The State of the Nation: Why Malaysia is unlikely to go bankrupt like Sri Lanka, but can’t afford to go into debt like Singapore

A country’s borrowing capacity cannot be determined solely by the ratio of public debt to gross domestic product (GDP); it must also take into account more relevant factors such as debt affordability as well as debt sustainability, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz rightly told Parliament last week in response to a question from the MP for Pontian, Datuk Seri Ahmad Maslan.

The former deputy finance minister had asked two questions that have gone viral on social media lately – whether Malaysia is at risk of going bankrupt like Sri Lanka, and why Malaysia isn’t just continuing to borrow more money to help people if the country’s debt is indeed at manageable levels and it still has room to borrow.

Citing prevailing economic indicators, Zafrul told parliament that the chances of Malaysia going bankrupt are very slim. Not only has the International Monetary Fund (IMF) never raised bankruptcy concerns, Zafrul said the fund also expects the Malaysian economy to grow by 5.75% in 2022. IMF forecasts of 3.6% for the global economy and 5.4% for emerging and developing countries. Asia in April (which, according to the IMF, could soon be revised downwards).

Yet Zafrul rightly added that Malaysia needs to be fiscally prudent and control its debt according to what the country can reasonably afford.

While Malaysia’s level of gross debt to GDP of 63% may seem low compared to Japan’s 263% and Singapore’s 133%, Zafrul noted that the debt service to revenue ratio of the Malaysia had reached 16.3% in 2021 and was already expected to exceed 18% when the 2022 budget was tabled (with only 40% or RM31bn of this year’s outsized RM77.7bn subsidy bill budgeted) .

In other words, nearly 20 sen of every ringgit earned by Malaysia will only cover interest payments on the federal government’s direct debt, which had reached RM1.02 trillion by the end of April. The debt-service ratio is expected to remain close to one-fifth of revenue in the 2023 budget, according to The Edge’s bottom-of-the-envelope calculations, unless there is a substantial increase in revenue or a significant reduction in debt and/or the cost of debt – which is perhaps why Zafrul had added that Malaysia’s tax revenue to GDP of around 11% is low compared to the Philippines’ 18%, in the 17, 2% of Thailand, to 13.3% of Singapore as well as the average of 33% of members of the Organization for Economic Co-operation and Development (OECD), which are mostly high-income developed countries.

Why it’s different for Singapore and Japan

Japan may have the highest overall gross debt in the world at 263.1% in 2021, but net debt to GDP is well below 169% of GDP, according to IMF data. Japan – whose net foreign assets hit a record 411 trillion yen ($3.24 trillion) in 2021 – has also been the world’s top creditor country for 31 consecutive years.

Although there are debates over whether the yen is still a safe-haven asset as the monetary policy gap widens with quantitative tightening, and the currency has fallen to its lowest level in 20 years against the greenback, the chances of a sovereign default are still considered low because Japan borrows entirely in yen and mainly (87%) from residents – the Bank of Japan holds almost half of the debt securities issued by the Japanese government.

And while modern monetary theory proponents can point to Japan as an example of how debt levels can be higher than traditionally thought, most pundits wouldn’t advocate for others to borrow the the same way by asking the central bank to close major budget gaps. This is true even for the United States, whose dollar is a reserve currency for the world. Debt, after all, has to be repaid one way or another at some point – there is a cost to the people and the economy even if the central bank allowed the government not to pay its dues.

Moreover, the ringgit — and Malaysia — are not in the same league.

Singapore – one of only 11 countries in the world to enjoy the coveted AAA sovereign rating – is also in a league of its own. For starters, it has no net public debt. Indeed, there are laws that prevent his government from spending more than it earns annually, except in extraordinary circumstances, such as the Covid-19 pandemic. Prudence in financial management has allowed the accumulation of significant reserves, in addition to what is declared by its central bank, which uses the strength of the currency to hedge against inflation.

The low debt servicing costs (less than 0.5% of revenue in 2020) that Singapore incurs are more than offset by its returns on investment, which represent about a fifth of its government’s annual revenue, giving the city-state the flexibility to remain a low-tax system.

Singapore’s seemingly high (gross) debt-to-GDP ratio is also not debt incurred to fund government operations, but to meet investment needs. Much of its gross external debt reflects foreign capital inflows and deposits in its banking sector.

Moreover, despite using a substantial amount of reserves to defend the strength of its currency since the start of the year, the official reserve holdings of the Monetary Authority of Singapore stood at 345.3 billion US dollars in May 2022, compared to 417.9 billion US dollars at the end of 2021 and 362.3 US dollars. billion at the end of 2020 but higher than US$279.45 billion at the end of 2019, according to Bloomberg data.

Sri Lanka debt service ratio

Data on Malaysia’s net debt to GDP ratio is not available in public IMF or World Bank databases.

We know that Bank Negara Malaysia’s foreign exchange reserves stood at $107 billion as of July 15 this year – down about $9.9 billion from the end of 2021 and down $5.8 billion. dollars compared to the end of May 2022 – but still represents 1.1 times the short-term external debt and sufficient to finance 5.7 months of imports of goods and services.

That’s not to say Malaysia can continue to borrow as much as it wants, as there are already warning signs that it needs to be more careful about borrowing.

Malaysia’s debt-service-cost-to-income ratio of 15.3% in 2020 puts it among the top 25 countries in the world ranked in terms of high interest costs to income, according to Bank data. world.

Topping the list is Sri Lanka, which saw 71.4% of its revenue go to paying interest on debt in 2020. In April this year, Sri Lanka said it would stop paying debt international bank to retain dwindling foreign exchange reserves and, for the first time in its history, defaulted on its debt on May 19 after the expiry of a 30-day grace period for missed interest payments totaling 78 million US dollars to foreign creditors of its sovereign bonds. The country had just $25 million in usable foreign exchange reserves when it suspended repayment of about $7 billion in international loans due this year on a $51 billion external debt.

Other countries on the list of top 25 countries ranked by percentage of revenue spent on servicing interest payments alone in 2020 are Ghana (44.6%), Zambia (38.8%), Kenya (24.1%), Jamaica (22.4%), Brazil (21.7%). %), Dominican Republic (21.6%), Bangladesh (21.1%), Lebanon (21%), Malawi (20.7%), Indonesia (19.1%), Costa Rica (19.1%) , Papua New Guinea (17.9%), Jordan (17.7%), Ecuador (17%), Bahamas (16.5%), Fiji (16.3%), Mexico (15.4%) , Guatemala (15.4%), Uganda (15.3%), Malaysia (15.3%), South Africa (15.2%), the United States (14.4%), the Philippines (13 .3%), Namibia (13.1%) and Iceland (12.3%). (See chart.)

Besides Canada’s 5.6% and Australia’s 3.5%, it is perhaps unsurprising that other countries with AAA sovereign ratings like Singapore spend less than 2% of government revenue on payments interest for debt service.

Improving debt affordability

With Malaysia’s debt service charges currently projected at 18% of revenue, there is a risk that the country could move up this list if revenue does not grow faster than its debt service charges, in order to reduce interest payments on his debt as a percentage of income.

The country’s past introduction of Goods and Services Tax has shown that there could be at least a RM10 billion increase in revenue per year compared to the current expanded Sales and Services Tax – considerable given that debt service charges were RM34.5 billion in 2020 (15.3% of government revenue) and RM38.1 billion in 2021 (16.3% of government revenue).

Debt service charges were estimated at RM43.1 billion in 2022 and could reach RM46 billion in 2023, according to our calculations on the back of the envelope.

This level of interest payments means that the government needs revenue of RM306 billion for the debt service ratio to fall back to 15%, a threshold crossed in 2020. This would be a difficult task even with the reintroduction of a broader consumption tax, as federal government revenue reached a record high of RM264.4 billion in 2019, supported by a special dividend of RM30 billion from Petroliam Nasional Bhd (Petronas) for pay the taxes due.

Revenue was estimated at RM234 billion in the 2022 budget, an improvement from RM233.75 billion in 2021, but is likely to be higher due to the outsized subsidy bill which Zafrul says could reach RM80 billion this year.

To be sure, Malaysia has never defaulted on its loan obligations, Zafrul recalled in his July 14 statement to correct misleading comments about the country’s debt and financial situation that were appearing on social media. He also noted that Malaysia’s offshore borrowing was capped at RM35 billion and stood at just RM29.4 billion at the end of June.

Malaysia’s statutory debt, capped at 65% of GDP, stood at 60.4% of GDP at the end of June 2022, it said in the July 14 statement without disclosing the absolute amount. This is up from 58.5% of GDP (RM958.5 billion) at the end of April, when direct federal government debt stood at RM1.078 trillion or 62% of GDP. , according to the pre-budget statement.

Although Malaysia is not at risk of defaulting on its loans like Sri Lanka, there is a clear need to improve the affordability of its debt and reduce the proportion of revenue spent on debt servicing so that more money can be used for more productive purposes, including supporting economies and human development. As the debt must be repaid, Malaysia must learn to spend within its means and to save for bad weather. No income would suffice to satisfy unbridled spending.

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