As debt numbers soar, analysts repeat calls for prudent spending

A money changer counts Malaysian ringgit bank notes at a foreign exchange booth in downtown Kuala Lumpur, 06 December 2006.
A money changer counts Malaysian ringgit bank notes at a foreign exchange booth in downtown Kuala Lumpur, 06 December 2006.

KUALA LUMPUR, Aug 10 — Putrajaya needs to rein in Malaysia's debt problem by controlling its spending and plugging wastages that occur through procurement, local business weekly The Edge reported today as concerns over the country's financials continue to pour in from analysts, economists and politicians across the board.

In a report titled "Malaysia's debt mountain", the newspaper noted that the country was caught in a debt trap, saying that overspending was aided by easy credit.

"From households to corporates, as well as at both the federal and state levels, Malaysia is a nation in debt, spending more than we earn on the back of easy and abundant credit and a shocking lack of financial discipline," it said.

The Edge noted that the household debt to GDP ratio stands at 83 per cent, while corporate debt is now at a whopping 95.8 per cent of the GDP.

Malaysia's national debt is currently at 53 per cent of the GDP, just slightly below the government's self-imposed debt ceiling of 55 per cent.

The Edge reported that economy observers as saying that Malaysia has to stop the abuses of public funds and procurement practices where purchases are made way above market value.

"Proper controls will cut wastages and inflated costs, making every ringgit of government revenue and taxpayer money count towards higher impact economic activities or aiding the lower income group," an analyst was quoted as saying by The Edge.

The analyst also noted the challenge posed by the cost in maintaining Malaysia's public sector, where an estimated 1.4 million of the country's 28 million-strong population are employed as civil servants.

"If you cannot significantly reduce operating expenditure, then you have to increase your revenue sources...It's just like how if you've overleveraged on credit card debt to a point where your income is not enough to make monthly payments, one way is to sell assets and significantly cut back on your living standards," he was reported as saying.

An economist also suggested that Malaysia still has a chance at fixing its debt levels, pointing out that the country had managed to turn around its extremely high debt-to-GDP ratio situation to register surpluses in the early 1990s.

"The budget deficit was over 10 per cent of GDP in the early 1980s and debt-to-GDP ratio was more than 100 per cent in 1987 before the government took steps to progressively reduce its debt servicing burden.

"But we [eventually] had several years of fiscal surpluses in the early 1990s, thanks to good control of expenditure coupled with decent economic growth, so I wouldn't say things are too bad to be fixed. But we need to move quickly and be upfront about matters.

"No more of all these off-balance sheet nonsense and bad procurement practices," the economist was quoted saying.

Last week, DAP's Tony Pua said the government should recognise off-balance-sheet loans and contingent liabilities as part of the government's debt, saying that the actual figure would exceed the 55 per cent debt ceiling.

"In reality, if both official government debt and government-guaranteed debt are put together, our debt to GDP ratio will be a much higher and worrying 68.9 per cent,” Pua had said.

London-based Academic Danny Quah said the government needs to explain the debt situation to the public in order to effectively control debt.

"Fear and uncertainty can needlessly and dangerously worsen any debt situation," the professor of economics and international development at the London School of Economics and Political Science (LSE) said.

But Quah indicated that crises can be averted even with high debt levels, provided that the economy grows at a fast pace.

"For instance, what might otherwise be a dangerous debt situation could turn out to be benign through the economy simply growing itself sufficiently quickly. Conversely, if that growth fails to materialise, then even what initially appeared to be unremarkable debt ratios can turn out to be unsustainable. This is arithmetic and is uncontroversial.

"In our case, Malaysia needs to continue to keep its eye on generating sustainable growth, evading the middle-income trap. What happens in the global economy - Asia in particular - will matter importantly, not just for generating demand for Malaysia's exports but to provide appetite for debt.

"But at the same time, both public and private debt in Malaysia need to be kept under control," Quah was quoted saying by The Edge.

Yesterday, The Malay Mail Online reported economists and a think tank's head as saying that Putrajaya needs to show its political will by moving on with reforms to the economy.

The economy observers pointed to various reforms which Putrajaya had raised but failed to implement, including the proposed Goods and Services Tax (GST) to boost the government's income, as well as an exercise to trim spending by cutting down on government subsidies.

CIMB’s chief economist Lee Heng Guie said fiscal reforms could be sped up with the formation of a Fiscal Reform Committee, while also saying that Putrajaya needs to send out a strong message through the Budget 2014 that will be tabled this October 25.

Suhaimi Ilias, group chief economist at Maybank Investment said Putrajaya needs to control its spending.

“[Hopefully] government will become more disciplined in terms of spending. Over the past few years it has been a regular situation with the government asking a big increase in the budget through the supplementary budget Bill which does not correlate with discipline budgeting and spending,” he told The Malay Mail Online.

Last Wednesday, global ratings agency Fitch Ratings cut its outlook on Malaysia’s sovereign debt to “Negative”, citing gloomier prospects for reforms to tackle the country’s rising debt burden following a divisive election result this year.

The revision from a stable outlook adds to concerns over Malaysia’s high debt pile at a time when the currency has been pressured by bond fund outflows and talk of the US Federal Reserve ending its easy monetary policy.

In its downgrade, Fitch had singled out the lack of political fortitude to see through necessary reforms.

“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,” Fitch said in a statement.

The Fitch outlook downgrade appeared as other warning signs began surfacing over Malaysia’s slowing economy: slowing export growth, a falling trade surplus, and a ringgit at a three-year low against the US dollar.