‘No denying external factors are beyond us’

THE following are excerpts from the New Straits Times’ exclusive interview with Second Finance Minister Datuk Johari Abdul Ghani.

Q: What are the macroeconomics of the country? Where are we now in terms of revenue and

GDP (gross domestic product) growth?

A: Basically, when we look at our macroeconomics, let’s look back at the last two years. In 2014, our GDP growth was about six per cent and last year, it was about five per cent. For this year, at the time we prepared the budget, we forecast four to 4.5 per cent. If you look at today, as far as the global economy is concerned, I think Malaysia is facing a lot of external issues that are beyond its control.

First, look at the last 1½ years. We have lost RM30 billion in revenue from the oil industry. This is a result of the drop in oil prices, from US$115 (RM452) per barrel to US$30 per barrel. Certainly, it would affect the government’s ability to spend money. We have to cut expenditure in many ministries to make sure that we maintain our fiscal deficit.

Our fiscal deficit last year was 3.2 per cent and for this year, we are targeting 3.1 per cent. A lot of people ask me, why are we so concerned about fiscal deficit? It is important for us to manage fiscal deficit because if we don’t, it will affect our sovereign rating. Today, we are A-, but assuming our rating drops to triple B, then our interest cost will be higher. When interest cost is higher, the cost of doing business is higher.

Ultimately, the people will suffer because if we look at our household debt, we are among the highest in the world. We are close to 89 per cent to GDP. What is household debt? Housing loan, car loan, credit card loan, personal loan, investment loan. So, if the interest increases, all these people will be affected because they will have to pay more interest.

Second, we are also facing issues in terms of the global economy. The IMF (International Monetary Fund) and World Bank have forecast a drop in global growth for this year. In particular, if you look at China, it is one of the important markets, the second-largest economy in the world after the United States. China is very important to us because it contributes approximately 15 per cent of our trade in the world. So, if anything happens to China, we will also get affected.

For example, China’s growth used to be at seven to eight per cent, and suddenly, it is now down to six per cent — and even that is uncertain. This has also created uncertainty in terms of the external factor, as far as the global market is concerned, because China is not only dealing with us. It does a lot of trade with a lot of Asian countries and also the world. And, these Asian countries also trade with us. If they are affected economically, it will also affect us.

We used to see the ringgit against the US dollar at 3.20 or 3.30, and suddenly, it shot up to 4.47 against the US dollar. Certainly, a lot of companies in Malaysia, especially the ones involved in manufacturing that rely on imported goods as part of their raw materials, suddenly have to pay 30 to 40 per cent extra. This has also caused a lot of issues in the economy.

The other issue that recently cropped up was Brexit in Europe. Out of the 28 countries (in the European Union), the United Kingdom represents about 10 per cent of our trade. If it has issues about uncertainty in Europe, certainly, that will affect our 10 per cent trade. You know how world economies work — they don’t like uncertainty. With uncertainty, a lot of people start to hold back on their investments. These are all the issues that we face at the moment.

A lot of people ask me, how are you going to address this? There are only a few things that we can address internally and domestically. External factors are beyond us. We cannot deny this. A lot of people are trying to convince the people, telling them that we are okay, and whatever happened to China or Brexit, we have no problem. But, the reality is that it will affect us. Because we are an open economy, anything that happens in the world will affect us.

Domestically, what we are looking at is, how do we manage our debt? Today, our debt is 54.5 per cent of our GDP. Is that high, low or reasonable? We have to compare ourselves with other countries. If you look at Japan, I think its debt to GDP is almost exceeding 200 per cent. The US is about 120 per cent of GDP. Singapore is 89 per cent of GDP.

Even though they are high, their ability to service their debts is good. It doesn’t mean that if we are at 54.5 per cent, we are good.

The issue here, I think, is that we must continue to put in check our debt situation so that we are always in a position to match our ability to pay.

Q: How is Malaysia doing now? A: At the moment, I think Malaysia is doing okay. We have never de- faulted on our loan. Any loan that we take, we invest back into our economy. We build our infrastructure, highways, airports and ports. Right now, we are aggressively expanding our public transport, such as the MRT (mass rapid transit) and LRT (light rail transit).

Next week, our prime minister will sign an MoU (memorandum of understanding) with the Singapore government to launch the highspeed rail project. These are the loans that we have taken to finance our infrastructure. We also borrow money to get our sewerage and water systems, and to consolidate all that.

But, we need to put a check on this. We have seen a lot of countries, like Greece, for example, where, because they did not manage their debts properly, they are affected. This is something we really need to look at.

Q: Inflation-wise? A: Inflation-wise, we are also doing okay. We are still at about two to three per cent. We need inflation, but we must manage it. If we don’t have inflation, it’s not good for the country. We need a manageable inflation, but it is just that last year, there was a spike in our inflation because we implemented the GST (Goods and Services Tax). But, I think it is manageable.

Q: What is your view on 1MDB (1Malaysia Development Bhd)? A: 1MDB is a company that started with a very noble idea, basically, to use the company to leverage against our ability to borrow money, and to do something that an ordinary company cannot do, which is to develop a huge asset like Bandar Malaysia and the Tun Razak Exchange, and to try to consolidate the energy sector. But unfortunately, along the way, things went wrong.

I am quite pleased to see that the government was willing to come out openly, to allow the Public Accounts Committee (PAC) to do a report and allow people like me to study the report.

Q: What conclusion did you make on the report?

A: There are three points. First, the business model for 1MDB was wrong. The business model was not sustainable because you are borrowing money and, at the same time, you have to service the interest and principal, but you don’t have the revenue or a positive cash flow from the business to basically help you pay that commitment. Most of the projects are long-term in nature, while the interest and principal payment is short-term in nature. So, the business model was wrong and not sustainable.

Second, based on what PAC outlined in the report, they (1MDB) had weak management. If there