Managing debt in Malaysia
FINANCE: Steps can be taken to manage household and govt debts in the new year
fully, this will lead to concrete measures to deal with the problem, as outlined by Foreign Minister Dato Seri Anifah Aman.
The year 2017 will usher in a number of milestone events that could shape the future of the nation, region and the world. Two major actors will dominate: the United States and China. It could be the beginning of serious confrontation or renewed cooperation between the eagle and the dragon.
Next month, US president-elect Donald Trump will be inaugurated as president, promising, among others, to make America great again, ease tensions with Russia, challenge China’s rise, relook global climate change agreements, renegotiate trade agreements, with emphasis on bilateral deals, and fight terrorism and “radical Islam”.
Trump has said he will ditch the Trans-Pacific Partnership (TPP). Malaysia and other TPP signatories should already be looking at alternatives. The prospect of having to work out a bilateral trade agreement with the US would be daunting for Malaysia given the agony in a previous exercise undertaken a few years ago, the difficult TPP negotiations that we had to undergo and the uncertain economic conditions that await us in 2017 and beyond.
An early indication of Trump’s attitude towards Asia Pacific and the Asean region would be helpful. How aggressive would he be in pursuing his policies towards or against China? He has questioned the “One China Policy”, but at the same time named Terry Branstad, governor of Iowa and reportedly a good friend of China President Xi Jinping, as the new US ambassador to China. At the same time, would Trump continue President Barack Obama’s legacy of rebalancing to Asia? To make America great, Trump would certainly be pushing for greater defence spending, build up the navy and, perhaps, a more assertive stance on the South China Sea.
Around the autumn of 2017, the 19th National Congress of the Communist Party of China will be held. While Xi is expected to continue leading the party and nation, a new set of young, dynamic leaders are expected to be chosen to carry on Xi’s initiatives and pursue the “Chinese Dream”. The state of US- China relations in the coming months could be crucial in determining how the Chinese leadership would position China in the regional and international arena in the near future. It would be in China’s interest to assure the Trump administration that China’s rise and influence would not be a threat to the US.
Asean will commemorate the 50th anniversary of its establishment next year under the chairmanship of the Philippines. Hopefully, there will be a lot of activities to advance the community building exercise kicked off in Kuala Lumpur in November last year. Inevitably, Asean would be part of the equation in the US-China relationship. Asean centrality, unity and cohesion could be under stress again, depending also on how Philippine President Rodrigo Duterte will play his cards vis-à-vis China and the US. His personal views on these two major powers should not get in the way of his stewardship of Asean. Next year could be a challenging year for the Asean community and Asean would have to be deft in negotiating the difficult terrain ahead.
At home, Malaysia would be celebrating 60 years of independence in 2017. Judging by the proceedings of the recent Umno General Assembly, the 14th General Election could possibly be held in 2017. The year would continue to be challenging, with the world economy expected to continue its low growth trajectory. World trade could continue to be sluggish. These would impact our economy. If Trump succeeds in implementing his “America first” policies, the US may benefit in the short term, but the rest of the world, especially emerging markets, including Malaysia, could be in for a rough ride ahead. If the election is held in 2017, water would not likely be one of the hot issues, unless the utility companies bungle once again. There are bigger ones that the government and public would have to contend with.
Nevertheless, let us wish for a happy and prosperous new year in spite of the daunting prospects.
DEBT management has acquired much attention among Malaysians and quite rightly so, especially when the overall economy is not too promising. In the last decade, the global economy has been fuelled by debt financing. Now that the stock of debt among many countries is substantial, resorting to borrowing as an instrument of investment financing has tapered off and, consequently, the world economy has slowed quite markedly. Consequently, interest rates have trended towards zero in most developed economies and total investments have not been sustained. The zero and low interest environment has led to resource flows to the United States, making the US dollar strong amid its yawning trade and fiscal deficits.
In Malaysia, two concerns related to debt have often been discussed. First is household debt, mainly for housing and purchase of a personal car, which constitutes about 80 per cent of the gross domestic product (GDP). It is quite high although the ratios in Singapore and South Korea are higher. However, our non-performing loans as a percentage of total borrowing is small, hardly 3 per cent of total lending, compared with the situation in 1997/1998 when the ratio reached a staggering 13 per cent. It is, therefore, not a threat to the banking system, which has been stable after the many regulatory changes to overcome the East Asian financial crisis of 1997/1998. The establishment of the Malaysian Deposit Insurance Corporation is but one of the institutional changes to enhance the financial stability of the country.
The second concern relates to public sector or government debt, which stands at 54 per cent of the GDP. This percentage is often said by many to be high. The servicing of government debt appears as an operating expense in the annual budget of the government.
As stated earlier, household debt is largely for purchases of homes of our workforce as well as for personal cars, given the inadequate public transport facilities and our need to support the car industry. If the economy performs badly in the ensuing years, this debt could materialise into an issue of concern to the banking system. Commercial banks, therefore, will have to monitor this seriously, notwithstanding the stable financial system we are enjoying now.
With regard to government debt, people seem not to take comfort of the high ratio of debt to GDP, and the increase in borrowing recently, especially from China to finance our infrastructure. On the latter, people need more information on the costs, and economic and social benefits of the proposed projects so that they could make reasonable comments and observations of the implications of the external financing. One needs to look at the social and economic analyses of the projects first, and not rely solely on financial rate of return because of the noted inadequacy of the latter in estimating externalities, such as spillover effects.
As in the past, the government deserves a fair assessment of its policies and programmes. In many cases, public sector programmes and projects need strong political support to succeed and sustain, right from the days of Tun Abdul Razak Hussein, through Tun Hussein Onn and Tun Dr Mahathir Mohamad, the latter noted for the many mega projects he pursued with vigour, despite the many negative comments then. Projects such as Putrajaya, KLIA and LRT did justify their undertaking now that we have the advantage of hindsight to reflect on them. Imagine if we did not pursue them.
Back to the issue of government debt. At least up to now, one should take some comfort that there is quite a compelling reason why they need to be incurred.
FIRST, government revenue is just not enough to finance development expenditure in view of the large operating expenses of the government.
SECOND, the expenditure is for capital formation (bridges, roads, hospitals, schools and colleges), which build capacity and contribute to GDP growth.
THIRD, it is largely sourced domestically or ringgit denominated, and, therefore, repayments do not involve the sale of the ringgit and disposal of our USD reserves.
FOURTH, much of the borrowing is actually deployment of our forced savings through the Employees Provident Fund (EPF), Retirement Fund Inc and Social Security Organisation. EPF was established to undertake compulsory savings of the workforce and the fund is to be used for development financing by the government. Thus, our financing instruments are non-inflationary and do not resemble Quantitative Easing used by the Americans to plug in their deficit.
Be that as it may, I do feel that we still have to rein in our government debt. We should aspire for a more sustainable debt level. This has to be achieved through rigorous control of operating expenditures and allow more private sector involvement in development financing, thus allowing government financing only for core and essential services. People have to support this by enhancing productivity and efficiency, as well as greater innovation and creativity.
Let us welcome the new year, with a greater sense for national consensus and national unity.