If not for Malaysia being a net exporter of natural gas, the country would probably be in turmoil, just like Sri Lanka where people have taken to the streets to protest the high prices of fuel, medicine and foodstuff.
With crude oil averaging more than US$95 per barrel this year and demand for natural gas surging, Malaysia is able to maintain its subsidy on petrol and electricity, and healthy foreign reserves to facilitate the import of food and medicine.
Without oil money and, to some extent, the export proceeds of crude palm oil, we would suffer the same fate as some developing countries because of overall weak economic fundamentals.
One major indicator of the fragile economy is the weak ringgit, which has been hovering at RM4.20 against the US dollar for some time now; another is the stagnant household income.
A persistent federal government deficit, which is funded by borrowings, and governance issues in the mishandling of public funds are among the reasons why the ringgit is weak. For every ringgit the government spends, the return is very little.
These are the common problems besieging countries such as Sri Lanka, where the leadership is centred on personalities and corruption is rife, leading to flawed economic and monetary policies.
The developments in Sri Lanka have raised questions about whether Malaysia is on a trajectory that could see it end up like that country where the rupee has depreciated by more than 60% in the last two months after it defaulted on its debts.
Most Malaysians had a first taste of what a weakening ringgit means to the pockets of ordinary people in late 1997 and 1998.
In October 1997, the ringgit was about RM2.70 against the US dollar. By end-November, it was already RM3.50 to the US dollar and surged to more than RM4 against the greenback in the first quarter of 1998.
To the ordinary Malaysian, this translated into more expensive imported food, a higher cost of medicine and more expensive tuition fees for education abroad. For companies with foreign borrowings, their US dollar-denominated loans almost doubled in a matter of months, causing a ripple effect on their balance sheets. Many shareholders took huge losses.
Malaysia was not alone.
The emerging Asian economies known as the “Tiger economies” had financed their high growth in the 1990s through borrowings, which caused a persistent budget deficit.
It was not only the governments that borrowed in foreign currencies to plug the shortfall in revenue. Companies also took up US dollar-denominated loans to expand. This was quite evident, especially in South Korea and Malaysia.
In Indonesia, the people demonstrated because the price of imported food such as infant milk became unaffordable to the ordinary citizen. Eventually, President Suharto stepped down, which in turn put pressure on Tun Dr Mahathir Mohamad.
However, Dr Mahathir took the unorthodox measure of imposing capital controls in September 1998, a move that caused the ringgit held outside Malaysia to flow back into the country. His political opponent, Datuk Seri Anwar Ibrahim, was jailed, suppressing resistance from within the country.
Capital controls stabilised the country’s economic situation. But the long-term effects of keeping the ringgit within the shores of the country linger.
The warning signs of poor governance are there for all to see. Questionable handling of public finances goes unpunished. Corruption is seen in all segments of society, starting from the very top, and very few are made to pay the price.
Rent seeking is almost a culture, especially in relation to government-related projects. What’s appalling is when some even claim that the money received is ploughed back to help the people.
In normal circumstances, a country with a persistent budget deficit and governance issues will pay a price. The currency will go into a tailspin and force its leaders to adhere to some form of discipline.
But Malaysia is largely shielded from this.
Since 2001, the Malaysian Federal government has consistently recorded a deficit in its budget balances. The shortfall in its expenditure is financed by the government taking on more borrowings from domestic institutions such as the Employees Provident Fund (EPF).
Every time there is an external crisis, which in turn slows down the country’s economic growth, the federal government incurs a larger deficit. It happened in 1998, 2009 and 2020.
There is nothing wrong in governments financing their expenditure and economic growth through borrowings. Even the most disciplined governments such as Australia and Singapore spent more than what they received in revenue in times of trouble.
But a persistent deficit is not healthy for public finances because there is nothing left for a “rainy day”.
The pandemic laid bare Malaysia’s poor financial health. The less fortunate households only managed to survive the pandemic by digging into their own savings in the EPF, aided by the moratorium extended by banks.
Out of the RM530 billion in government stimulus packages, direct fiscal injection amounted to RM82 billion.
A persistent federal government deficit displaces private investments. If the government was not borrowing to keep up its expenditure, the money would have gone to the private sector to fund their production and expansion.
In a situation where the country has a persistent deficit, the cost of funds for private entities is generally higher.
Public finance is measured relative to the country’s gross domestic product (GDP), which is the total output of goods and services produced by the economy. The country’s total debt and its debt servicing ability are looked at as a percentage of the GDP. The lower the ratio, the better it is for the country’s macroeconomic fundamentals.
According to the World Bank, the acceptable level of debt as a percentage of GDP is 55%. Governments were allowed to breach the ratio during the pandemic. But most governments keep it below the 55% threshold.
In Malaysia’s case, the self-imposed debt-to-GDP ratio has been adjusted upwards by about 50% in the last 19 years.
The debt-to-GDP ratio was 40% in 2003 before it was adjusted to 45% in 2008. In 2009, it was moved to 55% and now the level has been revised to 60%.
The government has reiterated its commitment to bringing the level down to below 55% in the next few years. But there is no guarantee that the present crop of leaders would be in the government when the time to deliver on their promise comes.
M Shanmugam is a contributing editor at The Edge