Wednesday, March 11, 2009

Malaysian Mini-Budget and National Debt Implications

I won't make any commentary on the mini-budget - there's been enough in the blogosphere today, both for and against. But here's some of the implications for the national debt that I covered yesterday. Only RM35 billion out of the RM60 billion total package will be direct spending, and a further RM7 billion will be PFIs or off-balance sheet expenditure which won't be financed by the government.

That leaves a net increase of RM28 billion additional borrowing required, on top of the original RM21.8 billion projected budget deficit plus last year's RM7 billion stimulus package. Assuming next year's (2010) deficit is around the same ballpark figure as this year's (I'm leaving aside for now potential revenue shortfalls), we're looking at an increase of the national debt to about RM365 billion by the end of 2010 (net of the new Savings Bond scheme), or just under 50% of 2008 nominal GDP. In per capita terms, the increase is approximately RM3,000 per person.

As far as the increase in gross debt is concerned, there's really no historical precedent. However, in terms of the debt to GDP ratio, the two year increase is on par with the increase in debt after the severe 1981 recession. Let's hope we don't follow the same trajectory this time - debt to GDP peaked at 69.7% in 1987.

Funding the borrowing shouldn't be too much of a problem, as there is enough excess liquidity in the banking system to take the whole lot. But at this scale we're now in crowding-out territory where considerably less funds will be available for the private sector, not to mention the impact on monetary policy. RM80 billion of MGS, even spread as it is over two years, is going to significantly contract the money supply - in fact, yields on MGS have already increased in anticipation (thanks satD!) - unless BNM monetizes the debt i.e. print money.

At this stage, I don't think we have much choice in either fiscal spending or quantitative easing to cushion the downturn, but interest rates and MGS yields will bear close watch from now on - yields on 5 year MGS has already jumped 20 basis points yesterday, and are over 100 basis points above January levels.


  1. there's always the option of direct placement with EPF for super long amortizing MGS's (non-tradable perhaps)that can match their cashflow and payout requirement...

    time to innovate now i think with products

  2. Hard to say whether EPF can actually shoulder very much, since their 2008 numbers aren't out yet. But my instinct tells me not much - EPF can probably take on something on the order of RM10b-20b, but anything more means selling down their existing holdings of equities (stock market comes down) and securities (yields go up) to come up with the cash. Their asset allocation up to 2007 is here:

  3. they can always bring back their foreign investment if condition permits(not sure if there's any?)they could make some handsome FX gains if they didn't lose that much money on the actual sec value

    how bout Petronas?

    Agree with you on the crowding out effect...and we also want the banks to lend going via direct PD market would not be a wise move

    Sakmongkol raise a simple interesting point since the budget is spread over 2 years why didn't it go into 2010 budget? how do they plan to account for this?

  4. EPF's foreign holdings are like 0.3% of total from what I can make out - not worth bothering about.

    Petronas is a possibility - but crowding out applies with Petronas funds as well. They do keep their money in the banking system after all. To have Petronas take up a private placement would require them taking cash out of the banking system, or reducing their holdings of securities.

    The only reason why I think it would make sense for the government to borrow from EPF or Petronas is if they can get cheaper rates than the market.

    As for putting the budget up front like this, we're dealing as much with the psychology of businesses and consumers as we are with the monetary aspects of the stimulus - confidence is as much an issue here.

    Also, look at it from a political economy perspective: better to put your cards on the table now and be seen to be 'decisive' and 'proactive', especially with the information we have now on what's going on in the global economy. If they wait until the 2010 budget to be tabled, the government would risk being pilloried as being unresponsive and slow, just like they are right now over the first stimulus pacakage. I mean, it's going to be another (long) six months before the 2010 budget is tabled.

    This budget certainly isn't doing any harm to Najib's political image either.