Friday, November 18, 2011

A FAQ On Malaysian Government Debt: Part III

[Since there’s a request for a simpler, more understandable version of the last two posts, this is the condensed version, with answers in two paragraphs or less. The full FAQ can be accessed here]

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. Households’ ability to service debt is limited by their ability to earn income. For the government, its income (taxation) is determined by itself. Moreover most governments reserve a monopoly on the issuance of money, which means it can always print money to pay its debts.

Lots of people have objections to printing money and they’re mostly correct, but there is a safe limit for this which is the ability of an economy to produce goods and services. Beyond that point is where printing money leads to inflation and eventually hyperinflation. Which leads to the next point.

Q2. Bigger and bigger amounts of government debt is inflationary

A. Debt itself is not inflationary – that depends on what the debt is used for. Inflation occurs when total demand in an economy – the sum of spending by households, companies and government – is greater than the amount of goods and services produced. The only way for government spending to be inflationary is when it causes total demand from all three sectors to exceed that limit.

If there is a gap between actual output and the potential output of an economy, extra government spending will not be inflationary, debt financed or not.

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. The goal of any macro-stabilisation mechanism is to achieve full employment (and this means not just labour but productive capacity) in an economy. If for some reason households and companies want to save more, to maintain an economy’s full employment status requires the third sector (government) to dis-save i.e. borrow and run a deficit. Only if private spending in an economy exceeds its productive capacity should a government start saving, i.e. run a budget surplus.

So it’s not just a binary decision of good times (save)/bad times (spend) for government expenditure.

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

A. 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.

In Malaysia, only about a fifth of government debt is held by foreigners, with the remainder being held by EPF, SOCSO, insurance funds, pension funds, banks and the like.

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

A. Government debt typically forms the benchmark for all bond issues in an economy – as governments essentially determine their own level of income, government securities are far safer than that of corporate or household debt. 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. 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. When the recession of 2008-2009 hit, the government instituted two fiscal stimulus packages with a face value of RM67 billion. But only a little over half of that constituted spending plans, and when all was said and done, Government expenditure in 2009 was only about RM1.4 billion higher than the original 2009 budget proposals sent to Parliament in 2008.

What happened was that, although the money for the stimulus packages was certainly spent, almost all of the funding for the extra spending didn’t come from extra borrowing but from cuts in other government programs and services. The increase in debt over the same period didn’t occur because of an increase in overall spending but 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, but wholly misleading. 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, and  since the recovery has come down to more sustainable levels. As long as debt growth is more or less in line with income growth, we should be fine.

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

A. 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. We’re not America.

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; has spent half of the last 200 years in a state of default; a debt to income ratio over 100% for the last twenty years; and owes three quarters of its debt to foreigners. Moreover, Greece is also part of the Eurozone and thus has no control over the issuance of its own money. Worse, the European Central Bank is legally bared from becoming a lender of last resort for the Eurozone governments. Greece is uncompetitive – it costs 40% more for a Greek worker to produce a unit of output compared to a German one.

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


  1. I liked you're unabridged version better but that's just me.

    Nice work.

  2. How about this site for a pseudo-peer reviewed comparison?

    FAQ for troglodytes?????

  3. Yes, that was one of the sites I actually had that site in mind when compiling this FAQ.

  4. Basically Hisham, you are not wrong in theory. However, look around you as to what is happening. The basic point is management of the economy. You can't just restructure and restructure, dig a hole to cover another, and print money just because domestic debt is flexible n x subject to foreign exchange risk. You forgot about the household debt and other obligations that the EPF and SOCSO contributors as well as the various insurance policy holders need to meet upon retirement. You also forgot about the guarantees that the Govt has issued. And what is controlled in Malaysia? Govt spending? Wastage and leakage? Corruption? Foreign exchange reserves when a large junk was dumped into the exchange market and RM21 bil vanished? Then again, don't forget on the Govt's dependance on oil, electronic and electrical goods and palm oil for revenue. Taxation as a source of revenue FYI has its limitation. The limitation is the people's revolt. So b4 BN kaput, better control national debt to manageable level albeit only 1/5 is external debt.

  5. @anon

    It's quite literally my job to look around. Exactly what am I forgetting?

    Household debt is a completely separate issue from government debt.

    Contingent liabilities (aka guarantees) aren't exactly unusual. As I recall, the government's current level is somewhere around 40% of total revenue, which is a more than acceptable level. Many banks have contingent liabilities far greater in proportion.

    Spending? Wastage and leakage? Corruption? Much of government spending is "sticky" and isn't subject to corruption or leakage, such as wages, pensions, debt service charges and subsidies. Most of the opportunity for loss lies with projects and procurement. Last year that amounted to around RM55 billion or so. Let's say 20% of that represents losses due to corruption and leakage, or around RM10 billion. But that's less than 5% of total expenditure, and only a quarter of last year's deficit. Not perfect or desirable, but not exactly the driving force behind debt increases either.

    With respect to forex reserves, BNM is a separate legal entity and reserves do NOT belong to the government. In any case, why bring up a scandal that's nearly 20 years old?

    Govt revenue is dependent on Petronas, but not necessarily oil. Natural gas is an increasingly important part of that revenue stream, and unlike oil, gas reserves are expected to last well into the next century. Local E&E is a dying industry, and palm oil is minisicule relative to the whole economy - both are important export earners, but not big contributors to government revenues.

    With respect to taxation, GST should come in after the election (increased tax yields with a reduction in the marginal rate), and we've proposed capital gains and estate taxes to the government. An increase in marginal tax rates is not really necessary. Even if it were, at what point would people "revolt"? Tax rates in some European countries exceed 40%, the US and UK once had tax rates in excess of 50%-60%.

    But what's the number one, discretionary portion of government expenditure? Subsidies. Get rid of inefficient, distortionary subsidies and tax petrol to its economically optimal price level (like almost everybody else in the world is doing now), and you'll halve the deficit without any increase in income tax rates, and still have enough left over to compensate low income families for the subsidy reduction.

  6. Household debt is different fr govt debt but a recognised limitation to e govt's capacity to borrow perpectually fr banks, insurance companies, social security schemes and pension funds. In any case, isn't household debts = household incomes equivalent to national income = national debt?

    The 20 yr-old forex reserves scandal is a reminder of e serious adverse effect that a repeat miscalculation of that sort could land on our exchange rate. With the slowdown in GDP growth of below 5% over e next 2 or 3 years and the unsettled world econ currency marauders and local sheepskin wolves could b already on e prowl for an opportunity to make a fast buck and send FDIs and native capital flying away yet again. What was that RM1 tri said to be fflown away fr Msia in the last 2 yrs or so?

    Why not a repeat? The same people are still around not in BNM but in e Govt or out of e Govt but yielding great influence on e political n economic affairs of the country.

    BNM is separate but not totally free of e Treasury. Any reference to e printing of money, a primary function of BNM, to pay for govt spendings is indicative of e supremacy of e Treasury over BNM, esp in time of econ distress.

    Exactly what have changed in our economy since e 1997/98 Asian Fin Crisis apart fr e big increase in govt debt? Have sources of income been diversified enough? Are FDIs back to normal? Has e private sector reinstated itself as the engine of growth? Have measures to cut wastage, leakage n corruption been implemented? Has rent-based economy been dismantled?

    The fact is e Govt has continued to depend on public expenditures to prop up e econ. That gives them e opportunity to reintroduce bil ringgit projects and procurements, frequently with deliberate cost/price escalatiion to meet political patronage n money politics esp with the looming GE13. Supposing an another currency attack occurred resulting in capital flight. A resource gap reemerges
    but unabled to be filled with domestic resources because of the slower speed of replenishments resulting fr e economic slowdown, lower corporate profits, higher unemployment, lower savings or even disinvestments or dissavings,
    higher level of non performing loans, etc. Cutting spendings may b limited due to their inflexibility. Efforts at cutting wastage, leakage and corruption would then be take time. All b'cos some pro establishment economists say the econ fundamentals of the country are strong.

    As to e plan to introduce new taxes, never compare Malaysia with developed countries. In developed countries despite high taxes, their generally higher n increasing income afford their people a higher take-home pay. Their narrower income gap means lesser people fall below e poverty line after pmt of taxes. Capital gains tax on e other hand would kill portfolio investments and e stock
    market. In addition, watch out for the effect of new taxes on consumption of goods with high demand elasticity and consumption in general, e basis of our domestic economy.

    Government may cut subsidies to cut the fiscal deficit but perhaps could first look into corruption, wastage and leakage. Last year it was not RM10 bil but more like RM25 bil with cost/price escalation of 50% and above common with govt projects and procurements. Coming back to cutting subsidies, get rid of subsidies to producers where they can no longer function as prod incentives. With regards to subsidies for consumers, redefine e target groups to ensure e elites never get to consume the same subsidised goods as the peasants and the proletariats.

    Lastly, Govt can print money to pay off govt spendings but take note even w'out 'too much money chasing too few goods', there is already cost-pushed inflation. What is likely to follow thereafter is excerbated inflation.

  7. Re: Household debt; no, household income and debt do not form the limit for government borrowing. Based on the latest data, total household income is just 50% of GDP; wages are just a third. More to the point, as I have repeatedly taken pains to point out, governments are not households.

    Re: capital outflows; half is approximately Malaysian corporate investment abroad, the other half tax evasion. Nothing to do with currency values.

    With respect to reserve loss happening again, how do you expect that to happen? The ERM was a bold but flawed experiment, as we are seeing again today with the troubles in the Eurozone. The difference now is that we're not dealing with separate national currencies, but a single one. Even in the event of the lagging countries leaving the monetary union, the rump Euro is likely to retain its value, because it reflects the underlying strength of the core countries (i.e Germany and France). In any case, BNM has as a matter of policy been diversifying its reserves holdings for over a decade.

    Re: printing money; to my knowledge, BNM has never done so in the technical sense of the term (i.e. direct financing of government borrowing).

    Re: change in the economy. Check the data. You're assuming that FDI pre-1997 was normal and that post crisis FDI levels are somehow lagging. FDI pre-crisis was driven by Japan's outsourcing of manufacturing, which is no longer a global factor as supply chains in the region have matured. Now the nexus is China.

    Re: diversification of income. Believe it or not, it's happened and is happening still. Before and just after the crisis, Malaysia was overly dependent on investment and trade in manufactures. The composition of trade has changed substantially since then.

    Re: government support of the economy. Again, check the data. Before 2000, government consumption contribution to growth was around 9.1%, after it was 19.1% - so far so good, as that fits into what people think has happened. But private consumption contribution also rose, from 43.5% to an average 69.7%, a much bigger increase and a bigger factor in the growth of the economy. So no, it would be false to state that government expenditures have had a prime role in driving growth over the last decade and that's true of both the demand side and the supply side.


  8. [cont]

    Re: comparing with developed countries. Again check the data. The US has a poverty rate in excess of 15%. In Europe it varies, but generally it's above 10%, largely due to structural unemployment. Even then, both here and abroad, it's rare for lower income earners to pay taxes. Your argument does not hold. In Malaysia, only the top 20% are eligible to pay taxes, and much less than that actually have to pay after taking into account deductions.

    Re: capital gains taxation. That would depend on the rate. Would 5% "kill" the stock market? Would 10%? The research on this area suggests that while there is an impact on investment, it's really minor at low marginal tax rates. RPGT (which is equivalent to CGT) has certainly never halted buying of properties, even when it was much higher than it is today.

    Re: the impact of GST. There has been really poor communication from the government about this. It will replace, not go on top of, sales and services taxes and at a much lower marginal rate. SST today stands at 15%, GST is likely to come in at between 4%-6%, while still yielding higher tax collection. Basic goods such as food will be zero-rated i.e. not taxed at all.

    Re: level of wastage. Frankly we're both guessing as to the rate of loss. Just bear in mind that what the AG reports are the out and out abuses of procurement, it shouldn't be taken as representative of the whole. I suspect when you average it out, the proportion isn't as big as people think. But that is just opinion, and we will have to agree to disagree.

    Re: subsidies. I agree that better targeting would be desirable, but as we found out with petrol pump prices, it's almost impossible to enforce at the point of sale. In any case, the distortionary incentives of subsidies remain even with targeted subsidies. Best policy option is to abolish subsidies and do countervailing cash transfers for lower income groups instead. I agree on abolishing producer subsidies as well - Petronas loses RM20+ billion every year from that source alone.

  9. 1. Househod income = total of incomes of individuals forming the household. National income = summation of incomes of all individuals, companies & govt in the nation. Individuals' incomes come fr companies'/govt. Vice versa cos' incomes come fr individuals/govt. But count only once. Govt income = taxes & duties, dividends, profits, interest, etc but these come from cos' or individuals'. Again no double counting. Total household income = total of all household incomes = total of incomes of all individuals forming the households either fr cos' or govt. In short, national income = total of incomes of all individuals in the nation = total of all households' incomes. So if total households' debts is 100% of tot of all households' incomes, isn't it also equal to national income? That is why in discussing govt debt, we need also to look at total household debt. I am a new learner in economics. Pardon me if I am wrong.

    2. Total household debt is a limitation to the govt capacity to borrow locally because:-

    (a) Contributors would eventually need their money in EPF, Socso& insurance policies to pay their debts. There would be a time gap for these monies to get back into the banking system. Therefore, govt cannot continue to ignore loan repayment to the bodies as it would affect the bodies' cash flow in meeting their contributors' requirements.

    (b) Banks that gave loans to the people are subject to non performing loans especially during an economic downturn. Their cash flow is adversely affected thus their ability to buy govt bonds, securities, etc. Their statutory reserves requirements too would decline in amount as they are calculated on a certain denominator that varies between good and bad times.

    3. Capital outflows: While they may not be e result of lack of confidence with RM, they can adversely affect e exchange rate especially during an economic downturn which would cause a decline in GDP, a higher fiscal deficit and may be a resource gap. It is worth noting that e Govt in Budget 2012 had assumed a GDP growth rate of 5 - 6 % whereas it was 4.7% for 1st Q 2012. The Govt has also not declared how much of their contingent liabilities in guarantees & support given to lenders in favour of GLCs, quasi govt bodies and state govts
    have now materialised.

    4. Reserve Loss: The matter for concern is the management & control of the forex reserves. If today the same people suddenly think these are idle cash and can be rolled to earn extra income for the country (or themselves?), we run the risk of reserve loss. The disclosure in e Scorpene case and e decision to settle out of court in the TR case are indicative of e strong influence some people out of e Govt still have on e monetary and fiscal policies & practices of e country. Despite GTP & ETP, there is enough willing 'partners' in e Govt.

    5. Printing Money: It is hard to prove Govt deliberate printing of money to pay off govt OPEX & debts 'coz it is privy to only a few people. However, looking at the big decline in the purchasing power of the ringgit in the last 15 years or so, there could be a certain amount of that done in the period not long after e Crisis. In fact, this was quite a popular rumor among e banking circle to which I once belonged for 20 yrs. Look also into BNM's credit creation policy during that period, which dictated banks' credit creation activities.

    (to be continued)

    1. In reply:

      1. Not a bad effort for an "amateur". What's missing from your conception is undistributed corporate profits. Companies pay wages and other costs (which is actually revenue for other companies), what remains is profit. You can actually come close to total national income by adding up corporate value-added plus wages. Out of those profits, some go to the government as taxes, while some are distributed to households as dividends. But the remainder is fairly substantial, and constitutes about 40%-45% national income. I wrote a short article about this here

      2(a) EPF has an excess of assets over contributors funds of around 40%. In any case, over-indebted households constitute just 15% of total household borrowings.

      (b) Bank holdings of government debt is less than RM40 billion, just 8% of the total. There's also plenty of capacity to take on more. Although the SRR is at 4%, the effective reserve ratio (stat + excess reserves) is over 16%. As at the end of March, there's over RM180 billion of banking system deposits sitting at BNM doing nothing at all, over and above the SRR.

      3(a). Given that that capital has been leaving the country at a rate of better than RM100 billion a year, yet the exchange rate has appreciated, do you really think the impact will be that great?

      (b) Since the government operates on a cash basis, and not on a accrual basis, all contingent liabilities actually called on will be part of the expenditure record each year. You might want to check the AG's report.

      4. I gather from this that you think that reserves are cash and held in a vault. In point of fact, nobody does this. All reserves are held in some form of securities in the currency they are denominated in. BNM handles this by itself, in Singapore for example all reserves are invested through the government-owned GIC. Holding cash is costly, not just in terms of storage and security, but because you lose out on inflation.

      5. "Printing money" has a very specific technical meaning in economics and finance. It's the direct purchase of government securities from the government by the central bank, not cash creation. The stock of cash in this country is less than 5% of the total money stock, which is about the average for most countries. This is different from what the US and the UK have done through QE, where purchases of government securities have occurred in the secondary market, not primary.

      Tracking money printing is actually a trivial exercise - all you have to do is watch the components of BNM's balance sheet. If at any point in time, holdings of government securities increases, you'll know they've been printing money. Same thing with currency notes (it's carried as a central bank liability). In a world where 95% of money is electronic (it used to be kept in ledgers, but the principle is the same), and where all accounts are double entry, there's not much you can hide. Not that anybody ever bothers. Even Zimbabwe didn't hide central bank financing of government.

    2. To add to the above, BNM actually publishes their balance sheet on a monthly basis, so its easy to check the changes. In the Monthly Statistical Bulletin, the monthly data goes back to 1998.

      Between the imposition of capital controls to the end of 1999, BNM's balance sheet doubled in size. Most of the increase was explained by accumulation of international reserves on the asset side more than matched by an increase in banking system reserves and excess reserves on the liabilities side. There was an increase of RM10 billion in currency over the same period, but that was the normal cash injection for the end of the year (mostly withdrawn in January 2000). If there was any government financing going on, it was so minor as to not matter.

      With respect to the purchasing power of the Ringgit, Malaysia's inflation record is on par with the US and only slightly worse than Europe. A little inflation is fine - you need it for growth (it reduces the demand for money). Zero inflation = zero growth, as Japan has found out. In any case, for much of the last decade BNM's main preoccupation has been to reduce the money supply, not increase it.

  10. (continuation)

    6. FDIs: Whatever is the reason for the decline in FDIs, fact remains they are not back to e pre Crisis level. The worry is with e Govt sticky OPEX; massive spendings on projects and procurements, many questionable as to necessity, costing and awarding process; and the anticipated economic slowdown in the next 2-3 years, the country could again be heading for a resource gap. The MRT itself is estimated to cost RM70 bil far in excess of the cost per km of e electric train that runs across China and the S'pore MRT.

    7. Income Diversification: At face value, e explanation given is acceptable but wouldn't it be more convincing if some new sources of national income are specified? To many they are still oil & gas, E&E goods, and palm oil. The contributions of MSIs and SMIs are not that material.

    8. Govt Support of the Economy: If what is meant by private consumption @ 69.7% is private sector consumption, marvellous. But isn't the major part of this is actually the individual consumers'? What is the local private sector total investment compared to Govt development expenditure? Without the data to support, believe it is the lower of the two. It is precisely for the fact that private consumption, mainly individual consumers', is the primary driving force behind growth that e Govt has to be careful with new taxes n e cutting of subsidies.

    9. Tax Incidence: Only e top 20% are liable to taxes may be right for income/ direct taxes. Unlikely, for indirect taxes like import duties, excise duties, SST and the incoming GST.

    10. Capital Gains Taxation: The prime motivator behind share investments by small investors this far is still capital gains as not many listed companies are generous in their individual dividend policy. Even a nominal CGT would drive small investors out. The timing is also not right. RPGT is different for as long as the gain realised is big enough to absorb the tax. Perhaps, increasing the RPGT would be a better option.

    11. GST: As to the Govt poor communication on this matter, it could b due to its non eagerness to implement it before GE13 for obvious reason. Moreover, that would keep their options open: still SST, only GST, or GST w SST if and as the country's financial situation necessitates. The people have yet to look at the GST scheme that e Govt wishes to implement after GE13 (if BN again emerged victors at the federal level). So one cannot assume whatsoever as regard the tax. The flip flop philosophy this far very apparent with the present leadership demands caution.

    12. Wastage & Leakage: Guessing yes, but get down to intelligent guessing. When universities are built at RM2 bil each as per KJ's tacit admission at the PTPTN debate; no answer is so far forthcoming as regard the RM237 bil said by 'the greatest leader' to be missing from Petronas at the time of a 'not-so-great leader'; PKFZ's development cost has bloated to RM12.5 bil from RM4.1 bil; and the MRT is estimated to cost RM70 bil, it is save to bet on the RM25 bil estimated figure if not much more. Not proper to agree to disagree on this. As you said it is practically your job to look around, suggest you look into this with a microscope. Perhaps, therein lies the solution to the fiscal deficit apart from the producer subsidies and inefficient consumer subsidies.

    Thanks to you for your tutelage and hope my writings are good enough s food for thought.

    1. 6. Knowing why actually matters. Pre-crisis FDI in Malaysia contributed to significant overcapacity in a number of industries, which indirectly led to the crisis. Even at this late date, the semiconductor industry in Malaysia is operating at 60% of capacity, well below the accepted normal level of 80%. Overcapacity means lower returns on capital, which means further investment in capacity will earn even less returns.

      A second factor is that the nature of FDI Malaysia is attracting has changed. As a high middle income country with an appreciating exchange rate and relatively mature consumer markets, FDI tends to be in services, which require less money than equivalent investments in manufacturing or in the primary sectors.

      In any case, I'm leery of attaching too much importance to FDI. It's does not necessarily signify investment in additional productive capacity. M&A for instance is classified as FDI, but in economic terms that's just a change in the ownership of assets, and not an increase in productive assets. Singapore's high FDI record is partially a reflection of the country's status as the regional financial hub, as well as HQ for large number of MNCs (retained profits are also classed as direct investment in the balance of payments).

      7. Off hand, going from memory, SME contribution is about 20% of GDP. In declining order of size, the important sectors are manufacturing (27%: of which E&E constitute about 40% of that), finance and insurance (17%), and wholesale and retail trade (16%). Everything else is less than 10% each. Agriculture and mining are about 7.5% each.

      8. Investment shares are fairly volatile, but the average for the last decade or so is about 50:50.

      9. Quite right, but if you look at patterns of expenditure the lower down the income scale you go, the more food and other basic necessities figure in. If food is zero rated, that's already a big plus.

      10. We're talking about marginal rates, not absolute taxes. If you make a RM100 gain off a RM1000 trade, a CGT of 15% means only RM15. If you make RM10000 profit, that's RM1500. I don't think your point holds. In any case, only the top 20% of income earners have any substantial financial assets at all. Most of the population will not be affected. The lack of a CGT means that long term investors (where most income is derived from dividends) are penalised in favour of day traders and speculators. And you're mostly wrong on the dividend policy of listed companies. Most GLCs now have a policy of 50% dividend payout of income. Half of EPF's and PNB's income from equity investment comes from dividends. In any case, retail investors constitute less than 20% of the turnover on Bursa. Institutional funds have dominated since 1998.

      11. Actually, what communication there is has been very explicit on this point - GST will replace SST.

    2. 12. Much of university construction cost is actually land acquisition - is that wastage or a deliberate design choice? With respect to Petronas, are you talking millions or billions, or just repeating rumours? Petronas' balance sheet size is only RM439b. A hole that big would be rather noticeable, and there's no sign of it in their annual accounts (which are publicly available). Petronas actually has the distinction of having a foreign debt rating better than the government i.e. it's financial management is considered more trustworthy. Also, if there was any serious hanky-panky in Petronas, I would've heard - one of my sisters is on the audit team, and another one used to report direct to the CEO. My father before he retired used to be part of the senior management team.

      PKFZ and MRT? Those are multi-year projects, not single year. Any cost increases there would reflect not just wastage but cost inflation, which most project managers somehow don't remember to account for, especially since with large projects cost increases are endogenous, not exogenous. Also remember, while PKFZ will have to be taken on the government's books (eventually), the MRT is technically under Prasarana, and their debt is a contingent liability, and not part of the government financing requirement. Cost savings there won't be reflected as a reduction in the deficit. Petronas is also classed as an NFPE, and not part of the government proper - their numbers are not consolidated with the government's either.

      My own personal experience with large tenders suggests cost savings from shifting to an open tender system would be relatively minor, especially when suppliers/contractors are specialised and few in number, unless you're willing to compromise on quality. The recently failed open tender for one of the MRT packages is a case in point - it only attracted one foreign bidder and no local ones.

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  12. But Hisham undistributed accumulated profits come fr current and past sales which in turn come fr individuals', government n other companies' purchases paid for with the individuals', e government and other companies' income. To count such profits in as part of national income for a particular yr would again constitute double counting.

    1. I think your confusing income with expenditure, and you're also leaving out savings. Second, you're also confusing stocks (accumulated profits) against flows (profit in a single year). Counting up profits doesn't constitute double counting, because it represents the value added for each company (revenue after paying for expenses). Other company earnings are subsumed under payments for factors of production, i.e. under expenses.

      What counts is final expenditure, i.e. expenditure by households (NOT other companies). Assume the government holds a balanced budget (taxation = government expenditure), which means we can essentially forget it. Aggregate all the companies into one. Company revenue then constitutes national income. Wages are paid to workers. The surplus is profit. Assume no corporate savings, which means all profits are distributed as dividends. That means household income=wages + dividends=national income=national expenditure.

      Now introduce savings. Households save and corporations save. That means household income drops by the amount of corporate saving. But both households and corporations don't just keep cash - money is always "invested". But investment in the economic sense is also expenditure, and constitute earnings for those companies producing investment goods, which still leads you back to the original conception above (wages + undistributed profits + dividends).

      national income = household expenditure + savings and corporate surplus = household expenditure + investment

      These are standard economic accounting identities. No double counting involved.

      You can try reading the manual if you like:

  13. Strongly disagree with ur comment that "open tenders" will not give lower prices.S'pore MRT tunnels open bids attract 20 of top global contractors and price variance between hi lo is 50%.Mind you..the best international contractors.

    Msia SBK tunnels with Swiss Cheese..only 5 PreQ n 2 DQ post tender.Surely thats not efficient mode of price discovery.

    Reason why most big guys doesn't want to bid for Msia Mega jobs is cos there are "preferred" parties.And it cost lots of money to do a good bid.

    1. I did not say that open tenders will not give lower prices, but rather the price difference won't be as much as people think.

      Two problems with big complex projects is that bids won't be identical, which means you cannot compare on the basis of price alone - we're not talking about the supply of a standardised product. Second is that greater project complexity exposes both project owner and contractor to operational uncertainty, which could lead to costly VOs.