There is a premium for being truthful

However, new Pakatan govt should quickly start behaving like the govt of the day

CAPITAL markets do not like surprises. Investors accord a premium to markets that are transparent. Investors tend to like capital markets where the government is not shy to reveal the true state of the national balance sheet.

In this respect, there is a premium for being truthful, which is the mantra of the new Pakatan Harapan government.

We have seen how investors punish governments that are not truthful with their numbers. Recent examples include Greece and Argentina. Greece is still regarded as the “sick man” of Europe, while Argentina is going through another round of economic turmoil.

The new Pakatan Harapan government has declared the federal government debt as just above RM1 trillion now. In response to attacks from former Prime Minister and Finance Minister Datuk Seri Najib Tun Razak, the new Finance Minister, Lim Guan Eng, has disclosed details on how he arrived at the figure.

The internationally accepted benchmark for federal government debt as a ratio of the domestic economic productivity is 55%. The RM1 trillion debt would push Malaysia’s ratio to 80%.

So, Malaysia is well off the mark. Should investors be alarmed?

No, they should not because the new government is simply being transparent with its balance sheet. After having taken over, certainly it would want to bare the books to show the depth of the problems it has to overcome.

Nevertheless, the numbers should not come as a surprise for those following the annual economic reports and debates on the national debt.

For instance, the federal government debt stood at RM685bil as at end-June last year, according to the Treasury Report under Najib. Lim’s disclosed figure of the federal government debt standing at RM686.8bil as of December last year is only marginally higher.

Lim said that a further RM199.1bil had to be taken as part of Malaysia’s liabilities because it was debt guaranteed by the government and held by entities unable to service their financial obligations.

Among the entities are DanaInfra Nasional Bhd, which raised the financing for the mass rapid transit (MRT) projects, Govco Holdings Bhd, Prasarana Malaysia Bhd that raised funds for the light rail transit (LRT) systems and the scandal-plagued 1Malaysia Development Bhd (1MDB).

There is information on government guarantees in the Treasury Report. It has been disclosed at RM187.3bil as of end-2016. However, there is no disclosure on whether the entities with government guarantees are able to service the debt obligations.

The third element in Lim’s disclosure is a sum of RM201.4bil that the government is obliged to pay as lease payments for facilities built by the private sector under the public private partnership (PPP) and private finance initiative (PFI) schemes.

Under the PPP/PFI structures, the private sector builds and maintains facilities such as schools, police stations and hospitals, while the government is obliged to pay the company or their bankers on a regular basis. The government cannot afford to default on the payments under the PPP/PFI structure.

Najib has disputed the PPP/PFI being included as part of the national debt because he describes the payments as part of the cost of running the government’s operations.

While the previous government’s argument of not taking into account the PPP/PFI obligations as part of the national debt may have its merits, its decision not to include the liabilities of the likes of Prasarana, DanaInfra and 1MDB has always been disputed.

This is because these entities took on debt guaranteed by the government and are already having problems servicing their obligations. The likes of Prasarana and DanaInfra would probably never be able to service their debts because most public transport systems do not make money.

Their liabilities would have to be absorbed by the government. There has always been a view that taking the liabilities of these entities out of the balance sheet is not prudent.

So, at the base-case scenario, Malaysia’s debt-to-gross domestic product ratio is 65.4%. This is taking into account the federal government debt and the liabilities of the entities with government guarantees. It is way above the accepted level of 55%.

Nevertheless, the good thing that came about following the debate on the national debt between Najib and Lim is a snap-shot of the country’s total liabilities for all to see and judge for themselves.

The matter at hand now is whether the latest set of numbers would impact the decision-making process of investors over the longer term.

Yes it would, depending on how the government handles the debt situation and economic policies from now on.

For instance, there is nothing wrong in undertaking large infrastructure projects. But there has to be a much higher degree of transparency and accountability than what was displayed by the previous government.

As public infrastructure projects are not designed to make profits, they have to be implemented at the lowest cost.

The previous government had always prided itself on bringing down the national debt to acceptable levels, based on international standards. However, it got low marks for accountability and governance in the handling of public funds and the implementation of projects.

This is shown in the extent of the 1MDB debacle and the potential cost overruns in the LRT and other railway projects.

There is an argument that Lim should have been more tactful in disclosing the national debt levels, as it impacts the market.

Well, a day after he announced that the national debt was at 80% of the total economy, which is well above the 55% threshold, the local stock market went up by 21 points.

It probably goes to show that the market appreciates some honesty. It does not care about the government being tactful in disclosing facts and figures as well as reprimanding officials who failed in their duties.

Generally, markets do not like surprises, uncertainties and inconsistencies. They disregard the intermittent noise of politicians. They look at the big picture and broad economic policies.

Malaysia’s economic fundamentals are still intact. The banking system is flushed with liquidity. The move to remove the goods and services tax while waiting for the formalisation of the sales and service tax has put money in the hands of businesses for a few months.

But what more is there in store to stimulate the slowing economy?

The rising global tensions between the United States and North Korea, the strengthening US dollar and the tumbling emerging-market currencies are pressing issues for the Pakatan Harapan government to look into. How is Malaysia going to handle the challenges?

Investors look at the macro picture. Malaysia has shown that it is capable of changing a government in a peaceful manner. The new government is sticking to the rule of law and promises reforms.

Such measures warrant a premium from investors. However, more work needs to be done to earn the premium.

It is time for the new government to start behaving like the government of the day. There is already too much news on old issues streaming out on a daily basis. A little more light on broad policies and economic plans would be helpful for investors in their decision-making process.

As for the old government, it should start behaving like the new Opposition and start looking at the flaws of the new government’s policies instead of debating on issues that ordinary folks cannot relate to.