Public Debt: Doing the Number on Us

After 55 years, it is an insult to our intelligence if all we do is to get ourselves corralled into stadiums, halls and fields to participate in huge love fests declaring our fealty to Supreme Leader Kim Il Najib. For a change let us apply our keen minds to investigate whether UMNO and BN have managed this country well. Good management is what drives this country forward but not sloganeering and speechifying.

We have heard ministers and government leaders say they can manage the economy well. When the public complains about rising public debt, our leaders say they are below the 55% debt-gdp ratio. There are no reasons to worry.

Not true, we have every reason to worry. Rising public debt means, all the people bear the risk of taking up the debt. The country is at risk. Lenders will be reluctant to lend to Malaysia and if they do, will do at exorbitant rates.

Sometime in the future, government has to pay debt. It must have revenue to pay off the debts. It can raise revenue, reduce spending or raise taxes. It doesn’t seem to want to reduce spending. Najib likes to spend. He has more than doubled public debt since he took over from Abdullah Badawi. He hasn’t put in plans to raise revenue. Oil and gas are exhaustible resources. Price of commodities is volatile. We are losing our competitive edge in manufacturing. In any case even when the going is good, Najib doesn’t reduce spending and debt.  

So he will raise taxes sometime in the future. It would appear the government doesn’t care about how the rakyat feel because it thinks it can do anything without anyone able to stop them. We have an insensitive government oblivious to the rising awareness of the rakyat. That forms the premise upon which lies the arrogance of this government. It thinks people are stupid.

If the government cannot find sources to increase revenue it will have to raise taxes. Such as GST to widen the net to include those who don’t pay taxes. Only 10% of the working population pays taxes currently. The people of Malaysia bear a potential debt of RM17k per person. So Mr Ministers, we have all the reason to worry. You have not been managing the economy efficiently.

The actual debt by the government or public debt may be hidden from public scrutiny.  As a result, the government crows that it has reduced budget deficit. In 2012 the deficit was 4.5%. In 2013 says the government, the deficit will be only 4%.  Federal government debt is projected to increase by 10% only reaching RM502bn. that is only 53% of GDP.

These figures say the government show, we can manage the economy better than anyone else. The opposition says the PM can only put up a budget not worth the paper on which it is printed. Debt servicing is around 15% of revenue. It’s around 10%.  The opposition will not be able to accomplish what we can do.

That part that is hidden is what worries us. The loan guarantees that the government gave out constitutes what we may call shadow public debt. It has grown tremendously under the stewardship of Najib making him the most spendthrift of all PMs. And there seems to be no restraints. Eventually the hidden public debt may appear in the official government’s balance sheet.

The government hasn’t revealed the extent of the guarantees it gives to debts taken by GLCs and other approved bodies. For example the government may guarantee the loans taken by the developers of the RM 50 billion MRT project. Suppose the loan is defaulted. The creditors go after the guarantors of the loan, i.e. the government. The government then pays for the loan taken. Over a period of one year, from June 2011 to June 2011, this form of loan guarantee rose from RM89bn to RM133bn. it increased by 49%.

Suppose we include these figures into the figures of official public debt. If we include the shadow debt into the official debt, then the debt to GDP is more than 55% allowed. It becomes 68%.

The debt guarantee is also known as contingent liability. It does not become a liability yet, unless there is a call on the guarantee. It is therefore not part of the official public debt. So why should we worry asks the government. The opposition likes to spin bad stories about us.

The response to that is, because the government has not been forthcoming and upfront with the rakyat, we need to inform them that this may be a possible trick from the government.  There is a strong possibility, that the government uses this kind of debt guarantees to bypass the ceiling of the 55% debt-gdp ratio.  If the government does this, then it is deceiving us and we cannot trust this government.

Who are the beneficiaries and recipients of the shadow debts? A host of government entities are taking up the shadow debt. These include entities like Prasarana, 1MDP and Johor Corp which is developing the more than 2000 square kilometers of land in Johor known as Iskandar Region. It’s 5 times the size of Singapore and if the Singaporeans keep gobbling up larger and larger tracts of land there, Iskandar Region may eventually become an annexure of The Republic of Singapore.

The Klang Vallley MRT project which is estimated to cost around RM50bn is funded by debt issued by Prasarana. The debt is estimated at RM160bn which is expected to be spent over a period of 10 years. From past experience we know these debts become official debt included eventually in the country’s balance sheet. They do because returns from pubic transport projects are never sufficient to cover the huge capital outlay.

Public Debt, including loan guarantees, 2011-2012

	2011		2012
	RMmn	%GDP	RMmn	%GDP
Domestic debt	438,025	49.7%	484,769	51.8%
Treasury bills	4,320	0.5%	4,320	0.5%
Investment Issues	116,992	13.3%	145,899	15.6%
Govt Securities	277,713	31.5%	292,150	31.2%
Housing Loan Fund	39,000	4.4%	42,400	4.5%
External Debt	18,103	2.1%	17,590	1.9%
Market Loans	10,403	1.2%	10,403	1.1%
Project Loans	7,700	0.9%	7,187	0.8%
Total Public debt	456,128	51.8%	502,359	53.7%
Govt Guaranteed Debt	89,300	10.1%	133,346	14.3%
TOTAL Shadow Public Debt	545,428	61.9%	635,705	68.0%

Sources: various. 

Look at the above figures. Government guaranteed debts rose by 4.2 percentage points of our GDP. It expanded by 149%! If we now include all those hidden contingent liabilities into the official public debt figures, then clearly total public debt in 2011 was 61.9% of our GDP and in 2012 it is 68% of our GDP. It has exceeded the 55% legislative limit.

The government ministers will continue giving us the mentally deficient answers that our public debt is smaller than Singapore or Japan. But these countries have the capacity to pay. Our ability to pay seems to be based on fortuitous events and chance and the willingness by the political masters to want to pay. If they continue to be insensitive, the debts will not get paid and they will spend and spend until we go bankrupt.

So now we can rebut what Awang Adek said about achieving our growth rate as being a walk in park. It is if you massage the figures and do a sleight of hand.  He did not tell us the impressive growth rate of over 5% came from the high debt taken up by government linked entities which are not reflected in our balance sheet currently. That was why investment expanded at a blistering rate of 26% in 2Q of 2012.

The government is cheating the public. It wants to spend money to buy voters as the elections draws near. It wants to maintain populist policies such as retaining subsidies on fuel and giving all the BR1Ms. It hides all these from the official balance sheet. By using the instrument of the shadow debt, it can sidestep the ceiling of 55% debt-gdp ratio. Taking this approach allows the government to also sidestep carrying out more serious fiscal reforms such as changing the manner it spends money. Doing such things like cutting fuel subsidies.

Awang Adek did not bring our attention to the debts incurred by Non-Financial Public Enterprise (NFPEs). Thus we cannot see the numbers in their Consolidated Balance Sheets. The fact of the matter is NFPEs registered the highest deficit to date- 6.2% of the GDP in 2012.  It was only around 0.5% in 2011. What do these NFPEs do? They do the large infrastructural projects like MRT construction, TRX, Bandar Malaysia Sungai Besi and Iskandar Region in Johor. They never tell us, they use a lot of money to finance these projects which are not reflected in our official balance sheets. 

Which Park is Awang Adek referring to?