A FAQ On Malaysian Government Debt


There’s a lot of misconceptions and misunderstandings regarding the level and sustainability of government debt, which has been seriously skewing the public discourse not just about Europe and the US but here as well. [For examples, here, here, here, here and here].

Rather than arguing the points one by one, I’m putting up this FAQ as a central reference point, with some faint hopes that we might move on to a better informed debate about the issue. It’ll be available as a permanent page (see the menu on the top right of every page on this blog), and I’ll update it from time to time. The focus will be on the Malaysian situation, but some of the general principles are applicable elsewhere as well.

First the raw data (RM millions; sample period 1970-2012, with 2011-2012 data based on estimates):




Up to 2Q 2011, government debt in total has reached RM437 billion, or approximately 53% of nominal GDP:



Based on Budget 2012 numbers, total government debt outstanding should reach just over RM495 billion by the end of 2012.

The average rate of increase for the last 40 odd years has been about 11% in log terms (log annual changes):



And on a per capita basis (RM):


Based on 2012 numbers, the per capita debt should reach a little over RM 17,000 per person by the end of that year.

Finally, the fiscal deficit (ratio to nominal GDP):


You’ll see from the above that it’s not unusual for Malaysia to run a fiscal deficit – in fact it’s been the norm, except for a short period in the mid-1990s.

Now on to the FAQ:

Q1. Government debt is like household debt – if we spend more than we earn, we’ll go bankrupt

A. That’s the common sense view, and its one that’s commonly held. The problem is that it’s also mostly wrong.

Here’s where the misconception lies – if you’re a household, you earn income based on your work and investments. For a company, income depends on selling the goods and services it produces. For both parties, that income represents the upper limit of what can be paid to service debt. It’s also – and this is the important point – determined by conditions mostly outside your control. You have to depend on someone else to determine your wages; the prevailing interest rate or investment rate governs returns; and market supply and demand (most of the time) limits what a company can sell.

But that’s not true of government generally. It’s “income” comes largely from direct and indirect taxation – the rates of which are determined by the government itself. So in a very real sense, governments don’t face the hard constraints that households and companies do. Instead its a soft constraint of what level of taxation citizens are willing to bear.

But even if governments come up against such a limit, there’s also the little fact that most governments also have a de facto monopoly on the issuance of money. As long as a government’s debt is denominated in its own currency and it retains control over issuance of that currency, government debt can always be paid off.
Third and more importantly, if government spending is directed towards investment which raises the productive capacity of the economy e.g. spending on education, that effectively raises the future tax yield, which indirectly allows a higher burden of present debt.

In the end, the real limit to government borrowing (and spending) is neither taxation nor the printing press – its the ability of an economy to produce goods and services. Which leads to the next point.

Q2. Bigger and bigger amounts of government debt is inflationary

A. It depends – and the size of debt isn’t the factor here, it’s what the money raised from debt issuance is spent on.

Consider a closed economy (i.e. no external trade) with three separate sectors – households, companies and the government. All three sectors produce and consume goods and services. Inflation occurs when demand for goods and services from all three sectors exceeds production. The only way for government spending to be inflationary is when it causes total spending from all three sectors to exceed that limit.

Now consider a case where households and companies suddenly want to spend more while the government maintains its level of spending. We’ll now have a case of excess demand and inflationary pressures even though the government is not spending any more than it did before.

Suppose the opposite case where households and companies suddenly want to save more instead. Under those circumstances, an increase in government spending up to the limit of the productive capacity of the economy will not be inflationary since its only taking up the excess supply that households and companies don’t want.

But inflation actually represents another way for governments to reduce their debt burdens and is often termed “implicit taxation” – if governments spend to the point where inflation increases, that effectively reduces the real burden of debt, and not just for the government but for all debtors. That’s because debt is contractually determined at the point of borrowing (in the past), but payment is usually in current tax dollars (which with inflation has lower purchasing power). Inflation also raises nominal growth, which generally means more tax dollars for a given level of real output.

Historically, with the exception of actual defaults, government debt has often been paid off through two channels – inflation and economic growth.

Q3. The Malaysian government has been running a deficit for years – but it should only be running a deficit in bad times. In good times, it ought to be saving and paying down debt

A. There’s another implication from the discussion on Q2 – whenever there’s an imbalance in the savings/investment decisions of households and companies, the opposite situation must prevail in government spending and investment for an economy to be maintained at full output and income generation .
If households and companies are saving more, the government has to dissave. Otherwise, demand will be deficient, and household and company surplus falls, which makes their saving pointless. If on the other hand households and companies are overspending, then the government has to save. Otherwise you’ll get inflation.

So it’s not just a binary decision of good times (save)/bad times (spend) for government expenditure, which is the popular notion of Keynesian economics. It’s more than possible to have a situation of economic growth but with excess saving in the household and corporate sectors. Excess government spending then helps maintain that growth situation with full employment, but with the side effect that it requires government spending to exceed its revenue.

Let’s take it one step further by adding an external sector (i.e. trade) to our though experiment.
In aggregate, if a country is running a trade surplus, then production in the economy exceeds consumption – in short, the economy as a whole has excess savings. The opposite is also true, in that a trade deficit indicates an economy that is consuming more than it produces. So far so good.

Plug in the conclusions from the preceding discussion and you get the following – excess government spending is not a big problem with a trade surplus, but a government should cut back its spending with a trade deficit. In the former case, whether the government should run a deficit or not depends on whether external demand is sufficient to provide full domestic employment. In the case of a trade deficit however, the advice is unequivocal – you have to run a budget surplus unless you’re willing to tolerate higher inflation.

Hence the consistent concern over America’s “twin” deficits over the past decade.


Q4. All this increase in debt will be a burden on our children and our children’s children

A. This is based on the idea that debt has to be repaid eventually, and the main source of government income is taxation – basically a corollary of the idea that a government is similar to a household. Hence, in this view, the greater the debt build-up the greater the expected future level of taxation. The popular notion is thus that of the current generation borrowing from future generations.

There’s a problem with this conception. First, since governments are collective enterprises on behalf of the governed, there’s no natural lifespan involved. There’s no necessity for debt to be fully paid off and it can be effectively carried in perpetuity. Some governments have actually taken advantage of this fact to issue perpetual bonds that never mature, and at least one major government has issued a 999 year bond.

But the most important point is this – whether government debt accumulation will become a burden on future generations depends greatly on who the debt is owed to. If the debt is held by citizens or agencies acting on the citizens behalf (for example EPF), then the taxes raised to pay for maturing debt comes from citizens and the debt payment goes back to citizens. All that occurs is a change in financial obligations and possibly some redistribution of wealth, but not a net burden on taxpayers.

That’s how Japan has managed to raise public debt to over 200% of GDP, yet is barely penalised by bond investors – most of that debt is held by domestic institutions like postal savings banks and pension funds. The Japanese are in effect lending to their government so that the government can spend it on them.

In Malaysia’s case, the ratio of foreign holdings of federal government debt has been rising steadily since 2005, but its still at a fairly low level (Government debt, not including BNM bills):


For the rest, about a quarter is held by social security institutions like EPF and SOCSO, the financial sector (banks, insurance companies) hold another quarter. Holders of general investment issues aren’t specifically classified, but foreign holdings of GII are relatively minor according to RENTAS.


Q5. Government debt growth is being aided and abetted by our pension and investment funds, which are now at risk

A. Here’s an interesting question for you – which is the better credit risk, a household or company who faces hard budget constraints on income and expenditure, or a government with discretionary powers of taxation and a printing press?

Government debt typically forms the benchmark for all bond issues in an economy. Even the best rated companies pay more on their debt than the government of their country. It goes back to the safety factor. That’s why pension funds and insurance companies put most of their investible funds into government securities. Whatever the risk of investing in government securities, every alternative except cash is riskier.


Q6. Since most of government debt is owned by Malaysians and only some by foreigners, the foreigners will get paid first while we have to pick up the bill

A. Actually, the reason why there’s such elaborate care and concern over foreign bond investor perceptions and rights – not just here but globally – is because historically when countries do default, it’s almost always a default on external debt, not on the debt held by domestic institutions.

It’s not hard to figure out why – when we’re talking about citizens, no democratically elected government would dare default on its debt obligations as it risks being booted out otherwise. Same thing for institutions such as pension funds and insurance funds, which take care of the future financial needs of their investors (read: voters). For banks, a domestic default could mean the government needing to bail them out, which makes a default worthless.

So foreigners are always first in the firing line, which makes them understandably skittish.


Q7. The government went on a spending spree during the recession

A. In 2008, in response to the Lehman Brothers collapse and the resulting shutdown of the international financial system, Malaysia instituted a fiscal stimulus package worth RM7 billion. When that didn’t appear to be enough, a bigger spending package with a face value of RM60 billion was passed through Parliament in March 2009, which put the total up to RM67 billion. That sounds like a lot, especially since both were enacted under conditions where tax revenue was expected to drop.

But here’s what really happened: Of that RM67 billion, RM5 billion was for National Savings Bonds paying 5% interest intended to help retirees and pensioners to raise their income even as BNM cut banking interest rates (i.e. it was actually revenue, not expenditure); RM7 billion was in Private Finance Initiatives, where the government didn’t pay a sen; RM20 billion was in credit guarantees for SMEs and small businesses, where again the government didn’t pay a sen; and only the remainder of RM35 billion was allocated for direct spending. That’s still a lot, and helps explain why debt ballooned in 2009/2010.

Or does it?

The truth is, Government expenditure in 2009 was only about RM1.4 billion higher than the original 2009 budget proposals sent to Parliament in 2008:


By my estimates, about RM14 billion of both stimulus packages were actually spent in 2009, yet the increase in total government spending was only a tenth of that. The implication is that most of the funding for the extra spending didn’t come from extra borrowing, but from cuts in other government programs. From my point of view that’s no spending spree, that’s being overly tight fisted – 90% of the stimulus effect was swallowed up by cutbacks in other areas..

So how come government debt rose sharply in 2009? Because government revenue came in at 10% below the budget estimates - in fact a little worse than the contraction in 2009 GDP of 9.9%:


Q8. We’re in trouble because debt has doubled in the past five years while income hasn’t

A. This is almost true: at the end of 2005, Federal Government debt stood at about RM229 billion and rose to RM407 billion by 2010. Nominal GDP on the other hand only rose from RM522 billion in 2005 to an estimated RM766 billion in 2010. But this little calculation is also wholly misleading as an indicator of debt sustainability.

The key point is that the recession seriously dented not just government income but the nation’s nominal income as a whole – the recovery in 2010 saw national income only just passing the level reached in 2008. In the meantime, the government had to deal with the drop in revenue in 2009, and thus had to borrow to cover the difference.

Looking at the growth rates, debt growth actually lagged income growth from 2005-2007:


It was only the recession that caused debt growth to jump, and it has now come down to more sustainable levels. As long as debt growth falls more or less in line with income growth, we should be fine.

Looking at the experience of the last recession (2000-2001) will give you an idea of why just taking a five year comparison won’t give you an accurate picture of the real situation.


Q9. Government debt isn’t sustainable because operational spending is greater than revenue

A. I think this came from a misunderstanding of what was said by Idris Jala at the recent ETP anniversary event. But it’s pretty easy to disprove:


The government’s operational balance has been negative in just three years out of the last 40, and it has not been in deficit since 1987. As required by law, the government only borrows to finance development expenditure, i.e. investment that will raise future capacity to produce.


Q10. Government debt is nearing the legal debt limit, and they won’t be able to borrow anymore so we’ll have to default

A. satD has covered this question in detail, so I won’t post more than a summary – the legal limit is a paper tiger and the government can change it anytime it wants. If at any point the government fails to gain legislative approval to raise the limit, in our system of parliamentary democracy that means an immediate dissolution of parliament and fresh general elections.

You’re not going to see a repeat of what happened in the US in August here. The US uses a presidential system, where the executive is elected separately from the legislative. Since this system is designed to promote checks and balances, that almost always means that a Democratic President has to deal with a Republican Congress and vice versa. The result is typically political gridlock.


Q11. The Treasury says the national debt is RM240 billion but the outstanding government debt is RM437, someone must be lying

A. It’s a funny thing but in Malaysia, we don’t use the term “national debt” in the way it’s commonly used elsewhere. Here the term refers exclusively to external debt only, of both the public and private sectors, and not to government debt.

So in Malaysia, government debt and national debt mean two very different things. The government’s external debt, by the way, is all of RM17 billion.


Q12. In ten years time, we’ll be like Greece

A. Greece has a 2000 year history of defaulting on its external debt. Malaysia has never defaulted on its debt.

Greece has had a debt to income ratio over 100% for the last twenty years, a ratio that is expected to climb to over 150% this year. Malaysia’s debt to GDP ratio peaked at 70% 25 years ago, and is at most 54% today.

Greece has something like three quarters of its debt owing to foreigners. Malaysia only owes about one fifth of its government debt to foreigners.

Greece is part of the Eurozone, and thus has no control over the issuance of its own money. Malaysia through Bank Negara controls the supply of Ringgit.

Worse, the European Central Bank is legally bared from becoming a lender of last resort for the Eurozone governments. Bank Negara has no such restrictions.

Greece is uncompetitive – it costs 40% more for a Greek worker to produce a unit of output compared to a German one. (Unfortunately the relevant statistics aren’t available for Malaysia).

Malaysia is not Greece, and we’re not exactly in danger of becoming one in the next ten years.

[If there are any other questions that I haven’t thought of here, feel free to post in the comments and I’ll add it to the FAQ).


Technical Notes:
Data on Federal Government borrowing and expenditure from Bank Negara’s Monthly Statistical Bulletin and from the Economic Planning Unit. Population estimates from EPU and the Department of Statistics

149 comments:

  1. I am sure the defence budget takes up a hugh chunk, buying submarines and warships when there is really no threat of war. Even if there is war, do you think 2 submarines and some warships will gaurantee us victory.
    Put aside corruption (it is really between the decision makers and God in final judgement) is there really a need to spend BILLIONs on such equiptment?

    ReplyDelete
    Replies
    1. I agree wif Syel,

      Anyway you will blame some one, if we in war and we lose guess who would you blame.... If everybody externally safe, ANY country do not need military power don't we.... Please think before you talk coz its look stupid!

      Delete
    2. Defence spending is determined by many factors. Many international observers are worried that there will be an arms build-up in this part of the world.

      Fortunately, Malaysia has always spent less on defence than most of its neighbours. Hopefully, we do not come to regret this.

      Delete
    3. I think one of the things which is lost is the effective dollar use.

      So does this mean that if country A spends 100 USD vs country B spending 100 USD they should have the same military standing or approximate?

      Assuming in a perfect world perhaps.

      But in one where even a straight-line analysis shows that our effectiveness per dollar spent is low, isn't that a big problem?

      Delete
    4. Weapon and military equipment can also be use as a force of deterrence, mind you.

      We only have peace because our enemies do not dare to attack us.

      You think they'll think twice before attacking us if we only use keris and parang?

      Delete
  2. Actually, security (internal and external) takes up less than 10% of the budget, about half of that for the police force alone.

    And there are solid strategic reasons for the buildup of defense hardware, not least of which is the slow withdrawal of US forces from our region.

    The main threat isn't war, but geo-political encroachment by China (the Spratleys is one example). Submarines for instance aren't defensive weapons in nature, they're power projection platforms.

    We (and I mean ASEAN as a whole) won't be able to defend our interests unless we're able to sustain a military presence outside our own domestic spheres. Relying on the US has allowed us to focus almost solely on economic growth for the past half century, but at this stage with US looking increasingly inwards, this isn't something we can fully rely on going forward. On that basis, the real question is are we spending enough?

    Having said that, some transparency and efficiency in defense spending is certainly called for.

    ReplyDelete
    Replies
    1. hishamh, Working submarines may be considered power projection platforms .. otherwise they are just expensive toys at best and projections of incompetence and bungling at worst

      Delete
    2. Rajesh,

      The only point where the operational status actually matters is if we actually get into a shooting war.

      Otherwise, it's the potential threat that's important. Prospective opponents will have to honour that threat whether its real or not, tying up resources.

      Examples from history abound e.g. the Tirpitz in WW2, Konigsberg in WW1.

      Delete
  3. Your argument is based on: the inflation is caused by demand/cost push/pull factors, without taking consideration of the monetary supply growth. Half truth at best.

    Agree with you, government have no problem paying off its debts. But at what cost? You did mention it.

    When government run into deficits, it can pay its expenses via increased taxation (or other receipts) or borrowing. If there is no borrowing, what government can do is either to increase tax or reduce its spending. Most politicians don't like it because increase tax cause people resentment and reduce government spending is equal to reduce government size, this is the last thing they want.

    What left, is borrowing. I agree with you that government will have little problem to pay its debts since the printing press is just a click away. The only culprit is it will bring inflation as more money supply will push up demand (prefer to say more money bid up the same quantity of goods cause price to increase).

    Through inflation, the big loser is the creditors not debtors (government) as eventually the inflation will wipe out the initial debts number. Imagine, if I borrow 100k now, there are 2 scenario. 1) inflation is 3% annually and 2) inflation is 15% annually. I, as a debtor, will gain so much if inflation is higher. The higher the better. By less than 5 years, the 15% inflation will cut the debts into half in nominal term.

    That's why government around the world is so addicted to debts. Government is just like an individual. He cannot endlessly spend out of the way he likes from the money he creates out of thin air. No one, can escape ever from the gravity rule. When music stops, it will come to an end.

    There is no lack of historical cases of similar stupidity by indebted government that had collapsed the entire nation. No lesson learnt, ignorance persists and head remains into the sand, otherwise why current mounting European problems still fail to give warning signal? It is not far off like Roman Empire or Yuan Dynasty? (both was collapsed by debts)

    ReplyDelete
  4. "Your argument is based on: the inflation is caused by demand/cost push/pull factors, without taking consideration of the monetary supply growth. Half truth at best. "

    Since we're talking here about the nexus between government debt and inflation, and not the determinants of inflation itself, I don't see how you can characterise my analysis as "half-truth". My argument is not based on how inflation happens, but the interaction between government debt and inflation.

    In any case, money supply growth is a part of the explanation, only it comes in indirectly - you've completely missed the point, as the following makes clear:

    "The only culprit is it will bring inflation as more money supply will push up demand (prefer to say more money bid up the same quantity of goods cause price to increase). "

    If you actually followed my explanation, you're actually describing the boundary where I said is the limit to any increase in government spending, i.e. when the economy is at full capacity and full employment. This is true irrespective of whether government spending is tax-financed, debt-financed, or money-financed.

    But if the economy is below that level, i.e. where demand is deficient relative to potential supply, then debt-finance or money-financed deficits are ok, and should in fact be sustainable.

    Why? Because under those circumstances the increase in money doesn't bid up prices, but rather builds up production from unused capacity, which in turn raises incomes (and tax revenue).

    It's only when you get pass this point that money supply growth turns into inflation, as demand exceeds supply. And it doesn't matter here whether the government is running a deficit or not, and is accumulating debt or not.

    Looking at it from another perspective, money supply growth only results in inflation if three conditions are met: the economy is already at full employment; money velocity is stable or increasing; and money supply growth exceeds money demand growth. If any of these three are violated, then growth in the money supply does not necessarily lead to inflation. And this would also be true whether the government is running a deficit or not.

    "There is no lack of historical cases of similar stupidity by indebted government that had collapsed the entire nation. "

    And how many of these countries ignored the limits that I've talked about? This is certainly the case in Europe, where the countries that are most in trouble have for decades overspent, and/or have been unable to adjust to demographic changes which made social spending and debt accumulation less sustainable.

    That's simply not the case for Malaysia.

    ReplyDelete
  5. Is it possible to find total federal government debt 2001 quarterly data? This is because it seems that data is quite available in BNM or MoF Thank you very much.

    ReplyDelete
  6. This because it seems that the data is NOT available in BNM or MoF. Thank you very much. Sorry for the error in the previous comment.

    ReplyDelete
  7. http://www.bnm.gov.my/files/publication/msb/2011/10/xls/3.1.4.xls

    ReplyDelete
  8. Excellence work. Wish that politicians here can argue on facts rather than facts-tailored to their belief.

    ReplyDelete
  9. hishamh,

    Just stumble along your blog. Excellent piece here. I am very much anti-BN but had difficulty stomaching Pakatan politicized attack on Msia public Debt and deficits. They went too far with their household comparison and omitting the fact that public debt for other countries was growing pretty fast in the last 5 years also.


    Pardon me a blue collar worker for adding a few grain of under informed opinions hereon what most Malaysian Debt/Deficit Doomsayer choose not to touch:
    1) Msia Government don't print money. They can only borrow money from BNM or other institutions(private/public)by issuing government securities(MGS). As a result, the interest on MGS will also cause the national debt to grow.

    2) Pakatan doesn't mentioned that other countries governments also rollover their debt consistently. And it is the major contributing factors to why most countries saw their gov debt rose steeply in recent years.(Compound interest curve become pretty scary after the 20th year)

    3) Gov deficit(public spending) represents a surplus for the private sector. Singapore has a public debt of 102.1% of GDP. Singapore public debt are used to keep public transport affordable, keep the street safe and other commonwealth functions. Malaysian gov deficit are spent into the pockets of cronies. We should be panicking because of corruption and not debt levels per se.

    4) Public(Gov) money vs Private(Banks) money? Both increases their liabilities(leverages) to supply the economy with money. But not enough panicky weight has been placed on the level of private debt(mortgage and vehicle). As much as we lament irresponsible gov borrowings, the private banking credits(created out of nothing too) are as culpable in messing up the economy. Both puts money into businessmen to create oligarchies/monopolies and very little are trickled down. Both also pushes the normal folks into debt choke-hold. Bottom line Najib's government needs to face the electorate but CIMB answers to the rich elites only.

    5)CM Lim Guan Eng mentioned it briefly but fell short of implementing anything that can curb excessive land speculation that is helping to choke the economy.

    6) Malaysia will be the next Greece? Only if Malaysian foreign debts grow out of proportion and our government cease to be sovereign state that can create its own credit money. We do have a decent trade surplus by today's international standard.

    IMHO instead of worrying about debt level, our main problem is political and legal. How to keep our sovereignty? What are we going to about practical issues:
    1)prevent escalation of an artificial crisis where predatory private individuals/entities (foreign or local) can buy up Malaysia for pennies on the dollar?
    2)If SHTF how are we going to repudiate odious debts incurred by corrupt politicians?
    3)Gotta to admit that most of the loots had already illicitly been transferred out of the country. So can we come up with some contingencies to claw back some of these funds? Can we find some way to neutralized the value of these illicit Ringgits overseas?
    4) Seems that half of our EPF had also been drawn down by our current gov(they seem to prefer borrowing form EPF than BNM). It is not ideal but we have to face the fact that EPF is not going to be fully funded for future retirees. But we can nonetheless find some way to manage the funds flow by not compromising on the retirees or the working public too much.


    Thanks

    ReplyDelete
    Replies
    1. This comment has been removed by a blog administrator.

      Delete
  10. Oi Mun,

    Thanks for the kind words. I didn't start this blog with the intention of being educational, but I'm happy it's been able to do so.

    With respect to your comments:

    1. Technically speaking, printing money isn't a literal phrase. It refers to direct purchases of government securities from the Treasury by the central bank. So Government borrowing from Bank Negara would be ipso facto "printing money", even if no money is literally printed.

    2. Agreed - but you have to factor in that income (GDP) generally will grow at the same time. As long as debt increases at a slower pace than nominal GDP, debt accumulation will be sustainable. We should reach that stage about next year.

    3. Again agreed, though I don't necessarily think it's due entirely to corruption. Consider that the debt to GDP ratio fell throughout most of the Badawi administration - I don't think anybody would argue that period was any less corrupt or inefficient.

    4. Not sure if I fully agree with this either - corporate borrowing has largely shifted to the bond markets, which is why banks have been pursuing household borrowing over the past ten years. The inequality in the economy has more to do with our tax structure and educational system then corporate plundering.

    5. & 6. Yup

    On the other remarks:

    1. Unlikely as the conditions for it (such as in 1997) no longer apply - the Ringgit is floating freely, and BNM has been careful to maintain adequate international reserves.

    2. I favour ensuring greater accountability and transparency - and bringing back local elections. One of the problems with our political system is that the winner take all approach to state elections entrenches a feudal culture among political parties (including the components of PR). That ensures political favour and largesse runs through whoever runs the state political mechanism - more opportunities and temptations for corruption.

    3. If you're referring to the supposed outflow of "illicit" money from Malaysia, I've commented on this before (here and here.

    4. You'll find that EPF's mandate requires that it invest most of its funds in government securities, which are much safer than anything else they can invest in domestically. Considering that EPF is basically a defined contribution pension plan, that's understandable. In fact, EPF has a problem because they have never been able to fulfill that part of their mandate - there's not enough freely traded government securities for them to invest in.

    I don't know if I'd really categorise this as the government "borrowing" from EPF, since MGS and GII issues are always conducted via auctions.

    ReplyDelete
  11. 1) Money printing- Actually I was trying to imply that it is the gov job to supply the economy with money it needs.But gov can only borrow from BNM to create money and not issue it themselves(debt free money).Which means legitimate public money appears as gov debt on the balance sheet. To reduce gov debt is to reduce money in circulation which some end of the world people dont get(something that really irritates me). In a sovereign country, central bank can even rebate the interests of gov bonds back to the public to reduce unnecessary burden on the country.

    3)But Debt and GDP figures are not absolute determinants of country well being. But again point is we should worry more about corruption and public services delivery on the ground.

    4)Corporate borrowing- Still new. Maybe you can write something it. Maybe something also on proportion of gov guarantees in corporate bonds market.

    ReplyDelete
  12. Oi Mun,

    First happy new year!

    But I'm not at all sure I understand what you're getting at. Under our current system, money is created largely independently of both government and central bank. Bank Negara does no more than try to influence the process.

    The government does not come into the picture at all, until and unless the central bank monetises government debt. But under normal circumstances, government borrowing does not create money.

    Also, the issuance of government securities should not have any influence on money in circulation.

    ReplyDelete
  13. hishah,

    Happy new year yo you too. I am new new to economics. From the stuff I had encountered so far(foreigh sources), I had assumed that money creation as follow:
    1)Treasury issues bond to the Central Bank. and the Central Bank issues an equivalent amount of Currency Notes to the treasury.
    2)Treasury bonds end up as asset of Central Bank and the currencies notes
    3)While commercial banks will create money through loan via fractional reserve.

    But after checking BNM bulletin, it seems that BNM only hold about RM2bil of MGS which is less than 1% of M1. So I need to throw my new found misinfo out of the window.

    Does this means our gov serves as an intermediary only to tax/borrow and respend it in other parts of the economy? While money is created by the economic activities through commercial banking sector and foreign currencies from oil/exports(420.

    Regardless of of money is created, money stagnant in EPF reservoir looks good but actually dont do anything much really except for preventing inflation. So am I correct to say that by borrowing from EPF, the gov debt actually increases the credits available in the economy that people can use for productive businesses.

    Money are scarce for your average Malaysians. They are right to be worried of gov overpaying (by the multiples) to military vendors or guaranteeing/bailout of lousy crony businesses.

    But it needs to be corrected, that people should be focused on how gov debt/deficit are utilized and not the amount of gov debt. Back to the point that gov debt are spent into the economy as fiscal surplus. To eliminate gov debt/deficit may backfire by starving the normal folks from basic services.

    ReplyDelete
  14. Hishamh,

    Oh ya almost forgot. Lots of people are worried that how on earth is our gov going to pay off RM4++billion debt. People are scared sh*t that they will be tax and suffer austerity to the hill.

    Is it just a number game? That Gov only needs to make sure to pay EPF what it needs to pay the retirees? Or BNM just monetize the gov debt periodically?

    ReplyDelete
  15. Oi Mun, the process you are describing where treasury notes are exchanged for money at the central bank is actually the process known as "printing money" - it has almost never been done in Malaysia to my knowledge.

    The second part (commercial banks) is almost correct, except the idea of fractional reserve creation of money really only applies when money is exogenous to the system (e.g. based on metals or other commodities), and not a pure fiat system where money is endogenous. Two years ago I thought the same as you did about fractional reserve banking, but I've since changed my mind - it doesn't really describe the true money creation process at all. Which means a lot of the commentary out there on the internet is flat wrong.

    Money is also created (and destroyed) through central bank open market operations (see this post for a primer).

    Also, only in the case of a dollarised economy, or if a country operates a currency board will inflows of foreign exchange automatically increase the supply of money. Otherwise, it would depend on the central bank's policies of forex intervention and sterilisation (see this post for details.

    Getting back to the topic, yes you could describe the government as a sort of intermediary. But this doesn't create credit for productive use - government spending is like any other spending. Insofar as that money is spent on goods and services (or for salaries), then it works.

    Second, EPF money is not stagnant, as government borrowing is always spent (i.e. the money circulates). Other EPF investments are about the same - if they invested in primary issues of corporate debt or equity, that money is spent too. It's only when EPF invests in the secondary market that that doesn't happen - but the counterparty getting the money should be spending it too, so it's still money flowing through the economy.

    As far as paying it back is concerned - the government doesn't have to, which is the point that many people miss. As long as income on average increases faster than debt, the debt load will be sustainable. The amounts don't really matter.

    Historically, government debt is "reduced" through two methods - inflation, which reduces the real burden of debt, and economic growth, which increases the resources available to pay it off. But these methods increase the sustainability of debt, not reduce its nominal amount.

    ReplyDelete
  16. Fiat & Debt Based Economy will fail.

    ReplyDelete
  17. Unfortunately, metallic based monetary systems promote wealth inequality, war and colonialism, and periodic depressions. Reading the literature, they're also incompatible with real economic growth and democracy.

    You pick your poison.

    The only situation I can think of where a metallic based monetary system would be desirable would be where the global population is either static or shrinking...which based on current trends should be in about 200 years from now.

    ReplyDelete
  18. Thank you for the good post. but just a comments on my humble opinions. Once the growth cant cope or merely enough to cover the interest payment, i do believed the printing press will comes to work, and in this situation, inflation is unavoidable & the one that's gonna feel the pinch is the middle to lower working class people. just my 2 cents. Keep up with the good post.

    ReplyDelete
  19. I personally own a few kilos of silver. I do it as an insurance and I pray everyday that we will not return to a gold standard. Because that we will betting against humanity ability to organized ourselves for the better.

    Being a worker I know how terrible it feels when inflation eats away our stagnant real wages. But to blame it on paper/digital currencies or government alone would be too narrow I guess.

    The problem is the elasticity of paper currencies being abused to enrich the minority elites and not elasticity per se.

    Inelasticity of precious metal can be also abused. It can be cornered and hoarded into a few hands by hook or by crook.

    No one can deny precious metals have intrinsic values, but it is still a token. Society greatest folly is our narrow fixation with these tokens and not the sweat&tears of people is backing.

    For example,
    1)to put paper currencies at the top of the money podium gives disproportionate power the paper elites while putting the rest at a disadvantage.
    2)to put precious metals to at the top of the money podium meanwhile gives disproportionate power the gold/silver hoarders while putting the rest(including farmers) at a disadvantage.
    3)to put commodity currencies at the top of the money podium gives disproportionate power the commodities owners while putting workers(esp services) at a disadvantage.

    Whatever type of money/tokens we used, the power lies with the hand that manage the credit/debit system of these tokens. Their discretion is powerful and often abused.

    ReplyDelete
  20. Correction:

    Society greatest folly is our narrow fixation with these tokens and not the sweat&tears of people that are backing these tokens.

    ReplyDelete
  21. Oi Mun, I like your thinking. Yes, there's this confusion between money and wealth, which are not the same.

    But the one advantage of fiat currency is that there's no limit to supply, unlike in metals or commodities. That gives people a fighting chance to improve their lot, which would not be possible under the hard constraints of a metallic system. As bad as wealth and income inequality are now, it was many times worse before.

    The keys are to ensure a level playing field, at least in so far as giving everyone the same chances and advantages at life - universal education and healthcare, and a culture that provides social and economic mobility. We're not there yet, but I think we're slowly moving in that direction.

    ReplyDelete
  22. "But the one advantage of fiat currency is that there's no limit to supply, unlike in metals or commodities."

    I do totally agreed on this, but this is in situation which the faith of the currency is intact. It will be at an disadvantage, if the faith for the currency is not there. Sorry for the words used. I'm not an economist, just another average Joe six pack. We can looked at an example for Iran today, as we speak, due to sanction & further manipulation of the economy or currency, their currency value has lost of more than 40% if i'm not mistaken, just within a few day's. People in Iran are running to gold & where gold is not accessible, people are running for other worthy currencies. Not to mentioned Zimbabwe which has already had an hyperinflation within this decade. Unlimited supply is an advantage, but once abused, there will be no turning back.

    ReplyDelete
  23. @din,

    The limits for government debt applies as well to currency printing - it's always about the ability of an economy to produce real goods and services. But the funny thing about fiat money is that because its demand is volatile, printing money will have different consequences depending on the circumstances. In the case of Zimbabwe, where we had full monetisation of government debt despite an economy already at full employment, the results are as you know. In the current case of the US and UK, central banks are barely keeping up with private sector deleveraging (aka money destruction).

    ReplyDelete
  24. Din,

    I am no economist either. But I was pretty careful in not dismissing precious metal or commodities as moneys by using the analogy of a money podium. Each has its advantages and disadvantages.

    I do agree with you precious metals are decent investments for the average folks.In fact we are under owning precious metals and over leveraging on mortgage. Not having exposure to different assets classes is not hedging yourselves.

    No doubt, when there is political/economic unrest gold/silver will trump any other currencies. But if things continue to breakdown, it will be energy, food,clean water and daily necessities that will be king. And if SHTF even the family(basic unit of society)will breakdown and we will see abandoned children everywhere. Dmitry Orlov five stages of collapse explained this in details.

    IMHO Iran is more of geopolitical attack on a country monetary system. Typical modus operandi for looting a country is through banks and then bombs. First is to attack it financially using currencies speculation and debt(IMF). If that doesn't work, than the bombs and bulletts come raining in.

    That was the case with Libya. It was impossible to bring down Libya financially as they had their own sovereign currency,gold, oil, water and are debt free. Then came NATO with their bombings and military support(or leadership) to the rebels.

    My wild guess is that Iran is more worried about its military attacks on its soil. Iran have plenty of gold in central bank coffers and public hands. It can be circulated as money freely to facilitate internal trade in the interim. To absorb the currency shock in the domestic economy the gov can try a mixture currency stabilization,recalibration or capital control .

    As for international trade, Iran can do direct bilateral trade or currency agreements with major trading partners. Denomination can be in partners currencies, 3rd party currencies, gold or even barter(eg oil for infrastructure).

    Every type of man-made system(including free market capitalism) has some sort of systemic flaw in it. Its alright to tweak,overhaul or switch between them if necessary(Note:The latter two has more short term risk)

    IMHO, on the surface our problems may seem political and economic in nature. But if we look further down it is actually our failure live peacefully/balancely as a community (be it local or international). In short it is a human problem.

    The fundamental question is how do human come together to manage the inherent flaws(sytemic and behavioral) with the tools we have. To be successful in this pursuit we need a whole damn lot of grace and respect for life.

    ReplyDelete
  25. Yang Oi Mun,

    I totally agreed on your statement aboved. I hope SHTF will not be in my lifetime. Just hoping to get enough to be able to hedge myself here.

    ReplyDelete
  26. Salaam Hisham,

    the worrying issue for a taxpayer like myself is the increase in debt/nGDP especially from 97/98 todate. Between yr 80 to 90 we had huge increases in debt but those were Malaysia's booming years where we were growing on average at 9% annually. Hence strong justification for huge spending to build infrastructure etc. However, Yr 97 was the start of the Asian financial crisis and thats when our debt started to increase, worryingly. Even during the 2001 slump we continued to increase our debt. (Lets not go back 40 yrs as it wont reflect the true economy of Malaysia ad world.) Yes, slight dip between yr 04-08 but overall an increasing trend.

    Question now is has the spending been justified and efficient to boost our economy so that the debts will be able to be repaid/reduced in later years. I commend you for providing the technical aspect of our debt but don't believe the Govt has answered this question to me and most Malaysians.

    Plot the debt spending against GDP growth since 1970 and you will see my point.

    rgds
    Worried tax payer

    ReplyDelete
  27. Salam, hope you've had a good holiday.

    I've rechecked the data - in the 1980s, average real GDP growth was just a hair under 6.0%. Government expenditure (and revenue) started climbing beginning about 1980 and peaked in 1982 - but GDP growth at the same time slowed. Both numbers fell back after 1982 but especially revenue, and debt to GDP didn't peak until 5 years later in 1987.

    The large runup in debt in the 1980s was only partly due to a jump in government spending, but more to a large drop in revenue from the 1981-82 (small) and 1985-87 (very large) recessions. The latter caused a revenue drop worth 6% of GDP - actually slightly bigger than the impact from the 1997-98 crisis.

    Same thing happened in 1997-98 and 2008-2009. While you could argue that debt accumulation in the 1980s and after 1997-98 was due to fiscal stimulus measures, there really hasn't been a relatively big increase in spending over this last recession.

    As a percentage of GDP, government spending is now back to pre-crisis levels at around 25% of GDP. If we can limit debt growth to around 8%-9%, that should stabilise the debt ratio and start the reduction process.

    ReplyDelete
  28. I find that you are trying to mislead everybody who reading your explanation! If everything goes like what you said, no country can go bankruptcy. You are just using all the unrealistic economic instruments and very limited viewpoints to explain away the problems of Malaysia Federal government are facing. For example, a sovereign government can always print money for paying off the debt, yes it is only technical true, but it will always depreciate our currency and the value of our assets. Our government are wasting a lot of money on unnecessary spendings, corruptions, etc. And thus they need to keep on borrowing in order to solve the deficit and causing the federal government debt going higher and higher. If one day, government were to print money in order to solve the debt problem, then all the money and assets that citizens holding will be devalued. Do you think this is a responsible and capable government should do?

    ReplyDelete
  29. Mislead how exactly? I've outlined the conditions under which debt accumulation is safe, and under what conditions it isn't safe. I'll be the first to point out when Malaysia's position reaches that stage, but we are nowhere close to that point. Scaremongering might be good politics but makes for poor economics (as Europe is discovering).

    With respect to printing money, whether it results in a depreciating currency and falling asset prices (shouldn't that be the other way around?) or not depends on the specific circumstances - in no way is this result automatic.

    For example, India has been "printing money" for decades, as has Japan. The US Fed has been doing quantitative easing through massive secondary market purchases of government debt through most of the past 3 years, which is close to printing money. Yet none of these countries are experiencing runaway inflation or rapidly depreciating currencies - except India lately for the reason I've outlined in my post: private plus public expenditure exceeding the productive capacity of the economy. This is not the case in the US or in Japan, or even here yet (based on the present rate of debt accumulation, it will take approximately 100 years for the debt to GDP ratio to reach 100% of GDP).

    Nor is it necessary to "solve" the debt problem - the government is not a natural person with a natural lifespan where all debts have to be repaid at the end of the day. It is sufficient to cap debt at a sustainable level of increase (i.e. below the rate of increase in nominal income). In terms of the fiscal plans for 2012, we're almost there.

    International investors don't even worry about a country's debt level until it reaches 60% of GDP. Why should we in Malaysia? Singapore's public debt is almost twice ours in relation to GDP - do you hear any noise from across the causeway? Almost none, because they're careful to adhere to the limits I've described.

    ReplyDelete
  30. Hi Anon @ 12-Feb
    I think Hisham doesn't mislead rather than discuss angles? He has been academic and fair in all his approaches/explanations and for that, I thank him, for I have learnt much.

    He does sometimes put forth opinions, to which you/I need not agree. But he does *not* mislead. He backs them with thought out rationale. As an academic/technocrat-ish fler commenting frm the sidelines, he has nothing to gain.

    Au contraire, opposition vitriol has proven to be less well considered and does not always isolate our governance issues fairly. Scoring political points w/ low blows.

    That's OK. Just spare the impartial academics from the venom please.

    ReplyDelete
  31. Thanks for the defense Metalrage, though I don't think it was necessary.

    I do find that I have to walk a pretty fine tightrope not to take a stand on politics - this is not and never will be a political blog. I have some sympathy for the opposition's positions on many things (such as social protection), but neither can I quite stomach some of the bad economics and analysis involved - and that's from both sides. If PR ever takes power, be sure I'll defend their right to maintain deficits as the correct economic policy to follow if required.

    Last point for anonymous: the degree to which countries are exposed to the risk of "bankruptcy" is only with reference to their external public debt (debt owned by foreigners and denominated in foreign currency). Malaysia and Singapore have almost none. Past sovereign bankruptcies have always involved countries owing money overseas, and never domestically. The European case is slightly different because there is no local currency within the Euro area, since as the ECB controls money issuance, all debt is by definition external.

    ReplyDelete
  32. I don't agree with hishamh simply because he just tried to explain or give an impression to the readers that given the condition of Malaysia and the way that Malaysia Federal Government is spending right now, we are very "safe". He is not giving a whole picture of the problem that Malaysia government is facing.

    First, US, Japan and India are very different from us, US is using USD which is the international trading currency, Japan and India are BIG economy engines, plus Japan is having a lot of private strong companies and enterprises . All these elements allow these countries to have deficits or issuance of money without much problems. Malaysia has none of these advantages. Plus, US and Japan government are facing very tough financial problem as well, no one guarantee that they will not go bankruptcy in near future.

    "International investors don't even worry about a country's debt level until it reaches 60% of GDP. Why should we in Malaysia? Singapore's public debt is almost twice ours in relation to GDP - do you hear any noise from across the causeway? Almost none, because they're careful to adhere to the limits I've described."

    - You only told part of the story. Singapore's public debt are mostly for investment on areas that could yield investment returns. And Singapore's GIC and Temasek are holding almost USD500billions assets of the Singapore Government. That is the reserve that Singapore accumulated from past years' surplus and investment return. Malaysia's debt is purely for serving the deficits, the debt interest or payments for old debt, just like running a "ponzi scheme". Malaysia has no single sovereign wealth fund could has the scale that Singapore is having now.

    Most importantly, Malaysia's 40% revenue (about RM60-70Billion) is from oil and gas, these natural resources can only last for another 20 years. We are facing "resource curse" problem within 20 years. Without oil and gas, Malaysia Government will for sure face very tough and serious financial problem then.

    Last one, a responsible and capable government should often maintain surplus budget and operation, not deficit for almost all the years since independent. A good government should maintain a good and controllable account, and have sufficient reserve to tackle or minimize the impact of any domestic or international economic problems.

    Yes, agreed that right now Malaysia is still pretty far away from bankruptcy but that's doesn't mean we should continue and spend in the way that Malaysia government is doing. Let's back to the very fundamental concept, no one can be sustainable without money and reserve, and keep on borrowing money.

    ReplyDelete
  33. "First, US, Japan and India are very different from us, US is using USD which is the international trading currency, Japan and India are BIG economy engines, plus Japan is having a lot of private strong companies and enterprises . All these elements allow these countries to have deficits or issuance of money without much problems."

    Being a big economy is no different from a small one - it'a all relative. You can't run away from economic fundamentals and truths. The reason why these economies can run deficits and issue money is the same reason why we can if we needed to - we have the fiscal and monetary space to do so.

    "Singapore's public debt are mostly for investment on areas that could yield investment returns. And Singapore's GIC and Temasek are holding almost USD500billions assets of the Singapore Government."

    1. During the 2008-2009 crisis, Singapore implemented tax cuts, income tax rebates, job assistance programs, and credit guarantees worth 6% of GDP. Where's the investment here? Our deficits over the last three years (not including 2011) came from a sharp drop in tax revenue, not accelerating spending increases.

    2. GIC manages Singapore's international reserves, not the government's accounts - these are not savings in the conventional sense, but more akin to insurance. And those reserves were gained through active manipulation of the SGD. And a lot of it is invested in (*cough*) US Treasuries. In contrast, BNM does not appoint a single manager for our reserves, but they do invest them (and quite probably, they're mostly in US treasuries too).

    3. Temasek's portfolio is worth about 2/3rds of Singapore's GDP. No we don't have quite the scale of Temasek, but last I checked, Khazanah Nasional's portfolio is a respectable RM108 billion, or about 15% of Malaysia's GDP. Considering they only started after 1998, that's pretty decent, especially for a government that hasn't been "saving".

    "Most importantly, Malaysia's 40% revenue (about RM60-70Billion) is from oil and gas, these natural resources can only last for another 20 years."

    Oil, yes...gas, no. From what I remember, gas reserves are expected to last another 50-60 years. The 40% figure comes from Petronas, and includes payments to state governments, not just central. Central government revenue derived from Petronas and other oil companies is less than 20% of total revenue.

    "Last one, a responsible and capable government should often maintain surplus budget and operation, not deficit for almost all the years since independent."

    Totally wrong from my point of view. You're assuming a government is like a household. The biggest differences - governments can vary their income, with the only constraint being what's politically and socially acceptable, which households cannot do. Second, government income is sensitive to total income - cut expenditure, and government income drops too, again unlike a household. What's the point of saving, if by saving you drop your income (and everybody else's) at the same time?

    Attempting to cut the deficit and debt levels by austerity only works if private sector income and production are booming (alternatively, very loose monetary policy which results in the same thing). If they aren't, then cutting back only results in slower growth, lower government income, and continued deficits. Fiscal austerity in Europe is resulting in worse deficits and debt levels, not better.

    My viewpoint has always been about what's best for the economy at the macro-level, in terms of maintaining and increasing employment and total incomes. In this context, debt and deficits are policy tools, not ends in themselves.

    A responsible government is one that tries to maintain full employment and growing real incomes, not to save on its own account. If the situation calls for debts and deficits, then so be it.

    ReplyDelete
  34. “During the 2008-2009 crisis, Singapore implemented tax cuts, income tax rebates, job assistance programs, and credit guarantees worth 6% of GDP. Where's the investment here? ”

    - The term 'investment' may not always refer to the real money that put into projects or companies that can reflect on the account book. Singapore spent the money to improve the skills of the workforce and to maintain the stability and the survival of the economy and all the companies in the country. These decisions has strengthen the confidence of both domestic and foreign investors toward the Singapore government and the entire business environment of Singapore. Yet Malaysia spent most of the revenue purely to maintain a big group of civil servant, not on the training or education or upgrading of skills but their salary and bonus. Why does Malaysia need such a big group of civil servant? All these are pure consumption not investment. The only reasons for maintaining big group of civil servant are for stabilize the votes count of BN and low unemployment rate.

    "Our deficits over the last three years (not including 2011) came from a sharp drop in tax revenue, not accelerating spending increases."

    - Wrong. The total tax revenue has dropped about RM6billion last 3/4 years, but the salary for civil servant alone has increased about RM15Billion.

    "GIC manages Singapore's international reserves, not the government's accounts - these are not savings in the conventional sense, but more akin to insurance. And those reserves were gained through active manipulation of the SGD. And a lot of it is invested in (*cough*) US Treasuries. In contrast, BNM does not appoint a single manager for our reserves, but they do invest them (and quite probably, they're mostly in US treasuries too)."

    - No matter how, the amount of GIC money is belong to Singapore Government. Singapore Government has the rights to use it if the country is in financial trouble.

    "Oil, yes...gas, no. From what I remember, gas reserves are expected to last another 50-60 years. The 40% figure comes from Petronas, and includes payments to state governments, not just central. Central government revenue derived from Petronas and other oil companies is less than 20% of total revenue."

    - I believe large amount of money is from Oil, but not Gas. Yes, Petronas alone doesn't contribute more than 40% to Central Government, but the Petroleum Income Tax (PITA) plus the dividend from Petronas, together contributed about RM60Billions to the Central Government in 2011/2010.

    "A responsible government is one that tries to maintain full employment and growing real incomes, not to save on its own account. If the situation calls for debts and deficits, then so be it."

    - Yes, agreed. But now the question here is "how"? Malaysia government spent a large amount of money on maintaining the 1.7million civil servant, which is about 15% of the entire workforce of Malaysia. Where does the money come from? From non-renewable natural resources! Is this going to be sustainable? A good government should provide good education and good business environment, to all the citizens so to ensure their are competitive, productive and able to produce and survive in tough and competitive business and social environment.

    All the points you put up here, are purely from economic points of view, without considering the long-term survival strategies of a country. What the Malaysia Central Government is doing also the same, they are putting the future of Malaysia into risk!

    ReplyDelete
  35. "Singapore spent the money to improve the skills of the workforce and to maintain the stability and the survival of the economy and all the companies in the country."

    And the funny thing is that most of their growth over the past decade hasn’t come from Singaporeans, but from a large influx of foreigners. Despite having a crude birth rate below replacement level, from 2004 until now Singapore’s population growth rate averaged over 3%.

    Hence, they’ve increased economic activity not by creating a better skilled more productive Singaporean workforce, but by adding more and more numbers of high income foreigners (who incidentally drive up the cost of living for everybody else). That’s not a survival strategy Malaysia can follow, nor should we, as it just exacerbates income inequality.

    "Yet Malaysia spent most of the revenue purely to maintain a big group of civil servant, not on the training or education or upgrading of skills but their salary and bonus. Why does Malaysia need such a big group of civil servant? All these are pure consumption not investment."

    One day, I’m going to write a blog post on this topic. The reason why Malaysia’s civil service appears bloated by comparison with our neighbours is because we are the only other country in this region apart from Japan who does not have the draft (try this link. The numbers look big because it’s not a like to like comparison. Take away the Malaysian police and the armed forces, and you get something close to the same relative size.

    "- Wrong. The total tax revenue has dropped about RM6billion last 3/4 years, but the salary for civil servant alone has increased about RM15Billion."

    Wrong. Tax revenue for 2009 alone was RM18 billion below expectations.

    [tbc]

    ReplyDelete
  36. [Cont]


    "- No matter how, the amount of GIC money is belong to Singapore Government. Singapore Government has the rights to use it if the country is in financial trouble."

    Again wrong. GIC money belongs to MAS. For the Singapore government to use that money would be illegal as MAS is a separate legal entity. It would also require MAS to completely change the entire basis for their conduct of monetary policy (which is based on control over the path and rate of appreciation of the exchange rate). Even if the government could use that money, operationally it would require the SGD to appreciate substantially, putting Singapore’s export competitiveness at risk.

    And even assuming your conception was true, that puts Malaysia in a pretty good position – BNM at last count is sitting on over RM420 billion in international reserves, or very nearly enough to cover the entire government debt.

    "- I believe large amount of money is from Oil, but not Gas. Yes, Petronas alone doesn't contribute more than 40% to Central Government, but the Petroleum Income Tax (PITA) plus the dividend from Petronas, together contributed about RM60Billions to the Central Government in 2011/2010."

    Gas production is double that of crude. The RM60 billion is correct from Petronas perspective, but where it is in the government accounts I can’t see.

    "Malaysia government spent a large amount of money on maintaining the 1.7million civil servant, which is about 15% of the entire workforce of Malaysia."

    I’ve covered that above.

    "Where does the money come from? From non-renewable natural resources! Is this going to be sustainable?"

    Did you know that by Malaysian law (unlike the paper tiger of a debt limit), the government can only borrow for development and investment purposes? Civil service salaries and operational expenditure must be covered by current revenue.

    And interestingly enough, output of crude and gas has been falling yet the yield in terms government revenue has increased instead. I suspect this is something we will continue to see going forward – as oil and gas reserves are depleted worldwide, revenues from oil and gas will remain high as prices adjust for the reduction in supply and as demand increases from developing countries like India and China. Government revenues would only fall if prices stagnate, and that’s simply not going to happen anytime soon.

    "All the points you put up here, are purely from economic points of view, without considering the long-term survival strategies of a country. "

    Which is another way of saying that debt and what it’s spent on is the same thing, a concept I reject. The issue of debt and deficits (the macro picture) are to me completely separate issues from the direction and purpose of government expenditure (the micro picture). I see deficits primarily as a tool for macro stabilisation policy (maintaining incomes and employment over time). How those deficits are used is an entirely different story.

    ReplyDelete
    Replies
    1. Hi HisHamh,

      i'm a tech guys - US and large economies may shift from pure consumer of oil & gas to net exporters in future. Due to technology advancement that is something we dun have. google and read about this "Shale Gas" (though the brainy group are still developing it) domestic consumption of oil & gas in the more advance economy will drop with green & efficient tech in place. Singapore are not influxing highly paid foreigners into their land but highly talented individual or non-talented individuals as long as they are capable and able to contribute to their GDP per capita as a whole.

      Delete
    2. to add-on, Singapore are able to provides job and sustain them as well as put in place control & contingency plan by contracting the workers. Not simply inviting anyone and giving them citizenship.

      Delete
  37. No doubt Singapore is facing birth rate problem, that's why they need foreign workers, talents or investors to fill up the gap. Yet this is their structural social problem, as far as the government spending is concerned, it is the correct way. The target of Singapore budget is always Singaporeans and PR.


    "One day, I’m going to write a blog post on this topic. The reason why Malaysia’s civil service appears bloated by comparison with our neighbours is because we are the only other country in this region apart from Japan who does not have the draft (try this link. The numbers look big because it’s not a like to like comparison. Take away the Malaysian police and the armed forces, and you get something close to the same relative size."

    - May be you should come to JB-SG custom and take a look, a lot of staffs are doing nothing there but sitting and walking around, even some of them go to the shopping center next to custom during office hours.


    "- Wrong. The total tax revenue has dropped about RM6billion last 3/4 years, but the salary for civil servant alone has increased about RM15Billion."
    Wrong. Tax revenue for 2009 alone was RM18 billion below expectations.

    - Maybe you should show us the report of 2008, 2009 and 2010 Malaysia Federal Financial report, the amount of revenue dropped and the amount of salary expenditure increased.

    ReplyDelete
  38. [Cont]

    “Again wrong. GIC money belongs to MAS. For the Singapore government to use that money would be illegal as MAS is a separate legal entity. It would also require MAS to completely change the entire basis for their conduct of monetary policy (which is based on control over the path and rate of appreciation of the exchange rate). Even if the government could use that money, operationally it would require the SGD to appreciate substantially, putting Singapore’s export competitiveness at risk.

    And even assuming your conception was true, that puts Malaysia in a pretty good position – BNM at last count is sitting on over RM420 billion in international reserves, or very nearly enough to cover the entire government debt.”

    - In 1997/98 economy crisis, Singapore has proved that they have the ability to stabilize the currency and economy problems, Malaysia has nothing to safeguard the depreciation of RM then. So why such situation happened?


    "Gas production is double that of crude. The RM60 billion is correct from Petronas perspective, but where it is in the government accounts I can’t see."

    - Production and the amount of money generated is different thing. Again, government revenue income heavily depends on non-renewable natural resources, yet mainly for servicing consumption. This is not a logical and good management and governance.


    “Did you know that by Malaysian law (unlike the paper tiger of a debt limit), the government can only borrow for development and investment purposes? Civil service salaries and operational expenditure must be covered by current revenue.”

    - This is just a distorted reason/excuse. Government total expenditure covers operating expenditure and development expenditure. If government maintains controllable and reasonable operating expenditure, then revenue income should be enough to cover the development expenditure without borrowing and letting the federal government debt growing.

    "And interestingly enough, output of crude and gas has been falling yet the yield in terms government revenue has increased instead. I suspect this is something we will continue to see going forward – as oil and gas reserves are depleted worldwide, revenues from oil and gas will remain high as prices adjust for the reduction in supply and as demand increases from developing countries like India and China. Government revenues would only fall if prices stagnate, and that’s simply not going to happen anytime soon."

    - Don't forget the world will not wait for the last drop of oil and gas before they starts exploring new energy sources. They are doing now.

    “Which is another way of saying that debt and what it’s spent on is the same thing, a concept I reject. The issue of debt and deficits (the macro picture) are to me completely separate issues from the direction and purpose of government expenditure (the micro picture). I see deficits primarily as a tool for macro stabilisation policy (maintaining incomes and employment over time). How those deficits are used is an entirely different story.”

    - Agreed. But this is a topic concerned the survival and governance problem of our country. You should at least clarify that Malaysian Government Debt is sustainable for now, however should not have happened in that way. You are just giving an impression and idea to the readers that what the government is doing is perfectly no big issue. That's wrong!

    ReplyDelete
  39. There are 2 issues that needs clarification here:

    1. GIC belongs to Government of Singapore, not MAS. Temasek belongs to Ministry of Finance, thus belongs to Government Of Singapore as well. Though the actual details of protocols, principles, structure of reporting are unknown.

    http://www.gic.com.sg/about/overview

    2. The Debt-To-GDP Ratio of Singapore is totally not an accurate indicator for gauging the financial health of Singapore. Singapore has been maintaining surplus most of the years since independence day, their debt is just for creating and running a robust sovereign debt market. Malaysia debt is purely for consumption and repayment of old debt, interest and servicing deficits. So, again please don't simply do comparison without knowing the details. Most importantly, the quality of Malaysia Government has no way to compare with Singapore.

    http://www.sovereignman.com/finance/the-cost-of-being-a-contrarian-for-contrarians-sake/

    ReplyDelete
  40. Anon "Yes, agreed. But now the question here is "how"? Malaysia government spent a large amount of money on maintaining the 1.7million civil servant, which is about 15% of the entire workforce of Malaysia"

    I do share your concerns. But as an average person, I am more concern about the delivery of our civil service than their size. As long as it is good service it doesn't matter whether private or public sector is providing it.
    That said we have to decide someday on whether:
    1) we get the civil servants to deliver more and reduce privatized concessions/monopoly
    2) Or reduce civil servants no and let the private sector takeover

    I maybe wrong but it took me a long time to get around the public deficit thingy.

    What hishamh is trying to say is that shrinking the public debt/deficit could make the GDP shrink even faster(instead of growing). So your debt to GDP ratio could actually increased thereby making debt repayment even harder.

    ReplyDelete
  41. @anonymous 4.52

    To clarify your clarification:

    1. Yes I know - but if you read what I actually wrote, I said the money they manage belongs to MAS, not that GIC was.

    2. Yes, I know that, too - I no more think that Singapore is in any kind of trouble than Malaysia is.

    "Malaysia debt is purely for consumption and repayment of old debt, interest and servicing deficits."

    Since money is fungible, how do you come to that conclusion? Especially since legally, the Malaysian government cannot borrow except to fund the development budget. Debt service for instance falls under the operational budget.

    ReplyDelete
  42. @anonymous 11.49

    "- May be you should come to JB-SG custom and take a look, a lot of staffs are doing nothing there but sitting and walking around, even some of them go to the shopping center next to custom during office hours."

    Sorry, how's this relevant to the topic at hand?

    "- Maybe you should show us the report of 2008, 2009 and 2010 Malaysia Federal Financial report, the amount of revenue dropped and the amount of salary expenditure increased."

    Read Point 7 in the post above, or the original post I had on this issue.

    - In 1997/98 economy crisis, Singapore has proved that they have the ability to stabilize the currency and economy problems, Malaysia has nothing to safeguard the depreciation of RM then. So why such situation happened?

    They "stabilize the currency and economy problems" by...well, actually they didn't. The reason why Malaysia suffered worse was we had a finance minister committed to an IMF "solution", a central bank that criminally allowed a massive credit and property bubble to grow over a two year period, and a short sighted reliance on a pegged exchange rate. Singapore at that point had already long shifted to a managed float - flexible exchange rates reduce the vulnerability to external flows, as we've experienced in this past recession. If we had still been pegged to the Dollar, we'd have been up the proverbial creek without a paddle...

    "- Production and the amount of money generated is different thing."

    I thought that's what I said.

    " Again, government revenue income heavily depends on non-renewable natural resources, yet mainly for servicing consumption. This is not a logical and good management and governance. "

    Come to think of it, my pet idea is to put a stop to petrol and diesel subsidies (it's all consumption), which would save about RM12-14 billion a year. Then tack on the full economic cost of petrol use as additional petrol taxes, which should raise another RM8 billion. Do away with unfair IPP contracts and the hidden gas subsidy from Petronas, and the dividend yield from Petronas would add on another RM20 billion. Put that together, and the fiscal deficit's gone and the debt level would decrease by 8% of GDP every year - care to put your name to that proposal?

    "- Don't forget the world will not wait for the last drop of oil and gas before they starts exploring new energy sources. They are doing now."

    Yes, which is why I'm not terribly worried about government revenue derived from non-renewable sources. By the time we get to that point, the country will have matured enough that other sources of taxation will become more important.

    "You should at least clarify that Malaysian Government Debt is sustainable for now, however should not have happened in that way. You are just giving an impression and idea to the readers that what the government is doing is perfectly no big issue. That's wrong!"

    To me - as far as the debt is concerned - it really isn't a big issue. I really don't understand why people seem to think our public debt level is a problem at all (hence why I wrote this FAQ). The market can't get enough government securities - yields have been continuously dropping for a full year now across all maturities.

    ReplyDelete
  43. "- May be you should come to JB-SG custom and take a look, a lot of staffs are doing nothing there but sitting and walking around, even some of them go to the shopping center next to custom during office hours."

    Sorry, how's this relevant to the topic at hand?

    *** What I wanted to tell is, Malaysia Government is spending too much on Civil Servants, and there is no single logical reason to have such a big group of people working in the government. Staffs working in SG-JB custom have always been doing nothing most of the time. This is obviously a waste of money, and thus Malaysia Government is not doing a minimal good job for maintaining the deficits and debt.

    *** From the very beginning, I have said that you just misled readers, to give an impression to the people that it is perfectly no problem with our country debt. Yes, from economic indicators and figures, you are right, but that's not the whole picture. We are running deficits and having high debt level, all because of the mismanagement, super-size of civil servants and corruptions. This is the problem of our government.


    "I really don't understand why people seem to think our public debt level is a problem at all"

    *** People are concerned about our country debt not only because of the ability of payment of debt, but also why we need to bear such a big amount of debt. We have ample of resources for export yet running a deficit budget.


    *** Another question that make me puzzled is that you compared the Debt-To-GDP ratio of Singapore with Malaysia. I believe you fully understand the rationale of this Debt-To-GDP ratio indicator, that it is meaningless to make such a comparison. So, personally, I feel you were just trying to explain away the problem.

    *** Well, essentially, you could just simply say: Malaysia Government will not go bankruptcy because they can always print money for paying debt or selling lands for revenue. There is no need to come out so many complex economic theories or explanation.

    *** Well, I think we should stop here because as I said, you are just using all the unrealistic economic instruments and very limited viewpoints to explain away the problems of Malaysia Federal government are facing. You yourself has admitted that you are just explaining thing from "macro-level", not "micro-level". That is the core problem of our discussion, "macro-level" and "micro-level" totally give different conclusion, and most crucially, it is the "micro-level" telling the true story.

    *** Last one , I always believe knowledgeable person should use his knowledge wisely and ethically.

    ReplyDelete
  44. "What I wanted to tell is, Malaysia Government is spending too much on Civil Servants, and there is no single logical reason to have such a big group of people working in the government. "

    And I can show you the stats that say otherwise. No doubt there are many in the government who don't work efficiently - but there are as many who do work hard (e.g. our health service). And the issue of debt and deficits should be considered separately from the use of funds.

    "From the very beginning, I have said that you just misled readers, to give an impression to the people that it is perfectly no problem with our country debt."

    There isn't a problem. My intent is not to mislead, but to educate. Too many view our debt level through simplistic and uninformed viewpoints that simply don't accord with theory, reality or the historical record.

    "People are concerned about our country debt not only because of the ability of payment of debt, but also why we need to bear such a big amount of debt."

    Because, honestly, it isn't big.

    "Another question that make me puzzled is that you compared the Debt-To-GDP ratio of Singapore with Malaysia."

    To show the nuances of my position - to show that debt can in fact be sustainable under certain conditions, which we mostly meet.

    "Well, essentially, you could just simply say: Malaysia Government will not go bankruptcy because they can always print money for paying debt or selling lands for revenue. There is no need to come out so many complex economic theories or explanation."

    Actually, yes there is. To not consider the limits of every proposition (such as money printing and debt financing) wouldn't be intellectually honest.

    "You yourself has admitted that you are just explaining thing from "macro-level", not "micro-level". That is the core problem of our discussion, "macro-level" and "micro-level" totally give different conclusion, and most crucially, it is the "micro-level" telling the true story."

    Actually both viewpoints are true - I am all for fighting waste or corruption, but in my judgement those are completely separate issues from the macro-stabilisation role of debts and deficits.

    "Last one , I always believe knowledgeable person should use his knowledge wisely and ethically."

    In other words, just because I mostly disagree with you, I must be stupid and unethical?

    But thank you for the debate anyway.

    ReplyDelete
  45. Please dont misunderstood. I put up my comments all because I wanted to tell the actual fact and the full picture, not to show my disagreement. Just like corruption, it is not the matter of small or big amount, it is the question of ethnic, responsibility, reason, and accountability. Same for our debt, not that anybody could explain that it is still at healthy level and reasonable level via any economic methods, it is perfectly no problem or question. It concerns about the interest, survive, and future of the citizens as well as the country. No doubt, a large amonut of our money has been wasted on unnecessary use, corruption, and big group of unproductive staffs(health service is not much different, public no confidence to them except the service is affordable, and our Sultan and PM go to Singapore or Australia for medical treatment). No single financial or economic instruments could explain away this fact. The last statement is always my believe, nothing to do with anybody.

    ReplyDelete
  46. Kawan anon,
    Doubtful anyone disagrees w/ the ills and inefficiencies you have mentioned or that if stamped out, the savings might negate the need to run a deficit to attain a similar level of output/productivity/investment.

    But the point of this FAQ is not to highlight those ills. It is a FAQ on Debt & Deficits as a tool. The out-take from it is that to stigmatize debt and running deficits as "wrong" is for all good intents... misguided.

    We need people to be passionate about righting wrongs. Just be careful not to misdirect that righteous anger.

    ReplyDelete
  47. @METALRAGE Agree thoroughly.

    Reducing public debt/deficit is not a guarantee panacea to economic woes.

    If applied wrongly, it will could cause the GDP to shrink at a faster rate than the initial reduction in deficit. Making the the debt to GDP ratio to soar thereby making debt repayment more difficult.

    ReplyDelete
  48. jesus this is like explaining the reason to build a dam to an environmentalist
    or trying to ask the Amish to drive a car instead of traveling on a horse back

    well, if big people getting treated here in malaysia is somehow be taken as a measure of public confidence to our health system, i can immediately name a few. one of them even managed to do heart related surgeries here TWICE. at the hands of malaysian trained surgeons.

    this is going political,dont u think so? jezzz. why everything has something to do with politics?

    ReplyDelete
  49. hi hishamh,

    im quite interested to know why you mentioned that singapore gic money belongs to mas and the troublesome process to use the reserves. as far as i know, it is true that sg gov can easily draw the reserve after president approved.

    ReplyDelete
  50. @anonymous 3.37

    Two problems with using international reserves in a domestic context (and this goes for just about everybody, not just Singapore):

    1. International reserves are foreign currencies and not legal tender;
    2. The intermediate target of monetary policy, which in the case of Singapore is the path and slope of exchange rate appreciation.

    Since US dollars or Japanese Yen are not legal tender in Singapore, to use international reserves in the domestic economy (for instance by the government), those reserves must first be sold in exchange for SGD. That does two things - reduces the supply of SGD in private hands, and puts upward pressure on the SGD exchange rate. In the Singapore context, this is equivalent to a monetary tightening, reducing asset market prices and raising benchmark and market interest rates, eventually leading to a reduction in economic activity.

    If the exchange rate appreciation approaches the upper intervention band, MAS will intervene in the forex markets buying foreign currencies in exchange for newly created SGD, which leaves you right back where you started.

    The only exception to this would be if you use reserves externally - for example, settlement of external debts. But since Singapore's public external debt is precisely zero, there's not much point.

    The process in Malaysia is slightly different because BNM uses an interest rate target instead of an exchange rate target, but the end result is pretty much the same:

    - international reserves sold into the domestic system in exchange for Ringgit;
    - this reduces Ringgit money supply, and puts upward pressure on interbank rates and exchange rates;
    - to maintain the OPR target rate, BNM has to provide fresh liquidity by buying up BNM bills with new money.

    Again, status quo ante. The only way for governments to utilise foreign reserves domestically is to either accept monetary tightening over and above what the economy requires (in effect displacing private financial resources by public financial resources) or to print money.

    For some strange reason, people seem to object to both alternatives.

    ReplyDelete
  51. hi hishamh,

    i thought the main purpose for sg building up the huge reserves, is to tackle any crisis. According to what you explained, seem like the sg reserves have very little help in time of crisis. If sg is in difficult time, they could simply draw, say 50billion, from the reserves, will they have to go through the troubles you mentioned till causing the appreciation of sg dollars and hurting the export competitiveness?

    ReplyDelete
  52. In the Singaporean context, there's two reasons for reserve accumulation - first is containing the appreciation of the currency, inherent in a fast growing high income economy.

    But the second is indeed to manage crises. But international reserves are primarily for forex liquidity and balance of payment crises, not for domestic crises.

    The first line of defense is foreign currency assets within the banking system. If capital and trade outflows exceed the available forex resources within banks, this puts downwards pressure on the exchange rate, which will lead MAS to sell reserves to meet forex demand.

    This function used to be more important when exchange rates were fixed and reserve gains/losses was non-discretionary, less so now when exchange rates are floating.

    International reserves are insurance, not savings.

    ReplyDelete
  53. I find anonymous attemot to turn hishamh into a political bogeyman failed miserably and make him look like a child.

    Hishamh, i have tried sharing your FAQ with many 'Malaysia will be bankrupt' chicken littles and you will be horrified what they call your blog...in a similar tone like anonymous' character assassination tactics but in the end these people are misleading their own silly selves.

    just to drop that I follow your blog faithfully and your blog also led me to read other wonderful economic blogs like mad druid and regional blogs in europe and US.

    ReplyDelete
  54. interesting article. spent me almost an hour reading. so would be great that hishamh elaborates a bit why our minister raised the alarm that malaysia is going into bankruptcy if we don't ease the subsidies and debt will bloat to crisis level in 2019. is it that our minister just finding an excuse for cutting subsidies?

    ReplyDelete
  55. Idris jala is an accountant..not an economist..if he is fiancne minister he will be auctioning national assets to keep the accounts book bloated while people go jobless and starving....that is the problem why he made thatnkind of chicken little statement ...he spewed rubbish like all PEMANDU staff and the many good stuff have alays been copied from the EPU

    ReplyDelete
  56. Hey guys settle down, I don't think anonymous was being spiteful or deliberately provocative. It's an honest disagreement, and I'll always welcome critical comments on this blog, as long as it doesn't descend into trolling.

    @anonymous 09.01

    Yes, it's an excuse. The problem is that the real reasons, which have more to do with economic efficiency, are a lot harder to sell to the public, especially since the public has a vested interest in maintaining subsidies. In retrospect, PEMANDU should have taken a different tack, but I guess that's what happens when you have management consultants in the mix.

    ReplyDelete
    Replies
    1. Now you should have understood why it is harder to sell mismanagement of micro-economy to public, comparing to soaring debt level.

      Delete
  57. given that gov. has no saving and accum. debt, if any sudden, deep or long eco downtime, all Malaysians will sure suffer since all stats here are either current or historical, cannot predict the future. or debt may shhot up faster than expected if gov to give stimulus package. so i think we should not too comfort w whatever presented here.

    ReplyDelete
  58. @anonymous 10.09

    A government is not a household - the two situations are not the same. For maximum social welfare, they must usually be symmetrically opposite i.e. an increase in household or corporate savings must be met with an equal and opposite government dissaving.

    The only clear cut situation where a government should save is when both private sector and households are not saving, under conditions of autarky. If both are in fact increasing saving, a government that also saves means the economy must necessarily be operating below capacity i.e. unemployment must increase.

    Under an open economy, whether a government should save or not depends again on the full employment level, though the situation is more complicated (see discussion in Q3 in the post above).

    ReplyDelete
  59. that's part of the function of gov, in economy. but that doesn't explain our debt will not accelerate to worse level if hit by eco problem bcos revenue drops borrowing up for stimulus.

    ReplyDelete
  60. Isn't that precisely the point? Whether debt increases or not (and the government saves or not) in this context is irrelevant. As long as debt remains at sustainable levels (and there's no reason to think it won't), then we'll be fine.

    ReplyDelete
  61. now i understand the core reason why the outbreak of debt crisis burning in PIIGS, most economists and financial guys think alike.

    ReplyDelete
  62. public debt - there's no reason to think it won't be sustainable!

    ReplyDelete
  63. it seems that some economists always have reasons to explain "it is sustainable" and "why it failed to be sustainable" before and after crisis burst.

    ReplyDelete
  64. ya... agreed ... Greece and Itally bankruptcy problem just suddenly exploded without much prior signals. How many economists and bonds investors in the world predicted correctly? US sub prime and housing also. people like to paint good picture without preparing for rainny days. i think it is good also to let public feel that Malaysia is going to bankruptcy as to push gov to do prudent management.

    ReplyDelete
  65. Many Malaysians smart alecs also predicted Malaysia will be bankrupt for as along as I remember when roaming the internet i the last 10 years...not to mention Malaysian will become maids..invaded by USA .that didnt happen right...these are all speculations based on gobbledegook...

    We need some study on Greece and Italy to comparenwith Malaysia's economic fundamentalns beopfore we can make comparisons...and I am sure such data will resurface soon and many economicsts to dissect the information..

    mowadays thebare many blogs that discuss thee economic condition in their respective countries just like hishamh and bloggers jn his blog rolll.

    A good example is this, sort of a hishamh for Spain which could be a good study as Spain is a PIIG country,
    http://spaineconomy.blogspot.com/

    but what we generally see, kost economic problems are precipotated by property bubbles..example, Japan,US and even Spain..not sure about Greece but probably thensame case.

    ReplyDelete
  66. no doubt that malaysia has been suffering slow progress or no progress for last 10-15 years, in mostly all areas, economy, social, education, etc. it is hard to compare malaysia with other well-developed countries like US, Japan or even Spain as we rely very much on natural resources. without rich natural resources, malaysia would be more or less like somalia. becoming maids ... not that serious, but a lot of talents and high-income group have been leaving the country. sorry, the discussion has been derailed.

    ReplyDelete
  67. At both anonymous,

    With the exception of Ireland, the PIIGS have been economic basketcases for years now. Actually, with the exception of some of the smaller countries (e.g. Finland) and Germany, most of Europe has been in poor economic shape.

    Greece and Italy already had preexisting debt loads as percentage of GDP exceeding 100% from as long as nearly 20 years ago, Portugal and Spain in excess of 60%. Spain and Ireland had big credit booms leading to a housing bubble - prices rose even faster (and have fallen further) than the US.

    All of them to a lesser or greater extent had social safety nets - so not only did they have to deal with rescuing wobbly banking systems and falling tax revenue when the crisis hit, they also all had to increase spending to cover unemployment and pension benefits.

    In Malaysia the debt to GDP ratio has risen about 13 percentage points since the crisis; by comparison, Italy has gone up about the same, Spain's is up about 30 points, Portugal 35 points, Ireland 65 points, and Greece 55 points. We can take another recession, they can't.

    Every single one of the PIIGS was running a fiscal deficit together with a current account deficit (violating the limits I was talking about under Q2 and Q3 in the blog post), implying not only public dissaving but also private dissaving - big no-no.

    All of them have to struggle under the constraints of a monetary union over which they have no control over the supply of money or interest rates.

    Every single one of these countries have governments spending in excess of 40% of GDP - Malaysia averages a little over 25%.

    When I look at these countries, I see Malaysia in 1995-1998 - trade and current account deficits, a housing and investment bubble, a runaway financial system, and a government in denial. But we've learned our lesson, and we had the benefit of being able to manage our own monetary conditions and our exchange rate.

    Those poor devils don't.

    No, right now, we're nothing like them. None of the risk factors are present, except a slightly bubbly housing market. The only macro risk factor that looks potentially dangerous isn't public debt, it's household debt (corporate balance sheets are in very good shape, as are our banks). and the main risk factor here is not systemically important banks, but non-banks which wouldn't have implications for the broader economy.

    So yes right now, I'm not worried at all about public finances. We can take another recession or two without too much problems, as unlikely as that is.

    ReplyDelete
  68. @anonymous 7.33

    Yes, there are much more important problems we need to address rather than worrying about debt.

    ReplyDelete
  69. A large part of Greece public debt are owed to German creditors. While French banks are exposed to Italy's debt. Swedish creditors to the Baltics debt, Austrian banks to Hungary debt, Brits to Spain debt and Irish banks like AIB.

    So I would not necessary put Malaysia public debt in the same category. Most of the money owed, we owe it to ourselves.

    That said we need to be monitor foreign debt trend also.

    ReplyDelete
  70. so,who is actually got the benefit from this debt crisis?

    ReplyDelete
  71. the FAQ is very informative and serves to soothe public's contention on our high debt levels in relative to GDP...if the FAQs are applied to PIIGS' economies, the EZ won't be in debt crisis as of now, IMHO

    ReplyDelete
  72. Well written article there hishamh. Fair assessment on government debt. I'm neither BN/PR supporter, I just couldn't comprehend how naive the leaders and supporters of both parties on economic issue. Neither has strong economic strategies.

    ReplyDelete
  73. Thanks.

    My boss and I have half-jokingly talked about doing basic econs seminars for ministers, MPs, and civil servants. Some of them need help.

    ReplyDelete
  74. I wouldn't worry much on the size of our civil service at the moment. It's very essential to keep the unemployment low, the distribution wealth should be spread out. Reducing the civil service for the sake of reducing the operational budget would be disastrous measure. Anyway, can't wait to see your opinions on civil service issue.

    ReplyDelete
  75. I think the problem is less the size of the civil service then its effectiveness. Teachers form one third of the civil service, and given present class sizes, I don't think there's an argument against having that many. But...are they effective in providing the education our children need? That's a different question altogether.

    ReplyDelete
  76. Excellent primer on govt debt hishamh! I'm new to your blog, but am enjoying your takes on economic issues. Also appreciate your refrain from politicizing economic data. Often times, i find that most people are too restricted by their own ideologies to be objective about anything.

    ReplyDelete
  77. @Ladybug,

    Welcome to the blog. Thanks for the kind words

    ReplyDelete
  78. Nice post. And so to the argument so far.

    Another economist i followed once said that economist's job is to explain what and how, not good and wrong, I believe Hisham has adhered to the rule so far, and others shouldnt required him to go beyond the boundary.

    Just another thought on EPF and Government Debt. From what i believe, the creation of EPF, and the raising of his fund, is not from voluntary market's action but government mandatory policy. Ie, cost of credit go low not because there is not enough government bond for the market to invest in, but the EPF policy make the market flood with liquidity.

    Giving the inflation figure in malaysia, that the return on government bond is less than satisfactory, I doubt the way of saving in EPF, using EPF to fund government debt, would be an efficient way in distributing resource and spread the wealth around in Malaysia.

    Inflation occur when the supply of money exceed the demand for money.
    As long as government is not monetizing the debit, when government borrows money from private sector, the amount of money available to spend (by the private market) will decrease.
    hence, government borrowing in this case, is just transfering spending from private to the public, and shouldnt cause inflation.

    The real source of inflation, i believe, was from the trade surplus that we have. We produce goods to be export, but the ringgit created, when foreigner exchanged Dollar with BNM, will stay in Malaysia. Thus less goods circulated for given amount of money supply.

    ReplyDelete
  79. Inefficiency of managing micro-economies is obvious, and I can see on one here deny it. Our debt level can be worse if we take out the windfall natural resources such as petroleum and gas. Government is now spending on rakyat's behalf, which is our hard-earned savings in EPF.

    Continuing excessive borrowings from EPF will one day drain up our epf through corruption and high inefinefficiency. Coupled with depleting natural resources, we will see soaring of external debt sreal soon...

    On the other hand, good management of resources will see rakyat benefit the most, such as increasing in development in human resources through high quality training and education, productive investment and subsidies to the poor and nneedy.

    ReplyDelete
  80. @J

    With respect to your last para, that would only be true under a fixed exchange rate regime. Under a floating rate regime as we have now, it's up to BNM discretion as to how much pass through to allow. In practice, given an interest rate target, the pass through into the domestic money supply should be zero.

    @Peter

    Depends what you mean by excessive. EPF holdings of government debt is less than 20% of total government debt. Holdings of government securities as a percentage of EPF managed assets is only slightly bigger - in fact far, far below the legal requirement of 70% under the EPF Act.

    ReplyDelete
  81. Hey Hishamh,

    I find that your article is well written and it has added well into my knowledge with regards to the issue on public/national debt. What you have explained in the article does have a strong sense.

    During one of my discussion with a few friends, he raised an interesting fact: Malaysia as an oil exporting country has a high level of public debt ratio. I did some read up that found out Petronas contributes at least 40% of our federal budget. would this be a concerning issue to all Malaysians? wouldn't it be wise that our government begin some austerity measure ?

    ReplyDelete
  82. Hi Ian,

    You can find the latest ratio with respect to Petronas here.

    As to the question of whether the government should implement austerity measures, in a sense it already is - expenditure growth over the past four years has been much slower than the previous four. The big issue is subsidies, which contributes about 2/3rds to the current deficit. But cutting subsidies is politically difficult.

    ReplyDelete
    Replies
    1. Sorry, the link doesn't work. Try here:

      http://econsmalaysia.blogspot.com/2012/06/1q-2012-federal-government-budget.html

      Delete
  83. Salam Hishamh,

    Excellent blog you're running.I personally have lost faith in the paper money system as it creates a lot of instability in the financial world.Too much manipulation and speculation which destroys the ordinary people who just want to create wealth.The credit crisis of 2008 and the recent LIBOR scandal have added to my scepticism. Since USD installation as world's reserve currency, we have seen countless wars in the last 100 years, more than the past 400 years, excluding the unseen war.

    The world is depending so much in the USD, other countries' wealth such ours which are honestly playing the field are being cornered. As USD becoming weaker and weaker, commodities & energy prices start to rise, reducing the real income we have generated. Every corner in the world is feeling the pinch. Is it fair that the whole world economy is being determined by a corrupted body called US Federal Reserve? I think the majority of the people on this planet is sick and tired of financial crisis. If we have a more stable system, I cannot imagine how much wealth can the world produce.

    So I'm moving away from Keynesian economics. I think that we should go back to 'money back by gold' system. The world does not have to go to war for gold resources, but can obtain them by international trades. China is importing gold like mad nowadays, they were net exporter a few years ago. I'm not sure why they are doing it, but I hope you can give some insights to it.

    Keep up the good work.Keep writing.

    ReplyDelete
  84. Fadzli,

    Thanks for the kind word, but I have to disabuse you of a few things.

    First, the USD as a reserve currency only began happening in a big way after WWII. In terms of global and regional conflicts, the period since has been the most peaceful and prosperous the world has known.

    Second, gold as a monetary system is likely to create a more stable financial system, but at the price of an unstable real economy. In the current system, shocks to the real economy are buffered by the financial system - it's a trade-off. Given that financial markets adjust considerably faster than the real economy, the latter option is more likely to be welfare enhancing, the occasional crisis notwithstanding.

    Third, the characteristics of gold imply that far from allowing people to create more wealth, it will instead severely limit the rate of real global growth. On a per capita basis, a gold based monetary system implies that no real increase in overall welfare is possible.

    Fourth, the historical record shows that gold reserve loss or accumulation is normally one way street - trade will not equilibriate country holdings of gold reserves.

    With respect to China (and to a lesser extent India), gold demand is really a function of higher incomes and local inflation rates i.e. their people don't trust their own currencies. Since both countries have strong capital controls, gold and real estate are their only "safe" investment options.

    ReplyDelete
  85. Hishamh,

    "Fourth, the historical record shows that gold reserve loss or accumulation is normally one way street - trade will not equilibriate country holdings of gold reserves."

    Interesting. Gold backers always touts physical aspect of precious metals helps prevent not only excessive trade deficit but also huge deficit for large scale wars. What is your take on the latter?

    ReplyDelete
  86. Hi. Good job on putting together an informative FAQ on the government debt situation. Just a question though - while government debt may be manageable based on what you have written, your explanation makes it seem like what the government has done is ideal and that there is no penalty for running up debts. Surely Malaysia does have to be prudent about debt otherwise it will just take on more and more debt as there is nothing to worry about?

    ReplyDelete
  87. @Oi Mun,

    The historical precedents show that countries faced with war do the sensible thing - they suspend gold convertibility. It's accepted practice, and is neither a point for or against the gold standard. I'm puzzled why gold bugs claim a reserve deficit can stop wars from happening though.

    @Invoker,

    As I wrote in the FAQ, there are clear limits to debt accumulation and deficits. I wouldn't say the government's fiscal record is ideal (e.g. deficit reduction could have been faster in 2006-2008, the 2009 stimulus was too little too late and wrongly funded), but given the time lags between planning and execution, I'm not going to be overly critical.

    Looking at debt metrics and ratios right now, I really don't see what the fuss is about. Malaysia's position is perfectly ok, and at the rate we are accumulating debt, it'll be about a century before we have to worry about anything.

    ReplyDelete
  88. Hi Hishamh,
    I had gone through your blog and it's very a good blog,but i do have a few question:
    I strongly agree with you that the government debt doesn't resemble household debt or anyway near it. Yes, there isn't any risk for our country now.They can certainly manage to sustain the debt,but with what cost?
    You did mention earlier,debt can be paid off in 2 channel,increase productivity or printing money (inflation).
    Our productivity increase stagnantly since 2010 to date and I can't see it able to overcome debt to GDP ratio (info i got based on the report by world bank).Hence, i guess the second option is the most ideal method.That said, our monies will depreciate right?

    You mention government borrow monies to expand the GDP growth rate,I agree with these point of view.But I still have doubt where the government invest the funds,It had been 6 years since 2008 (year we borrow the most) but I can't see a promising increase in our country GDP potential growth rate.The same question all of our countrymen ask, did the government invest 100% of the monies borrowed to increase the GDP potential or they just investing 60% out of 100%? and i do understand some investment need up to 10 years to bear the fruits but with all the information leak by the opposition in media these past few years really make me question the current government,like the 'cow' issue (the funds allocated for that project is debatable to begin with, do they need few million to raise a few cow? Yes,They planning to produce 'Kobe beef').Last question, the funds allocated for the said cow project, is it a funds they borrow?I guess I know the answer, yes it is and it does contribute to the debt against GDP we been discussing where i can certainly see they had borrow the money but i can't see any return from the cow project yet.

    ReplyDelete
  89. It's me again, sorry few more things to add, I notice 'they' also allocate alot of funds to MAS airline and Proton past few year, but why those company still undergo insolvency or reported lost end of financial years? Is that what we call potential GDP growth? but not in positive instead in negative.I heard their worker doesn't get much bonus. Just joking, I'm just a joker, don't mind me = )

    ReplyDelete
  90. @anon,

    Believe it or not, the interest cost has come down substantially. In the wake of the 1987 recession, debt service took up over 29% of the government's operating expenditure. In 2009, it was just 9.1%, and last year it was up only slightly to 9.7%.

    In terms of debt sustainability, it's sufficient to maintain the debt to GDP ratio below 60%. I'm not sure where you got the idea that GDP is stagnant - nominal GDP growth over the past two years is right on the average for the past decade. To start reducing the debt load, all the government has to do is ensure debt growth is below nominal GDP growth, which should start beginning this year.

    With respect to investment, no government spends all its money on "investment". Most outlays involve operational expenditure to cover provision of public goods and services (health, education, defense etc).

    In Malaysia, we segregate government expenditure into two categories - operational and development. On average, about 20%+ is always spent on development (or investment if you prefer).

    The rule that MoF follows is to always have a balanced budget on the operational side - this is funded purely by revenues. Only the development budget is funded by borrowing. NFC notwithstanding, most of this budget is actually used for useful things - rural roads, water treatment, schools, low-cost housing, poverty alleviation, micro-finance etc. Details are contained in each 5-year Malaysia Plan.

    MAS is and Proton was under Khazanah Nasional and not under the government directly, so funding for these comes from them not the government. There's no implication on the government budget.

    ReplyDelete
  91. Come on, genius writer! With you around, no economy will collapse. It must be some supra ivy league u where you got your education. Please, Obama needs you and certainly Najib too. My god, where have you been hiding all this while?! You can use favourable assumption et al to argue any point and you won't be wrong. Of course you are right about printing money. And of course you are right too about taxation.

    ReplyDelete
  92. @anon,

    And where did I say that nothing can go wrong? And what favourable assumptions are you referring to?

    And if I went to the Ivy League, given their idealogical predelictions, chances are I'd be arguing for austerity.

    ReplyDelete
  93. Well, check out this GDP for Capita from Google Public Data if Malaysia better or Singapore better running the country.

    http://www.google.ca/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:MYR&dl=en&hl=en&q=gdp#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:MYS:SGP:CHE:SWE:CAN:USA&ifdim=region&hl=en_US&dl=en&ind=false

    ReplyDelete
    Replies
    1. Thanks, nice one. Though to be fair, Dollar comparisons might be a little misleading.

      Delete
  94. hishamh,
    It is so heartening to have read your blog and I spend more than 1 hour trying to digest your points and arguement on the current debt issue. And what I got out was, I can't freaking explain this to my fellow 'little people' associate who keep thinking that BN is going to drive us off the cliff. No thanks to all the rubbish that opposition is churning out. And btw, i am pro-Najib but anti-BN. I think he should bloody fire a lot (if not all) of his surbodinates (i shall refrain from naming).

    Anyway, on your defence against the 'Anonymous', well done! I could tell from your language that you are a polished & sophisticated, learned man. As a Chinese saying goes "a gentleman should not fight with a pig in the sty". Leave the dirt to himself. Ironic I am using this on fellow chinese race (i suspect), hah!

    To fellow Anon, if you are still reading this. Please please grow up. We are all aware of all the corruptions and mis-management of the country. Mess-up education, cronyism, non-merit base policy which limits talents, etc etc. But that doesnt give u the right to rubbish a truly learned economist who knows his stuff. Just admit that you lose out in this one and move on.

    Kudos hishamh. Please keep up the good work. I shall promote your piece to my 'little people' circle of friends.

    Alex.

    ReplyDelete
  95. What a breath of Fresh air. Finally an economic perspective which makes economics look like less of the Dismal science it is in the West.

    Am writing from Latin America/Caribbean, where we have not been nearly as succesful as the Asian economies have been when it comes to development. I think one of the reasons why latin America has been such a failure in terms of development is because it has been captured by neoliberal crap economics which has no practucal solutions to development problems.

    These governments need to invite Asians from Taiwan, malaysia, South Korea, and Singapore to be their economic advisors, instead of relying on the IMF. As far as Westerners are concerned there are no solutions to economic woes except cutting back on government spending until market equilibrium is achieved---an idea which doesnt mean a damn thing in the real world.

    Look at their idea of success--Latvia--a country where austerity shrunk the economy by 25%, and where wages and essential government services like the police and education have been slashed drastically. Stupidity and madness are a dangerous combination.

    And by the way are you fmiliar with Michael Hudson;am about to buy an ebbok edition of his recent: The Bubble and Beyond. From what I have read by him so far his ideas sound quite similar to yours.

    I end with a quote by one of the earliest economic thinkers from a free sample edition of Hudson's new book:

    "Hume himself noted in his 1752 essay “Of Money”: In every kingdom, into which money begins to flow in greater abundance than formerly, everything takes a new face; labour and industry gain life; the merchant becomes more enterprising, the manufacturer more diligent and skillful, and even the farmer follows his plough with greater alacrity and attention."

    Hudson, Michael. THE BUBBLE AND BEYOND (Kindle Locations 840-842). ISLET. Kindle Edition.

    ReplyDelete
    Replies
    1. Nelson thanks for the kind words.

      The IMF is structured like a credit union - its main purpose is not economic development, but repayment of creditors, especially external creditors. Things are slowly changing on the governance side, with emerging economies gaining greater voice. But we're not quite there yet.

      Delete
  96. hishamh

    There is one thing you missed out on and it is the issue of hyperinflation bought about as a result of external debt denominated in a foreign currency being paid by resorting to the printing press.

    Almost every hyperinflation in history is a result of external debts denominated in foreign currency being paid through the printing press. The Weimar republic and more recently Zimbabwe are good examples.

    ReplyDelete
    Replies
    1. I think you're not quite correct with the causal link here Nelson, though you could argue that the end result is the same.

      You cannot in fact pay off external debts with the printing press, since by definition external debts are not denominated in your own currency.

      What can be done is to use existing foreign exchange reserves to pay off external debts, and if these prove insufficient, to buy foreign exchange through the banking system, with "printed money" if that proves necessary (causing an exogenous expansion of the money supply). The limit to this obviously is the willingness of private agents to trade foreign exchange for government money.

      That was certainly the case in the Weimar Republic, with Allied (read: French) insistence on payment in bullion.

      Zimbabwe's case is a little different as I think it was less about payment for external debt but rather complete monetisation of government spending, which breaks the limits on government debt that describe in point 2 and 3 in the blog post.

      But thanks for dropping by and keep the comments coming.

      Delete
  97. Hishamh

    very informative writing. I can understand all the points clearly... and fully agree with your FAQ.

    But

    Your FAQ .... the one obove... no layman/ordinary/damnititshardtodescribestupidpeoplewhilebeingverypolite person can understand it. I tried so hard to explain ... none of them can understand my explanation. They cant grasp the meaning of this FAQ.

    can you be more how do i say Graphics on your explaination? you know like an infographic style to explain about this debt thingy.

    GGK

    ReplyDelete
    Replies
    1. GGK,

      Something like what Refsa does?

      Not very easy, as a lot of these concepts don't translate well to graphical form. I have a few ideas in mind though so stay tuned.

      Delete
    2. Yes sort of like that..

      http://visual.ly/economy-infographics

      this too. Will stay tune.

      GGK

      Delete
  98. After reading your FAQ on this, somehow I get the idea of Malaysia economy. It's always good to read an article without any politic involvement.

    ReplyDelete
  99. It is acceptable by the people If the government debt arises from activities that hold benefit to the people and country such as education, medical, social benefits and so on. But as we know the government of the day are misusing the monies for themselves, such as inflated cost of project, unnecessary project, monopolies of busines for cronies and families.

    ReplyDelete
  100. excuse me, i am doing a research regarding to nation debt issue. may i know where do you get the data from 1970 until 2012? I can only get data that starts from 1990 onward.

    ReplyDelete
    Replies
    1. Hi ray. Try this link:

      http://www.bnm.gov.my/files/publication/msb/2012/11/xls/3.1.4.xls

      If you can open the file, looking at the margin on the left there's a "1" and "2" button (outline control). Click on the "2".

      Delete
    2. Hey thank you for that. I was unable to get this file in bnm after browsing the website for few hours. You make my day! Thank you!

      Delete
  101. I'm not sure who mentioned that the writer was misleading but to that person:u are acting stupidly here...

    No doubt, corruption hurts but can we expect no corruption for pkr to lead? I doubt so...

    1) we just need to look at *inflation*... inflation decrease your value of money so after the correction figure grown year by years

    2) our household income... the increased rate is an issue... are we the blue collar able to ccatch the inflation?

    3) domestic market strength will be the focus on Malaysia next 5 years because we can mever outperform regional countries export?

    4) yes we might look safe right now that there is no war... but foreign trade is like an economic war... Remember what soros did in 97-98...can't blame anyone but he was smart... but how come he was able to did that? Think further

    5) PKR economic policy plan has doubt because they really just able to mislead some youngsters that dream for freebies... like free education bla bla bla... I agreed for 12 but definitely not to the University because university earnings is part of the gdp... it will decrease the gdp... and everyone knows there's no free lunch after all...

    6) I really doubt pkr proposal because we really need a lot of tax income to fulfilled their political strategy

    7) spending on country defense is not wrong at all...

    Seems like there's really nothing perfect for us...

    :) good night

    ReplyDelete
  102. Congrats Hisham for a very informative blog. I learned a lot too from your FAQ but I wish some commentators here (going by id Anonymous) would refrain from bringing their political (anti govt) bias and rhethoric into this otherwise wonderful discussion. Stop being an idiot and being so naive. Does Anon think that PR especially DAP is not corrupt and not transparent? (Just THINK why is Guan Eng bulldozing his full of typo error mega 6 billion project without an EIA?) So much for his CAT.

    ReplyDelete
  103. Dear Hisham,

    Thank you very much for your sharing. : )

    I have two humble questions:

    1)What are the areas to be improved or which area you think the administration is doing badly?


    2) In your perspective, from current ranking to the world's best, what shall be done to come through the gap?

    Thanks in advance.
    SC

    ReplyDelete
    Replies
    1. @Anon 12.46,

      Those are really broad questions, and there are a lot of specifics that could be gotten into.

      My specialisation is macroeconomics, not micro, so in some of those areas, I'm probably as ignorant as everybody else. Any thoughts I might have must be balanced against the fact that experts in each field would have a better idea of the true situation and potential remedies than I would.

      Some of my thinking will be impossible to implement, some are being implemented but have yet to reveal substantial results, and at least one is unconstitutional:

      1. Education needs to be expanded and quality improved, from pre-school up to tertiary. The drop-out problem at all levels needs to be addressed.
      2. Income and wealth inequality - not being handled well at all. Tax policies need to be adjusted, and transfer policies put in place permanently. Transfers should also be ideally conditional.
      3. Agriculture strategy has to be rethought. Too much focus on helping smallholders.
      4. Land use laws and administration needs to be reformed.
      5. Civil service reform - less focus on seniority, more on performance.
      6. Civil service scheme of service - too much leeway for salary deduction and over-leveraging by government staff.
      7. Judicial independence needs to be strengthened. Contract enforcement is a known weakness in Malaysia.
      8. Subsidies need to go.
      9. R&D spending is way too low, and too focused on engineering and the sciences. Knowledge based R&D (e.g. supply chain management) has been left out.

      I'm sure I left a few out, but that's all I can think of off the top of my head.

      Delete
  104. Dear Hishamh,

    I really enjoyed reading your blog which is very informative and easy to understand. The reason I stumbled here was after my wife telling me (after hearing from her hardcore PKR friends) that Malaysia is going bankrupt with high public debt etc and after reading your blog I think I got some idea of the current economic situation.
    Just out of curiosity you did mentioned:

    They "stabilize the currency and economy problems" by...well, actually they didn't. The reason why Malaysia suffered worse was we had a finance minister committed to an IMF "solution", a central bank that criminally allowed a massive credit and property bubble to grow over a two year period, and a short sighted reliance on a pegged exchange rate. Singapore at that point had already long shifted to a managed float - flexible exchange rates reduce the vulnerability to external flows, as we've experienced in this past recession. If we had still been pegged to the Dollar, we'd have been up the proverbial creek without a paddle...

    My question is..Is he the same guy as the current opposition leader (the economic advisor for Pakatan Rakyat ) who is scaremongering the public on the country's economic situation ie public debt, bankruptcy etc.

    ReplyDelete
    Replies
    1. @anon 1.01pm

      The very one and the same...

      Delete
    2. You were convincingly apolitical until you blamed the dollar peg to Anwar...

      http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFGkt9MS.sjU

      Delete
    3. @anon 10.58

      You are referring to the post-crisis hard peg; I was referring to the pre-crisis soft peg.

      The Ringgit was de facto tied to the USD at a rate of approximately RM2.5 to RM2.7 to the USD since 1985 Soft peg regimes suffer from credibility problems.

      The historical record in emerging markets shows a soft peg fx regime, financial liberalisation, and open capital accounts = financial crises.

      1997-98 was the culmination of multiple policy mistakes and failures, both in fiscal and monetary policy. I hold both Anwar and Mahathir culpable in this. If speculators hadn't attacked the Ringgit, a crisis would have happened anyway, from excessive speculation in property and financial markets.

      Delete
  105. I do agree that deficit is not an indication on whether it's "good" or "bad". It is just reflect an underlying economic trend which maybe desirable or undesirable.

    If the deficit reflects an excess of imports over exports, it may be indicative of competitiveness problems, but because the current account deficit also implies an excess of investment over savings, it could equally be pointing to a highly productive, growing economy. If the deficit reflects low savings rather than high investment, it could be caused by reckless fiscal policy or a consumption binge.

    So the question is, with our growing deficit, is it really due to our high economic growth and high value investment? Guess is something to ponder.

    ReplyDelete
  106. agree with most of your points. It is nice to read that you have incorporated some of the MMT's ideas in your writings.

    One point to clarify:

    GIC singapore manages the fund from three sources

    a) Foreign reserve from MAS as you have mentioned
    b) CPF
    c) government reserve, which is accumulation of government surplus

    ReplyDelete
    Replies
    1. Thanks ET, that clarifies quite a bit.

      Delete
  107. I'm curious - does the money lent by the government to the public through Amanah Saham and similar get counted in the government debt statistics? And how much money is this, exactly?

    ReplyDelete
    Replies
    1. Mike,

      I'm not at all sure what you mean. While such schemes exist, they are also very small. The only one I know of amounts to less than RM5 billion.

      In addition, such loans involve utilisation of funds, not their sources. Since money is fungible, you can't directly tie source with use.

      Delete
  108. Hi, I'm a Singaporean. And I think the comments, favourable and otherwise, you made about our policies are very fair. I just chanced upon your blog and don't know what you do (maybe I'll find out from other posts) but I think your views on economics are enlightening, if not at least thought-provoking.

    I am also impressed at how you remained calm at what seemed at many times to be attacks and vitriolic. Knocking off now but will be back to read more of your blog.

    ReplyDelete
  109. hi hishamh,

    thanks for writing this blog; it is a refreshing change from conventional A lvl economics in Singapore which extols the virtue of the fiscal prudence of the Singapore economist. at the very least, it made me see things from a different POV.

    i was wondering, why is it not possible for malaysia to run a balanced budget? should we have a balanced budget sustained over a few years, do you think it'll have any impact on the strength of the ringgit?

    ReplyDelete
    Replies
    1. Hi Jon,

      Thanks for the kind words.

      You can find my thoughts on balanced budgets here.

      Delete
  110. also, could you publish a book with all the articles you have written so far? i think it'll be a success!

    ReplyDelete
  111. Hisham

    I just noted your comment dated "November 24, 2011 at 11:37 PM" and I think your simplistic argument about full employment and inflation is flawed:

    The U.S. economy was effectively fully employed during the housing boom of 2003-2007 as the easy money policy encouraged lending into the unproductive sector of the economy. Headline inflation was benign at that time but asset prices were escalating. Thus, it is not true that inflation and imbalances will only occur when an economy under monetary reflation reaches full employment.

    Asset reflationary policies distort the capital allocation process and like in Malaysia, capital was misallocated into unproductive property-related projects that may create temporary low-value added construction jobs, but when the global cyclical downturn happens as we are facing today, the government faces the dilemma of whether to reflate further with low interest policies or allow the economy to deflate itself via lower domestic growth (e.g. China, Singapore and more recently Indonesia).

    So the key point is not whether we are at full capacity but what kind of jobs and capacity have we created. The slow deterioration in human capital is not likely to reverse especially with a government insistent on promoting affirmative action policies based on the colour of one's skin. You may call it politics but is is the lowest kind of politics that choose to cut a nation's pie unfairly that has yet been fully baked.

    ReplyDelete
    Replies
    1. Hi Jeremiah,

      Refer to Q2 and Q3 in the actual blog post.

      1. In the comment, I was arguing solely from the point of view of a closed economy, since that was the context we were speaking in.

      However, there are actually two ways excess demand manifests itself. In a closed economy, demand above the capacity to supply bids up prices. In an open economy, inflation can also occur, but so too can a current account deficit i.e. demand is met by supply from excess capacity overseas. In the US case, the current account deteriorated below -5.0% of GDP, or more than double the average deficit during the Clinton administration.

      2. I don't think I would characterise the current situation in Malaysia as "asset reflationary", since real interest rates are positive and have been increasing, and money supply growth decelerating, since 2011.

      As for affirmative action, I'm prepping a post on that now.

      Delete
  112. Hi Hisham,

    Great writeup on Malaysian debt! I just had a query on where Bank Negara's FX reserves come from? I noticed that it has been increasing a lot from about RM54bio in Jan 1998 to RM436bio in Oct 2013. Does it increase based on demand for the MYR? i.e if foreigners keep buying MYR then BNM's USD reserves will increase.

    Thanks and keep it up!

    ReplyDelete
    Replies
    1. @anon 5.17

      The answer is not going to be very simple:

      1. From Sept 1998 to July 2005, Malaysia had a fixed exchange rate regime. Under this system, any changes in the overall balance of payments will be mirrored by an equal change in international reserves. This is automatic, due to how a fixed exchange rate system has to be managed.

      2. From July 2005 to the present, Malaysia operates a free float system. Under this FX regime, the level of reserves are entirely discretionary. BNM can increase or decrease it as they see fit. There are a number of reasons to accumulate international reserves:

      a. "Insurance" against sudden outflows of capital;
      b. Meeting FX needs of the banking system;
      c. Reducing private sector FX exposure risk (from loans denominated in foreign currencies). Reducing the supply of FX in the banking system reduces the ability to grant FX loans;
      d. Reducing inflation, since FX inflows boost the total domestic money supply

      However, holding international reserves entails an opportunity cost, and can be "expensive". The consensus is that Malaysia (along with most East Asian economies) has an excessive level of reserves.

      Delete
  113. Hi Hisham,

    Thanks for the response. I was looking at BNM's statement of assets and liabilities. Basically, the assets consist of reserves. On the liabilities side, an amount about 50% of reserves come from 'Deposits by Financial Institutions'. Would this have anything to do with the level of reserves? I am just looking at it from a balance sheet point of view.

    From the FX reserves side I can understand that the levels fluctuate now on how much BNM is in the market when the USDMYR becomes too volatile.

    Thanks and merry Xmas!

    ReplyDelete
    Replies
    1. @anon

      And a merry Xmas to you too!

      The composition of liabilities is mostly independent of the asset side, and mainly has to do with liquidity management (details here. Deposits of FIs tend to be due to liquidity management for the FIs themselves, and partly related to regulatory requirements. The other major components are BNM Bills (which is used by BNM to regulate liquidity in the interbank market), currency, and the Government's primary bank account.

      There's some inter-relationship between BNM's liquidity management with international reserves, as accumulation of reserves is almost always funded by new money, which increases the size of the balance sheet and adds liquidity into the interbank market.

      Most central banks would "sterilise" such FX intervention through open market operations to remove the resulting addition to the money supply, assuming FIs don't "remove" the new money themselves by allowing it to stay on BNM's balance sheet as RM deposits.

      But note here that the causality runs from reserves to bills and deposits, and not the other way around.

      Delete
  114. Thanks a lot Hisham. Been most helpful!

    ReplyDelete
  115. Hi Hisham,

    I want to clarify something. Is it true that 97% of our nation's money supply is in credit form (digital) and the remaining balance is in notes & coins ?

    Regards,
    Prakash

    ReplyDelete
  116. Thanks hishamh for the blog and willingnes to debate some of those comments written here.

    It had been a pleasure to read the comments here where people agree to disagree and countering each other with facts and figure. (Wish people in parliment do so as well)

    If more people can behave like they do here, this country will be a much greater place.

    ReplyDelete
  117. The way you shared your knowledge here is amazing!

    PIC Bonus 2014

    ReplyDelete