KUALA LUMPUR: Due to excess spending, the Malaysian government's debt has grown an average 10% a year over the past 10 years to reach RM687.43 billion as at end-September 2017, from RM266.72 billion in 2007. In fact, the annual growth averaged 10.8% a year between 1997 and 2017.

A big part of the debt spiral is because operating expenditure grew an average 6% a year in the past 10 years to RM219.91 billion in 2017 from RM123.1 billion in 2007 — faster than its revenue growth, The Edge Malaysia's senior news editor Cindy Yeap wrote in the publication's cover story, 'The debt spiral — what's on the books, contingent liabilities, and off-balance sheet items', for the week of Jan 8 — Jan 14.

The country's revenue grew at an average 4.9% a year over the last decade, to RM225.34 billion in 2017 from RM139.9 billion in 2007.

A budget or fiscal deficit happens when a government spends more than it earns that year. So, when the government said on Wednesday (Jan 3) it would unlikely be able to meet its zero budget deficit target by 2020, and would instead need up to three more years to do so, it was not surprising. At least not to a number of economists who had expected as much. They also do not think the country will pare down its debt substantially, if at all, in the coming five years, the weekly wrote. 

While Malaysia's deficit halved from 6.1% of gross domestic product (GDP) in 2009 to 3% of GDP last year, and is targeted to reduce further to 2.8% in 2018, the actual fiscal deficit amount still remains high at RM39.79 billion for 2018 compared with 2017’s RM39.89 billion, it noted. 

The excess spending doubled from about RM20 billion a year in 2003-2007 to RM34 billion in 2008, peaking at nearly RM44 billion in 2009, before improving to RM35.17 billion in 2015, only to go up again, according to the weekly. If federal government debt is allowed to continue growing at the rate it has in the past decade, it could reach RM1 trillion by 2021, RM2 trillion by 2028 and RM3 trillion by 2032, the weekly's back-of-the-envelope calculations show.

Already, debt service charges have risen from RM6.4 billion in 1997 (9.8% of revenue) to RM12.9 billion in 2007 (9.2% of revenue) and RM28.87 billion in 2017 (12.8% of revenue). This year, debt service charges are projected to reach RM30.88 billion, or 13% of government revenue — that’s RM2.57 billion every month. Ironically, the RM30.88 billion debt service charge is also about 78% of this year’s fiscal deficit, the weekly noted.

Revenue-wise, that's 96% of the estimated RM32.2 billion personal income tax collection and 71% of the estimated RM43.8 billion collection from the Goods and Services Tax (GST), it said.

About RM75.7 billion of government debt will mature this year, higher than the RM71.3 billion last year, according to economists at AllianceDBS Research. Between 2018 and 2022, a total of RM363.7 billion or 51.9% of total debt is set to mature, the team’s Jan 5 report noted.

"Endorsements by global sovereign debt rating agencies mean there is no immediate worry that Malaysia will not be able to honour its debt obligations.

Still, the maturing debt papers could spell new borrowings, likely at higher cost, with interest rates 'normalising' across the globe. Bank Negara Malaysia too is widely expected to raise its key overnight policy rate by 25 basis points this year," the weekly wrote.

That could mean more money to service debt in the future, unless something is done to significantly reduce the total outstanding debt, it noted. 

As at end-September 2017, federal government debt stood at RM687.43 billion (51.1% of GDP). That's not including the government-guaranteed debt of RM226.88 billion (16.9% of GDP), in which entities like Ministry of Finance Inc-owned 1Malaysia Development Bhd (1MDB)'s debt falls.

As at end-2016, debt with direct government guarantees stood at RM187.23 billion, of which RM5 billion was from 1MDB (30-year bond) and RM699 million from TRX City Sdn Bhd (formerly 1MDB Real Estate Sdn Bhd). There was also RM4 billion from its former subsidiary SRC International Sdn Bhd that was transferred to the MoF in 2012, according to the weekly.

In the first nine months of 2017 alone, debt guaranteed by the federal government jumped 21% or RM39.6 billion to RM226.88 billion as at end-September 2017, from RM187.32 billion at end-2016, it noted. 

What's more, a lot of infrastructure spending has been taken off the federal government budget, "which reduces transparency and accountability, not just to Parliament, but also to the public,” economist Professor Jomo Kwame Sundaram told the weekly.

To read more about the repercussions of that, what Malaysia's actual debt burden is — and which are the entities with federal government loan guarantees  — pick up a copy of The Edge at newsstands near you today.

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