This article first appeared in The Edge Malaysia Weekly on October 14, 2019 - October 20, 2019

THE country’s debt and liabilities expanded to RM1.1703 trillion as at end-June 2019, up from RM1.0873 trillion at end-2017 and RM1.0908 trillion at end-2018.

Why is debt still rising, and above RM1 trillion, 17 months after the Pakatan Harapan took over from the previous administration?

A key reason is that Malaysia still does not make enough revenue to cover its development expenditure. That is why it has had a budget deficit since 1998.

The projected budget deficit for 2020 is RM51.72 billion, compared with the revised estimate of RM51.76 billion for 2019. That is expected to add to the federal government’s direct debt, which rose from RM686.84 billion as at end-2017 to RM741.05 billion as at end-2018 and RM799.1 billion as at end-June 2019.

Apart from direct federal government debt, the RM1.1703 trillion in debt and liabilities includes committed government guarantees, 1Malaysia Development Bhd’s net debt of RM32.2 billion (excluding interest cost) as well as lease payments for public-private partnerships (PPP). Finance Minister Lim Guan Eng describes the bad PPP models as schemes which look cheap upfront but for which the country could be paying for decades.

Committed government guarantees is government-guaranteed debt that the federal government has been tapped to support payments for. This amount increased from RM113.38 billion as at end-2017 to RM132.7 billion as at end-2018 and RM157.349 billion as at end-June 2019.

The net increase in the first six months of this year from end-2018 was 18.6%, or RM24.65 billion, largely due to the RM20 billion for Urusan Jamaah Sdn Bhd, the special purpose vehicle for the restructuring of Tabung Haji’s assets.

Rail infrastructure-related debt also caused the amount to rise. A RM5.08 billion increase was seen for Danainfra Nasional Bhd, which undertakes funding for the Mass Rapid Transit project as well as the Pan Borneo Highway in Sarawak.

Heavy cost of debt

There are also debt service charges that take up more than 14.3 sen of every ringgit the government expects to earn next year. The absolute amount is RM34.945 billion for 2020, up from RM33 billion for 2019 and RM27.86 billion for 2018.

An early fruit that the current government is seeing is slightly lower interest rates on the debt. The weighted average interest rate on outstanding market debt instruments as at end-June stood at 3.848%, from 4.106% in 2018. This is largely due to a lower average coupon rate for debt paper issued during the first half of 2019, due to a favourable low interest rate environment, high liquidity and increased investor confidence, the Fiscal Outlook 2020 report says.

While the 25.8-basis-point reduction may look small to some, every bit of savings counts. The every bit would be RM2.064 billion a year on RM800 billion of debt, a back-of-the-envelope calculation shows, with the interest cost being RM32.848 billion at 4.106% per annum while the same would be RM30.784 billion at 3.848% interest cost per annum.

The 14.3% of government revenue that goes to debt service charges can only be reduced if there is a sizeable reduction in total direct debt or a sizeable increase in revenue. This can happen if the government finds a new sustainable revenue source that is big enough to make a difference.

One way is to pool resources to increase investment income for Malaysia. Currently, investment income only makes up about 13% of government revenue and 80% of that is dividends from Petroliam Nasional Bhd. The rest includes dividends from Bank Negara Malaysia and Khazanah Nasional Bhd. (See The Edge, Sept 30, 2019, Issue 1286 for details.)

For 2020, investment income is expected to be RM28.58 billion, of which 83.97% or RM24 billion is dividends from Petronas.

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