This article first appeared in The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020

AS expected, Malaysia last week sought to raise its statutory debt limit from 55% to 60% of gross domestic product (GDP) to give itself added fiscal flexibility to accommodate additional spending to tackle challenges brought about by the Covid-19 pandemic. As at end-June, the direct debt-to-GDP ratio stood at 53.2%, still below the existing self-imposed threshold, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said.

That the government had asked for the change under the Temporary Measures for Government Financing (Covid-19) Bill 2020 — which will run from Feb 27, 2020 to Dec 31, 2022 once approved — also demonstrated its resolve on fiscal consolidation alongside its commitment to help save businesses and people’s livelihoods during this tough period.

“The government needs adequate fiscal space to tackle the current crisis without having to worry about transgressing financial rules, and the Covid-19 bill is a step in the right direction to achieve this objective,” says ­Tricia Yeoh, CEO of the Institute of Democracy and Economic Affairs (IDEAS) in an Aug 7 statement that welcomed the setting up of the Covid-19 Fund and called for sufficient public monitoring of it.

“Disclosure of the use of the fund should be reported regularly to the public. It can be incorporated into the current LAKSANA report. Such disclosure can ensure the stimulus package expenditures are open to public scrutiny and are spent efficiently,” she adds.

Yeoh also asked that the Minister of Finance table in parliament information such as total estimates of borrowings that will be raised for the purpose, their interest rates, sources of debt as well as the total estimates of outstanding debt as a result of the borrowings “to allow Members of Parliament to judge whether the increase in the debt limit is necessary or even adequate to tackle the crisis” and the public to “assess the risks of these borrowings on government finances”.

Incidentally, a topic of heated discussion in parliament last Thursday was Malaysia’s debt and liabilities, which Zafrul said stood at RM1.264 trillion as at end-June. Of this, direct federal government debt was RM823.8 billion (53.2% of GDP) while committed government guarantees was RM166.9 billion — which implies there is RM273.3 billion in other debt and liabilities, The Edge’s back-of-the-envelope calculations show (see table).

According to the Fiscal Outlook Report 2020 that was released when Budget 2020 was tabled last October, Malaysia’s total debt and liabilities as at end-June 2019 stood at RM1.1703 trillion, of which RM799.1 billion (52.6% of GDP) was direct federal government debt. The remaining amount was made up of RM157.3 billion in committed government guarantees, RM32.2 billion of 1Malaysia Development Bhd’s (1MDB) net debt and RM181.7 billion in lease payments for public-private partnerships and other liabilities.

Our back-of-the-envelope calculations also show that the RM823.8 billion direct federal government debt as at end-June, being 53.2% of GDP, results in an implied value of RM1.55 trillion for the economy — about 2.5% higher than the 2019 nominal GDP of RM1.51 trillion. The debt-to-GDP ratio would be 54.5% if we were to use the 2019 nominal GDP, our estimates show — still below the 55% threshold.

It is understood that a sizeable portion of the RM45 billion direct fiscal injection by the government for the Covid-19 stimulus will have to be debt-funded and this figure has yet to be included under direct federal government debt, which already stood at RM823.79 billion as at end-March, up from RM793 billion as at end-December 2019, according to central bank data.

Debt guaranteed by the federal government — which can include committed government guarantees as well as other direct guarantees that do not currently require any funds from the government — stood at RM280.38 billion as at end-March, up from RM275.38 billion as at end-2019, central bank data shows.

Malaysia’s 2Q GDP, slated for release this Friday (Aug 14), is expected to be the country’s first negative growth reading since 3Q2009. This is already one quarter later than expected as Malaysia’s 1Q2020 GDP came in at 0.7%, beating expectations of negative growth when the reading was released in mid-May, although sharply lower than an already low 3.6% reading in 4Q2019.

It remains to be seen if Bank Negara Malaysia will revise its GDP growth forecast of -2% to 0.5% for Malaysia this year after releasing the 2Q GDP data. In June, the World Bank and the International Monetary Fund revised lower their 2020 forecast for Malaysia to -3.1% and -3.8% respectively due to the impact of the Covid-19 pandemic, before rebounding in 2021.

Zafrul told the lower house last Thursday that Malaysia’s economy is expected to gradually recover from the third quarter of this year with the reopening of businesses in various sectors as well as the impact of the RM295 billion Prihatin Rakyat Economic Stimulus Package (Prihatin) and Short-term Economic Recovery Plan (Penjana), which are expected to boost GDP growth by three percentage points.

In addressing questions on Malaysia’s finances in parliament last Thursday, which was shown live on YouTube, Zafrul mentioned another self-imposed fiscal limit of keeping the debt service coverage ratio to below 15% of federal government revenue. According to him, Malaysia’s debt service charges were RM35 billion, or 14.4% of revenue or 2.4% of GDP.

That implies government revenue of about RM243 billion, which is not that much less than the RM244.53 billion announced in Budget 2020 last October, which assumed oil prices at US$62 a barrel as opposed to the US$40 levels currently. Debt service charges were pencilled in at RM34.95 billion then before the central bank trimmed the overnight policy rate by 125 basis points between January and July. The next scheduled Monetary Policy Committee meeting is on Sept 10.

More numbers are likely to be disclosed before the end of the current parliamentary session, going by how Zafrul was fielding questions last Thursday. The minister, who has said he will be tabling a revised or supplementary supply bill for 2020 as well as a motion on Development Expenditure Estimates for this year during the current sitting that runs until Aug 27, has so far asked parliament to approve only RM7 billion in extra money spent for 2019 as well as reallocate RM7.18 billion for the restructured Cabinet (where three new ministries were formed and one abolished). It is understood that he will be fielding questions on the RM45 billion in direct fiscal spending under the Covid-19 fund when the bill, which was tabled by Deputy Finance Minister Mohd Shahar Abdullah last week, comes up for second reading in parliament.

According to preliminary fi­g­ures, government revenue in 1Q2020 declined about 29% compared with the previous corresponding period. Apart from the decline in oil prices this year, however, the initial decline in government revenue is not unexpected, given the Movement Control Order (MCO) that ran from March 18 to May 3 and the government allowing businesses more time to file their taxes. Zafrul had previously said that revenue enhancement measures could well shore up receipts in the later part of the year.

Even if some numbers remain elusive in the current parliamentary sitting, revised 2020 numbers will be out within three months, with Budget 2021 slated to be announced on Nov 6. Zafrul has said that Malaysia will address how it wants to move forward with revenue measures by the time Budget 2021 is tabled.

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