Sunday, March 3, 2013

When does Malaysia’s debt becomes a problem? Just the facts please!

Since March 2008, Malaysians find it harder and harder to get non-partisan balance and factual point of views. Each time we read an article whether it is about politics, education, and economics and even bread it would likely be colored with politics – one side trying to paint the other as worst as possible and show off that they are the smarter one. Facts and figures are twisted, half-truths made like solid analysis, hoodwinking the innocent public. All these have made many Malaysians on the verge of giving up on politicians and their cohorts.

One such example where half-truth was made as though it is an intellectually factual economic paper was the recent writing by ‘an enemy of the state’ who go by the name of Pak Sako. I consider him or her an enemy of the state because he or she prefers non-peaceful options like what happened during BERSIH 3 rather than the peaceful and productive action during #KL112. He or she constantly writes article to create panic, negativity and hatred. This fella is tarnishing the name of a national laureate who has left us and the fact is we are not even sure if this person masquerading as Pak Sako is a Malaysian!

In the article about our national debt ( ) this Enemy of the State, tried to deceive and alarm readers by focusing on 2 main themes. Firstly, noting our debt in Ringgit so it will look enormous to the average reader instead of the more exact approach by observing percentage over GDP and secondly, by forecasting a sharp increase in debt within the next few years second guessing that the government will continue the current populist agenda even post GE 13. This Enemy of the State did not even offer any comparative figures with other economies!!!

I wanted a more non-politically biased point of view so I asked a close associate who is knowledgeable about economics and not into politics to explain the economics of debt without any partisanship.

Just the facts, please. 

The following is a balanced explanation. At the end of the article, I will also provide a comparative debt ratio of countries all over the world so readers can see for themselves.

Here we go.

If like the US, government is expected to bail out the banking sector debts apart from its own debt, then we need to compare how much revenue government has to cover for any banking debt crisis and government debt crisis. To do that the formula will be as below;

  1. Malaysia p.a. (3rd qtr 2012 figures)
  2. Gov. Debt (RM484b) + Private Sector Debt (RM77b)
  3. DIVIDE BY Gov. Revenue (52b)
So Malaysia has a Debt cover of 10.8x (times)

How does this debt cover “debt gearing” as per accounting term compare with other countries?

In 2011, a comparative data with other country figures are as below;

  • Ireland 43x
  • Japan 37x
  • United States 16x
  • United Kingdom 14x
  • Spain 11x
  • Portugal 10x
  • Netherlands 10x
  • France 10x
  • Germany 9x
  • Greece 8.5x
  • Australia 8.4x
  • Italy 7.5x
So the debt gearing might look high and of concern, but is almost on par with Germany, France & Netherlands and even lower than US and UK.

But we may also realise that the problem countries like Italy, Greece have slightly lower gearing, and we are on par with problematic Spain.

Are all debt gearing the same?

It all depends on the income generating capacity and economic efficiency to service that debt. Just like companies and individuals, we can borrow to fund productive ventures and invest for income potential or borrow for current consumption i.e. welfare programs by government or cover large public spending deficits etc.
Example : Greece debt gearing figure may look good in comparison to Germany, but Greece is having a debt crisis while Germany is not because Germany has managed to consistently run a current account surplus (income positive) for the last decade  compared to Greece which has more consistently run a current account deficit (income negative). So same with Italy & Portugal, even though have similar “gearing ratio” with Germany.

With Malaysia, as long as we get more money/trade flowing into the country, the better we are at servicing our debt. However, since the last 2008 global economic crisis, the government had to spend more on the local economy to help cover the decline in current account surpluses, but it has still consistently been in surplus territory and beginning to show a trend reversal (if CPO prices & manufacturing export figures recover)

Japan is not in the news for any debt crisis, even though very high gearing of 37x, because they borrow heavily from internal country funds rather than foreign (9% of Public Debt), where Malaysia is even lower at 3.6% of Public debt from foreign sources (BNM). Local sources like retirement funds and deposits are more stable source than fickle foreign lenders. And most importantly Japan still consistently runs a current account surplus (however increasing trend/historical high in foreign borrowing, as more foreign funds are needed to fund trade surpluses that have shrunk due to CHINA issues)  

With regards to Malaysian banking sector loans disbursed are for more productive business working capital/loan uses (52%), compared to US (only 15% business loans – while 35% for real estate loans etc ).

In terms of government debt as per our Gross National Production (GDP),  our revenue capacity, globally we are still below the critical 100% level.  

And if future trends are a concern, IMF forecast (2011 figures) suggests that Malaysia Debt per GDP ratio will be incremental to a still comparatively safe 60% level by 2016 (please refer the table below).


So as long as we can maintain our GDP growth, and get business growing rather than hinder it, then we should be okay.

At the end of the article, The Enemy of The State suggested that, Tackling debt ought to be a major subject of political discourse in Malaysia.”

Any thinking and caring Malaysian should want the government to be vigilant with our debt. But the major subject of political discourse in Malaysia should be tackling these enemies of the state who are doing a disservice to the country by deliberately propagating lies and half-truths just to win some votes. Politicians and the rakyat from both sides of the political divide including those non-aligns must not support them.

‘When the facts change, I change my mind. What do you do, sir?’

                                                                                      John Maynard Keynes
Note :

1. Current Account

Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. And a current account surplus is usually associated with trade surplus. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Positive net sales to abroad generally contribute to a current account surplus as the value interest or dividends generated abroad is bigger than the value of interest or dividends generated from foreign capital in the country. Net transfer payments are very important part of the current account in poor and developing countries as workers' remittances, donations, aids and grants and official assistance may balance high trade deficits.

2. Gross government debt (sortable; in percent of GDP)

International Monetary Fund, World Economic Outlook Database of September 2011


Unknown said...

Figures can always be 'arranged' to suit a particular purpose, so it all depends on the reader's interpretation to form a conclusion.

There are 2 facts which you did not address but is surely a cause of concern.

1. Like Greece, a lot of government debts have been hidden under private debts to make the gdp% look good

2. Despite the golden years of petroleum and palm oil exports, we were still running a deficit which means servicing these debts in the years to come. Indications are that earnings from this sector is on the decline, so how?

Don't you think the govt has also overspent on opex which does not generate any future income.

Uppercaise said...

Anas, sorry to say but your belief that Malaysia's debt is okay collapses.

See here, in the news -

There are heaps of unanswered questions that gotta be answered first before it can be said that the debt level is okay.

And the RM1 trillion trajectory - IMF forecast apparently. Wanna go tell IMF they are second-guessing?

Anonymous said...

Always remember that GDP figures do not necessarily indicate real economic growth or productivity.
For eg, if a huge bomb landed in PJ and created a massive crater, a lot of "economic activity" will be produced to fill up that hole. GDP figures for that year will go through the roof but what has it done for the real economy? Nothing much because the net result is that a hole was merely filled up.