Tuesday, June 12, 2012

1Q2012 Government Debt Update

With the fiscal deficit still with us, government debt continued to increase in 1Q2012 (RM millions):


Gross issuance reached RM24.7 billion, with redemptions totalling RM9.3 billion. As a result, net government debt increased by RM15.5 billion in 1Q2012, a marginal increase over 4Q2011, and total debt reached RM470.8 billion.

With the rebasing of GDP to 2005 prices, there’s been some changes to the debt to GDP ratio (ratio of government debt to nominal GDP):


Last year’s total debt to GDP ratio was reduced from 53.6% to 51.8%, with a marginal increase to 52.6% in 1Q2012 (debt denominated over a rolling summation of nominal GDP). While the number’s up, the ratio’s actually a little lower than last year’s 1Q number, which came in at 52.7% based on the rebased GDP figures.

To underscore the improvement, debt growth has fallen off since 2009 (log annual and quarterly changes):


For there to be an improvement in the debt to GDP ratio, you need to see debt growth below nominal GDP growth. It’s almost there, but not quite (log annual changes):


Part of that is slowing nominal growth over 1Q2012; breaking it down further, you could also point to lower commodity prices (which impacts inflation, terms of trade and the GDP deflator). I expect to see some relief in 2Q2012, as there should be a fillip from higher tax revenue, which should reduce the deficit and required debt issuance.

But if the seasonal pattern holds, we are likely to see further deterioration in 3Q and 4Q 2012 as government departments start finishing off their spending allocations in the second half of the year. Having said that, any movement in the debt to GDP ratio should be relatively minor.

More to the point, I’d consider anything under 8% debt growth to be “safe” irrespective of volatility in nominal GDP growth, as that represents the trend nominal growth for the Malaysian economy. Again, we’re almost, but not quite, there.

In any case, I think the PM’s commitment in capping the debt to GDP ratio at 55% is a safe bet…for this year anyway.

One point of vulnerability is that foreign holdings of government debt have continued to climb (ratio to total debt; average for period):


Foreign demand has helped cap the yield that investors demand for government borrowing. But a sudden stop pullout of foreign portfolio capital also risks yields spiking up, so foreign portfolio investment is a bit of a double edged sword.

On the other hand, I’d evaluate the risk of high interest rate volatility to be fairly low – even with government risk premiums rising due to the Euro debt crisis, foreign demand for MGS and GII has held steady through April and May, and improved for June.

On a per capita basis, using rough estimates of population growth, the current debt to capita figure currently stands near RM16,300. Inflation adjusted, the number stands at about RM12,600:


Technical Notes:

Federal Government debt data from the April 2012 Monthly Statistical Bulletin published by Bank Negara Malaysia

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