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This article first appeared in The Edge Malaysia Weekly on July 1, 2019 - July 7, 2019

MALAYSIA can service its trillion-ringgit debt burden, as attested by rating agencies. Yet, Prime Minister Tun Dr Mahathir Mohamad clearly thinks Malaysia cannot afford to borrow so much and must cut the debt noose around the country’s future — a stance he has maintained even before he led the Pakatan Harapan coalition to a surprise victory in May last year.

“The debt” is the one thing Mahathir wants to resolve before his term as prime minister ends.

“No, I will not go beyond three years,” was his reply when asked if he will stay in office to see out his goal of cutting Malaysia’s debt from 80.3% of gross domestic product (GDP) in 2017 to 65% by 2021.

In fact, Mahathir aims to push Malaysia’s debt down to 54% of GDP, just below its self-imposed debt ceiling of 55%. He had stated a 20% headline debt reduction from the get-go.

“It may take two years or more, but the most important thing is to solve the problem, then I’ll go. I do not want to stay on,” says the nonagenarian who turns 94 come July 10.

The good news is his three-year target is tough but not impossible.

First, however, comes the bad news: At RM1.1 trillion as at end-2018, Malaysia’s total debt and liabilities has yet to decline in absolute terms from the RM1.087 trillion (as at end-2017) it inherited from the previous administration.

“This was partly due to a RM54.2 billion rise in direct government debt to RM741 billion from RM686.8 billion in the previous year. The debt was used to finance the fiscal deficit, especially for the expenditures arising from the PPP lease commitments and off-budget spending that were previously not transparently included in the budget,” the Ministry of Finance (MoF) said in a June 1 statement.

The RM37 billion in excess taxes owed to people and businesses by the previous government wiped out much of the sizeable RM46.1 billion cost saved from mega projects renegotiations, including the controversial East Coast Rail Link (ECRL), Mass Rapid Transit Line 2 (MRT2), the Light Rail Transit 3 (LRT3) and 121 smaller projects. Tabung Haji and FELDA, for example, needed financial injections of RM17.8 billion and RM6.23 billion, respectively.

That is not to say there was no progress. As announced by the MoF in early June, the total government debt and liabilities as a percentage of GDP fell 3.9% from 79.3% as at end-2017 to 75.4% as at end-2018. These figures are consistent with the “new” or re-based GDP of RM1.45 trillion last year, which uses 2015’s prices as its base year. The Department of Statistics Malaysia say this is “a normal statistical procedure performed by the National Statistical Office around the world to ensure that statistics reflect the current economic structure”.

Based on the “old GDP” with a base year of 2010, debt as a percentage of GDP would have been a tad higher — falling from 80.3% as at end-2017 to 76.3% as at end-2018, according to back-of-the-envelope tabulations.
 

Can Malaysia cut its RM300b debt? 

“In ensuring that businesses continue to thrive in Malaysia, the government is committed to nurturing an environment that is fair and competitive, with policies that are clear and consistent, that provide the right incentives to encourage growth,” Mahathir told participants at the recent Asia Oil & Gas conference in Kuala Lumpur.

If the economy can grow at least 5% per annum in the next three years, Malaysia can reduce its debt to GDP levels to 54% by 2021 even if debt remains at around RM1 trillion, back-of-the-envelope calculations show. To reach a 54% of GDP by 2021, the country’s debt needs to drop below the RM900 billion mark on top of having economic growth of at least 4% per annum.

If debt falls below RM800 billion, then a 54% debt to GDP target may be possible by 2020 even if GDP growth slips to 3%. That would involve cutting some RM300 billion debt — an amount that points to the need for some level of asset sales — especially as the government takes on additional liabilities such as its recent RM6.2 billion purchase of four tolled highways, which the MoF says would be self-financed through congestion charges and saves RM5.3 billion in compensation charges that works have had been paid to freeze toll rate hikes until the end of the concessions for Lebuhraya Damansara-Puchong (LDP), Sistem Penyuraian Trafik KL Barat (SPRINT), Lebuhraya Shah Alam (Kesas) and SMART Tunnel (SMART).
 

What of debt service charges? 

The Debt Management Office has been tasked with reviewing all acts, procedures and legal requirements relating to the issuance of direct government debt, government guarantees and other government commitments. It also needs to come out with strategies to reduce the government’s debt and liability burdens.

In the meantime, the government says it “will proceed with its fiscal consolidation in order to ensure there is sufficient fiscal space to address future crisis, without adversely affecting the performance of the domestic financial market, while supporting economic growth. The government is confident that these measures will help to maintain [Malaysia’s] sovereign credit ratings at A3 and A-”.

During a Budget2020 consultation session with industry players, Finance Minister Lim Guan Eng told reporters that Malaysia is “on track” in its aim to cut fiscal deficit from last year’s 3.7% of GDP to below 3% by 2021. The government hopes to reduce fiscal deficit to 3.4% this year and 3% in 2020 to preserve the country’s sovereign rating while balancing the need to pursue inclusive economic growth.

It is as important to maintain or improve Malaysia’s credit rating as it is to reduce its debt and debt service charges. Malaysia has sourced cheaper debt from Japan, but debt service charges continue to be elevated pending substantial progress in the ongoing debt restructuring exercise aimed at saving finance cost and reducing debt repayment.

Some RM33 billion or 14.2% of government revenue is going to service  interest payments for the country’s debt this year — if one were to exclude Petronas’ RM30 billion special dividend earmarked to repay excess taxes.

The RM33 billion in debt service charges is more than the RM30.5 billion needed to build MRT2. The RM30.9 billion that went to servicing debt last year could have paid for LRT3 (RM16.6 billion) as well as all 121 projects (RM13.1 billion) that the government had renegotiated costs for, with RM1.2 billion to spare — enough to pay 43.6% of the RM2.75 billion needed to service debt every month.

For the ordinary Malaysian, 2019’s debt service charges of RM33 billion is equivalent to RM1,010 in cash for each of the 32.66 million people in the country.

It is no wonder that Mahathir told reporters this early in his current tenure: “We need to pay our debt and reduce it to a reasonable level so that it does not swallow up all the revenue we make.” Malaysia’s future could well depend on how fast he is able to ensure that the country can loosen itself from the debt noose once and for all.
 

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