Economists were quick to point out that actual government debt stood at merely RM687 billion in 2017 — only a bit more than half of the widely-reported RM1 trillion gure. The remainder actually consists of non-debt contingent liabilities, such as government debt guarantees as well as committed future payments for Public-Private-Partnership (PPP) projects. But many others did not make this distinction. Before long, a nationwide fetish for debt reduction became ingrained in the public psyche.
Yet, for all the furore, fears of a looming public debt crisis were widely overstated. The Malaysian government has never defaulted on its sovereign debt, and it likely never will anytime in the near future. Recall that a monetarily-sovereign, currency-issuing, politically stable government can literally never default on its public debt unless it wanted to. Historically, national debt crises are usually triggered by defaults in private sector debt — and in select cases of sovereign debt defaults, they are more often than not the result of political upheaval or losses in monetary sovereignty.
But there may be other reasons to be concerned. Elevated levels of public debt do carry other, more inconspicuous hazards, even if a sovereign debt crisis is unlikely. The danger is then not that government debt will spark a crisis, but something more subtle: that public indebtedness will constrain the fiscal space of the federal government, thus creating headwinds for long-term economic growth and welfare of the nation.
As such, rational anti-debt arguments often take an affordability standpoint: higher government debt levels directly increase debt service costs as the required principal and interest payments rise in tandem with the size of the debt stock. Indeed, back in 2012, the Malaysian government spent only about RM19 billion in debt service payments. By 2018, this amount had grown by a whopping 60 percent to RM31 billion. Debt service alone made up about 13 percent of annual government operating expenditures in 2018, representing the top operating expenditure item after emoluments. With current global interest rates at its highest levels in almost a decade, debt service will only rise as it is eventually refinanced at increasingly higher rates. This limits fiscal space — more of the annual budget going to debt service means less available to fund current expenditure, keep essential government services running and respond to crises. Other anti-debt commentators also rightly note that government-guaranteed debts are increasing at an alarming rate, nearly tripling from RM97 billion in 2010 to a sizable RM260 billion in 2018.
On the other hand, the situation may not be as dire as the anti-debtors paint it to be. The sustainability of government debt fundamentally depends not on its absolute level in ringgits, but on its amount relative to the size and growth of the nation’s economy. One way to look at it is by using benchmarks such as government debt-to-GDP. This will show that even as government debt grew in 2018,the debt-to-GDP has remained constant, meaning the increase in debt levels was matched by a roughly commensurate increase in the size of the country’s economy. Over the past few years, Malaysia’s government debt-to-GDP has actually decreased from a peak of 55 percent to current levels of about 51 percent of GDP — not an exceptionally high level compared to our international peers with similar national income per capita figures.
Besides, debt sustainability has other dimensions too and the underlying composition of Malaysian government debt offers some comfort: 97 percent of Malaysian government debt is raised domestically and denominated in ringgit (though that may change with the issuance of Samurai bonds), while 75 percent of Malaysian government debt is owed to Malaysian residents. Further, a substantial portion of federal government debt is owed to itself: the top holders of Malaysian government debt are actually other arms of the government, including the Employee’s Provident Fund (EPF) and Retirement Fund Incorporated (KWAP). All this acts to decrease foreign currency risks and limit sudden spikes in borrowing costs that can occur when foreign holdings are large.
Besides, other underlying characteristics of Malaysian government debt, such as its maturity structure, has also improved in recent years. The average maturity of outstanding Malaysian government debt has risen from about 5 years in 2005 to 7.6 years in 2018, close to the average debt maturity of advanced economies of about 8 years. Here, a longer debt maturity profile reduces short-term refinancing risks and helps improve government fiscal space. Additionally, as the government’s 2019 Fiscal Outlook Report notes, there is still strong demand and adequate capacity in domestic financial markets to absorb government debt issuances.
Even “off-balance sheet” liabilities, like PPP lease liabilities and government guarantees are not a problem in and of itself. PPP lease liabilities are a natural result of financing infrastructure projects through PPPs, while government guarantees help reduce borrowing costs of agencies and increases overall fiscal space for the federal government. The problem here then, is that these guarantees and PPPs are not subject to the same degree of parliamentary and public oversight as regular on-budget expenditure — and consequently they were often deliberately used by the Najib administration to circumvent public scrutiny. While a full list of government guarantees are published in the Accountant General’s Annual Federal Government Financial Statement, the particulars and balance sheets of these guaranteed quasi-government bodies are frequently not readily accessible. It is probably worse in the case of PPPs, where any detail of a PPP’s contractual agreement and their termination clauses are virtually non-existent. On this, increased transparency and public disclosure will bolster public scrutiny and increase accountability, directly helping to reduce insidious crony-capitalist rent capture and leakages.
In the end, it is important to understand that fundamentally, government debt is simply the accumulation of all previous yearly budget deficits and is thus a function of government revenue and expenditure. As such, for as long as Malaysia continues to run a budget deficit, the absolute level of government debt will only continue to grow larger each year.
For this reason, public finance reforms need to first address the myriad issues that remain on the budget level. On the revenue side, the return to reliance on oil-related revenues and one-off contributions from state-owned enterprises (SOE) is both unsustainable and a direct consequence of the narrower tax base. Accordingly, comprehensive tax reforms are needed to broaden the tax base and improve revenue sustainability. On the expenditure side, politically-difficult pension and emoluments reforms have yet to be undertaken, with longer-term issues like demographic change threatening to compound these challenges in the decades ahead.
Consequently, it is time to move away from the demonisation of government borrowing and debt, and from unbridled efforts to reduce public debt just for the sake of it. Instead, herding public efforts towards the more pressing matter of building expenditure and revenue sustainability — such as broadening the tax base and moving away from oil-related revenues — would be much more productive for Malaysia as a whole. Indeed, recall that government borrowing ultimately serves two main purposes: to support the domestic economy in times of demand slack and to finance investments that carry future socio-economic benefits for the nation. As such, we should all be cognisant of the fact that whatever the optimal level of public debt is, at least one thing is certain: it is not zero.
Calvin Cheng is a Researcher in Economics, Trade and Regional Integration, ISIS Malaysia