Economic Report 2014/2015: Public debt-to-GDP ratio eased to 52.8% from 54.8%

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KEEPING with its self-imposed debt ceiling of 55%, the federal government’s debt-to-GDP ratio eased to 52.8% as at June 30, 2014, down from 54.8% registered last year.

While the absolute amount of federal government debt for the first six months of 2014 rose 5.4% to RM568.89 billion from RM539.86 billion at the end of 2013, domestic debt issuances account for RM552.65 billion,  or 97.1% of the financing requirement, according to the Economic Report 2014/2015.

Despite the higher absolute debt levels, the government will continue to meet all commitments to debt servicing. “Debt service charges, which refer to interest payments on loans, are expected to remain manageable at 10.3% of revenue (2013: 9.7%), well below the threshold of 15% of total revenue under the administrative fiscal rules,” the report says.

In line with the recommendations of the International Monetary Fund (IMF), Malaysia is adopting a wider definition for external debt, which includes all liabilities owed to non-residents by residents irrespective of the debt’s currency denomination.  This allows the government “to better assess its exposure to non-residents”.

The figure would have been 31.1% of GDP under the previous definition, where Malaysia’s external debt only consists of foreign currency-denominated debt.

Under the new definition, Malaysia’s external debt stood at RM729 billion, or 67.6% of GDP, as at end-June 2014. This is up from RM696.61 billion, or 70.6% of GDP, in 2013, mainly due to larger offshore borrowings by the private sector and non-resident holdings of ringgit-denominated debt securities and deposit.

“Importantly, although the redefined external debt level is higher, Malaysia’s external indebtedness indicators remain well above the standard international benchmark for prudence and external soundness,” it says, pointing out that Malaysia’s external position is nearer to the lower-end of the standard international threshold range of 60% to 90%.

According to the report, non-resident holdings of ringgit-denominated debt securities issued by the federal government and other corporations increased to RM243 billion as at end-June 2014 compared with RM229.67 billion as at end-2013, making up just over a third of total external debt. The bulk of these are medium and long-term papers issued by the federal government amounting to RM154.28 billion as at end-June, up from RM140.39 billion in 2013. The increase “indicates investor confidence in the domestic economy alongside attractiveness of the higher yields”, the report says.

Additionally, as the bulk of the debt securities are ringgit-denominated obligations, the potential for currency mismatches in the country’s external indebtedness is reduced.

Addressing concerns over the impact of a sell-off by non-residents, Malaysia flagged the strength of its well-diversified domestic institutions. “Malaysia now has several large institutional investors, a more developed insurance industry and a larger fund and wealth management industry that could absorb these ringgit-denominated papers.

“Of significance, the strong capacity of domestic institutional investors, resilient financial institutions, well-developed capital markets as well as ample international reserves, are able to absorb any reversal of capital flows and financial market shocks,” the report adds.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.