Reducing Malaysia’s debt burden
So while immediate concerns over a Malaysian sovereign debt crisis are substantially overblown, the case for reducing the debt to GDP ratio makes sense. This is especially true since the economy appears to be growing along its potential-output growth path which means, whether viewed from the lens of neo-classical or Keynesian macroeconomic thought, fiscal consolidation in Malaysia is thus both necessary and appropriate.
HishamH, New Mandala
Malaysia came out of the ‘Great Recession’ relatively little the worse for wear, but bearing a higher burden of debt than is common among emerging markets, both in the public as well as in the private sector. While concern over Malaysia’s public sector debt has been less evident in the public discourse lately, those concerns are never far away. At 52.9% of GDP in 2012, the debt level is nowhere near the onerous burdens carried by many advanced economies, with much of the increase in debt due to the 6.7% fiscal deficit incurred during the Great Recession.
Yet public sector debt remains far above the regional average and while not in itself dangerous, it does limit the ability of the government to counteract future crises. Arguments against the government’s debt level are thus now framed in terms of improving “fiscal space”. For example, in the latest Article IV Consultation, this is what the IMF had to say:
Malaysia’s fiscal space has shrunk considerably following the global financial crisis…A weak structural fiscal position and a relatively high debt ratio reduce the ability to mount countercyclical fiscal responses in the future.
There are quite valid concerns over the sustainability of government revenue and expenditure. The tax base is narrow with less than 10% of the workforce actually paying taxes, while a third of government revenue comes from taxes and dividends on the oil & gas industry, which over the long term is threatened by potentially declining reserves and more recently, lower global prices. Nevertheless, the overall debt to GDP ratio is below any critical threshold, and the government carries minimal external debt with over 95% raised domestically. The financial system has more than sufficient excess liquidity to absorb further debt issuance, and both interest rates across the term structure and debt service ratios are at near all time lows.
So while immediate concerns over a Malaysian sovereign debt crisis are substantially overblown, the case for reducing the debt to GDP ratio makes sense. This is especially true since the economy appears to be growing along its potential-output growth path which means, whether viewed from the lens of neo-classical or Keynesian macroeconomic thought, fiscal consolidation in Malaysia is thus both necessary and appropriate.
The question remains as to how to go about it. Much of the government’s financial commitments are “sticky” – salaries, pensions and debt service payments make up nearly 40% of the 2013 Budget. The development budget (which is fully funded through debt) is discretionary, but cuts here would reduce future potential growth, and limit investment in needed infrastructure. The two other major items of expenditure that could be ripe for the plucking are procurements and subsidies, which combined total nearly 30% of total government expenditure.
Shifting to a largely open-tender based procurement approach, as the government has committed to doing, could yield some savings by plugging leakages and wastage. But gains here may be more limited than one might imagine – open tenders may be more cost-effective in theory, but much of these efficiency gains are lost as procurement needs grow larger and more complex.
Subsidy reduction offers greater scope for cost savings. The federal government expects to spend RM37.6 billion (about US$12.3 billion) on subsidies in 2013, of which the largest portion will go towards maintaining below market petrol and diesel prices. In addition, there is the “hidden” subsidy borne by the national oil company Petronas, which provides natural gas below market prices to domestic power producers, industry, and consumers. In 2011, this subsidy amounted to an additional RM18.7 billion (US$6.1 billion).
Rationalising subsidies would go a long way towards reducing the deficit, and begin making a dent in reducing the government’s debt load. While this has met with considerable and understandable civil and political opposition, there’s no doubt that any future administration will need to address this issue. The long overdue implementation of GST would also, on the revenue side, help close the fiscal gap.
But leaving aside the effort to improve fiscal space, of more pressing concern is Malaysia’s private sector debt, specifically household debt. Malaysian corporate gearing ratios have been generally declining since the Asian Financial Crisis of 1997-98, but household debt has been concurrently on the rise. From 72.6% of GDP in 2005, household borrowing has increased to 80.5% as of 2012 – as corporate balance sheets mended, household balance sheets have deteriorated.
This trend has come from a confluence of global and domestic macroeconomic factors such as low-wage competition (e.g. from China), wages progressively delinking from productivity, falling real interest rates, banks shifting emphasis from corporate to household lending, rising property prices, and a higher cost of living. While much of this household debt has been used to acquire properties and financial assets which could presumably back the attendant liabilities in the event of a crisis, there is a worrying heterogeneity in the distribution and direction of borrowing.
Something like 80% of household borrowing is by households that earn higher than average incomes (greater than RM3,000 per month, or US$1,000), and 46.5% are to households earning above RM5,000 (US$1,600) per month. The leverage ratio of the latter is in the region of 2.3-3.3 times annual incomes, a relatively comfortable level. For households earning less than RM3,000 however, the leverage ratio ranges from 4.4 to an astonishingly high 9.6 times annual income.
More worrying still, the fastest growing component of low income household debt is in personal loans, which are increasingly provided through the non-bank sector. The numbers are frightening – loan approvals through non-banks rose 63.7% in 2012, and the average personal loan was for RM68,000 (US$22,300) with a duration of 20-25 years.
