009 following the global financial crisis, and prior to that, the ceiling was also raised in April 2008 from 40 per cent of GDP. It warned that raising the debt ceiling again would be viewed negatively.
But the ratings house said Malaysia’s strengths include low domestic interest rates, high current account surpluses and ample liquidity in the banking system, which have allowed the government to finance its deficits through mostly MGS (Malaysian Government Securities) and government investment issues.
It added that Malaysia’s ringgit-denominated treasury debt is now about 50 per cent of GDP with most on a long-term maturity and fixed rate basis.
Fitch noted that national pension fund Employees Provident Fund (EPF) is a particularly strong support to funding conditions, holding one-third of outstanding MGS.
The report also noted that Malaysia’s debt-to-revenue ratio is now on par with more heavily-indebted “A” range sovereigns such as crisis-hit Italy.
It said that the poor debt-to-revenues ratio stems from a narrow revenue base.
At 22 per cent of GDP, federal government revenues are on par with the Emerging Asia peer median. Compared with both the ‘A’ and ‘BBB’ range medians of 34 per cent and 32 per cent of GDP respectively, however, Malaysia’s fiscal resources appear significantly lower.
Some economists previously said that the federal government’s debt ― which nearly doubled since 2007 to RM421 billion, far outpacing revenue that only grew 31 per cent from RM140 billion to RM183 billion during the same period ― could impair Malaysia’s resilience to economic shocks, which appear to be occurring with increasing frequency.
While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is also worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure has been estimated to have already hit 65 per cent of GDP last year.
21st August 2012, 06:51 PM
Malaysia yet to show ‘credible’ plan to tackle deficit says Fitch (http://www.themalaysianinsider.com/business/article/malaysia-yet-to-show-credible-plan-to-tackle-deficit-says-fitch1/)
By Lee Wei Lian
August 21, 2012
http://www.themalaysianinsider.com/images/uploads/2012/august2012/21/m_fitch.jpgFitch earlier warned that Malaysia is now on par with more heavily indebted ‘A’ range sovereigns, such as crisis-hit Italy, on some measures.
KUALA LUMPUR, August 21 — Malaysia has yet to present a convincing plan to tackle the twin fiscal threats of its federal budget deficit and federal debt even though strains on its credit profile are increasing said Fitch Ratings in a report yesterday.
Fitch also said that data clearly shows public sector-linked activity has been a key driver of GDP growth for the last four quarters alongside robust private sector activity.
It said that the ratio of federal government debt to GDP reached 51.8 per cent at end-2011 despite strong GDP growth but barring a further deterioration in the global economy, the Malaysian government should be able to meet its 2012 deficit target of 4.7 per cent of GDP.
“Looking beyond this year, however, the Malaysian authorities have yet to outline a credible near-term plan to reduce the fiscal deficit to three per cent of GDP, and the debt/GDP ratio to 50 per cent, by 2015, in line with their official targets,” said Fitch.
The ratings agency noted that Malaysia’s public finances already compare poorly with its similarly rated peers in both the ‘A’ and ‘BBB’ range medians and added that improving the nation’s fiscal position will be challenging without significant reform to address the cost of fuel subsidies, broaden the fiscal revenue base, or reduce dependence on energy-linked revenues.
“Without such reforms, our base case is that the debt/GDP ratio will continue to rise until 2016,” said Fitch. “The federal debt ceiling of 55 per cent of GDP, which was increased from 45 per cent in July 2009 to accommodate fiscal stimulus, suggests that the room for fiscal slippage may be limited without further alteration to the debt ceiling. If this were to happen, it would apply additional negative pressure on Malaysia’s credit profile.”
It said, however, that Malaysia still possessed several strengths such as a track record of macroeconomic stability, a strong net external credit position, and funding flexibility.
Malaysia reported a surprisingly strong second-quarter economic growth of 5.4 per cent despite weakening exports largely due to the buffer of ongoing construction projects and increased spending attributed to civil servant salary hikes and government cash handouts said economists.
They added that the difference in performance between the domestic and export sectors could point to uneven growth in the months ahead and lead to a two-speed economy
While the Najib administration’s efforts to help tide the country over the rocky global economic environment with a longer term goal of transforming the country in a high income nation by spending more on salary hikes and kick-starting large infrastructure projects has helped boost GDP growth, analysts have noted that its debt has outgrown revenue since 2007.
Figures from the Federal Treasury’s Economic Reports show that the federal government’s domestic debt almost doubled in the space of less than five years — from RM247 billion in 2007 to an estimated RM421 billion in 2011 — far outpacing its revenues which only grew 31 per cent, or from RM140 billion to RM183 billion, during the same period.
While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is increasing worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure has already risen to about 65 per cent of GDP last year.
Fitch earlier warned that the country is now on par with more heavily indebted ‘A’ range sovereigns, such as crisis-hit Italy, on some measures like debt-to-revenue ratio and a lack of progress on fiscal reforms and may lead to a ratings downgrade which could push up the country’s borrowing costs.
28th August 2012, 05:53 AM
Another warning, this time from Lee Wee Tak.
Click on the attachment to see a simple picture.
The debt driven 5.4% GDP growth in Q2 2012
By Lee Wee Tak (http://www.blogger.com/profile/07642184470249251353) at 8/25/2012 02:45:00 PM http://img1.blogblog.com/img/icon18_email.gif (http://www.blogger.com/email-post.g?blogID=7306009336680641277&postID=8250318158835206106)
The Q2 2012 Gross Domestic Product growth of 5.4% seems to be a pleasant surprise from 1Malaysia administration.
The Second Finance Minister who is on top of the numbers pointed out the oil rigs are responsible.
Tuesday August 21, 2012
Husni: 5.4% Q2 growth a boost for Malaysia
IPOH: The better-than-expected 5.4% growth in gross domestic product (GDP) in the second quarter is a confidence booster for Malaysia to perform better for the rest of the year.
Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah attributed the current positive growth to the resumption of operations at oil rigs, which had affected the country’s production of crude oil previously.
According to Jabatan Statistik Malaysia, however, has more to say:
The Malaysia's economy strengthened further to 5.4 per cent against 4.9 per cent in the preceding quarter led by continued expansion in the Services and Manufacturing sectors. The robust growth in Gross Fixed Capital Formation (GFCF) has driven the demand side.
The statistic seems to point to services as the catalyst, rather than oil rigs.
Notice also that the Perbelanjaan Penggunaan Akhir Kerajaan growth vs Perbelanjaan Penggunaan AKhir Swasta growth. For 2010, the government’s growth in spending was 2.9% vs private at 6.6% but starting from 2011, the government spending growth exceeded the private sector and morphed onto double digits! Look at Q3 and Q4 2012 at 21.1% and 22.95% respectively.
The increase in Najib administration’s expenditure is getting at very significant pace. When BN administration spend our tax payers' money, the usual stuff like Auditor General's horror stories, contracts awarded without open tender comes to mind.
With regards to services sector, the Jabatan Statistik has this to say:
The Services sector rose to 6.3 per cent supported by Wholesale & Retail Trade and Finance & Insurance. The growth of 5.9 per cent in Wholesale & Retail Trade was led by the Retail segment. In addition, the growth in Motor Vehicles segment accelerated to 8.4 per cent during the quarter (Q1 2012: 0.2 per cent) propelled by the higher sales of motor vehicles.
Finance & Insurance expanded to 6.6 per cent boosted by the higher fee income on banking activities and increase in premium income on insurance activity. Meanwhile, Business Services picked up to 8.8 per cent underpinned by professional services related to engineering activities.
The growth in motor vehicles sales is due to lack of viable public transport, the need to preserve Proton and hence the Malaysian public is burden with overpriced cars that build on hire purchase loans and interest repayment.
The banking activities, however, have to be interpreted with the explanation on Construction further below:
The Construction sector expanded remarkably at 22.2 per cent from 15.5 per cent in the previous quarter. The growth was spearheaded by the robust performance in the Civil Engineering and Residential.
The vibrant performance of Civil Engineering at 39.8 per cent was spurred by major infrastructure projects mainly in Sabah, Melaka, Pulau Pinang and Perak. During the quarter, Residential continued the strong momentum at 20.1 per cent driven by the high-end residential projects in Klang Valley.
So residential housing is the key driver of growth but is this “growth” a quality growth i.e. improving the quality of life of the people? For a minority per yes but for the majority, house prices increase have far outstripped salary/earnings growth. Try asking for a salary increment that matches the house price increase and see what your boss say.
Therefore, while it looks good when economic growth is measured on inflated house prices, the sentiment on the ground is very much different.
Property market in certain parts of Malaysia, notable Klang Valley are subject of speculation.
Efforts to curb property speculation
By Zaidi Isham IsmailPublished: 2012/08/15Share PDF
THE government will initiate measures to address various issues gripping the property sector, including curbing rampant speculative activities in the market.
Metro Kajang Holdings Bhd group managing director Datuk Eddy Chen Lok Loi said for example, a house built in Perlis cost RM250,000 but the same house using the very same materials but built in KLCC would cost RM1 million
Meanwhile, National House Buyers Association secretary general Chang Kim Loong said all parties, including the government and developers, need to launch proactive measures to stop steep price increases in the property market due to false demand and excessive speculation fuelled by easy mortgages and low real property gain tax.
"There is a huge mismatch between what the average household income can afford to buy compared to what is available in the market. A homeless generation will emerge and create various social problems," said Chang.
Chang said the average rakyat in a major urban area was struggling to buy his dream home where the average household with income of RM5,962 in 2009 would not be able to qualify for a 90 per cent loan over a 30-year period.
The crazy property prices mean crushing housing loan debts. And it will also deprive families of having more money to be spent elsewhere, curtailing their purchasing power hence hindering other consumer commercial activities. The crazy house prices have made many Malaysians bearing housing loan debts at beyond reasonable level compared to their earning as well as what their counterparts in other countries as the article below shows:
Generally a debt service ratio of 30% is acceptable, i.e. one third of a household income is used to pay off debt (principal and interest). However, the Malaysian household debt service ratio was 9.1% in 2006, rose to 49.0% in 2009 and dropped slightly to 47.8% in 2010. This means that on average almost half of a household’s income goes to repaying debts. Thus after paying off the debt there is not much left to spend on food, transport, education, and for emergencies. Should the breadwinner fall sick or lose his job, the family will find it hard to make ends meet and loans may be defaulted.
In fact, the GDP numbers hide the ever increasing debts – national debts which have to be paid by tax payers, housing and personal loans which also have to be paid by tax payers. This is no more than debt fuelled pumped up growth
That is why bankers are having a great day and it shows in their contribution to growth in GDP
High net interest income – low fixed and saving deposits interest pay to responsible citizens who saves their earning s (if possible) vs high lending rates on housing loans, credit cards and commercial loans
Huge government projects given out sans open tender requiring more bank borrowings
Lack of viable public transport forces Malaysians to purchase their own cars and motorcycle making consumer loans growth inevitable
While some people might point to the increase of GDP and use it as bragging tool and even to justify for more uncontrolled spending (e.g. RM500 vote buying round 2?), it is worth knowing that our debts obligations are increasing at a much faster rate than the GDP.
27th September 2012, 02:32 PM
Malaysia's 'hidden debt' bumps total debt to RM573mil (http://www.malaysiakini.com/news/210049)
Admin: It is nice to have some vindication.
12:58PM Sep 27, 2012
While the on-paper federal debt inches closer to the 55 percent of GDP threshold, senior lawyer Tommy Thomas said that “true debt” as of December 2011 was RM573 million, or a whopping 67 percent of the GDP.
In a paper prepared for the International Malaysia Law Conference 2011 today, the corporate governance specialist said that this includes contingent liabilities like government guarantee and “off-balance sheet” borrowings.
“In 2009, these hidden debts totalled RM84 million, which increased to RM117 billion in 2011.
http://1-ps.googleusercontent.com/x/www.malaysiakini.com/mk-cdn.mkini.net/526/233x231xdafc44b2b38f03a368f9823fa2fb337f.jpg.pages peed.ic.f_WF7A_6yO.jpg“Having regard to the crisis involving Greece and other European nations over the sovereign debt, this is highly irresponsible,” Thomas (left) said.
The lawyer, who is senior consultant to the United Nations Development Programme on corporate governance, said Malaysia’s debt has nearly doubled compared to six years ago.
In 2005, under then-PM Abdullah Ahmad Badawi, the national debt reached RM229 billion.
“But in the six years, it nearly doubled to RM456 billion, representing 52 percent of GDP.
“Thus the last two administrations have added more debt in six years than what took 48 years after Merdeka to accumulate!” the paper read.
3rd October 2012, 06:38 AM
'Hidden debt' not in debt-GDP ratio as not 'realised' (http://www.malaysiakini.com/news/210456)
5:58PM Oct 1, 2012
The government does not take into account contingent liabilities such as off-budget borrowing into its debt to GDP ratio as these are not “realised” debt.
Finance Ministry secretary-general Mohd Irwan Serigar Abdullah said that without taking these liabilities into account the federal debt is at a “safe” level.
http://mk-cdn.mkini.net/527/665db4f37303607872fb995d320d69e5.jpg“We only look at realised debt. Most of the contingent liabilities involves government-linked companies, not private sector borrowings.
“So far we can say we are safe at 55 percent and below,” he told reporters after a post-Budget forum in Kuala Lumpur today.
He also said that the government will “by hook or by crook” keep the debt under the 55 percent threshold.
Last week, lawyer and corporate governance specialist Tommy Thomas raised concern that “hidden debts” (http://www.malaysiakini.com/news/210049) in the form of contingent liabilities had caused federal debt to far surpass the 55 percent threshold, hitting 67 percent in December 2011.
‘Not a legal requirement’
Meanwhile, Finance Ministry undersecretary of the economic and international division A Sundaran said that the 55 percent of GDP debt threshold “is not a legal requirement” but an administrative fiscal rule observed by the ministry.
He said the legal requirement only involves debt as stipulated under the (Local) Act and Government Funding Act.
“(The amount) is far from the legal rules,” Sundaran said, without stipulating the actual amount.
It is understood that this figure stands at about 40 percent.
Debt to GDP ratio for 2012 is 53.7 percent and is expected to be 54.7 percent in 2013.
On a related matter, Mohd Irwan said that the government is also heeding the International Monetary Fund’s and World Bank’s advice to reduce dependence on oil and gas revenues, via Petronas dividends.
“We have discussed gradually reducing Petronas dividend to the government, but I will not tell you by how much,” he said.
“This is good for Petronas as it mean they can invest more (in its own development).”
The government expects Petronas dividends for 2013 to be RM27 billion.
27th November 2012, 08:44 AM
I can see the Mamak's fingers behind most of these outfits.
29th March 2013, 10:08 PM
The misleading debt-to-GDP ratio (http://www.themalaysianinsider.com/sideviews/article/the-misleading-debt-to-gdp-ratio-pak-sako/) ― Pak Sako
MARCH 29, 2013
MARCH 29 ― An overly-optimistic and misleading impression of debt results when the government puts its faith in one number, the debt-to-GDP ratio.
The current government-debt-to-GDP ratio for Malaysia of 53 per cent is assumed as being within safe limits, below the 55-per-cent ceiling set by Malaysian policy.
Here it is argued that judging the nation’s debt condition primarily on account of this one indicator is wrong. A critical look at debt is required to understand the real situation and health of the economy.
Problems with the debt-to-GDP ratio
(i) It is an incomplete measure of the debt situation
The debt-to-GDP ratio is useful in providing an idea of a country’s debt level and potential capacity to repay debt, but it has discrepancies.
GDP, the value of goods and services produced in the country, is a crude measure that does not reflect the money actually available for servicing debt. Only part of GDP belongs to Malaysians and can theoretically be used to settle debt — the amount collected by the government as tax and the disposable cash that enters the savings of citizens.
More accurate indicators of debt would be government debt as a percentage of export earnings and government debt as a percentage of the government’s capacity to tax.
However these indicators are also imperfect. Clearly, not all of export earnings are in cash that is available for debt repayment. Measuring debt as a proportion of government tax receipts is questionable when domestic debt is involved, since it implies that the government can tax its citizens to repay what it borrowed from the savings of the citizens themselves.
It is clear that “no individual indicator can provide an adequate measure of the complexity of a country’s debt problem” (K. Pilbeam, International Finance, 2006, p. 384). These indicators “neglect factors such as differing degrees of vulnerability to external shock, differing capacities to increase export earnings”, “differing future economic prospects of the economies”, or institutional and political factors.
(ii) Domestic debt matters
A study asked why countries default on foreign debt even though these debts seemed relatively small (C. Reinhart and K. Rogoff, 2011, ‘The forgotten history of domestic debt’, Economic Journal, Vol. 121).
It found that large domestic debt is linked to external debt defaults. This helps explain why “emerging market governments tend to default at such stunningly low levels of debt repayments and debts-to-GDP”.
Unlike external debt defaults that grab headlines, the study found that defaults on domestic debt — money borrowed by governments from the savings of its own citizens (pension funds etc.) — have been numerous, but are hidden. This finding raises the question of whether governments cheat when it comes to repaying what is owed to its citizens.
The Malaysian government’s external debt is about RM17 billion, but its domestic debt holdings are substantial. At the end of 2012, domestic debt stood at RM485 billion and accounted for 97 per cent of total Malaysian government debt, and 66 per cent of all Malaysian government and private sector debts.
Government debt is predicted to almost double to close to RM1 trillion by 2020, following the historical trend and forecasts suggested by the IMF (see ‘Malaysian government’s debt to approach RM1 trillion by 2020’, Centre for Policy Initiatives, 25 February 2013).
Can the Malaysian government default on its domestic debt? The debt-to-GDP ratio gives no clue.
(iii) The debt-to-GDP ratio is only as good as its underlying numbers
The debt-to-GDP ratio is only as meaningful as the debt and GDP values used to calculate it.
Malaysia’s current GDP figures may not be reflecting long-lasting or sustainable growth.
GDP numbers may be artificially high when we rapidly draw down on natural resources, such as petroleum reserves and forests, without regard for future generations, or stimulate all sorts of economic activities even if they are unproductive and have questionable returns for the public.
Therefore using unsustainable GDP figures to calculate the debt-to-GDP ratio understates the seriousness of our debt situation.
There is also suspicion that the Malaysian government’s debts are higher than what is being revealed.
Questions have been asked about the government’s hidden debts, such as ‘contingent liabilities’ (see “Hidden debt” edges M’sia beyond 55pct limit’, Malaysiakini, 27 September 2012). Contingent liabilities are difficult to trace, less transparent and its existence may pose a greater risk than the official debt size alone.
Because such debt can be kept hidden, “it is questionable whether many governments face sufficient incentives to reduce the use of contingent liabilities” (T. Ito and A.K Rose (eds.), Fiscal Policy and Management in East Asia, 2007, p. 285).
The Malaysian government’s contingent liabilities are not fully known but are growing (see IMF Country Report No.13/51, February 2013, pp. 12, 22). Although Malaysia is not alone in its failure to account for this openly and transparently, it is important to take action to reduce the use of contingent liabilities before they reach a dangerous level and overwhelm the country’s fiscal capacity.
Another type of debt not captured by the usual debt-to-GDP ratio is household debt. The above-mentioned IMF report says that Malaysia’s “household debt is high, as is bank exposure to households (55 per cent of bank credit)”, and “growth in credit to households remain in double digits” (p. 9).
If these other debts are taken into account, the debt that the Malaysian government is exposed to breaches the 55 per cent ceiling.
Also worrying is the evidence that Bank Negara Malaysia’s statistics give conflicting information about Malaysia’s true total debt.
In one part of Bank Negara’s Quarterly Bulletins, Malaysia’s domestic and external debts, both private sector and government, are provided and total up to RM695.4 billion for 2011 and RM737.6 billion for 2012.
Elsewhere in these bulletins, there are indications that Malaysia’s total debt is much higher:
“Malaysia’s total external debt declined to RM257.2 billion... as at end-December 2011... and remains small as a share of total debt (12.7 per cent)” (BNM, Quarterly Bulletin, fourth quarter 2011, p. 134).
“Malaysia’s total external debt declined to RM252.8 billion at end-December 2012... and accounted for only 14.5 per cent of total debt” (BNM, Quarterly Bulletin, fourth quarter 2012, p. 146).
Simple calculations show that the total debts implied here are RM2.025 trillion for 2011 and RM1.743 trillion for 2012.
The total-debt-to-GDP ratio becomes 230 per cent for 2011 and 184 per cent for 2012.
Given that government debt is currently around two-thirds of total debt, a speculative estimate of the government-debt-to-GDP ratio gives us the figures of 115 per cent for 2011 and 92 per cent for 2012.
These are crisis-level percentages.
(iv) The debt-to-GDP ratios of different countries cannot be directly compared
It is sometimes simplistically argued that Malaysian debt level is healthy because other countries tolerate higher debt-to-GDP ratios than Malaysia’s without adverse effects, or that Malaysia’s debt-to-GDP ratio is similar to that of other countries that are doing economically well.
This is fallacious thinking. A well-regarded study on sovereign debt has found that debt thresholds are importantly country-specific (C. Reinhart, K. Rogoff and M. Savastano, 2003, ‘Debt intolerance’, Brookings Papers on Economic Activity, Vol. 1).
Comparisons with countries such as Japan, Germany and Australia, which may have similar or higher debt-to-GDP ratios, can be erroneous.
These countries may have far more ‘leg room’ to take up larger debts.
For instance, Japan and Germany have the capacity to innovate, create home-grown technology and export without undermining their resource base. Australia, with a population size that is close to ours, has immensely large and important mineral deposits.
Malaysia lacks world-beating innovative capacity (hence the ‘middle income trap’), is reliant on limited resources (oil reserves and land area), and suffers brain drain. Malaysia may not be as equally geared as some other countries to assume the same proportion of debt for this and other reasons.
More accountability is needed on debt
The Malaysian government appears to have carte blanche in procuring debt. The ordinary citizen is left in the dark about debt levels and debt policy.
A more democratic approach is required given that debt has a critical effect on the people’s wellbeing. Debt amounts and debt policies should be brought under parliamentary scrutiny. Critical debt decisions could be put to public referenda.
Transparency is required. The government must clarify how it intends to repay the money that it has borrowed from the savings of its citizens, and at what rates and by when. The government is obliged to inform its citizens about the use that is being made of borrowed money. The government must reveal the full extent of the government’s debt holding and the annual interest payments that are being made on it.
In a genuine democracy, the people must be able to evaluate how much absolute debt they would be willing to collectively shoulder. ― cpiasia.net
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.
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