The lowdown on Malaysia’s debts

Ali Salman, CEO of IDEAS says for Budget 2018, this amount is 11%, which is very adequate. Going by World Bank standards, the situation becomes worrying only if more than 30% of the budget goes towards loan repayment.

Now that Malaysia’s debt of a trillion ringgit has become public knowledge, are you one of those who fear the country is headed for ruin?

There’s no call for panic as long as the government has a repayment plan and is able to stick to it, according to Ali Salman, the CEO of the Institute for Democracy and Economic Affairs.

The figure of RM1 trillion was given by Prime Minister Mahathir Mohamad last Monday at a meeting with the staff of the Prime Minister’s Department.

Finance Minister Lim Guan Eng subsequently gave some details.

Lim said official federal government debts amounted to RM686.8 billion (50.8% of gross domestic product), commitments to government guarantees stood at RM199.1 billion (14.6% of GDP) and commitments to lease payments for projects under public-private partnerships stood at RM201.4 billion (14.9% of GDP).

FMT recently asked Ali to clarify for the layman some issues relating to national debt.

“Strictly speaking,” he said, “a country’s debt is incurred when the government takes loans to fund projects or its operations. The money is borrowed from other countries or international financial institutions such as the World Bank or IMF.

“Some governments consider liabilities as part of their debts.”

FMT: When does a debt become worrying? 

Ali: Technically speaking, the amount of a debt isn’t too important. What is more important is the government’s debt repayment plan and whether it is capable of following this plan.

Incurring debts is not always a bad thing. The question is whether the debts are productive.

A debt is productive when you borrow, say, RM30 billion repayable in 20 years to build an infrastructure project from which you can recoup the amount within those 20 years.

But if a loan is taken to pay a government’s operating expenditure or if it goes towards a white elephant project, then it is not productive.

FMT: Does Malaysia have the capability to pay off its debts?

Ali: Yes. The situation is manageable. One of the important indicators of a country’s ability to repay debts is the amount of money allocated in the annual budget for the purpose.

For Budget 2018, this amount is 11%, which is very adequate. Going by World Bank standards, the situation becomes worrying only if more than 30% of the budget goes towards loan repayment.

On the debt alone, there is no need to panic. But what is worrying is the revelation that institutions like 1MDB, Danainfra Nasional Bhd, Prasarana Malaysia Bhd, Malaysia Rail-Link Sdn Bhd and Govco Holdings Bhd need to be rescued by the finance ministry.

With the exception of 1MDB, these companies are involved in transport and infrastructure projects. There are indications that loans taken for these entities are unproductive, that they can’t recoup enough money to settle the loans.

This could lead to an increase in prices to meet the loan repayments. It could also lead to the use tax revenues for the repayments, which was what the previous administration was doing.

FMT: Does our debt ratio affect credit ratings?

Ali: No. Our credit ratings are affected only when the government or its agencies default on loan repayments.

FMT: Were the debts incurred by the previous administration productive?

Ali: At this point in time, we can’t tell because details aren’t available. Ideally, in the interest of transparency, the current government should reveal this data to the people. If it is deemed too sensitive, it should at least reveal it to parliament.

Moving forward, the new government should make it a point, before incurring any large debt in the future, to have it sanctioned by parliament.

FMT: Do you think it was okay for the finance minister to reveal the extent of Malaysia’s debt?

Ali: He might have felt it was his job to be transparent with the public. This should be balanced with statements to reinforce the confidence of investors and the public in the loan repayment plan and the government’s capability to repay.

FMT: What should the government do now?

Ali: The government doesn’t need to address the debt ratio immediately. It is more important to fix institutional failures, and these were worsening in the past few years.