Monday, August 22, 2016

Malaysia’s Government Contingent Liabilities

A fast one (seems like all I have time for these days are fast ones), on contingent liabilities (excerpt):

Analysts say Govt’s contingent liabilities likely to rise

...In recent years, the Government has relied on what is called contingent liabilities, or off-the-books debt, to fund major development projects. Big-ticket items such as the rail lines cost billions of ringgit, and with Government debt close to its self-imposed ceiling of 55% of gross domestic product, the use of special-purpose vehicles (SPVs) that take the debt burden off the Government’s books has been almost the preferred way of funding such mega projects.

Cumulatively, contingent liabilities amount to RM178bil worth of guaranteed debt by the Government. With government debt at RM630.5bil at the end of last year, the off-the-books debt that is guaranteed by the Government is worth 28% of the public sector’s total debt.

...Structuring debt in such a way is by design, according to economist Datuk Dr R. Thillainathan, who is the former president of the Malaysian Economic Association....

...He says the use of contingent liabilities and implicit liabilities – both debt deemed guaranteed by the Government – has been rising and with the pace it is at now, the amount signals trouble over the horizon.

He says that given the Government’s current debt load versus the level at the start of previous economic crises, Malaysia is now likely to be close to or at the danger zone....

...His worry stems from the total indebtedness of the Government. His calculations show that the Government’s debt load exceeds 77% of the gross national product (GNP) if the implicit debt is taken into the books of the Government....

...In 2008, the year before the Global Financial Crisis’ impact was felt in Malaysia, the Government’s overall debt load was around 56%, of which contingent liability was 11.7% and implicit debt 7.5%, which is an estimate.

You can check out the accompanying chart here. If anybody knows how I can get in touch with Datuk Thillainathan, do let me know. I’d be very interested to know what constitutes his estimate of implicit liabilities.

The thing is, by my estimation, Malaysia’s implicit liabilities are far higher. First and foremost is deposit insurance, though truth be told this is technically considered to be under BNM. PIDM’s Annual Report 2015 has the details (pg 78) – total deposits insured amounted RM483.7 billion in 2015, compared to a insurance fund sizes of Rm1.3 billion (pg 100: Islamic plus Conventional), relative to a GDP of RM1.157.1 billion (latest DOS GDP release). That roughly equates to an implicit liability of 41.8% of GDP.

Of course, actually expected loss would be far, far lower than total insured deposits (roughly a maximum RM3.7 billion, again pg 100 of the PIDM report), which nicely illustrates why just adding up government guarantees and implicit liabilities to government debt just doesn’t make any sense. Guarantees and implicit liabilities (which may or may not be required to be paid, and whose value is uncertain) are very different in nature to government debt (which does have to be paid).

There are also big differences between different categories of implicit liabilities, which is a nice segue into the other big implicit liability the government carries – pensions and gratuities under the civil service.

To be honest, I don’t have the exact figure here, though I knew what it was a few years ago. As a rough lower bound I’d optimistically call it at about 20% of GDP, though its likely to be higher – changes to the scheme of service, increasing longevity, and a sheer increase in numbers means pension payouts will likely grow faster than economic growth.

Or not, as changes to any of the parameters (or the calculation methodology) would change the total amount of liability (for an example of what I mean, see pg 82 of this paper). That uncertainty is why pensions are considered an implicit liability, rather than just tacked on to government debt.

If you’ve a mind to, adding all those together with government debt and we have a figure somewhat north of 100% of GDP (cue, alarm bells ringing).

But really, that’s hardly outside the norm. Many countries have contingent liabilities in that ballpark, or even higher (check out the US numbers or Europe’s). If you want to see something really scary, read this paper, where the author estimates the EU has an unfunded gap of 8.3% of all future GDP. Put another way, this is the equivalent of from 244% of annual GDP (Spain) to 1550% of GDP (Poland), all in 2004 terms, which means the gap has grown even larger after the collapse of interest rates after the 2008-2009 recession. Now that’s what I’d call a problem.


  1. In short, just because a celebrity (USA/Europe/Japan) can get away with murder doesn't mean we (Developing countries) can do the same. That is why people still buy US debt and not Argentina's debt.

    It is a game of perception. There is a limit to how far we can stretch, where as it is almost limitless for USA, and we all know why. If USA collapse, everyone collapse. If Malaysia collapse, life goes on.

    Apple vs Orange comparison?

    1. @James Fernandez

      Absolutely, and not just country comparisons either. Unlike debt, which is relatively straightforward, different categories of contingent liabilities can have very different probabilities of being called. Adding up doesn't make sense.

      Even debt is not always what it seems. Take for example Singapore, as you mentioned below.

      Roughly half of Singapore's government debt is actually used for central bank open market operations. In other words, the government doesn't utilise the proceeds, and the cash just sits on the central bank's balance sheet. The other half is issued as non-tradeable securities to CPF (can't be bought or sold), and the proceeds are used to finance HDB land purchases and construction i.e. backed by property.

  2. Hi Hishamh,

    Do we have threshold on this government debt + contingent liabilities?

    1. @Group 8,

      As in a legal or administrative limit? Not that I know of.

    2. I haven't contributed in a while -_-

      but just to give you perspective, check: The Loans Guarantee (Bodies Corporate) Act 1965 for rules of guarantees issued by the Government

      Hisham: Any chance that you have a link on the new Treasury website for the list of MOF Inc's companies?

    3. Hi Jason, long time no see. No, unfortunately I don't.

  3. Mr. Fernandez, in general I would agree with you. But that is because in general not many people knows about how deep (in shit) the celebrities is in as compared with the developing countries. Now I know, thank you En. Hishamh, I will certainly change my perception (fighting against the deluge from the western press).

    1. Yes, it is an unfair world. If we can't beat them, join them, like Singapore. Singapore's debt is so high, but nobody on the street says sell sing dollar for RM.

      It is hard to climb up, easy to fall down. We must do whatever it takes to climb up, the question is, are our politician doing what it takes to climb up to be the best of the best?

      I don blame the west, that is like the Middle East blaming the west for everything, just like how Communist China in the 50's blame the west and Japan for everything.

      Do what is right and we too can join Singapore and be the elites. Sadly, this will never happen for as long as meritocracy is not implemented.

  4. En Hishamh, side-tracking a bit, locally, the economy is really bad. Hardware shops are reporting a 50% drop in revenue. Loan officers are telling me, loan application and approval is basically zero, etc etc. So how bad is it really in the second half and 2017, recession??

    1. @Zuo De

      It's not great, but its not bad either. We're actually expecting a (marginally) better second half and stronger growth in 2017. DOS reports pretty strong retail sales so far this year, although I suspect its spread unevenly and there is also the impact of growing online sales.

      Loan approval ratios are actually running at around 40% (approvals ÷ applications), and this is an all time low - it's been around 50% over the last few years, and down from ≈60% before the Great Recession.

      It's a difficult year, no question, but it could have been worse. I'm actually more concerned over the medium term, when the infra projects under the ETP start winding down, and the growing overhang in office and commercial property space. There's a quiet recognition that these may become major risks for economic growth over the next five years.