Debt and deficits – a perpetual concern

LAST week, the Finance Minister was quoted as saying that the country’s debt to GDP level could hit the 55% mark by year-end from the current 52% level.

This as the government has taken measures via its Prihatin and Penjana programmes to support the country and the people with income as well as to stimulate the economy. As we are aware, under the various economic stimulus programmes announced since February, the government is providing some Rm301bil in stimulus package, of which some Rm53bil are in the form of direct fiscal measures.

From this amount, some Rm45bil is in the form of actual cash infusion and a further Rm8bil is in the form of foregone taxes and incentives. Of the Rm45bil, the actual funding the government would raise is Rm35bil as some Rm10bil will be derived from other sources, including a re-allocation from Budget 2020, that are no longer needed, and higher dividends from government-linked companies. The minister also said the budget deficit will be between 5.8% and 6% this year and is expected to stabilise at 4% within the next threefour years.

The above remarks are significant as we need to see whether the numbers are realistic in the Covid19 economic era as well as whether Malaysia has actually crossed the 55% self-imposed debt/gdp ceiling. First, let us look at the formula of debt to GDP. It is a moving number as any change in both the numerator (debt) or denominator (GDP) will have an impact on the actual ratio.

Table 1 shows Malaysia’s debt to GDP ratio and budget deficit as a percentage of GDP in 2018 and 2019 and the forecast for 2020 based on the budget presented last year.

Based on the Budget 2020 estimate, nominal GDP growth for this year was expected to be about 6.8%, driven by real GDP growth of 4.8% and inflation rate of 2%. As we now know, GDP growth this year as envisaged by Bank Nagara is between -2% and +0.5% while inflation is expected to be between -1.5% and +0.5%. This is as per the guidance given by the central bank when it released the 2019 annual report in early April. Since then, the first quarter (Q1) GDP was much better than expected, coming in at +0.7% y-o-y, but the economy remains in deflation with a reading of -0.7% up to May this year.

At the same time, GDP estimates too have varied with four latest GDP growth estimate by the Asian Development Bank, International Monetary Fund, the World Bank and S&P Global Ratings coming it at -4%, -3.8%, -3.1% and -2% respectively. Among private economists, the range of forecast is from -1.1% to as high as -5%. Taking the median forecast, the consensus figure for Malaysia’s GDP this year is -3.4%.

Hence, without taking into consideration the changes in government revenue and expenditure, which was forecast at Rm244.5bil and Rm241bil respectively, translating to a current balance of Rm3.5bil, the government’s projected budget deficit and debt to GDP based on Bank Negara’s GDP forecast of -2% and +0.5% as well as consensus estimate of -3.5% and the deflation rate of -0.5% is as per table 2.

From Table 2, it can be seen that the projected debt/gdp under the current economic data estimate is well above the statutory rate of 55% while budget deficit as a percentage of GDP is slightly above the guidance of 5.8% and 6%. However there is another spanner that is working against these data points and that is the expected change in government revenue and expenditure for this year from the projections budgeted as well as looking at the actual 1Q20 data points and up to May 2020 for these two line items.

Based on statistics released by Bank Negara, in Q1 the government only achieved a revenue of Rm45.3bil, which was 28.8% lower y-o-y and 35.1% weaker q-o-q. In 1Q19 and 4Q19, the government revenue was at Rm63.7bil and Rm69.9bil respectively. The decline mainly came from three sources. The first was a plunge in “interest and returns on investment” which amounted to only Rm372mil in 1Q20, against Rm14.7bil and Rm15.6bil in 1Q19 and 4Q19.

However, a word of caution though. The decline can to a certain extent be explained by the one-off Rm30bil special Petronas dividend to the government last year, meant for income tax and GST refunds.

Nevertheless, the decline is still steep as on a normalised basis, the government receives “interest and returns on investments” of about Rm7.5bil per quarter. The other significant decline was seen in the collection of direct taxes where companies’ income tax and petroleum income taxes dropped by

Rm2.3bil and Rm1.8bil to Rm13.6bil and Rm2.3bil, a decline of 14.7% and 43.2% when compared with Rm15.9bil and Rm4.1bil a year ago.

On the expenditure front, the government’s total expenditure for Q1 was at Rm62.5bil, which is Rm3.1bil or 5.2% higher y-o-y but down by Rm7.2bil or 10.4% q-o-q. Hence, the current balance for the Q1 period of the year stood as a deficit of Rm17.2bil.

Post the Q1 period, according to Bank Negara statistics, as the government rolled out Covid-19 stimulus packages, government expenditure for April and May has increased substantially. Revenue in April and May amounted to Rm38.4bil while expenditure in the same two months totalled Rm56.4bil. All in, up to May this year, the government’s revenue stood at Rm83.7bil year to-date.

Assuming the momentum of revenue is sustained at about Rm19.2bil a month for the next seven months, the government’s revenue will likely hit Rm218.1bil this year against the projection of

Rm244.5bil in Budget 2020.

On the expenditure side, excluding the Penjana and Prihatin packages, it is safe to assume that the government will likely stick to the original budget of Rm241bil.

Hence, Malaysia will likely record a current balance deficit of Rm26.4bil. As some Rm8bil has been taken into consideration in the Penjana package, we can safely assume that the deficit in the current balance will be expanded by Rm18.4bil.

From Table 3, Malaysia’s debt/ GDP is seen rising to between 60% and 62.4% while budget deficit is expected at between 7.5% and 7.8%, depending on the GDP growth/contraction for 2020. A note of caution though, the above does not take into account the sensitivity of revenue to change in GDP growth as there are no clear historical relationship to these data points.

Since the 1980s, Malaysia experienced three recession years, i.e. in 1986, 1998 and 2009. GDP then contracted by 7.4%, 1% and 1.5% while government revenue declined by 13.7%, 7.6% and 0.7% respectively, while expenditure was flattish in 1986, higher by 7% in 1998 and expanded by 2.3% in 2009.

As Malaysia has been running budget deficits since the Asian Financial Crisis and it’s likely that this will continue for at least the next few years, it is important to recognise the fact that it is adding a further burden to our national debts.

With Budget 2021 set to be unveiled in November, it is hoped that the government is able to formulate longer term strategies, especially in terms of tax revenues, to tackle the perpetual economists’ concern on Malaysia when it comes to debts and deficits. This was also reflected in S&P Global Ratings’ when it revised the outlook on Malaysia to negative as it saw further downside risk to the government’s fiscal position.

The views expressed here are the writer’s own.