Monday, March 05, 2012

Malaysia's Debt - RM450 billion, Singapore - Zero; Malaysia's Debt 54% of GCP, Indonesia only 24%, Singapore 0

The failure of the UMNO-led coalition, today the Barisan Nasional government, is most shocking. Lack of transparency and accountability has kept us all in the dark. After all, this government has not openly told us too many important things about the state of our nation, and it so difficult to get 'basic data' about the state of Malaysia.

What is Malaysia's national debt? (Oh, we cannot be sure because of exact figures, because of the lack of transparency and accountability). For a long time, until about 1984 it was less than RM50bn, it crossed RM100bn on or about 1998, and in the last 14 years it has sky-rocketed to about RM450bn. (Badawi(2003-2009) Debt from about RM150bn to about RM350bn, and Najib(2009 until now) from about RM350bn - to now about RM450bn) - Blame should not rest on who was the PM then, but the entire cabinet and BN government...In the past, changing of a BN PM satisfied many who said 'give the new PM a chance', and this is wrong for the fault has always lied in the entire BN government - and its political parties - noting that they always had the option to 'speak out' or even leave BN but they did not and consented to what was being done...
 
"...By the end of 2011, we can expect Malaysia's debt to reach RM450bn..." - and Singapore has NO debt?
 
 
"...the debt at the end of 2012 will be only 54 per cent of our GDP, which is relatively low compared to the current crisis nations like Greece and Italy. (GDP is a measure of the total value of all the goods and services produced in a year in the country.) While it may not reach the levels of Greece by 2012, at our current rate of borrowing it won’t take long before we become another Greece. Just to put this in perspective, our giant neighbour, Indonesia has a debt of only 23 per cent of GDP! Singapore has no debts.

Remember as your debt increases, the interest rate for new borrowings just keep increasing.

A major factor is the large leakage in government spending due to corruption and wasteful spending that has been highlighted by the Auditor General year after year in his annual reports. It has been estimated that we can easily save RM25-30bn without changing any of the deliverables if we can get rid of corruption and cronyism.
Read more about this in the following article that appeared in ALIRAN Monthly - written by a learned man who should know what he is talking about.


Towards a bankrupt Malaysia?

Subramaniam Pillay looks at the worrying rising trend of federal government debt and wonders if Malaysia will go bankrupt. At our current rate of borrowing, it won’t take long before we become another Greece. 
 
 
Figure 1: Outstanding debt of the Malaysian federal government - Source: Bank Negara Malaysia

That the budget that was tabled in the Dewan Rakyat on 7 October 2011 was an election budget is very clear. There have been numerous detailed comments on the budget by politicians and analysts (since then). In this article, we are just going to focus on one of the long term issues from the budget. It concerns the increasing debt burden of the federal government. 

How big is the government debt?

The accompanying chart shows the federal government’s outstanding debt at the end of the successive years. As can be seen, the debt has been increasing since 1970. From the detailed data available form Bank Negara’s website, in 1991, it reached a temporary peak of RM99bn and then decreased to RM90bn by 1997. From then, it has been virtually doubling every five years. By the end of 2011, we can expect the figure to reach RM450bn. 

In other words, since the Asian crisis of 1998, we have been growing by borrowing heavily. In the 10 years since 1999, our debt has quadrupled. If we continue on this path, by 2020, our national debt will reach RM1.6 trillion. If our population is 40 million then, each Malaysian will have a debt burden of more than RM40000 and this does not include our own personal borrowing. Assuming an interest rate of 5 per cent, paying the interest alone will cost the taxpayers RM80bn per year!

The government has been reassuring us by saying that our debt is manageable. It argues that the debt at the end of 2012 will be only 54 per cent of our GDP, which is relatively low compared to the current crisis nations like Greece and Italy. (GDP is a measure of the total value of all the goods and services produced in a year in the country.) While it may not reach the levels of Greece by 2012, at our current rate of borrowing it won’t take long before we become another Greece. Just to put this in perspective, our giant neighbour, Indonesia has a debt of only 23 per cent of GDP! Singapore has no debts. 

The federal government debt alone does not tell the full story. Many government-owned enterprises also have borrowings. If these figures are included, then the total debt would be much higher. It is difficult to get the complete data on these borrowings.

Why has the debt been growing so rapidly?

Since the 1998 Asian Financial Crisis, the government expenditure has consistently exceeded its revenue by a considerable margin. For example, in 2011 the spending is estimated to be RM229bn while the revenue will be only RM183bn. So the shortfall of RM46bn has to be met by borrowing.

Of course it is not expected that the government balances its books every year. Prudent economic management requires the government to balance its budget over an entire business cycle. So we can have deficits during bad years and budget surpluses during good years. Since 1998, we have had at least two business cycles; yet every year without fail we have had budget deficits!

This is evidence of fiscal irresponsibility. Here is a government which does not know the meaning of saving for a rainy day. A good example is the situation in the current year.




Table 1 shows that the actual revenue for 2011 is going to be higher than the budgeted figure by RM17.6bn. This is mainly due to the increased income from the rise in oil prices in 2011. The federal government relies heavily on different forms of revenues (corporate tax, petroleum profit tax, royalties, Petronas dividends etc.) that originate from the production and export of oil and gas in Malaysia. The proportion can be 30-40 per cent of the total government revenue. Thus a rise in the world price of oil translates directly into higher income for the government. So essentially, we had a windfall income.

What would a prudent government do with this windfall? It would reduce the planned borrowing. But that’s not our BN government’s way of financial management. Uncannily, the increase in the actual spending is going to be the same amount of RM17.6bn! When asked about this at one of the post-budget forums, a Treasury official explained that it was mainly due to higher spending on salaries and increased subsidy for petrol and diesel. We can understand the increased subsidy but why the higher salary? Did we just increase the size of the bureaucracy? This is a clear case of a government which has no control on its spending.

Why is the federal government spending more than it earns?

There are a few reasons for this consistent imbalance. A major factor is the large leakage in government spending due to corruption and wasteful spending that has been highlighted by the Auditor General year after year in his annual reports. It has been estimated that we can easily save RM25-30bn without changing any of the deliverables if we can get rid of corruption and cronyism. Transparent practices like open tendering can cut down the cost of much of the procurement and project spending.

In addition, spending can be reduced on military procurements. If a fraction of the money that is saved here can be used to improve the quality of our diplomats in Wisma Putra, we can avert any potential threat to national security. We can also cut down on the excessive use of foreign and local consultants by the government for work that ought to be done by the civil service. Reduction of subsidies to the operators of privatised projects such as the independent power producers and toll road operators will also narrow the deficit.

Another reason for the deficit is the under collection of revenues including income tax and customs duties. Better compliance to and enforcement of existing laws and provisions can increase government revenue. It is common knowledge that many business operators evade paying their full share of income tax by under declaring their true income. Similarly, evasion of customs duties is rampant due to corruption in the Customs department.

What will happen if the debt keeps increasing at the same rate in future?

As the debt gets larger, interest payments will take an increasing share of total government spending. Table 2 shows this clearly. 




If the government continues with the trend of the past 13 years, by 2020 we may be spending about 18-25 per cent of the operating budget on interest payments. In fact as the borrowing increases, the government will be forced to pay higher interest rates to borrow more because its credit rating will be downgraded. (For example, in Europe, currently the German government can borrow at around 2 per cent per annum while the Italian government has to pay about 7 per cent for its loans.) So the interest cost will rise exponentially.
This will leave much less money for other social and economic spending. It will also widen income inequality as the government will have to cut spending on many public goods like education, health care and public transport. At the same time, the interest it pays goes mainly to foreigners and the better off segment of the population.

What is even more worrying is that given our large revenue from petroleum-related sources, we should not really be running deficits. It is only a matter of time before we run out of oil and gas and thus become net importers of these two commodities. When that happens, our budget situation may become very critical.

A prudent Malaysian government would have saved a sizeable portion of the petroleum revenue from the past few decades as a fund for rainy days. Many other countries have done this. Norway is a prime example. Abu Dhabi is another country which has a huge sovereign wealth fund set up from its petroleum windfall. Botswana in southern Africa saved its windfall earnings from the discovery of diamonds and invested it abroad for its long-term well being.

Unfortunately, we are governed by a spendthrift government which is beset with problems of corruption and incompetency. Unless the situation changes, we are leaving a huge burden to our children and grandchildren. They are not going to forgive us if we do not try to change the situation.

Dr Subramaniam Pillay, an Aliran exco member, is an adjunct associate professor with the School of Business at the University of Nottingham Malaysia.


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Media, especially the mainstream media, failed not just to reveal the truth - especially of the failings of this government, and certainly have also failed to play the role of being a 'check and balance' to this government. Why? Fear of having their publishing permits revoked? Or because the ownership and control is pro-establishment - making main stream media just the mouthpiece of the ruling government, or more accurately of the BN government or maybe not even that but the PM and the BN leadership. I doubt that they will even carry the voices of dissension within UMNO and/or the other BN component parties. 

6 comments:

anon said...

You keep repeating Singapore has no debt, when they actually have the highest debt in SEA.

http://www.tremeritus.com/2011/01/07/cia-factbook-singapore-has-8th-highest-public-debt-in-the-world-after-bankrupt-greece/

Dracryst Shin said...

Singapore has a public debt of USD230bn+, with public debt as % of GDP at 93.1% (Economist, 2012).

http://www.economist.com/content/global_debt_clock

敬杰 said...

Singapore debt is due to invest in the Singapore Government Securities and Special Singapore Government Securities, not even a dollar borrow is for spending in expenditures. If compute in net amount, Singapore is a net creditor.

adam said...

Singapore has among the highest debt in the world - 118.2% of GDP.

https://www.cia.gov/library/publications/the-world-factbook/fields/2186.html

I'm a local Singaporean. Our lifetime savings (at least 20% of salary) has been systematically held hostage by so-called CPF (Central Provident Fund).

Amir F. Arif said...

"A prudent Malaysian government would have saved a sizeable portion of the petroleum revenue from the past few decades as a fund for rainy days. Many other countries have done this. Norway is a prime example. Abu Dhabi is another country which has a huge sovereign wealth fund set up from its petroleum windfall."

FYI, Khazanah is Malaysia's sovereign wealth fund. Please see http://www.swfinstitute.org/fund-rankings/

Gab81 said...

Whatever it is, I and my friends are panic selling all my Malaysian assets, properties and shares soon just to be safe; and will advice anyone else who we know to do the same.