This article first appeared in The Edge Malaysia Weekly on May 3, 2021 - May 9, 2021

CITING the country’s RM1.26 trillion debt and liabilities (89.2% of GDP) burden and highlighting unproductive debt, including that of 1Malaysia Development Bhd (1MDB), Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz said on April 26 that Malaysia is fortunate to have the RM19.5 billion National Trust Fund (KWAN) as it battles Covid-19.

“We are the future KWAN was created for,” he told members of the media assembled at his office in Putrajaya last Monday as he addressed mounting criticism over the tapping of the fund, which was set up in 1988 to ensure that future generations will continue to benefit from a stable income source — the country’s rich but finite wealth of natural resources.

“If this generation doesn’t tap into KWAN and the next generation [also doesn’t], which [future] generation are we talking about?” asked Zafrul, adding that the government is only withdrawing RM5 billion from the RM9.1 billion generated from investments over the years and not the RM10.4 billion capital from Petroliam Nasional Bhd (Petronas), the sole contributor to KWAN, which had RM19.5 billion as at end-2020. “We will replenish the funds in KWAN when the country’s finances permit it.” (Also read My Say, “What the KWAN funds will be used for” on Page 54.)

Zafrul also corrected a popular belief among members of parliament and economists that RM3 billion had been allocated for vaccines under Budget 2021 and was further increased by RM2 billion under the People and Economic Strategic Empowerment Programme (Pemerkasa) in March, bringing the total allocation for vaccines and related expenses to RM5 billion.

While money for vaccines was mentioned in the Budget 2021 speech, Zafrul said that the government did not actually allocate any funds for vaccines and related expenses under the RM322.5 billion budget as the required amount “was not yet certain”. He cited Malaysia’s history of supplementary budgets when asked why such a sizeable expected spending was accorded zero allocation when drawing up the annual budget.

An additional allocation of RM5 billion (0.3% of GDP) for vaccines and related expenses would have raised the 2021 budget deficit of RM84.84 billion (5.4% of GDP) to RM89.84 billion (5.7% of GDP), a back-of-the-envelope calculation shows. That is still below the fiscal deficit of 6.2% for 2020.

Since Malaysia’s budget deficit was revised higher from 5.4% to 6% on March 18 when the RM20 billion Pemerkasa (which involved an RM11 billion direct fiscal injection) was announced, an additional RM5 billion expenditure for vaccines and related costs without new revenue or cutting back on existing expenditure could bump up the country’s fiscal deficit to 6.3% of GDP, our back-of-the-envelope calculation shows.

That may have a bearing on the upcoming sovereign credit rating review by Standard and Poor’s (S&P), which on June 26 last year affirmed Malaysia’s “A-” rating but revised the country’s outlook from “stable” to “negative” on risks to fiscal metrics owing to the pandemic.

While Malaysia’s credit rating would remain investment grade even after a downgrade, a seasoned economist says “two downgrades would have a larger impact than one downgrade, knee-jerk or otherwise”. Malaysia saw its first sovereign rating downgrade since the 1997/98 Asian Financial Crisis on Dec 4 last year when Fitch Ratings cut the country’s long-term foreign-currency issuer default rating (IDR) to “BBB+” from “A-”.

Zafrul did say last Monday that the country’s targeted fiscal deficit for 2021 could exceed last year’s 6.2% if the RM5 billion for vaccines and related expenses does not come from KWAN and the government had to borrow more.

While the government thought it best to withdraw money from KWAN — which it can already tap for development expenditure without amending the KWAN Act, as it did on April 14 to allow withdrawal for the purchase of vaccines and related [operating] expenses — Zafrul said Malaysia “still has fiscal space” but did not elaborate, apart from noting that Malaysia’s statutory debt is still below the ceiling of 60% of GDP.

In March, Zafrul said the federal government’s direct debt of RM879.6 billion as at end-2020 is expected to rise to RM975 billion, which works out to 62.2% of 2021 GDP, based on the projected nominal GDP figure of RM1.57 trillion on the Ministry of Finance’s (MoF) website.

Now that we know the government needs to tap RM5 billion from KWAN because the amount was not allocated under Budget 2021 last November, the spotlight turns to the details of the Covid-19 Fund.

There needs to be more timely and detailed disclosure of what is being spent under the Covid-19 Fund, whose ceiling was raised by RM20 billion from RM45 billion to RM65 billion last November before parliament was suspended on Jan 12 after the state of emergency was declared.

The Fiscal Outlook 2021 report only provides a breakdown of RM45 billion (as per the original ceiling for the Covid-19 Fund): some 62% was for wage subsidies (RM16.8 billion) and cash transfers under Bantuan Prihatin Nasional (RM11.2 billion). (See table for the breakdown.)

Budget 2021, however, had pencilled in RM55 billion for the Covid-19 Fund — RM10 billion above the original ceiling of RM45 billion — with RM38 billion budgeted for 2020 and RM17 billion allocated for 2021.

It is not immediately known if the tapping of KWAN means that the entire RM17 billion allocated for 2021 has been exhausted. It is also not immediately known if the RM65 billion Covid-19 Fund ceiling has been hit.

Based on existing disclosures, the current RM65 billion ceiling for the Covid-19 Fund (which needs to be funded either by revenue, debt or reserves) means that there is another RM10 billion headroom for 2022 or the 2021 allocation can be raised from RM17 billion to RM27 billion before the ceiling for the Covid-19 Fund needs to be raised again by amending the Temporary Measures for Government Financing (Covid-19) Act.

When the government announced two additional stimulus packages post-Budget 2021 — the RM15 billion Permai assistance package (RM6.6 billion direct fiscal injection) in January and RM20 billion Pemerkasa programme in March — which brought total Covid-19-related assistance to RM340 billion (RM72.6 billion direct fiscal injection) over seven stimulus packages since February 2020, excluding Budget 2021 measures, the guidance to economists was that unutilised spending would be reallocated and that there was also additional revenue, with oil prices being above US$60 per barrel compared with US$42 when Budget 2021 was drawn up. Every US$1 increase is guided to add RM300 million to government coffers.

“What happened to the RM17 billion Covid-19 Fund that was approved in the 2021 Budget?” asked DAP secretary general and former finance minister Lim Guan Eng. “Is the Finance Ministry telling Malaysians that in the space of less than four months, RM17 billion has been fully used up? In the interests of transparency and accountability, the Finance Ministry must come clean and give a full accounting of how the RM17 billion was spent,” Lim said in a statement dated April 27.

“Even if the RM17 billion has been fully spent in less than four months, there is no justification to ‘raid’ and dip into the National Trust Fund (KWAN) when the government still has the capability and capacity to borrow. This is shown by Malaysia’s recent issuance of US dollar Sustainability Sukuk via the issuance of US$800 million 10-year trust certificates and US$500 million 30-year trust certificates,” he added.

Much of the commotion over KWAN could have been averted if the Ministry of Finance had been “more upfront and transparent about funding sources” for Budget 2021 and the Covid-19-related stimulus packages, say economists who have had to make their own estimates on what is in the Special Covid-19 Fund.

Dr Yeah Kim Leng, director of economic studies at the Jeffrey Cheah Institute on Southeast Asia, Sunway University Business School, deems tapping KWAN as “a second best and sub-optimal option given that the fiscal rule pertaining to the debt ceiling could be relaxed due to exceptional circumstances such as the pandemic crisis facing the country”.

“Moreover, the country’s creditworthiness remains unimpaired, as evidenced by the overwhelming subscription to the recent green sukuk by international investors. The first best option via borrowing to fund the national vaccination programme can be further justified by the low interest environment. It is expedient to tap into the trust fund given that other alternatives such as using the 1MDB settlement charges and fines and seeking the return of the SRC fund withheld by the Swiss authorities may be more challenging but doable,” Yeah adds.

As the decision has already been made to tap KWAN for vaccines and related spending, Yeah says the policymakers must ensure there is proper oversight to ensure transparency and accountability.

“They [the Auditor-General and the Public Accounts Committee (PAC)] will have to ensure that there is no leakage, overpricing or overcharging given the heightened public concerns on fiscal accountability and transparency surrounding the vaccine budgeting issues,” Yeah says.

Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC), says the government “must reaffirm that the KWAN Fund will be governed properly, investing wisely and carefully, built up on a sustainable basis”.

“This would allow us to tap it during the extreme crisis policy response (as a last resort) without having to borrow excessively, and without burdening our future generations with repayment obligations. To have checks and balances, the utilisation of the KWAN should get the approval of parliament,” Lee says, adding that the government should better communicate how it intends to replenish and rebuild the country’s coffers.

While conceding that exemptions may have to be made during times of crisis, Lee says “we must be mindful that tapping KWAN is only for an exceptional purpose and must not be a recurrent drawdown to part finance the budgetary operations. It is strictly saved for the intended purpose of accumulating a strong reserves buffer for future generations”.

Lee adds that going forward, it is of paramount importance to safeguard our nation’s financial resources by putting in place and adhering to prudent fiscal management policies that will fortify the government’s realisable financial reserves when our economy remains relatively strong.

“This is so that we will have sufficient (reserves) and maybe, even excess, when it rains again,” he says.

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