Malaysia’s debt level assessed to be still sustainable

AN assessment on the sustainability of Malaysia’s debt levels found that the country’s debt level remains sustainable, although some debt indicators were vulnerable to stress tests.

Among the tools utilised for the assessment was the debt sustainability analysis (DSA), which was developed by the International Monetary Fund and the World Bank.

The DSA is used to assess a country’s capacity to service debt and finance its policy objectives without large adjustments which could otherwise compromise the country’s stability.

The DSA’S framework consists of the baseline scenario, which refers to a set of macroeconomic projections and assumptions that underline the government’s policies; and the sensitivity analysis, which is applied to the baseline scenario with various stress tests to determine the dynamics the government debt profile.

Under the baseline scenario analysis, the 2020 Fiscal Outlook and Federal Government Revenue Estimates report said the government’s gross financing needs are expected to remain below the DSA benchmark limit for emerging countries, at 10% of gross domestic product (GDP).

The government’s debt is projected to remain manageable, registering 50.2% of GDP in 2024, below the self-imposed limit of 55%.

Macro-fiscal stress tests were conducted to assess the sensitivity of the debt dynamics to key exogenous and policy variables under different scenarios.

The tests specifically assessed the impact of debt sustainability in the event shocks occurred to economic growth, primary balance and combined shock.

Under the sensitivity analysis, a limit was set by the IMF, whereby the upper threshold of debt and gross financing needs under any shock scenario should not exceed 70% and 15% of GDP respectively.

Under all the scenarios, except for the Contingent Liability Shock scenario, both the debt and gross financing needs indicators remained below the DSA threshold.

Gross financing needs were projected to exceed the DSA threshold at15.5% in 2020, before reducing to 8.8% in 2024.

The government said a gradual fiscal consolidation and debt reduction were crucial to building adequate fiscal buffers, particularly in the event of a global economic and financial crisis.