This article first appeared in The Edge Malaysia Weekly on August 9, 2021 - August 15, 2021

IT was clear that Malaysia’s economy would not recover to its pre-pandemic size in 2021 when the country reimposed stringent Covid-19 containment measures from June 1, so much so that Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz conceded that this year’s GDP projection of 6% to 7.5% would have to be revised lower to “around the 4% range” when the second quarter GDP reading is released this Friday (Aug 13).

The World Bank’s 2021 GDP forecast for Malaysia was cut to 4.5% (from 6%) in June while the International Monetary Fund (IMF) lowered its forecast to 4.7% (from 6.5%) in July. Malaysia needed at least 6.75% growth this year for its GDP (current prices) to match the pre-pandemic level of RM1.51 trillion in 2019.

Amid growing appeals by the people plus the clamour from politicians for the government to temporarily ignore its self-imposed debt ceiling and inject a lot more money into the economy to save lives and livelihoods, Zafrul, on June 29, hinted not only at the possibility of raising the statutory debt limit but also the size of the special Covid-19 Fund that allows the government to borrow to fund operating expenses.

While Malaysia’s fiscal space looks tight, there are other avenues that the government still can tap to increase its fiscal space to support the economy apart from raising the statutory debt limit, trimming development expenditure, prioritising expenses and turning to national oil company Petroliam Nasional Bhd (Petronas) — just as it did in 2019 with the RM30 billion special dividend that brought its total dividends to RM54 billion that year.

One way of expanding the fiscal space is to dip into “savings” at institutions created to support the country’s fiscal sustainability. This is justifiable due to the unprecedented impact of Covid-19 on lives and livelihoods, but it should be done in a transparent and accountable way to prevent abuses and wastage. There should also be clear rules, with parliamentary oversight, to ensure savings are replenished when the financial situation permits.

More fiscal room could be created, for instance, by tapping Kumpulan Wang Persaraan (Diperbadankan) (KWAP) — which reportedly has RM150 billion in assets under management — to help pay a bigger part of the government’s public pension obligations for this year and next.

Unlike the RM1 trillion at the Employees Provident Fund (EPF), which is members’ savings, the RM150 billion with KWAP belongs to the federal government, which is obliged by law to pay pensions to eligible civil servants who do not need to save money with KWAP for their retirement.

A RM15 billion withdrawal, or 10% of KWAP’s assets under management, can either help reduce the fiscal deficit by 1% of GDP or free up another RM15 billion for stimulus packages.

The additional fiscal space, when deftly used, can make a huge difference to speed up the country’s recovery. After all, the ability to spend played a huge part in the richcountries’ ability to secure vaccines and vaccinate their people to allow for a faster reopening and recovery of their economies.

The IMF, which highlighted the lower prospects of emerging markets in its latest World Economic Outlook report released on July 27, said the 0.5 percentage points upward revision of its 2022 GDP forecast for advanced economies, particularly the US, reflects the anticipated legislation of additional fiscal support in the second half of 2021 and improved health metrics.

The IMF kept its 2022 GDP projection for Malaysia at 6% while the World Bank currently projects 5%. It remains to be seen if Bank Negara Malaysia will introduce a 2022 GDP forecast when revising the official forecast for 2021 on Aug 13, but that is not its usual practice.

What’s certain is that Malaysia’s Budget 2022 — currently planned for Oct 29 — is expected to be expansionary given that recovery is still not yet certain even as the country ramps up its national vaccination drive. Between Jan 18 and June 28, the government embarked on four Covid-19-related economic stimulus and recovery plans totalling RM225 billion, involving RM26.8 billion in direct fiscal injection or about 1.8% to 1.9% of GDP. That’s on top of the RM55 billion in direct fiscal injection last year over five stimulus packages totalling RM305 billion (3.9% of GDP).

As it is, Malaysia’s fiscal deficit — basically how much the government needs to borrow because total expenses exceed revenue — is expected to rise to nearly 7% of GDP from the current guidance of 6% of GDP this year. This is largely owing to the impact of fresh movement restrictions from June 1 to curb Covid-19 that cost the economy RM1.1 billion a day in Phase 1 or RM33 billion (about 2.2% of GDP) a month. The impact is estimated at RM550 million per day in Phase 2 and RM160 million per day in Phase 3, according to estimates in the National Recovery Plan.

Tapping KWAP is not a new idea. At least RM14.5 billion has been “withdrawn” from the fund since 2018 when the government tapped it for the first time to bolster federal coffers as it shouldered more than RM1 trillion in debt and liabilities.

The first “withdrawal”, so to speak, was RM4.5 billion in 2018 to help pay for the civil servants’ pension and gratuities bill of RM25.18 billion that year. It is not immediately certain if KWAP was also tapped in 2019 but the fund gave the federal government RM5 billion in 2020 and another RM5 billion in 2021 to help pay for civil service pension obligations of RM27.1 billion last year and RM27.6 billion estimated for this year, official records show.

KWAP’s 2019 and 2020 annual reports have not been released at the time of writing. Its 2018 annual report showed its asset size to be RM136.51 billion — significantly above the RM42 billion it had at inception in 2007.

KWAP was created to eventually take over the federal government’s burgeoning public pension obligation without any government injection — a distant hope, mathematically, if its fund size does not grow a lot faster relative to the increase in the public pension burden, which has been growing at an average of 7.4% a year over the past decade.

In April, the government withdrew RM5 billion from the National Trust Fund (KWAN) to pay for Covid-19 vaccines and vaccine-related expenses. While that move drew criticism, there were also people who reckoned that the government should have done a lot more — be it borrow or tap its own resources — to expand the social safety net so that there would have been no need for the unprecedented move of allowing private sector wage earners to use their retirement savings in their EPF Account 1, which was previously off-limits until one reaches age 55.

The RM5 billion that the government withdrew from KWAN was from the RM9.1 billion generated from investments over the years and not the RM10.4 billion capital contributed by Petronas. Since its inception in 1988, the national oil corporation has been the sole contributor to KWAN — a fund that was set up to ensure that future generations would benefit from the country’s finite natural resources.

In short, there is still RM4.1 billion in investment returns at KWAN that can be tapped by the federal government.

Raising the debt ceiling in itself is not bad, especially if the money is used to save lives, preserve livelihoods and prevent permanent damage to the economy. It is also important to invest in building new capacity for the economy, another good usage of debt, experts say.

Malaysia last raised its statutory debt ceiling from 55% to 60% of GDP in August 2020, and the Covid-19 Fund size by RM20 billion to RM65 billion after Budget 2021 was tabled last November. The next parliament sitting is scheduled from Sept 6 to 30 (with the 12th Malaysia Plan scheduled to be tabled on Sept 20) as well as from Oct 25 to Dec 16.

Given that every one percentage point (of GDP) increase in deficit roughly equals the need to raise about RM15 billion more debt, raising the statutory debt ceiling by five percentage points from 60% to 65% of GDP would mean there is flexibility to take on RM75 billion more debt. A 10-percentage-point increase to 70% would equal the space to borrow another RM150 billion.

A key concern when it comes to raising more debt is the rising ratio of debt service charges, which already takes up 16.5% of every ringgit the government expects to earn in 2021 — above the 15% of revenue that some credit analysts deem as a measure of debt sustainability.

If the government’s total borrowing cost stays near 4% per annum, debt service charges could rise from RM39 billion in 2021 to about RM42 billion in 2022, our back-of-the-envelope calculations show. That means that federal government revenue would need to be RM280 billion in 2022 for the country to meet the 15% debt service charges ratio —  no small feat given that federal government revenue was RM234.4 billion pre-pandemic in 2019 (RM264.4 billion including the RM30 billion special dividend from Petronas) and was RM227.27 billion in 2020, and estimated at RM236.9 billion this year when Budget 2021 was tabled last November. Flat or low single-digit revenue growth would put the ratio of debt service charges to federal government revenue near 17%.

Direct federal government debt climbed from RM879.56 billion (62.2% of GDP) as at end-2020 to RM917.49 billion as at end-March 2021 — more than 60% of GDP. Statutory debt, however, remained between 58% and 59% of GDP — just below the 60% ceiling — as the Ministry of Finance only counts outstanding Malaysian Government Securities (MGS), Malaysian Government Investment Issues (MGII) and Malaysia Islamic Treasury Bills (MITB) ) but not offshore borrowings and other domestic debt.

Whichever ratio one chooses to look at, there is no denying that direct federal government debt already looks set to climb to above RM960 billion by year end, and above RM1 trillion before end-2022, even without counting other liabilities.

Yet, the sustainability of debt should not come above the need to save lives and livelihoods. Malaysia would only have a fighting chance of successfully paying down its debt burden if the economy recovers strongly and people’s livelihoods are secure.

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