Investigate Malaysia’s debts now

By Pak Sako | Thursday, 21 February 2013 11:34

Former prime minister Mahathir Mohamad claimed last week that Malaysia’s current debt level is “healthy” compared with Greece’s.

But the debt-to-GDP percentage Mahathir relied on tells next to nothing about the full extent of Malaysia’s debts; the nature of these debts; or what can happen next.

The real devil lies in the details, namely:

(i) the trend in the debt level.

How has it changed in the recent past? Is there momentum in a certain direction? The federal government’s debt had doubled in just four years from 2007 and 2012. Will it stop growing, or will the trend and absolute totals continue their upward rise?

In the last decade, our finance ministers have repeatedly pledged to reduce the budget deficits. This has not happened. Instead, deficits have ballooned and the federal government’s debt has mounted.

(ii) the causes of debt.

For what are the borrowings and for whom? Are these borrowings for worthwhile investments that benefit the public? Are these liabilities being used to cover government operating costs or to prop up failing crony companies or the stock market? Is the use of costly loans for projects with low or no rates of return justified?

Almost a trillion ringgit was recently whisked out of the country in the form of illegal outflows. This is capital flight. It is conclusive evidence that our economy is ‘leaking out’ wealth.

Capital flight explains what the crony private sector and other rent-seekers are doing with their ill-gotten gains: they are squirreling these away in offshore accounts in Swiss banks and tax havens such as the Cayman Islands.

It is no wonder that private-sector investment in Malaysia is dismal. To make up for foregone domestic investment and job creation, environmental standards and taxes are lowered to lure foreign investors such as Lynas.

(iii) the types of debt, both known and “hidden”.

How much of the debt is borrowed from the savings of citizens (internal debt)? How much is borrowed from foreign lenders (external debt)? How much of these debts is government debt, and how much is private?

A big chunk of Malaysia’s debt, RM467.4 billion as of September 2012, is internal debt (Bank Negara Malaysia, Quarterly Bulletin, Third Quarter 2012).

This is the portion of debt that is popularly spoken about — the debt-to-GDP percentage of 53% involves almost entirely this debt.

This is money borrowed domestically from the savings of citizens. It is money belonging to individuals taken from the Employee Provident Fund (EPF), Tabung Haji, pension funds and other social security organisations and institutions (see ‘Debt growing but manageable, says MOF’, The Malaysian Insider, 28 September 2012).

At what rates of return are Malaysians being compensated for this borrowing? Will they recover their savings at all? Will they be fraudulently ‘compensated’ with funds coming from the liquidation of oil and forest assets; in other words, from the public’s own pockets? Or will a Ponzi scheme be devised to borrow more to honour commitments that come due?

Wholly separate from internal public debt is private external debt — money borrowed from foreign lenders. This is a portion of debt that is hardly spoken about.

The government’s external debt is RM17.3 billion as of last September, according to Bank Negara. But this is the tip of the iceberg.

We should also be very interested in the private sector’s external debt.

Because when private companies borrow from foreign lenders, the government is obliged to pay off these debts if the companies fail to do so. Simply put, citizens might have to pick up the tab. That is what happened in the debt crises in the West.

That is why this category of external debt is called ‘publicly guaranteed debts’.

Beyond these, there is the ‘non-guaranteed’ debt obligation of the private sector. These affect the overall creditworthiness of the nation and also cannot be ignored.

Bank Negara says Malaysia’s total external debt was RM257.8 billion at the end of September 2012.

How much of this is publicly guaranteed debt held by private corporations?

It is alleged that one Malaysian tycoon and his group of companies owe RM34 billion (‘Syed Mokhtar’s debts raising fear of future bailout, says Tony Pua, The Malaysian Insider, 27 September 2012). How much is publicly-guaranteed? What about other Malaysian corporations?

More disturbing are the claims that the Malaysian government has large hidden debts.

These are “contingent liabilities” and “off-balance sheet” borrowings, which are said to have amounted to RM117 billion in 2011 (see ”Hidden debt” edges M’sia beyond 55pct limit’, Malaysiakini, 27 September 2012).

There is also little knowledge about annual interest payments and the due dates of debts.

Any meaningful public discussion of Malaysia’s debt situation must consider all of the above.

Neither the Ministry of Finance nor Bank Negara give a full picture of all of the above.

Mahathir Mohamad said nothing about any of the above.

He told Malaysians not to worry about debt because our foreign reserves are strong.

But foreign reserves or public wealth are not for settling the illegitimate debts accumulated by corrupt regimes. They are not to be used as collateral to pile on new debts or service existing ones.

The size of the foreign reserves gives false comfort. During the 1997 East Asian crisis the government devalued the total stock of ringgit using a currency peg. Foreign reserves took the hit and shrunk.

Mahathir Mohamad’s comments lull Malaysians into a false sense of security. These comments should however serve as a wake-up call. Malaysians should demand for clarification about Malaysia’s total debt and its consequences. The Ministry of Finance and Bank Negara should respond.

  1. #1 by yhsiew on Saturday, 23 February 2013 - 6:36 am

    Going by the way the BN government spends money the likelihood is that the Constitution stipulated debt-to-GDP ratio of 55% will be exceeded if the same government resumes power after GE13. That does not augur well for the future of the country.

  2. #2 by chengho on Saturday, 23 February 2013 - 8:03 am

    for that reason you cannot let Pakatan to rule , they have no imagination

  3. #3 by Bigjoe on Saturday, 23 February 2013 - 8:28 am

    The perspective on debt is wrong. You can’t talk debt unless you also talk revenue and profit – how its paid off. Some companies are in unstable business and hence lenders will limit their lending to such firms EVEN if he firm is very profitable. Technology companies for example have a difficult time taking a lot of long term debt because their business is very cyclical even if it is very profitable – that is why tech firms usually have very low debt.

    Similarly Malaysia is like an unprofitable reliant on commodity revenue business. There is a limit to what borrowers will lend. The issue is that in times of trouble do we have reserves to borrow, not just existing debt.

    And its possible – only if they start to increase taxes – Its not about current debt – its about taxes that have to be increased if debt is to be increased or even just sustained in the long run because the oil & gas revenue will run out.

    So Mahathir is both right and wrong. The debt level is healthy BUT IT WILL NOT BE IN THE FUTURE WITHOUT TAXES.. So you vote for UMNO/BN – you vote for taxes. GST, 1Msia insurance, AES etc. They are all tax increases..

  4. #4 by kg on Saturday, 23 February 2013 - 10:36 am

    A big challenge for PR is, how much the new government can get back all those money sapu by Ajib Kor, PakeLah, Medey, Diam Diam etc and their cronies. Is it enough to pay the 500b debt if, say than, PR gomen managed to recover 1/3 of the robbed wealth?

    Anyone has any idea?

  5. #5 by Dap man on Saturday, 23 February 2013 - 10:48 am

    Mahathir is a personification of ‘THE LIAR’.

  6. #6 by sheriff singh on Saturday, 23 February 2013 - 10:50 am

    Mahathir’s knowledge about debt is only that of a schoolboy, he says, Form 3G, to be exact.

    He thinks utang is untong.

    He’s always dangerous to have around. No wonder 1TRILLION ringgit is missing.

  7. #7 by sotong on Saturday, 23 February 2013 - 11:09 am

    Majority are in the dark or fear of change for various reasons.

    The country has to go bankrupt for real and meaningful change to happen.

  8. #8 by john on Saturday, 23 February 2013 - 11:21 am

    When this MaMak Kutty open his big mouth, what comes out is of no significance except ” WHAT’S HIS HIDDEN MOTIVE ? ”
    (MMKutty speaks of contrary, nonsense, supposedly senile, provocations, rubbish, TOKOK, racism, recalcitrant traits, MONEY,,,,,, ALL AS MEANS OF DIVERSION from his self- interest )
    Here, judging by recent revelations or rather affirmations ie.
    First, Sabah RCI on illegals ” Malaysians ”
    Second, Invaders from Sulu – awaiting further revelations ,
    No harm done to do it now, at least get the truth out first and if he is right, then ” give him a pat on his head – well, you behave proper this time. “

  9. #9 by cseng on Saturday, 23 February 2013 - 12:44 pm

    These debts are necessary price m’sian have to pay for electing BN as goverment, and allowing the leaders to goverb with posters and lies. Ribs off the nation, institutionised the abuses, industrialise the corrution, export the illicit gains 1 malaysia style.

  10. #10 by boh-liao on Saturday, 23 February 2013 - 12:50 pm

    As far as MMK n UmnoB/BN, d nation n all M’sians ARE INDEBTED 2 them
    Hence, they hv d RIGHT 2 jiak, jiak, jiak n b filthy super rich

  11. #11 by Bigjoe on Saturday, 23 February 2013 - 3:32 pm

    Mahathir purchased Proton for RM1.28b AFTER the taxpayer subsidized the company to the tune of literally tens of billions maybe even over a hundred billlion over the years. NOW he want us to subsidized an airline to the tune of tens of billions after he buys it for peanuts too..

  12. #12 by St Peter on Saturday, 23 February 2013 - 3:41 pm

    Economy : we are not as bad as Greece
    Education : we are not as bad as Zimbabwe
    Foreign affair : we are not as bad as North Korea
    Defense : we are not as bad as Somalia
    Transport : we are not as bad as Nigeria
    Ah Jib : I am not as bad as Osama
    CSL : I am not as bad as Edison Chen

    Malaysia is actually NOT that bad lah huh !!!

  13. #13 by Noble House on Sunday, 24 February 2013 - 3:16 am

    Managing the National resources required skills in prudent financial management – not imagination which the BN is good at!

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