Challenges of Government Debt for Fiscal Policies in Malaysia
Total Page：16
File Type：pdf, Size：1020Kb
View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Lehigh University: Lehigh Preserve Lehigh University Lehigh Preserve Volume 37 - The New Malaysia (2019) Perspectives on Business and Economics 1-1-2019 Challenges of Government Debt for Fiscal Policies in Malaysia Hillary (Zhenyang) Ni Lehigh University Follow this and additional works at: https://preserve.lehigh.edu/perspectives-v37 Recommended Citation Ni, Hillary (Zhenyang), "Challenges of Government Debt for Fiscal Policies in Malaysia" (2019). Volume 37 - The New Malaysia (2019). 3. https://preserve.lehigh.edu/perspectives-v37/3 This Article is brought to you for free and open access by the Perspectives on Business and Economics at Lehigh Preserve. It has been accepted for inclusion in Volume 37 - The New Malaysia (2019) by an authorized administrator of Lehigh Preserve. For more information, please contact [email protected]. Perspectives on Business and Economics, Vol. 37, 2019 CHALLENGES OF GOVERNMENT DEBT FOR FISCAL POLICIES IN MALAYSIA Hillary (Zhenyang) Ni Having inherited a concerning amount of government debt and obligations from its predecessor, Malaysia’s newly elected political party faces a tough balancing act between being fiscally responsible and meeting its ambitious goals for socioeconomic reforms. This article explores the friction between these two objectives by analyzing the fiscal policies proposed and implemented by the new administration as well as future improvements needed for long- term prosperity in public finance. Introduction In this article I examine the conflicts between the government’s initiatives to meet Shortly after Dr. Mahathir Mohamad the public sector’s debt obligations and enhance claimed victory as Prime Minister in Malaysia’s fiscal competitiveness, and its determination to fourteenth general election on May 9, 2018, jumpstart institutional reforms and improve the new Finance Minister, Lim Guan Eng, the socioeconomic well-being of its citizens. disclosed that the country’s total estimated I first provide clarifying information on liabilities amounted to over RM1 trillion ($251 the status of Malaysia’s government debt in billion), 80.3% of GDP, at the end of 2017 2018. After a discussion of the fiscal policies (Shukry and Jamrisko). These figures presented introduced by the PH government in 2018 a much higher fiscal burden than the former and their credit impacts, I elaborate on the Prime Minister, Najib Razak, and his Barisan Ministry of Finance’s short-term financing Nasional (BN) government had led the world solutions. Finally, I offer some analysis on to believe. Moreover, the campaign promises several key areas for the Malaysian government made by Mahathir and his Pakatan Harapan to focus on in the long run in order to keep its (PH) government to lower the cost of living, obligations sustainable and move toward fiscal along with the public’s high expectations that consolidation. the administration carry out urgent reforms, exacerbated the burden of servicing the trillion- Composition of Malaysia’s Government ringgit debt. The PH government pledged to Debt and Liabilities remedy the troubled public finance sector with the principles of competency, accountability, and Table 1 outlines the total debt and transparency (CAT) (Ministry of Finance, 2018b). liabilities borne by the government of Malaysia 1 Table 1 Federal Government Debt and Liabilities RM Billion Share of GDP (%) 12/31/17 6/30/18 12/31/17 6/30/18 Federal government debt 686.8 725.2 50.7 50.7 Committed government guarantees 102.1 117.5 7.5 8.2 PPP and similar liabilities 260.1 184.9 19.2 12.9 1MDB (net debt) 38.3 38.3 2.8 2.7 Total 1087.3 1065.9 80.3 74.5 Source: Ministry of Finance, 2018c. on June 30, 2018, divided into four categories. and their subsidiaries (Ministry of Finance, Malaysia holds an A− sovereign credit rating 2018c). They hold the government responsible as of the writing of this paper. However, its for payment in the event that the borrower federal government debt-to-GDP ratio of defaults. Government guarantees incentivize 50.7% is significantly higher than the median the aforementioned entities to take on public of other countries that are rated A− , estimated projects by protecting them against insolvency at 40.9% for 2018 (Shah). Nevertheless, the risks. In addition, with the government as domesticity as well as the maturity profile of an intermediary guaranteeing the loan, the Malaysia’s federal government debt limited lending institutions, gaining comfort from the risk exposure. First, 97.1% of federal reduced counterparty risks, tend to offer government debt was dominated in ringgit, lower coupon rates to the borrowing entities, shielding the government from foreign thus lowering borrowers’ cost of capital. The exchange risks. Additionally, large domestic BN government, however, did not exercise institutional investors, whose investments discretion in granting loan guarantees. tend to be stable and long term, held almost From 2008 to 2017, government guarantees two-thirds of all government securities. As a increased by nearly 250% from RM69.2 billion result, risks associated with shifting demands to RM238 billion, while federal government from foreign investors, who held 28% of debt only increased by 124%. Because government issuance at mid-year 2018, can be government guarantees are contingent better monitored and controlled. Furthermore, liabilities, the government is not liable for 54.5% of debt papers outstanding at June 30, repayment of the debt it guaranteed unless 2018, had a remaining maturity period over the primary debtor defaults. However, citing 5 years, thereby curtailing immediate threats prudent debt management as the reason, the associated with refinancing (Ministry of PH government included RM117.5 billion Finance, 2018c). of committed government guarantees (i.e., Government guarantees and public- roughly 50% of all government guarantees), private partnership (PPP) lease payments are on June 30, 2018, as its obligations, even not direct debt obligations but contingent though the debt had not defaulted. In the case liabilities to the government. Employment of of committed government guarantees, the these off-balance sheet arrangements in lieu government partially subsidizes borrowing of direct borrowings is intended to alleviate entities (typically public infrastructure the government’s financial and administrative projects) for their cash flow needs to service burden. Government guarantees are awarded debt when their own income is not sufficient, to statutory bodies, government-linked typically during construction and early stages companies, and state government bodies of operation (Ministry of Finance, 2018c). 2 Given the statutory limits on federal were embezzled by corrupt officials under government debt (i.e., Malaysia set a self- the Najib administration for their personal imposed ceiling of federal government debt at indulgence. Finance Minister Lim indicated in 55% of GDP) and the expanding government the 2019 budget that the government would be guarantees, the previous BN government liable to pay up to RM43.9 billion to settle the engineered “aberrant contracts” with the 1MDB debt. less scrutinized PPP mechanism to present a In summary, Malaysia’s debt and misleadingly prosperous fiscal picture. The PPP obligations remained elevated despite the lease payments include rental, maintenance, significant progress made during the first and other charges for a variety of construction half of 2018. More importantly, the debt and projects, such as schools, hospitals, police liabilities exposure served as a warning sign stations, and roads. As an example, Tony Pua, a for the new administration to recalibrate and special officer to the current Finance Minister, reform its fiscal sector. Economic growth in reported that the BN government had intended 2018 and 2019 likely faces some contraction, to award a contract that would pay RM1.5 billion especially since Malaysia’s open economy left to a private company to build a polytechnical it particularly vulnerable amidst the escalating university, when paying for the contract trade war between the US and China, along with with direct expenditure would have only cost rising volatility in global financial markets. In the government RM0.5 billion (“Malaysia fact, in October 2018, the World Bank adjusted Committed to …”). Similar approaches (i.e., Malaysia’s estimated 2018 GDP growth down to choosing to utilize PPP instead of government 4.9% from an earlier prediction of 5.4% (Tan, debt or guarantees, albeit more costly) created “World Bank…”). A comprehensive review of a false perception that the BN government Malaysia’s fiscal challenges and solutions is managed to sustain fast-paced economic and imperative to alleviate the risk of a heightened debt load that would restrain economic infrastructure development while reducing the development. In addition to these concerns, debt-to-GDP ratio at the same time. Moreover, it is worth noting that political motives are many of the contracts under PPP were poorly inherent in PH’s disclosure and discussion of negotiated in terms of both the amount and its financials. Such political motives include the timing of payments. In his budget speech further damaging the political image of BN for the year 2019, new Finance Minister Lim and Najib as well as citing debt obligations disclosed that for projects such as the Trans- as the reason for delaying urgent reforms. Sabah Gas Pipeline and Multi-Product Pipeline,