This article first appeared in The Edge Malaysia Weekly on May 28, 2018 - June 3, 2018

Experts have always known that Malaysia’s 2017 headline debt-to-gross domestic product (GDP) figure of 50.8% was really closer to 70%. Yet, even they were taken aback last Monday when Prime Minister Tun Dr Mahathir Mohamad said abuses pushed Malaysia’s debt over RM1 trillion, which means the new headline debt-to-GDP number is potentially well over 74% of GDP.

“We find that the country’s finances [had been] abused in a way that now we are facing trouble settling debts that have risen to a trillion ringgit … We have never had to deal with this before. Before, we never faced debts higher than RM300 billion, but now it has climbed to RM1 trillion,” he told reporters on May 21.

While Mahathir said “it won’t take too long for the country to recover” and the government is confident of overcoming challenges, for the number crunchers, there was no telling if the new figure is up from 68% or that massaged 50.8%. Economists and investors were left guessing whether there would be more contingent liabilities to further shore up that RM1 trillion headline figure.

If it is any consolation, the UK’s debt-to-GDP figure was 87.7% with general gross debt at £1.786 trillion as at end-2017, and the general government [budget] deficit was 1.9% of GDP. Greece’s debt-to-GDP — the highest among European Union member states — stood at 178.6% as at end-2017.

Back to Malaysia, three days after Mahathir’s revelations, Finance Minister Lim Guan Eng, fielding reporters’ questions, said “this is it”, meaning there will be no more surprises to the new, and true, federal government figure of RM1.0873 trillion, or 80.3% of GDP, as at end-2017.

“Let me emphasise that the obligations and financial commitments of the federal government are unchanged … the only change is that the new federal government has decided to call a spade a spade … we firmly believe that in the medium term, by recognising our true debt situation today, the federal government [can] take concrete actions to regularise and strengthen our financial state,” Lim told reporters in Putrajaya shortly after the closing bell last Thursday.

“The fundamentals of the economy remain strong, the financial sector is stable, the banking sector is well-capitalised and there is sufficient liquidity in the market,” he added, noting that investor confidence “will only strengthen over time” as the new administration abides by the principles of competency, accountability and transparency.

The RM1.0873 trillion federal government debt for end-2017 is a combination of three numbers:

1.    The official federal government debt of RM686.8 billion (50.8% of GDP);

2.     Government guarantees for various entities that are unable to service their debts of RM199.1 billion (14.6% of GDP), which is a variation of the “old” debt guaranteed by the federal government of RM238 billion (17.6% of GDP); and

3.     RM201.4 billion (14.9% of GDP) in lease payments (including rental, maintenance and other charges) for an unspecified  list of public private partnership (PPP) projects such as the construction of schools, hostels, roads, police stations and hospitals that are not included in the first two groups.

The Ministry of Finance’s press statement, dated May 24, states that the RM199.1 billion (Item ii) excludes government guarantees for entities such as Khazanah Nasional Bhd, Tenaga Nasional Bhd and Malaysian Industrial Development Finance Bhd (MIDF) that “are able to service their debt”, which is why it is different from the “old” official figure of RM238 billion.

The entities that are counted on the “new” list would be entities “with committed government guarantees and have no independent sources of income”, such as DanaInfra Nasional Bhd — a special purpose vehicle for the government to raise funds for infrastructure projects such as mass rapid transit (MRT), a source says.

The source adds that the newly introduced third PPP figure of RM201.4 billion includes commitments to maintain PPP projects like the 30-year build, lease, maintain and transfer concession for the Permata Children’s Hospital (HKKP) in Cheras that was awarded to Zecon Bhd in 2013 by the Ministry of Education and Universiti Kebangsaan Malaysia (UKM) after a competitive bidding process. In 2014, Zecon Medical reportedly expected the project, which required RM744.4 million in funding, to generate about RM3.7 billion in total gross revenue over the concession period.

We were not able to obtain an official list for the RM199.1 billion at press time, but the The Edge’s estimates (see table on Page 15) are based on information provided by a reliable source.

“It is better to reveal the true situation now so that appropriate action can be taken to strengthen our financials … there will be more details [on concrete measures to cover the shortfall in revenue from GST cancellation] next week,” adds the source, who said the examples given of abuses of government finances are not meant to run down the previous government but are in the spirit of transparency and that the people “deserve the truth”.

Asked how the lack of GST income will impact the budget deficit and whether it is possible to have a surplus budget from the get-go last Thursday, Lim said those details would be discussed at the next Cabinet meeting and revealed when they are finalised.

There is no doubt the people deserve the truth. But, is the truth and a firm commitment to reform enough?

“Yes, there will be additional oil revenue but what if oil prices fall? There are also petrol subsidies and forgiving of debt. There is no income replacement for GST yet and it seems that the Inland Revenue Board (IRB) will not be pushing as hard, which is good for the people, but it makes the revenue shortfall question even more pressing,” says a seasoned observer.

“The truth is good but [that alone] won’t rescue the economy or boost market confidence. Even if genuine investors stay and benefit from ongoing reforms, everyone could have been spared the near-term volatility [from the lack of details].”

Dr Yeah Kim Leng, Sunway University Business School Economics Professor, also reckons more details need to be provided for the data crunchers.

“Any major changes in market-sensitive government statistics should preferably be accompanied by more detailed information and clarification notes so that analysts can better assess the implications. In this case, it is not unusual for a new government to uncover discrepancies and irregularities in the previous administration but the market impact should be anticipated and accompanying data and mitigation factors and measures should be in place already to forestall knee-jerk reactions,” he says.

Lee Heng Guie, executive director of Socio-Economic Research Centre (SERC), is not the only one who thinks the government needs to convince the rating agencies that Malaysia is fully committed to a fiscal consolidation framework and manage its debt and finances better than before.

“The government has to reassure that the fiscal consolidation framework remains intact… so as to avoid a credit-rating watch, though an outright rating downgrade is unlikely,” he says.

Yeah agrees the risk of a rating downgrade has “ratcheted up”, given that the debt load and repayment capacity, as well as changes in taxation and spending plans, are all major rating considerations.

According to him, credit rating agencies and investors, especially those in the bond market, “will need assurance on the actual extent and the type of the new debts such as coupon rate, currency and maturity profile to assess the impact on the country’s sovereign creditworthiness”.

“A rating watch could be on the cards if the rating agencies are not able to access information on the latest developments. Given that the government’s capacity to fulfil all its debt obligations remains strong, a default can be ruled out but any negative rating actions will elicit adverse market reactions such as a widening of credit risk spreads and an increase in borrowing costs. Should a downgrade happen, the market impact could be significant because the rating if downgraded a notch will be in the next category BBB from the present A category,” Yeah explains.

Suhaimi Ilias, Maybank Investment Bank group chief economist, sees the government “managing future debt growth” and expects a review of mega projects to manage its direct and indirect debt financing costs.

A government source says officials are “in contact” with rating agencies — an important move, given that a sovereign rating cut will raise the cost of funds for the government as well as businesses.

“We have to be mindful of the fact that foreign investors now hold 44% of government debt (Malaysian Government Securities) outstanding versus 5% to 10% in the pre-global financial crisis years. A credit rating downgrade may lead to significant foreign sell-off in the bond market, which poses further risks on government funding costs as well as impact the ringgit,” Suhaimi says.

That is just one reason why market guidance about policy changes or recalibration “must be clear and consistent to avoid market confusion about the state of fiscal position and debt”, Lee says.

“Information dissemination must not be piecemeal and more organised with details to reduce market uncertainties, especially during this transition period. What matters most to investors are economic and financial policies and market stability,” says Lee, who also put in a good word for the government and the Council of Eminent Persons.

“[The council members’] untiring efforts to meet and have dialogues with all stakeholders is a positive step in the right direction to provide strong assurance to investors that the government is confident of maintaining sound and credible economic and financial policies management.”

That is a step in the right direction, and together with the brownie points from speaking the truth and commitment to reform, will be well rewarded if investors’ fears are allayed by the presentation of necessary facts.

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