Tuesday, June 7, 2011

1Q 2011 Government Debt Update

Even as the government is moving towards balancing the budget, we’re still borrowing as much as ever. In fact, 1Q 2011 net Federal government borrowing hit a near record RM24.6 billion, just a hair under the RM24.7 billion net borrowing made in 2Q 2009 in the depths of the recession (RM billions):


Part of the reason for this was the runup in commodity prices in early 2008. Subsidies on essential items, but particularly on oil and gas, forced the government to borrow heavily to cover the shortfall. About half that borrowing was in 2-5 year MGS issues, which are now beginning to fall due – it’s been three years since then. It’s not in the numbers yet, but there was RM19.7 billion in redemptions for April 2011 alone, and 1Q borrowing is more a reflection of rolling over of that debt then fresh borrowing – the government’s cash balance at BNM has actually fallen.

Having said that, outstanding debt has jumped a bit:


…and so has the debt to GDP ratio:


…and on a per capita basis (with some revisions to the population data based on Census 2010):


Debt per capita has breached the RM15,000 level, an annual increase of about 12% in log terms. Inflation adjusted debt per capita doesn’t look quite so bad, but it does clearly emphasise the impact commodity prices and subsidies have had on Malaysian government debt accumulation:


Now before anybody starts to get too worried, I’m expecting a lot of these numbers to turn down a bit in 2Q…or at least not grow quite so fast. Net borrowing in this quarter has so far been pretty much close to zero, which means most of the ratios will almost certainly turn down or flatten in 2Q 2011. But it looks like rolling over of debt is going to be the story for MGS and GII issues from now going into next year.

Technical Notes:

Government debt data from the Bank Negara’s April 2011 Month Statistical Bulletin.


  1. Looks like our Federal Government's debt is going up linearly. It'll reach close to 1 trillion debt by 2020. Our country is actually developing through debt and this shows we are in tandem with 1st world countries out there; i.e US & EU. Doesn't look healthy at all. We are halfway towards a meltdown. Where should we turn to for rescue package? Do we just go bankrupt like Greece?

  2. Actually, if you go back far enough (say 1970), it looks like an exponential curve - but then most economic time series look like that.

    I wouldn't be too alarmist about the level of debt as it stands. Even assuming government debt reaches RM1 trillion by 2020, that should still be alright, as at that point nominal GDP should be in the region of RM2 trillion - the ratio will have about the same proportions as it has today.

    You might want to look at the latest update here.

  3. Debt is ok if ur using it for positive things that can grow the economy.Its bad if its used for non productive things n to top up leakages.

    So..where do we stand in this regard?

  4. It depends on your point of view. And since money is fungible, its hard to say which portion of the budget the deficit is financing.

    For example, spending on primary and secondary education takes a hefty chunk of the budget - schooling is now effectively free up to secondary level. Is this expenditure or investment? The budget treats it as spending, but Pemandu lumps it under subsidies.

    Budgeted subsidy spending for next year is expected to hit RM33 billion, and almost all of it is for consumption not investment.

  5. Corps/Industries enjoy 70% of the gas/electricity subsidy n probably as much on some other items.The products n services from these enterprises are not exclusively for local consumption.Of cos arguement myb on employment and taxes.
    Is this sustainable? i.e giving subsidies to industries (n taxbreaks) to create employment n whatever multiplier.

    Thus if subsidy is withdrawned there will be real risk of unemployment i.e saving 33bil will catalyse safety net cost of even higher proportions?

    We are indeed in Capital Trap.

  6. There are two essential problem with oil and gas subsidies in my thinking. First is that the negative externalities (pollution, smog, etc etc) are not captured in the market price - and subsidies make it even worse by encouraging their use.

    Second is that I think high prices of oil and gas are here to stay, and should go up even more as time goes by. That means the subsidies as they stand are unsustainable by any measure.

  7. it's sad, i think malaysia will be like the US soon


  9. Crude oil prices are a function of global economic growth, particularly in China and India (rising oil intensity) and reducing supply. Right now, growth is softening in both countries, but if it picks up again (as is likely to happen next year), so will oil prices.

    Reducing pump prices now would require the government to borrow more (or equivalently, cut spending on other services). Since oil prices are long term on the rise (you might want to read this), higher prices now applies the right pressure on consumers, businesses and alternative energy investors to make the necessary changes.

    You should know I'm in favour of taxing oil prices, not subsidising them.

  10. Last time I heard, they'd rigged up a 'mechanism' whereby prices will go up or down along with world market prices, my contention is what happened to this arrangement.
    Secondly, if you assume that 'subsidising' may cause some displacement of resources, do you reckon that taxing won't.

  11. The APM was suspended in May - the last adjustment was in December 2010, when the average crude oil price was approximately around the same level as it is now.

    For the second point, removing subsidies is not sufficient to remove distortions when we're talking about fuel. Given the negative externalities involved with fossil fuel consumption, taxing it is actually the optimal policy choice. It's not a question of whether we should, it's about how much.

  12. The APM was suspended in May, good grief, another bunch of abbreviation, whatever it was, it was so typically short lived or as they used to say another injun bites the dust, but for its death, can't you hear the sound of the wet japanese slippers in the corridors of putrajaya who done it in? And wow, up sprout a demon called fossil fuel and due to its Involvement with The Negative Externalities must be taxed, there's no other way about it, naughty, naughty fossil fuel, why o why did you get involve with the Negative Externalities. Regardless, millions be affected including this laptop scribe while the rich and the vulgar including the abbreviatorer who fly to Kazakhstan on a million ringgit junket and get away with it. So in getting back to the country mountain of debts, pray it is not the poor fossil fuel and its associates at all, it is those fossils wearing the wet Japanese slippers.

  13. The APM is short for Automatic Pricing Mechanism. The suspension meant that we didn't have to endure RM3.50 petrol these last 6 months. Would you have preferred that instead?