This article first appeared in The Edge Malaysia Weekly on September 30, 2019 - October 6, 2019

IN discussing the likelihood of the country going bankrupt should absolute debt levels remain stubbornly high, some may recall a prognosis made seven years ago that Malaysia could go broke this year if government debt and subsidy spending continued to rise the way they had since 2009 and if economic growth remained below 3% annually. Thankfully, Malaysia’s economy has grown well above 3% every year since that doomsday scenario made the headlines in 2012.

Yet, just being solvent is not enough. A country that is barely earning enough to cover operating expenses, for example, would not be able to comfortably provide the right kind of environment that encourages entrepreneurship as well as provide for the more vulnerable groups in society. The worst-case scenario is more likely with poor management and lax governance, especially under prolonged harsh conditions.

A government’s spending power, or ability to provide stimulus based on its income stream and balance sheet strength, is what economists call fiscal space. The general prognosis for Malaysia is that its fiscal space is limited by the RM1 trillion debt and by revenue exceeding operating expenses by just a thin margin.

If only Malaysia had a trillion ringgit stashed somewhere — not so much to repay the entire RM1 trillion debt pile but to earn stable recurring income to supplement the country’s annual budget.

To be sure, the annual budget will also benefit from having another RM10 billion or so if debt service charges fall nearer to say, 10% of revenue or lower. This can happen if much of the country’s direct debt can be refinanced at lower cost and if total direct debt is paid down by one-third to RM500 billion-levels from about RM800 billion now.

Prime Minister Tun Dr Mahathir Mohamad reiterated in a Sept 17 interview with BFM radio that the government is looking at raising funds by selling some of its assets to help get the country’s financial situation back on track. One way to do this is to sell non-essential properties locally and abroad that can fetch good prices, he said, adding that the accumulated value from disposals may be substantial. Incidentally, later that day, state-owned Khazanah Nasional Bhd announced the disposal of Prince Court Medical Centre Sdn Bhd to IHH Healthcare Bhd for RM1.02 billion cash.

Back to the hypothetical RM1 trillion. Having RM1 trillion at the government’s disposal for investments could mean an annual recurring net income boost of RM60 billion for its coffers if it can earn 10% every year from debt that cost 4% per annum to borrow, back-of-the-envelope calculations show. A RM500 billion fund size could potentially rake in RM30 billion in recurring net income, using the same assumptions.

An additional RM60 billion in revenue collection would eliminate the budget deficit or double development spending, based on Budget 2019 numbers (normalised by excluding RM30 billion Petroliam Nasional Bhd special dividend and RM37 billion tax refunds).

Even RM30 billion (6% per annum net yield from a RM500 billion fund) could double the RM22 billion expected collection from the Sales and Services Tax (SST) or RM24 billion “normal” dividend from Petronas this year. It could also potentially increase development expenditure by 50% or halve the overall budget deficit, The Edge’s rough calculations show.

If the cash is not borrowed, a pool of RM500 billion could earn RM30 billion at 6% returns. If one can earn 10% returns a year, just RM300 billion would already deliver RM30 billion for a start.

“Malaysia has more assets than the debt pile … We just need to make sure that the assets are efficiently/effectively employed instead of being squandered or just spent without maximising the benefits to the country,” one observer says.

Admittedly, finding enough investments that can generate the desired returns to consistently boost the government’s coffers would be a challenge — though not impossible given time. What is important is to start making significant progress towards this goal while keeping expenses in check, but demonstrating the willingness to spend in areas that will benefit the economy.

It is understood that the government may soon demonstrate part of its balance sheet strength to shore up investor and business confidence in the economy. This could not be officially confirmed at the time of writing.

At least RM10 billion could be unlocked for investments if, for instance, Petronas were willing to pare down some of its key holdings in listed entities. Assets at several other government-linked institutions could also be pooled to generate more income for the government. The institutions themselves can also be restructured to generate savings by cutting duplication. (See “Investment income as new income pillar for the government” on Page 58.)

As it is, the purse strings look tight.

Excluding the RM37 billion owed for tax refunds and RM30 billion special dividend from Petronas, Malaysia’s current balance — revenue less operating expenses — is just under RM9 billion or 3.9% of government revenue, based on Budget 2019 projection (ex-one-off items) — the highest since 2010, though not a lot. Since 2011, the current balance has stayed below RM3 billion, or 1.5% of government revenue, dwindling to as little as RM1 billion or 0.4% of government revenue in 2018.

Even the extra revenue from the Goods and Services Tax (GST) in 2015 to 2017 (including the excess that was not returned until this year) was not enough to provide a comfortable gap as operating expenses rose faster than income, exacerbated by excess spending.

Civil service emoluments, pension and gratuities as well as debt service charges jumped from RM67.15 billion or 42.3% of federal government revenue in 2009 to 61.1% or RM141.6 billion this year.

More debt was needed to fund over 96% of development expenses, which improve the country’s underlying fundamentals and the people’s welfare. Direct federal government debt alone doubled from RM362.39 billion (50.8% of GDP) as at end-2009 to RM799.1 billion or 52.2% of GDP as at end-June 2019.

Recall that Mahathir recently said past generous increases in wages and pensions are coming at the expense of development money and investments for future generations.

What is certain is that the government needs to either slow the pace of the rise in its emoluments and pension bill or find new sources of revenue to bolster its fiscal space. Trimming debt service charges and cutting expenses, supplies spending and blanket subsidies would help.

Emoluments and pensions payments alone would overtake the size of total government revenue by 2040 if allowed to grow at their respective 10-year compound annual growth rate (CAGR) of 6.73% and 10.1%, and government revenue continues to grow at its 10-year CAGR of 3.87%, back-of-the envelope calculations show.

If debt service charges are also allowed to grow at its 10-year CAGR or 8.78% between 2009 and 2019, the emolument and pension bill plus interest payments could hit 100% of government revenue by 2032 — just 12 years away.

From RM231.8 billion or 61.1% of government revenue in 2019, the trio could reach 89.6% of government revenue (RM339 billion) by 2029, 133.6% (RM495 billion) by 2039, 203% (RM723 billion) by 2049 and 313% (RM1.06 trillion) by 2059.

Rather than a projection of what is to be, this simplistic calculation is to illustrate why expenses cannot be allowed to grow at the same pace, given that the current administration is clearly poring over the matter with the setting up of the Fiscal Policy and Debt Management Office in May 2019.

That Malaysia expects to spend RM33 billion or nearly 15% of normalised revenue on debt service charges this year — exceeding the RM29.2 billion allocated for the economic sector under development expenditure — is another warning sign for the government to rework its revenue sources and spending.

Indications are that there is a limit to how much expenses can be trimmed without burdening the people, which leaves the option of finding more money.

The current government has talked at length of eliminating corruption and plugging leakages. The ability to generate income from the country’s resources to supplement its spending on the people would definitely be louder than mere words.

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