Economics

Managing Malaysia’s Public-Sector Debt

By Kit

July 02, 2018

By R. Chander

BACKGROUND

This note, in three parts, focuses on the public sector debt in Malaysia. Part I presents a brief overview of the manner in which the Najib administration approached the issue of public sector debt. Part II presents a summary view of the assessment made by the International Monetary Fund (IMF) in the course of the annual Article IV Consultations completed earlier this year. The IMF Report was critical of the manner in which debt reporting was conducted by the previous administration. Part III looks to the future and makes a number of observations concerning the most appropriate manner in which the new Pakatan Harapan government could better manage Malaysia’s public sector debt. PART I: THE NAJIB ADMINISTRATION AND PUBLIC SECTOR DEBT

Following the defeat of the BN led Federal Government and the take over of the reins by the Pakatan Harapan (PH)coalition, there has been intense and critical attention paid to fathoming the true nature and size of the Malaysian Government’s public debt obligations.

The BN administration, under Prime Minister Datuk Seri Najib Abdul Razak, had been less than transparent about the true size of the Government’s liabilities. The Najib administration chose an approach that was designed to obfuscate by being less than transparent.

The strategy that appears to have been put in place had a number of components. First, the annual Federal Government budgets (as presented to Parliament) recorded for most years a modest deficit; such deficits were financed by borrowings in Ringgit denominated loans. Direct borrowings from foreign sources were minimal. However, foreign hedge funds and other investors held sizable holdings of Malaysian ringgit denominated paper. These holders were attracted in part by the relatively higher returns from Malaysian government debt instruments at a time when interests rates were at record low levels.

Total Federal Government debt was kept to a level averaging just above 50 percent of GDP. Much of the financing of development projects was however from off budget loans raised by publicly owned/controlled corporations and entities. These loans appear, for the most part, to have been guaranteed by the Federal Government. These guarantees represented contingent liabilities of the Federal Government but were not fully reported. The net effects of these practices were several. These included: a) by-passing the obligation to obtain Parliamentary approval and accountability; b) off budget borrowing obscured the size of debt and permitted the ignoring of self-imposed and statutory limits on public sector indebtedness; c) the virtual out sourcing of development projects provided an opportunity to ignore procurement rules e.g. the need for competitive bidding.

Reporting of debt data was partial and lacked clarity or any semblance of full disclosure. The three main sources of data were Bank Negara Malaysia’s Quarterly Statistical Bulletin, the Bank Negara SDDS website containing economic and social data based on IMF mandated conventions and thirdly the Treasury’s annual Economic Report.

All three sources had limitations: a) The Bulletin provides no details about off budget borrowings or continent liabilities b) SDDS table (see Table 1 below) is also silent about off budget borrowings; it does however incorporate data on Federal Government guarantees without any acknowledgement that these guarantees are, in a strict sense, contingent liabilities. Furthermore, no details are provided as to the nature of these guarantees. c) Economic Report incorporates several tables; the focus of these tables was on Federal Government debt; a single table reported on the consolidated public sector debt made up of the i) Federal Government Budget based transactions ii) borrowings by Statutory bodies and iii) the debt of a group of 29 Non -Financial Public Corporations (NFPC)(see Tables below).

Table 1: FEDERAL GOVERNMENT DEBT

Source: Bank Negara Malaysia, SDDS website This table shown here is truncated for reasons of space.

Table 2: CONSOLIDATED PUBLIC SECTOR DEBT

ECONOMIC REPORT 2017/18

Table 4.9. Public Sector Debt 2015 – 2016

Source: Ministry of Finance, Malaysia. Economie

Table3: Non-Financial Public Corporations

Little information has been provided about the criteria used for selection of the 29 NFPCs. Footnote to Table 6.13 in the Economic Report is far from helpful. The criteria, if applied objectively, would preclude the exclusion of important entities such as 1MDB. Large loans linked with the High Speed Rail Link and the East Coast Railway Link Project were not highlighted in the Economic Report or the Budget presentation.

In brief, off-budget borrowing and the granting of guarantees to NFPCs and other favored entities coupled with less than full disclosure about the coverage of all NFPCs contributed to flawed reporting and less than transparent accounting.

It will be observed that the total reported in the Economic Report as the consolidated public sector debt at the end of 2016 amounted to RM 901 billion. This figure appears to be close to the amount of RM1.087 trillion reported by the new Finance Minister as the debt outstanding as of the end of 2017. This latter figure was however calculated using a somewhat unconventional approach; it was derived from an aggregation of Federal Government debt of RM686.8 billion, Government guarantees of RM199.1 billion, Lease payments for public-private projects of RM201.4 billion.

PART III: THE IMF ASSESSMENT

The report by the IMF following the 2017 Annual Article IV Consultations was laced with numerous observations concerning fiscal transparency, risk management, the high level of contingent liabilities and loan guarantees by the Federal government. Some of these critical observations were couched in terms that departed from the Fund’s usual nuanced language. While Government officials attempted to placate Fund staff by stating that actions were either being taken or under consideration, there is no evidence that this was indeed the case.

Although the IMF Report was publicly available and was referred to by main stream media, such reporting was selective and picked on growth prospects, upward revisions to GDP forecasts (largely linked to a recovery in international oil prices). None of the critical observations or those deemed to be negative were reported or commented upon.

The IMF Report: Selected Quotes

Source: Malaysia 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Malaysia

The Report contained two Appendices – Appendix IV: Public Debt Sustainability Analysis and Appendix VI. External Debt Sustainability Analysis -that ran simulations under different scenarios and offered policy options for debt management. There is no evidence as of this date that the measures proposed by the Fund have been acted upon by the then BN Government. There is some uncertainty as to the extent to which the new Government as had an opportunity to fully review the Article IV Consultations Report.

PART III: DEBT MANAGEMENT

The speed with which the new Finance Minister of the PH Government acted by issuing a Press Statement together with the statement by the newly installed Prime Minister were commendable actions. They were indicative of the seriousness with which the new Government saw a need for openness and transparency in addressing the economic challenges it faced. These early actions were in part designed to reassure the markets that the new Government was committed to act in a manner to promote stability and to pursue responsible policies. These actions had the intended calming effect on the markets; the public at large welcomed the greater transparency and sharing of information. It led to a surge in the expression of patriotism through contributions to the Tabong Harapan Fund which has attracted over RM 100 million in public donations. These were commendable initiatives and represented positive developments.

That said, it is important to take note of the fact that there were a number of less then positive aspects. The Minister’s Press Statement has been criticized as alarmist by citing the estimated size of the “government’s debt” of RM 1 trillion. The calculations deviated from the standard statistical framework established by the IMF and other international agencies. In citing the RM 1 trillion figure, no attempt was made to distinguish between foreign and domestic debt.

The overall impression conveyed to the public at large was that Malaysia was on the verge of a serious debt crisis akin to what a number of Latin American countries such as Mexico, Argentina had faced in the past. Segments of the public concluded that Malaysia would join a number of European Union countries such as Portugal, Italy, Greece (PIGs) in seeking assistance. This was far from the truth as Malaysia’s debt is made up substantially of domestic debt whilst that of the other countries was mainly foreign debt. Malaysia’s circumstances were thus different. It would have been more appropriate to focus on the size of the external debt.

The disclosure of the size of public debt was accompanied by a series of statements concerning the adoption of austerity measures, cancellation or suspension of a number of mega projects, intent to renegotiate bilateral loans arranged by the previous government etc. However, these actions were not fashioned as part of a coherent and integrated plan to tackle the issue.

The overall impression that has been created is that the PH Government will pay off the debt even as it restores certain subsidies, eliminates the GST and embarks upon new programs. The reality is that repayment of debt is unlikely; at best some reduction in liabilities is likely. The inconsistencies inherent in this populist mix are likely to come back to haunt the coalition. It is thus imperative that steps are taken urgently to develop a coherent DEBT MANAGEMENT PROGRAM.

As a first step there is an urgent need to improve the scope of Government Finance Statistics. Greater transparency pertaining to the activities of all publicly owned corporations is essential. Meaningful consolidation of public finances is demanded as it will provide the basis for evidence based decisions.

It is not feasible to present a fully designed Debt Management Program. Some key considerations in the design of such a program should be:

CONCLUDING REMARKS

The IMF in its report on the Malaysian economy, following the 2017 Article IV Consultations, observed that despite the low share of foreign currency and short-term debt in public debt, Malaysia faces risks arising from its external financing requirement and relatively large share of public debt held by foreigners. At 39 percent, the external financing requirement was considered above the upper threshold of early warning benchmarks and the share of debt held by foreigners was relatively high at about 30 percent of total. These conclusions cannot be ignored but must receive close attention by the newly installed PH administration. Malaysian officials have modest experience in handling the complex issues and may need advisory technical help to develop and implement a coherent Program.

The Public Debt Sustainability Analysis prepared by the IMF offers useful tools and guidance. The analysis should be up dated periodically.

Datuk R. Chander: The author was the first Malaysian to hold the office of Chief Statistician of Malaysia in the 1960s and 1970s. He then went on to serve as the Senior Adviser to the World Bank’s Chief Economist/Senior Vice President from 1977 to 1996. Upon retirement from the Bank he has functioned as an international advisor to multiple international agencies and governments.

Washington DC

July 1st, 2018