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Thread: Economy: Malaysia Illicit Outflow & Debt - Sinking deeper and deeper

  1. #21
    Join Date
    Oct 2008

    'Hidden debt' not in debt-GDP ratio as not 'realised'

    • Aidila Razak

    • 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.

    “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” 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.


  2. #22
    Join Date
    Oct 2008

    I can see the Mamak's fingers behind most of these outfits.

  3. #23
    Join Date
    Oct 2008
    The misleading debt-to-GDP ratio ― 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. ―

    * This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.

  4. #24
    Join Date
    Oct 2008

    Economics: A FAQ On Malaysian Government Debt

    Basically, this economist is telling you: Relax. All is fine.

    • Are you going to wait and find out or

    • do you take action now to protect yourself?

    Don't be a victim of Bank Negara! Buy gold!

    A FAQ On Malaysian Government Debt

    There’s a lot of misconceptions and misunderstandings regarding the level and sustainability of government debt, which has been seriously skewing the public discourse not just about Europe and the US but here as well. [For examples, here, here, here, here andhere].

    Rather than arguing the points one by one, I’m putting up this FAQ as a central reference point, with some faint hopes that we might move on to a better informed debate about the issue. It’ll be available as a permanent page (see the menu on the top right of every page on this blog), and I’ll update it from time to time. The focus will be on the Malaysian situation, but some of the general principles are applicable elsewhere as well.

    First the raw data (RM millions; sample period 1970-2012, with 2011-2012 data based on estimates):

    Up to 2Q 2011, government debt in total has reached RM437 billion, or approximately 53% of nominal GDP:

    Based on Budget 2012 numbers, total government debt outstanding should reach just over RM495 billion by the end of 2012.

    The average rate of increase for the last 40 odd years has been about 11% in log terms (log annual changes):

    And on a per capita basis (RM):

    Based on 2012 numbers, the per capita debt should reach a little over RM 17,000 per person by the end of that year.

    Finally, the fiscal deficit (ratio to nominal GDP):

    You’ll see from the above that it’s not unusual for Malaysia to run a fiscal deficit – in fact it’s been the norm, except for a short period in the mid-1990s.

    Now on to the FAQ:

    Q1. Government debt is like household debt – if we spend more than we earn, we’ll go bankrupt

    A. That’s the common sense view, and its one that’s commonly held. The problem is that it’s also mostly wrong.

    Here’s where the misconception lies – if you’re a household, you earn income based on your work and investments. For a company, income depends on selling the goods and services it produces. For both parties, that income represents the upper limit of what can be paid to service debt. It’s also – and this is the important point – determined by conditions mostly outside your control. You have to depend on someone else to determine your wages; the prevailing interest rate or investment rate governs returns; and market supply and demand (most of the time) limits what a company can sell.

    But that’s not true of government generally. It’s “income” comes largely from direct and indirect taxation – the rates of which are determined by the government itself. So in a very real sense, governments don’t face the hard constraints that households and companies do. Instead its a soft constraint of what level of taxation citizens are willing to bear.

    But even if governments come up against such a limit, there’s also the little fact that most governments also have a de facto monopoly on the issuance of money. As long as a government’s debt is denominated in its own currency and it retains control over issuance of that currency, government debt can always be paid off.
    Third and more importantly, if government spending is directed towards investment which raises the productive capacity of the economy e.g. spending on education, that effectively raises thefuture tax yield, which indirectly allows a higher burden ofpresent debt.

    In the end, the real limit to government borrowing (and spending) is neither taxation nor the printing press – its the ability of an economy to produce goods and services. Which leads to the next point.

    Q2. Bigger and bigger amounts of government debt is inflationary

    A. It depends – and the size of debt isn’t the factor here, it’s what the money raised from debt issuance is spent on.

    Consider a closed economy (i.e. no external trade) with three separate sectors – households, companies and the government. All three sectors produce and consume goods and services. Inflation occurs when demand for goods and services from all three sectors exceeds production. The only way for government spending to be inflationary is when it causes total spending from all three sectors to exceed that limit.

    Now consider a case where households and companies suddenly want to spend more while the government maintains its level of spending. We’ll now have a case of excess demand and inflationary pressures even though the government is not spending any more than it did before.

    Suppose the opposite case where households and companies suddenly want to save more instead. Under those circumstances, an increase in government spending up to the limit of the productive capacity of the economy will not be inflationary since its only taking up the excess supply that households and companies don’t want.

    But inflation actually represents another way for governments to reduce their debt burdens and is often termed “implicit taxation” – if governments spend to the point where inflation increases, that effectively reduces the real burden of debt, and not just for the government but for all debtors. That’s because debt is contractually determined at the point of borrowing (in the past), but payment is usually in current tax dollars (which with inflation has lower purchasing power). Inflation also raises nominal growth, which generally means more tax dollars for a given level of real output.

    Historically, with the exception of actual defaults, government debt has often been paid off through two channels – inflation and economic growth.

    Q3. The Malaysian government has been running a deficit for years – but it should only be running a deficit in bad times. In good times, it ought to be saving and paying down debt

    A. There’s another implication from the discussion on Q2 – whenever there’s an imbalance in the savings/investment decisions of households and companies, the opposite situation must prevail in government spending and investment for an economy to be maintained at full output and income generation .
    If households and companies are saving more, the government has to dissave. Otherwise, demand will be deficient, and household and company surplus falls, which makes their saving pointless. If on the other hand households and companies are overspending, then the government has to save. Otherwise you’ll get inflation.

    So it’s not just a binary decision of good times (save)/bad times (spend) for government expenditure, which is the popular notion of Keynesian economics. It’s more than possible to have a situation of economic growth but with excess saving in the household and corporate sectors. Excess government spending then helps maintain that growth situation with full employment, but with the side effect that it requires government spending to exceed its revenue.

    Let’s take it one step further by adding an external sector (i.e. trade) to our though experiment.
    In aggregate, if a country is running a trade surplus, then production in the economy exceeds consumption – in short, the economy as a whole has excess savings. The opposite is also true, in that a trade deficit indicates an economy that is consuming more than it produces. So far so good.

    Plug in the conclusions from the preceding discussion and you get the following – excess government spending is not a big problem with a trade surplus, but a government should cut back its spending with a trade deficit. In the former case, whether the government should run a deficit or not depends on whether external demand is sufficient to provide full domestic employment. In the case of a trade deficit however, the advice is unequivocal – you have to run a budget surplus unless you’re willing to tolerate higher inflation.

    Hence the consistent concern over America’s “twin” deficits over the past decade.

    Q4. All this increase in debt will be a burden on our children and our children’s children

    A. This is based on the idea that debt has to be repaid eventually, and the main source of government income is taxation – basically a corollary of the idea that a government is similar to a household. Hence, in this view, the greater the debt build-up the greater the expected future level of taxation. The popular notion is thus that of the current generation borrowing from future generations.

    There’s a problem with this conception. First, since governments are collective enterprises on behalf of the governed, there’s no natural lifespan involved. There’s no necessity for debt to be fully paid off and it can be effectively carried in perpetuity. Some governments have actually taken advantage of this fact to issue perpetual bonds that never mature, and at least one major government has issued a 999 year bond.

    But the most important point is this – whether government debt accumulation will become a burden on future generations depends greatly on who the debt is owed to. If the debt is held by citizens or agencies acting on the citizens behalf (for example EPF), then the taxes raised to pay for maturing debt comes from citizens and the debt payment goes back to citizens. All that occurs is a change in financial obligations and possibly some redistribution of wealth, but not a net burden on taxpayers.

    That’s how Japan has managed to raise public debt to over 200% of GDP, yet is barely penalised by bond investors – most of that debt is held by domestic institutions like postal savings banks and pension funds. The Japanese are in effect lending to their government so that the government can spend it on them.

    In Malaysia’s case, the ratio of foreign holdings of federal government debt has been rising steadily since 2005, but its still at a fairly low level (Government debt, not including BNM bills):

    For the rest, about a quarter is held by social security institutions like EPF and SOCSO, the financial sector (banks, insurance companies) hold another quarter. Holders of general investment issues aren’t specifically classified, but foreign holdings of GII are relatively minor according to RENTAS.

    Q5. Government debt growth is being aided and abetted by our pension and investment funds, which are now at risk

    A. Here’s an interesting question for you – which is the better credit risk, a household or company who faces hard budget constraints on income and expenditure, or a government with discretionary powers of taxation and a printing press?

    Government debt typically forms the benchmark for all bond issues in an economy. Even the best rated companies pay more on their debt than the government of their country. It goes back to the safety factor. That’s why pension funds and insurance companies put most of their investible funds into government securities. Whatever the risk of investing in government securities, every alternative except cash is riskier.

    Q6. Since most of government debt is owned by Malaysians and only some by foreigners, the foreigners will get paid first while we have to pick up the bill

    A. Actually, the reason why there’s such elaborate care and concern over foreign bond investor perceptions and rights – not just here but globally – is because historically when countries dodefault, it’s almost always a default on external debt, not on the debt held by domestic institutions.

    It’s not hard to figure out why – when we’re talking about citizens, no democratically elected government would dare default on its debt obligations as it risks being booted out otherwise. Same thing for institutions such as pension funds and insurance funds, which take care of the future financial needs of their investors (read: voters). For banks, a domestic default could mean the government needing to bail them out, which makes a default worthless.

    So foreigners are always first in the firing line, which makes them understandably skittish.

    Q7. The government went on a spending spree during the recession

    A. In 2008, in response to the Lehman Brothers collapse and the resulting shutdown of the international financial system, Malaysia instituted a fiscal stimulus package worth RM7 billion. When that didn’t appear to be enough, a bigger spending package with a face value of RM60 billion was passed through Parliament in March 2009, which put the total up to RM67 billion. That sounds like a lot, especially since both were enacted under conditions where tax revenue was expected to drop.

    But here’s what really happened: Of that RM67 billion, RM5 billion was for National Savings Bonds paying 5% interest intended to help retirees and pensioners to raise their income even as BNM cut banking interest rates (i.e. it was actually revenue, notexpenditure); RM7 billion was in Private Finance Initiatives, where the government didn’t pay a sen; RM20 billion was in credit guarantees for SMEs and small businesses, where again the government didn’t pay a sen; and only the remainder of RM35 billion was allocated for direct spending. That’s still a lot, and helps explain why debt ballooned in 2009/2010.

    Or does it?

    The truth is, Government expenditure in 2009 was only aboutRM1.4 billion higher than the original 2009 budget proposals sent to Parliament in 2008:

    By my estimates, about RM14 billion of both stimulus packages were actually spent in 2009, yet the increase in total government spending was only a tenth of that. The implication is that most of the funding for the extra spending didn’t come from extra borrowing, but from cuts in other government programs. From my point of view that’s no spending spree, that’s being overly tight fisted – 90% of the stimulus effect was swallowed up by cutbacks in other areas..

    So how come government debt rose sharply in 2009? Because government revenue came in at 10% below the budget estimates - in fact a little worse than the contraction in 2009 GDP of 9.9%:

    Q8. We’re in trouble because debt has doubled in the past five years while income hasn’t

    A. This is almost true: at the end of 2005, Federal Government debt stood at about RM229 billion and rose to RM407 billion by 2010. Nominal GDP on the other hand only rose from RM522 billion in 2005 to an estimated RM766 billion in 2010. But this little calculation is also wholly misleading as an indicator of debt sustainability.

    The key point is that the recession seriously dented not just government income but the nation’s nominal income as a whole – the recovery in 2010 saw national income only just passing the level reached in 2008. In the meantime, the government had to deal with the drop in revenue in 2009, and thus had to borrow to cover the difference.

    Looking at the growth rates, debt growth actually lagged income growth from 2005-2007:

    It was only the recession that caused debt growth to jump, and it has now come down to more sustainable levels. As long as debt growth falls more or less in line with income growth, we should be fine.

    Looking at the experience of the last recession (2000-2001) will give you an idea of why just taking a five year comparison won’t give you an accurate picture of the real situation.

    Q9. Government debt isn’t sustainable because operational spending is greater than revenue

    A. I think this came from a misunderstanding of what was said by Idris Jala at the recent ETP anniversary event. But it’s pretty easy to disprove:

    The government’s operational balance has been negative in just three years out of the last 40, and it has not been in deficit since 1987. As required by law, the government only borrows to finance development expenditure, i.e. investment that will raise future capacity to produce.

    Q10. Government debt is nearing the legal debt limit, and they won’t be able to borrow anymore so we’ll have to default

    A. satD has covered this question in detail, so I won’t post more than a summary – the legal limit is a paper tiger and the government can change it anytime it wants. If at any point the government fails to gain legislative approval to raise the limit, in our system of parliamentary democracy that means an immediate dissolution of parliament and fresh general elections.

    You’re not going to see a repeat of what happened in the US in August here. The US uses a presidential system, where the executive is elected separately from the legislative. Since this system is designed to promote checks and balances, that almost always means that a Democratic President has to deal with a Republican Congress and vice versa. The result is typically political gridlock.

    Q11. The Treasury says the national debt is RM240 billion but the outstanding government debt is RM437, someone must be lying

    A. It’s a funny thing but in Malaysia, we don’t use the term “national debt” in the way it’s commonly used elsewhere. Here the term refers exclusively to external debt only, of both the public and private sectors, and not to government debt.

    So in Malaysia, government debt and national debt mean two very different things. The government’s external debt, by the way, is all of RM17 billion.

    Q12. In ten years time, we’ll be like Greece

    A. Greece has a 2000 year history of defaulting on its external debt. Malaysia has never defaulted on its debt.

    Greece has had a debt to income ratio over 100% for the last twenty years, a ratio that is expected to climb to over 150% this year. Malaysia’s debt to GDP ratio peaked at 70% 25 years ago, and is at most 54% today.

    Greece has something like three quarters of its debt owing to foreigners. Malaysia only owes about one fifth of its government debt to foreigners.

    Greece is part of the Eurozone, and thus has no control over the issuance of its own money. Malaysia through Bank Negara controls the supply of Ringgit.

    Worse, the European Central Bank is legally bared from becoming a lender of last resort for the Eurozone governments. Bank Negara has no such restrictions.

    Greece is uncompetitive – it costs 40% more for a Greek worker to produce a unit of output compared to a German one. (Unfortunately the relevant statistics aren’t available for Malaysia).

    Malaysia is not Greece, and we’re not exactly in danger of becoming one in the next ten years.

    [If there are any other questions that I haven’t thought of here, feel free to post in the comments and I’ll add it to the FAQ).

    Technical Notes:
    Data on Federal Government borrowing and expenditure from Bank Negara’s Monthly Statistical Bulletin and from the Economic Planning Unit. Population estimates from EPU and the Department of Statistics

  5. #25
    Join Date
    Oct 2008
    Fiscal deficit could worsen

    Primary tabs

    First Published:7:01am, Jul 25, 2013
    Last Updated:8:58am, Jul 25, 2013


    'Random Thoughts' by Anna Taing

    • Malaysia's fiscal health is deteriorating and an improvement isn't likely to be on the cards any time soon.

    MALAYSIA'S fiscal health is deteriorating and an improvement isn't likely to be on the cards any time soon, especially when the government has recently asked for RM12.2 billion in additional spending.

    So what happened to the fiscal discipline that the government has said it is exercising to rein in its budget deficit? Requests for additional spending, it appears, have been happening on a regular basis over the years. Last year, the supplementary budget was even higher at RM13.8 billion.

    Latest statistics from the Ministry of Finance have reinforced doubts about the government's ability to trim the fiscal deficit to 4% of gross domestic product (GDP - the sum of goods and services produced in a country) this year.

    Here is why.

    In the first quarter (1Q) of this year, Malaysia's fiscal deficit stood at RM14.9 billion or 6.4% of GDP, compared with RM21.1 billion in 4Q2012. In 1Q2012, it was RM5.8 billion or 2.6% of GDP.

    For the first five months of this year, the fiscal deficit is already at RM19 billion, or 4.8% of GDP.

    Total government spending rose 9.8% in 1Q2013 to RM58.4 billion, against RM78.8 billion in 2012's 4Q. Drilled down further, operating expenditure rose 9.4% to RM49.9 billion, due to higher spending on emoluments (RM14 billion) and transfers to statutory bodies (RM7.7 billion).

    On the other side of the equation, revenue fell 8.6% in 1Q to RM43.8 billion. The Inland Revenue Board has targeted a tax collection of RM130 billion for 2013. In 1Q, the collection was RM27.4 billion.

    The general view is that fiscal discipline has been lacking in recent years and populist programmes in the run-up to the 13th general election have been cited as one of the reasons for the widening fiscal gap. For example, cash handouts and other incentive payouts to households earning less than RM3,000 in 1Q2013 amounted to RM3.5 billion. There is also a sharp rise of 19% in emoluments and this is attributed to the generous increase in wages and bonuses for the civil service.

    The government has stated its intention to bring down the deficit to 4% of GDP this year and 3% by 2015. This has led to the setting up of the Fiscal Policy Committee in June, which will be chaired by the prime minister. The objective of the committee is to trim the fiscal deficit without impacting growth.

    The committee will face tough challenges, going by the deterioration in the statistics in 4Q2012 and 1Q2013 and amid an environment where economic growth is seen as weaker, at around 5% to 6% for this year and 2014.

    The committee has a few options - to raise government revenue, cut spending or do both. But as things stand today, the government seems to be in no position to do either. Raising taxes and cutting spending are unpopular decisions and the question is whether there is political will to push both through.

    On the revenue side, economists have noted that the numbers at the end of 1Q are already falling short of the RM208.6 billion projected in the 2013 Budget.

    One way to raise taxes is through the Goods and Services Tax (GST) but this isn't likely to be implemented any time soon, although it has been debated for several years.

    On the expenditure side, instead of contracting, additional spending is now required. Indeed, if the RM12.2 billion supplementary budget is approved, it would widen the fiscal gap to around 5% of GDP.

    Insofar as cutting government spending is concerned, a low-hanging fruit, so to speak, is putting the subsidy rationalisation scheme back on track. For the first three months, spending on subsidies actually fell 14.6% quarter-on-quarter to RM7.9 billion, but this was not through any government efforts to cut subsidies. Instead, the contraction was due to lower crude oil prices.

    Going forward, the government will need to relook the subsidy reduction scheme and tread cautiously when it comes to cash handouts. There is talk that the BR1M (Bantuan Rakyat I Malaysia) scheme could be an annual affair but the question is whether it is sustainable without worsening the fiscal situation.

    Given the current weakness in the government's financial position, it will have to prioritise its spending.

    If we look at past trends, fiscal deficits tend to be smaller in the early part of the year before touching a high by year's-end. For example, in 2012, the deficit in 1Q was RM5.8 billion but RM21.1 billion in 4Q. The same pattern is seen in 2011 (see table).

    The intention here is not to paint a picture of gloom and doom, but whichever way one looks at it, government finances aren't looking good. If the fiscal gap continues to widen, it will impact the overall investment climate of the country. For one, continued fiscal indiscipline is exposing Malaysia to a credit downgrade by international rating agencies. A downgrade means higher borrowing costs for Malaysian companies because of the higher risk premium.

    Let's not forget that Malaysia's vulnerability to a rating downgrade is not caused by its fiscal deficit and rising public debt only. Its household debt has exceeded 80% of GDP and its current account surplus has narrowed significantly to 3.7% of GDP from 7.4% in the same period of 2012. The surplus was even bigger at 16.7% in 1Q2009.

    The Fiscal Policy Committee has its work cut out. The warning signs are showing. There is no time to waste.

    Anna Taingis managing editor atThe Edge. This article was first published inThe Edge MalaysiaJuly 22-28 issue.

    Read more:

  6. #26
    Join Date
    Oct 2008
    Federal government’s deficit rises in first quarter 2013

    Posted by Anil Netto on 29 July 2013 Add comments
    The federal government posted a RM14.9bn deficit for the first quarter of 2013 compared to a RM5.8bn deficit for the first quarter of 2012.

    Source: Ministry of Finance

    For the first quarter of 2013, the increased expenditure of RM49.9bn was due to higher emoluments (RM14bn), transfers to statutory bodies (RM7.7bn) and state governments (RM1.2bn). The higher expenditure was partly due to bonus payments to civil servants announced at the end of 2012 and higher allocations for road maintenance to state governments in the run-up to GE13. BR1M, incentive payments, financial assistance to students and book vouchers amounted to RM3.5bn.
    Source: Ministry of Finance

    The fiscal deficit for the whole of 2012 of RM42.0bn amounted to 4.5 per cent of GDP.

    For 2013, Najib says he will reduce the deficit to 4.0 per cent of GDP.

    But one research house said it would be difficult for the government to meet this target due to the handout programme.

    For the first five months of 2013, the Edge reported that the fiscal deficit was already 4.8 per cent of GDP.


  7. #27
    Join Date
    Oct 2008
    Malaysian Election Leads To Debt Downgrade

    By Luke Hunt

    The Malaysian government has had a hard time coping with the May election, which resulted in voters deserting the ruling party in droves and Prime Minister Najib Razak relying on gerrymandering to secure another five-year term.

    Transparency International said the election did not reflect the will of the people. In its aftermath Najib and senior figures in the United Malays National Organization (UMNO) tried to be conciliatory – particularly with Chinese voters fed up with a political system that discriminates against them.
    But their efforts have been erratic and included another unwanted effort to ban the use of the word “Allah” in non-Muslim communities and the banning of Muslim girls from a beauty pageant. Rights groups have also accused the government of abusing laws to detain opposition figures.

    Much of this has been led by Foreign Minister Anifah Aman, an ambitious man whose brother Musa is the chief minister of the East Malaysian state of Sabah, home of many electoral irregularities, illegal logging and corruption, and a dormant insurgency launched from the Southern Philippines.

    Human rights groups, lawyers, independent journalists and opposition politicians have gone a long way in explaining why most Malaysians do not like their government. Now the ratings agencies are also voicing their opinions and they are not good either.

    Fitch has cut its outlook on Malaysia’s sovereign debt from stable to negative, saying the divisive election result has worsened prospects for much-needed economic reforms. According to Fitch, public finances were the country’s key rating weakness.
    “Prospects for budgetary reform and fiscal consolidation to address weaknesses in the public finances have worsened since the government’s weak showing in the May 2013 general elections,” the ratings agency said in a statement.

    While the merits of ratings have been the subject of intense debate ever since the Global Financial Crisis erupted in 2008, they remain fundamental to businesses, governments and their respective economies – particularly in countries like Malaysia which harbors ambitions of becoming a developed nation.

    Ratings determine the cost of debt, influence money policy and interest rates, and in some countries serve as a chief economic factor for governments – often in banana republics that are juggling junk bonds within a bankrupt economy.

    Standard & Poor’s and Moody’s have allocated a stable rating to Malaysia, but where one ratings agency goes the others are sure to follow.

    Fitch said the election result had only exacerbated multi-ethnic divisions within Malaysia. It noted Najib could face a leadership challenge from within his own party by October, adding Malaysia was comparable with Mexico, which had a lower rating of BBB+ compared with Malaysia’s long-term foreign debt rating of A-.

    Politics and racial divides aside, Fitch noted that due to persistently high deficits the federal government’s debt reached 53.3 percent of gross domestic product at the end of last year, up from 39.8 percent at the end of 2008.

    Malaysia’s problems are many. Challenges to Najib’s leadership should be expected after he delivered one of the most dismal performances for the UMNO in recent elections. His deputy Muhyiddin Yassin has been touted as one possible challenger, although a bid by Aman, with his brother’s backing, cannot be ruled out.

    Luke Hunt can be followed on Twitter at @lukeanthonyhunt.

  8. #28
    Join Date
    Oct 2008
    Friday, 27 September 2013 07:18

    Debt-strapped Malaysia to sell first-ever 30-YEAR bonds

    KUALA LUMPUR - Malaysia will sell 30-year bonds for the first time in its longest-maturity offering to set a benchmark for companies raising funds under Prime Minister Najib Razak's US$444 billion (RM1.43 trillion) development programme.

    The government will sell RM2.5 billion of 2043 notes today, according to Bank Negara Malaysia's website. Pre-market trading showed bid to offer yields were 4.35 to 4.75 per cent yesterday, said Michael Chang, head of fixed-income at MCIS Zurich Insurance Bhd, here.

    Similar-maturity US Treasuries were paying 3.67 per cent and 30-year Thai debt 4.6 per cent, data compiled by Bloomberg show.

    The maturity extension will add more depth to the region's biggest bond market given that Thailand and Indonesia already have debt maturing in 30 years or beyond, Chang said.

    Highway operator PLUS Bhd is only the second Malaysian company to have issued securities due in more than 25 years, along with sovereign wealth fund 1Malaysia Development Bhd, as the prime minister embarks on a 10-year spending spree to build roads, railways and power plants.

    "The offering will help facilitate project financing," said Soo Seohan, head of debt capital markets at AmInvestment Bank Bhd, Malaysia's second-biggest bond arranger this year, on Wednesday. "Demand will be there given that insurance companies and pension funds need to match their assets with liabilities."

    Chang said he's keen to buy the debt because it's an inaugural issue.

    Yields on 20-year notes, currently the longest government maturity in Malaysia, are falling three times as fast as rates on three-year debt this month. Long-term securities are more sensitive to expectations for consumer prices, which rose 1.9 per cent in August, compared with two per cent in July and 1.2 per cent in December when the 30-year bond plan was announced.

    The extra yield investors demand to hold the 20-year government notes over those due in three years narrowed 24 basis points to 78 in September, according to data compiled by Bloomberg. That's down from this year's high of 120 on September 4.

    "Given that inflation is expected to rise further, we would only be interested in the 30-year bonds if the yields are above five per cent," said Lam Chee Mun, a Kuala Lumpur-based fund manager at TA Investment Management Bhd, which oversees around RM650 million.

    "At the moment, we feel that other asset classes give better returns."

    "Longer-term bonds are more viable for countries building infrastructure because you get a maturity mismatch if your fund-raising is in the short end," said Iwan Azis, head of the Asian Development Bank's regional economic integration office in Manila, on Monday.

    "If Malaysia is doing successfully, then I'm pretty sure other neighbouring countries will follow suit," Iwan said.

    Thailand sold 50-year debt, Southeast Asia's longest-maturity sovereign notes, in December 2010. The maximum government debt duration in the Philippines is 25 years and 15 in Vietnam, data compiled by Bloomberg show. In Singapore, it's 30 years. Those bonds yielded 3.16 per cent on Wednesday, compared with 3.51 percent at the end of August.

    Malaysia had US$314 billion of debt outstanding as of June 30, compared with US$286 billion in Thailand, US$118 billion in Indonesia and US$95 billion in the Philippines, according to Asian Development Bank (ADB) report this week.

    "Malaysia's 30-year bond will extend the yield curve and deepen the local market," said Jason Chong, who oversees US$1 billion as chief investment officer at Manulife Asset Management Services Bhd. Bloomberg

    Full article:
    Follow us: @MsiaChronicle on Twitter

  9. #29
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    Oct 2008
    Posted by Anil Netto on 4 October 2013 Add comments

    Malaysia’s total local currency bonds outstanding stood at RM994bn (US$314bn) at 30 June 2013, the highest in the Asean region.

    That’s a 6.4 per cent rise from last year though 0.2 per cent lower than the end-of-first quarter 2013.A bond is paper issued by a borrower, whether the government, GLCs or private firms, with a promise to pay periodic interest and to repay the face value upon maturity. The terms of payment depend on how investors view the offer, the risk involved and the country’s economic climate – a view also shaped by rating agencies.

    Out of this RM994bn bonds outstanding, the corporate sector accounts for RM406bn or US$128bn. Here are the top 30 outstanding corporate bonds in Malaysia. Note that four out of the top five issuers are state-owned.

    Meanwhile, the central government accounts for RM459bn (US$145bn) or 77 per cent of the the total government bonds outstanding of RM588bn. This is a 10 per cent increase from the previous year. Moody’s Investors Service has an A3 rating for government bonds.

    Banks and other financial institutions are the largest holders (42 per cent) of government debt at the end of the first quarter of 2013. Foreign investors hold 31 per cent of outstanding government bonds, while social security institutions like the EPF hold 20 per cent. Social security institutions also hold 10 per cent of corporate bonds.

    When compared to the size of our economy, our bond market comes up to 105.3 per cent of GDP, still the highest in Asean and higher than Hong Kong’s or even China’s.

    Source of tables: Asian Bond Monitor, September 2013, ADB Bank.

    Meanwhile, Malaysia’s central bank has sold RM2.5bn of 30-year bonds, the longest-maturity offering ever but foreign investors have stayed away, the Wall Street Journal has reported. “One concern among investors has been Malaysia’s debt. The country had $145 billion of local-currency government bonds outstanding—one of the highest levels in the region—as of June 30, according to the Asian Development Bank. Indonesia has $89 billion of outstanding government bonds, Thailand has $104 billion and Vietnam has $26 billion.”

  10. #30
    Join Date
    Oct 2008

    Little foreign interest in Malaysia's 30-year bonds

    COMMENT Institut Rakyat views with great concern various insider reports suggesting the virtual absence of foreign investors in Malaysia’s inaugural issuance of 30-year sovereign bonds on Sept 27 this year.

    This could set off alarm bells due to worries within the investment community over the health of Malaysia’s public finances and further deterioration of the current account balance, raising the spectre of twin deficits.

    Historically, Malaysia’s sovereign debt issues, which are in the investment grade league of A- or A3 have never failed to draw significantly high levels of foreign interest.

    Indeed, the recently tabled first Supplementary Bill 2013 for operating expenditure worth RM15 billion could push this year’s budget deficit-to-GDP ratio to 5.5 percent, way above the initial 4 percent target set in Budget 2013 assuming no change to forecasts for revenue, development expenditure, loan recovery and GDP.

    Malaysia’s current account surplus narrowed dangerously to RM2.55 billion in the Q2 2013, compared to the quarterly average of RM23.93 billion between 2005 and 2012.

    Institut Rakyat also estimates that the public debt-to-GDP ratio may breach the self-imposed ceiling of 55 percent by year-end from 53.5 percent as at the end of last year, leaving it among the highest in Southeast Asia (versus 51.5 percent in the Philippines, 44.5 percent in Thailand and 23 percent in Indonesia) due to the additional expenditure for 2013.

    Little wonder that Malaysia’s public debt burden is among the highest in the region - its local currency denominated government debt outstanding stood at US$145 billion versus Thailand’s US$104 billion, Indonesia’s US$89 billion and Vietnam’s US$26 billion as at end-June 2013, according to the Asian Development Bank.

    In addition, three factors may have also caused foreign investors to shy away from subscribing to these long maturity bonds to avoid currency and interest rate risks:

    (i) Anxiety over the Federal Reserve’s looming ‘tapering’ of its bond-purchasing programme or a scale-back of its quantitative easing policy since late May 2013 and hence, prospects of tightening global monetary policy including for Malaysia;

    (ii) Moderating growth momentum with GDP growth averaging at only 4.2 percent year-on-year in the first half of 2013; and

    (iii) Persistent capital outflows and hence, substantial ringgit weakening in recent months, in particular following revision to Malaysia’s sovereign credit rating outlook to negative from stable by Fitch in late July 2013 and increased financial volatility,

    Address concerns

    Notwithstanding the consolation from the bond over-subscription rate of 2.44 times, the fact remains that only domestic institutional investors such as pension funds and insurance companies were keen.

    These are likely to hold the long-tenured bonds to maturity as part of their asset-liability management and not necessarily an indication of the bond quality.

    As at end July 2013, foreign ownership of Malaysian government bonds stood at 40 percent down from 46.8 percent in June 2013 or 49.5 percent in May 2013, according to Bank Negara.

    While these long-term bonds are the most appropriate to prevent maturity mismatch and viable for infrastructure projects of long gestation period while extending the yield curve and adding more depth to the ringgit-denominated bond market - Southeast Asia’s largest bond market - Institut Rakyat is less certain whether they could turn out to be a good fund-raising or project financing benchmark for corporations given the quasi-indifference among foreign investors towards these historic issues.

    As a result, while these sovereign bonds will mature by September 2043, priced to yield 4.935 percent at only 123.5 basis points above comparable US Treasuries, final yields come in at the higher end of the indicative range of 4.35-4.75 percent and significantly higher than those of similar Thai bonds at 4.6 percent.

    With the longest ever maturity of any kind of Malaysian debt offering, the RM2.5 billion proceeds from these bonds will be used to finance Malaysia’s US$444 billion infrastructure development programme under the Economic Transformation Programme.

    Although most Asian governments and corporations, including in Malaysia, may have missed the opportunity to raise funds more cheaply for their infrastructure spending in the immediate-to-medium term, their vulnerability to forex gyrations, sudden spike in borrowing costs and shifts in investor risk appetite is much reduced today.

    This is thanks to the rapid expansion of the local currency bond market and the maturity lengthening of bonds, both of which have helped address currency and tenure mismatch issues as well as improve the systemic soundness, stability and resilience.

    Nonetheless, the foreign non-participation in such a momentous and eventful debt issuance could be a harbinger of further loss of interest among investors in Malaysia's growth story should we fail to promptly address their concerns, which are valid for both foreign and domestic investors, or at least demonstrate assuring signs of taking steps in the right direction.

    AZRUL AZWAR is executive director of Institut Rakyat.

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