Debt, Deficits, and Government Assets

I’ve been asked by a number of people to comment on this (excerpt):

Laporan Bank Dunia: Kerajaan BN Jual Aset Negara Untuk Capai Sasaran Defisit

Pentadbiran Dato’ Seri Najib Tun Razak terus mengumumkan angka-angka untuk meyakinkan orang ramai dan institusi kewangan bahawa beliau serius untuk mengekang tahap keberhutangan negara. Sasaran yang diletakkan ialah untuk menurunkan defisit ke paras 4% dari jumlah Keluaran Dalam Negara Kasar (KDNK)…

…Lebih memeranjatkan, Dato’ Seri Najib Tun Razak dilaporkan akan mengambil jalan menjual aset negara dan menerbitkan lebih banyak sekuriti hutang dari aset-aset negara semata-mata untuk menutup kegagalan pentadbiran ekonomi beliau mencapai sasaran defisit yang beliau sendiri tetapkan.

Laporan terkini dari Bank Dunia iaitu “Malaysia Economic Monitor: December 2013” pada mukasurat 10 menyatakan seperti berikut:

“… the government reaffirmed its headline deficit target for 2013 (4.0% of GDP vs 4.5% in 2012). This target will be achieved through additional tax revenues (Figure 13). Of the additional RM11.8 billion in revenues expected to be raised compared to budgeted estimates, RM7.4 billion originated from non-tax sources, including RM1.4 billion of proceeds from asset sales and RM4.2 billion from the securitization of government mortgages…”

Ini adalah pendedahan yang cukup mengejutkan kerana pentadbiran Dato’ Seri Najib Tun Razak sudah sampai ke peringkat menjual aset negara dan mencagarkan harta-harta negara (melalui securitization of government mortgages) untuk menampung keborosan dan pembaziran kerajaannya.

Saya syak rancangan menjual aset negara ini telah pun berlaku kerana ia bertujuan mencapai sasaran defisit 4% bagi 2013 yang sebenarnya telah gagal. Ini bermakna, harta-harta negara ini telah pun dijual dan digadai supaya hasilnya itu diperolehi dalam tahun 2013 untuk menutup jurang pendapatan dan perbelanjaan negara….

For those who don’t read Bahasa Malaysia, Rafizi is basically claiming that the government is selling and securitising assets to close the budget gap and meet its deficit target.

The Ministry of Finance has issued a rebuttal, in essence claiming that the use of assets is a normal part of operations, which of course got a follow-up post (excerpt):

Penjualan Aset Negara: Kerajaan Tidak Menafikan Malah Cuba Memberi Alasan

Kenyataan rasmi Kementerian Kewangan mengenai kontroversi penjualan dan penggadaian aset negara untuk mencapai sasaran defisit tidak sedikit pun menafikan laporan Bank Dunia bahawa perkara-perkara berikut telah berlaku…

…Sebaliknya, Kementerian Kewangan hanya memberikan alasan bahawa penjualan aset dan pensekuritian pinjaman perumahan kakitangan kerajaan adalah satu perkara biasa dan telah pun berlaku sebelum ini…

…Oleh itu, jelas bahawa Kerajaan Persekutuan telah pun mengakui bahawa laporan Bank Dunia itu benar dan aset-aset negara telah dijual dan digadai untuk mendapat pendapatan tidak dirancang bagi mencapai sasaran defisit negara….

…Walaupun ia amalan yang telah dimulakan sejak tahun 2004, pensekuritian pinjaman perumahan menjadi salah satu punca krisis kewangan subprima yang melanda Amerika Syarikat dalam tahun 2007 dan 2008. Ia mempunyai risiko tersendiri kerana rumah-rumah yang dibeli peminjam digadaikan pula kepada pelabur yang mereka tidak ketahui.

Here he makes the comparison between the government’s securitisation of civil servant housing loans with the sub-prime crisis. That’s plain silly – the “sub-prime” crisis was a confluence of events and market structure that doesn’t exist in Malaysia. We may or may not go there in the future, but what the government has done is hardly any kind of tipping point. Missing from this is the role of structured finance (bundling together of securities with different risk profiles), and the concentration of default insurance (in the form of AIG) that were equally characteristic of the 2008 US financial crisis.

If you’re really worried about a sub-prime crisis, s-t-o-p e-n-c-o-u-r-a-g-i-n-g h-o-m-e o-w-n-e-r-s-h-i-p. If prices are to heady for the majority, making it easier for people to own homes just gets us there sooner. Securitisation in this context is neither here nor there.

But to return to the main point, this is what MoF is talking about (RM millions):

A positive value means asset were sold or securitised, while a negative value means assets were bought. Looking at the time series, this is what MoF means by common practice – this has been going on for a long, long time. But you’ll notice that the absolute amounts have been increasing over time, but also have been comparatively small since 2007, while being alternately positive and negative.

But you really need to scale these numbers against the impact on government revenue (% revenue):

Here we see just how (ir)relevant the buying and selling of assets has been over the years. But since 2007, use of assets has never exceeded 2% of government revenue. Even going by the numbers being quoted in article, we’re not talking about much more than 2% of revenue.

Want to know what the current situation is? Up to 3Q2013, total sale of assets is negative RM66.6 million. In other words, there hasn’t been a net sale of assets so far this year. There were net sales of assets in 1Q2013 of RM8.98b, but that was more than offset by asset purchases in 2Q2013 and 3Q2013.

More importantly, there’s an accounting issue here that’s not at all addressed – in the Malaysian context, use of assets doesn’t offset the deficit, only its financing. Assets sales don’t count towards revenue, but reduces the need to borrow i.e. it goes in the books as a reduction in government securities issued, not as an increase in revenue.

The whole claim that the government is selling assets to meet its deficit target is on pretty shaky grounds. You can certainly argue that asset sales are being used to meet the government’s debt target (which it is very, very close to exceeding) and I might agree, but the deficit? Not so much.

Technical Notes:

Data on government revenue from the October 2013 issue of Bank Negara Malaysia’s Monthly Statistical Bulletin