2015 Budget (5) – A Critique
by Economic Observer
19th October 2014

In his speech, the Prime Minister studiously avoided any reference to the size of the public debt which now requires an allocation of RM 23.2 billion or almost 11 percent of the Budget to service the accumulated debt of the Federal Government now estimated to amount to RM 568.9 billion accounting for 52.8 percent of GDP, a level marginally below the established ceiling.

These numbers exclude the contingent liabilities of the Federal Government and other off budget borrowings.

Nor did the Prime Minister mention the level of debt carried by households, now in excess of 85 percent of GDP.

What is wholly inexcusable is the failure on his part to refer to the bombshell dropped in the Treasury’s Economic Report concerning the size of the nation’s external debt.

The Economic Report discloses that Malaysia’s external debt totals RM 729 billion, equivalent to 67.6 percent of GDP. This compares with a debt level of RM 335.6 billion or 31.1 percent of GDP before the revision.

This more than doubling of the external debt cannot be swept under the carpet. It is shameless in the manner in which the Prime Minister dealt with the issue.

The Report goes into a long discourse about revised international standards for debt reporting being the reason for a sudden rise in the level of foreign debt.

The Report notes that under the new definition non-resident holdings of local currency debt, loans and credits and non-resident financial flows are treated as liabilities.

Thus, the external debt of the country includes all liabilities that require payment of the principal and interest on it at some point in the future irrespective of the currency in which these amounts are denominated.

The Treasury Report offers a weak justification for the high level of external debt.

It asserts that the rapid growth of the bond market has led to sizable increases in the participation by non-residents in lending in the Malaysian market. It takes great pains to suggest that the level of external indebtedness should not be viewed with alarm.

However, the Treasury does not point out that a sizable part of the debt is short-term (with a ratio of 47.6 percent to GDP). Such short term debt is by nature volatile and subject to flight in periods of uncertainty.

It would appear that the authorities have not learnt lessons from the 1998 East Asia Crisis which was triggered by the withdrawal of short term funds by the hedge funds in the face of uncertainties in the region.

The nation and the markets need assurances from the Minister of Finance that the authorities have well thought out contingency plans to cope with all eventualities.

The dangers posed by a change in the policies pursued by the US Federal Reserve, resulting in monetary tightening, could easily trigger a flight of short term capital from the Malaysian market.

The dangers associated with this high level of short term external debt cannot be dismissed or swept under the carpet through silence in the manner of the Prime Minister’s stance. It would be highly irresponsible to ignore the need for clear policies to address a potential devastating crisis.

Conclusion

The Prime Minister observed in his speech: “From an economic perspective, when we achieved independence 57 years ago, we developed the country based on agriculture before progressing to a modern industrialized economy. Next, we moved into the upper-middle income phase. We are now moving towards a services-based economy and knowledge-based economy.”

He further repeated the mantra that Malaysia would become a high income developed nation by 2020. The reality is wholly different.

Because of policy failures, Malaysia is truly caught in the middle income trap. It has lost competitiveness, it is suffering from a serious brain drain; its human resource pool is inadequate to enable the nation to move up the chain; it suffers from massive illicit capital flows.

National institutions have atrophied. The country is led by a group whose competence is being increasingly questioned. These trends do not auger well for the future of Malaysia.

It would not be far-fetched to suggest that the country is on the wrong track.

It does not appear to be headed toward joining the ranks of high income or advanced nations (however defined).

If left unchecked, Malaysia is in all likelihood headed towards joining the group of highly indebted countries.

Objective assessments of the state of the country point towards a looming crisis unless urgent steps are taken to first and foremost restore fiscal discipline.

The sacrifices that Malaysians are being asked to make by assuming a large burden represented by the introduction of the GST and the withdrawal of subsidies on fuels and the concurrent rise in the cost of living are not matched by responsible fiscal policies.

The increased revenues that the Government proposes to harvest are being frittered away and not being applied towards reducing the deficit which essentially feeds the rapacious appetite and greed of those close to the corridors of power.

There is one bright spot. That is reflected in the willingness of ordinary citizens willing to express outrage at the inequities inflicted by the current policies.

The nation cannot afford not to change course. The Prime Minister must offer leadership or make way.