Analysts: Debt crisis looming, dire need to address problem
KOTA KINABALU: In the face of a looming debt crisis across emerging markets, analysts believe that Malaysia’s economic growth will remain resilient but they also highlighted the need to address its public debt in order to overcome this debt problem.
To note, the Ministry of Finance Malaysia (MoF) recently reported that Malaysia’s public debt has reached RM1.09 trillion or 80.3 per cent of the gross domestic product (GDP).
AmInvestment Bank Bhd’s research arm (AmBank Research), in its report, highlighted that this has raised concerns as to whether the borrowings would help improve growth or weigh on the economy and also future generations.
“A key challenge is to determine the amount of debt in which it is considered ‘high’. We believe much is country specific, and hence the need to examine each case based on the country’s fiscal situation. In the case of Malaysia, the debt-toGDP ratio sitting at 80.3 per cent.
“Our major concern is the rising Government-Guaranteed loans and the lease payments for the Public Private Partnership (PPP) that lacks transparency. It somewhat suggests a convenient way to shift the debt figures while maintaining the public debt below the 55 per cent level. If left unchecked, it could weigh on the ability to repay debts,” it said.
It also pointed out that the high public debt could result in more spending on servicing the interest for the borrowings, thus putting a strain on the resources.
It noted that the ratio of operating and development expenditure to debt fell to 0.2-folds and 0.04-folds respectively in 2017 from a high of 0.5-folds and 0.14-folds respectively in 2008. It is the lowest reading since 1988. It added, the level of reserves against debt improved to the historical average of 2.6-folds in 2017 from 3.5-folds in 1990.
“We need to lower public debt, debt servicing, and government consumption to improve growth given the inverse and significant relationship.
“The focus areas could be improving the monitoring of the expenditure in each area of the economic activities, especially at the micro level, greater transparency on government guarantee loans under the publicprivate partnerships that may not be fiscally responsible, improving and effectively managing government consumption, targeting high-impact and productive businesses to drive growth, boosting investors’ and household confidence by addressing leakages;, and attractive ringgit to support overall business competitiveness,” AmBank Research suggested.
Another key concern to Malaysia’s economy is the debt crisis that is looming across emerging markets, including in Malaysia.
It noted that estimations are that about US$249 billion that needs to be repaid or refinanced in 2019 by the emerging markets.
“Hence, we feel the emerging markets have ignored the lessons of the past like the 1980s Latin American debt crisis, 1997/98 Asian financial crisis and 2000s Argentine default,” it said.
Nevertheless, the research arm stressed that while the current scenario shows some signs of similarities to the 1997/98 AFC (whereby markets plunged on average around 60 per cent and governments raising interest rates to exceptionally high levels), it might not be similar to the AFC.
It explained, “Our argument is that it is important to take note that one of the salient reason for foreign funds flocking into the emerging markets is the attractive growth rates and low inflation compared to the previous decades which are adequate tool to keep interest rates low.”
However, it noted that the Malaysian market is vulnerable, as can be seen by the recent net foreign outflow.
“Apart from the regional impact, the revelation on the state of the debt by the new government amounting to RM1.09 trillion will have some knock-on effects.
“It would have sparked worries with jitters amongst the investors on the ability to repay the debts, crowding out of investments, higher interest rates demanded by creditors due to increased risk for them to keep financing the deficits, a sharp rise in interest rate can harm GDP and spark financial crisis, noise of debt overhang, and lesser funds used for other productive business sectors,” it added.
Nevertheless, AmBank Research believed that the domestic emerging-market growth is still resilient.
“On that tone, we expect the noises on the Malaysian front will potentially taper off, compensated with greater levels of transparency, governance and clarity on the direction of the economy. Hence, some of the emerging markets including Malaysia are positioned for a bounce-back in risk appetite in coming months,” it opined.
A key challenge is to determine the amount of debt in which it is considered ‘high’. We believe much is country specific, and hence the need to examine each case based on the country’s fiscal situation. In the case of Malaysia, the debtto-GDP ratio sitting at 80.3 per cent. AmBank Research