Weighed by huge debt burden

MALAYSIA has long had to contend with the issue of rising public debt in recent years.

As at end-august 2023, the total federal government debt stood at RM1.15 trillion or 62% of gross domestic product (GDP), below the stipulated debt ceiling of 65% of GDP.

The amount was largely denominated in ringgit, with a share of 97.4% of the total debt, while the remaining 2.6% was in foreign currencies.

It is, however, estimated that Malaysian government debts and liabilities have risen to about RM1.5 trillion. This implies an increase in debt servicing charges and a narrowing of fiscal space to implement new projects or prepare for economic shocks.

Under Budget 2024, debt service charges alone are expected to account for about 16%, or Rm50bil of the total operating expenditure this year, as compared to about 15%, or Rm46bil, of total operating expenditure in 2023.

Be that as it may, economists in general are not so concerned about the government debt level, pointing out that it remains manageable at current point and any associated risks appear to be well contained.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, for one, argues that the government debt level is still sound, as the bulk of its debt is raised internally. As such, the government should be able to service its own currency debt almost seamlessly.

He adds: “The existence of large institutional investors such as the pension funds, banks, insurance, fund managers and foreign investors will ensure that every government securities issuance will be fully taken up, and in fact, it will be oversubscribed.”

He tells Starbizweek that addressing the debt issue is not so much a matter of urgency but rather it is to give the government more fiscal space to address the needs of the nation and to showcase its financial discipline, which will boost market confidence.

Cost load

Meanwhile, Malaysia University of Science and Technology economics professor Geoffrey Williams says the current government debt rate is less likely to be risky.

In fact, he tells Starbizweek that the government debt has actually decreased, and that in spite of many people’s worries, Malaysia’s debt-to-gdp ratio is actually quite low as compared to many other nations, including Singapore.

Sharing Afzanizam’s opinion, Williams says the majority of government debt is held by Malaysians or Malaysian institutions, which explains why the debt is not at a risky level.

“So, there is no particular risk exposure to overseas lenders,” he adds.

However, Williams says, the issue of concern is the high debt service costs, totalling about Rm50bil this year.

“These take up a great portion of the operational expenditure from the government, which could be better used on health, education, and social protection,” he explains.

Having said that, Williams says good fiscal management is essential to cut wastage, leakages and corruption, as he believes there is more significance in keeping the nation’s debt number from rising as compared to finding ways to bring it down.

Focus on growth

Ambank Malaysia Bhd chief economist Firdaos Rosli adds to the point as he says its crucial to note that Malaysia had a far greater debt level in the past, peaking at 103.4% of GDP in 1986.

He says despite this high level of government debt, Malaysia saw fast development following the “Volcker shock” crisis in the mid-1980s, with the nation’s growth rate averaging 9.3% yearly from 1987 to 1997.

“Therefore, I believe the bigger question about debt levels is not how much or the level of debt itself but how much growth an economy can generate from debt accumulation. In other words, what we do with the debt matters, not the debt level,” he adds.

According to Firdaos, deficit control may slow growth even further, thus it is important to reevaluate if the move is worth pursuing.

“In my view, we could highlight areas where we can generate higher growth, such as decentralisation, liberalisation or a greater push for mega projects in areas with the greatest economic multipliers,” he says.

On the question of whether the government has done enough in addressing the issue, Afzanizam says the passing of the new Public Finance and Fiscal Responsibility Bill 2023 shows that the government is serious about fiscal consolidation.

He continues by stating that the execution and impact of the government’s efforts to reduce the nation’s mounting debt is the most crucial factor to take into account.