Monday, April 8, 2013

Time For Independent Fiscal Assessment

I don’t see any of the papers or online media picking this up yet (maybe tomorrow?), so I will (quoted in full):

Academics call upon Barisan and Pakatan to declare policy positions on national finance and debt

Recent financial crises have visited economic calamity upon ordinary citizens in the countries of the East and West alike. Experience tells us that there can be no complacency about a nation's financial state.

Concerns voiced in various reports and the media call for special attention to Malaysia's finances and their management. These concerns are:

  • A record-breaking capital flight out of Malaysia. Financial watchdog Global Financial Integrity (GFI) reported that a total of RM880 billion of funds were illegally transferred out of the country between 2001 and 2010.
  • A sharply rising trend in government debt. This debt almost doubled from RM274 billion at the beginning of 2008 to RM502 billion at the end of 2012. International Monetary Fund (IMF) statistics expect it to grow by RM277 billion to RM779 billion in 2017.
  • Incomplete information about the Malaysian government's full exposure to debt. The official figures for government debt exclude debts that are called contingent liabilities. These include off-balance-sheet borrowings and the debts of banks, government-linked companies and other private-sector enterprises that the government has guaranteed to pay off in the event that these entities default. One estimate of these hidden debts in 2011 placed it at RM117 billion.
  • Rapid growth of the share of total government debt owed to foreign holders. This has soared from 0.1% in 2003 to 6.7% in 2006, 11.8% in 2009, and 26.8% in 2012. Although 97% of this debt remains Ringgit-denominated, this trend is a cause for concern, and compromises future policy autonomy as well as heightens exposure to capital flight in the event of financial panic.
  • Possible massive losses by 1Malaysia Development Bhd. Recent revelations indicate that this strategic company, wholly owned by the government of Malaysia and tasked to lead in market driven initiatives to help transform the Malaysian economy, may have incurred losses of as much as RM4 billion through mispricing of its bond issue.
  • Inconsistencies in Bank Negara reports regarding Malaysia's total debt. While one portion of Bank Negara's statistics tallies with the official total debt of RM695.4 billion for 2011 and RM737.6 billion for 2012, elsewhere in its reports it is implied that Malaysia's total debt is more than twice larger, at about RM2.025 trillion for 2011 and RM1.743 trillion for 2012. The latter would ordinarily be considered crisis-level figures.
  • Fears of an imminent credit bubble in Malaysia and other East Asian countries. Households in Malaysia have amassed a consumer debt in excess of RM600 billion according to an IMF country report. Various financial analyses claim that Malaysia, Thailand, Singapore and Taiwan are at risk of a household debt crisis.
  • The lack of sustainability of Malaysia's GDP growth. Rapid liquidations of natural capital such as petroleum and forests to finance deficit spending or to fulfill debt obligations have adverse economic and ecological implications for present and future generations. Moreover, unproductive investments and expenditures are recorded as positive GDP in the national accounts even if they yield returns that do not cover borrowing costs.
  • A lack of discipline in adhering to Malaysia's statutory ceiling for debt. The ceiling has been raised on the debt limit from 40% of GDP set in 2003 to 45% in 2008 and subsequently to the present 55% in 2009.

The above details signal an alarming trend.

Decisive action is required to safeguard Malaysia's development potential and forestall a crisis situation such as in Greece.

In line with public interest, therefore, and as a first step towards democratising the management of government finances, we, the undersigned, call upon Barisan Nasional and Pakatan Rakyat, the main contenders for government in the 13th Malaysian general elections, to openly lay out detailed policy positions on how they intend to manage the nation's finances.

In their policy briefs on national finance and debt, the two political coalitions must provide the following minimum feedback:

1. Justify the projections for the borrowings that they anticipate making in the coming five years under their respective watch;

2. Spell out plans for tackling fiscal deficits and ballooning government and household debts;

3. Explain how their election manifesto promises on government spending will be consistent with sustainable debt and resource management;

4. Declare their commitment to investigating illegal financial outflows and repatriating these monies as prescribed by the United Nations Convention against Corruption;

5. State explicitly whether they will support the foundations of public transparency and accountability in our national finances by

(i) establishing a continuously updated 'debt register' that will be publicly available on the Internet, which records the stock of debts, the sources of these debts, interest/dividend payments made on these and details of the uses made of these borrowings;

(ii) establishing a multi-partisan parliamentary committee for debt oversight and approval;

(iii) holding public fora and referenda on spending or debt decisions of great import; and

(iv) other possible measures.

We urge the two major political coalitions to produce their national finance and debt policy briefs focusing on the proposals set out above as soon as possible.

The voters of this country deserve to go to the voting booths with better knowledge of what to expect in the management of Malaysia’s finance and debts from the new government in power.

I’ll return to the gist of the proposal a little later, but first, there are some factual errors in the statement:

  1. The GFI numbers on capital outflows refer to “illicit” flows, not “illegal” flows. This is not a semantic difference. Trade mispricing constitute over 80% of these “flows”, and while you may certainly refer to these as unethical, unfair or inequitable and while they are certainly “hidden”, they are not unfortunately illegal under the current tax law. Nor are they really flows, but more a geographic shift in the accounting treatment of profit. That means trying to repatriate the monies won’t work, because no “money” actually “left”.
  2. There is no “trend” in the doubling of the government debt level. What you actually have is a structural break in 2009-2010, when the government incurred a larger than expected deficit due to falling revenue – technically, a change in the intercept, not the slope. The actual “trend” is a lot more sedate.
  3. Contingent liabilities are actually reported (much to my surprise). Granted, you do have to dig for the info, but it is publicly available. One thing that should be mentioned is that there are 4 categories of contingent liabilities – they are explicit or implicit, and direct or indirect. Reported and estimated contingent liabilities are only of the explicit-direct kind i.e. written government guarantees. Bailing out the financial system on the other hand would fall under the implicit-indirect category, while a government owned company with no explicit guarantee would be considered a implicit-direct liability. It should be noted here that one of the initiatives under the GTP is a switch to accrual accounting, as well as adoption of the latest government accounting standards. Two relevant outcomes should be expected out of this move – computation of a government balance sheet, from which a better assessment of public debt can be made, and secondly, heightened disclosure and risks involved with contingent liabilities.
  4. Total debt calculations can be highly misleading, mainly due to offsetting obligations. There’s also the difference between external obligations and internal obligations which I think is the source of the discrepancy, but I’ll reserve judgement until I can verify the numbers for myself.
  5. There’s still a lot of confusion over the statutory debt limit, mainly because the stat limit (which caps a subset of debt instruments) is the same as the administrative limit (which caps total debt). As far as I can tell, debt has yet to even exceed the stat limit for  2008 (45%) (again, to be confirmed).

Now as for the proposal, and given the commitments outlined in each coalition’s election manifestos, it’s certainly appropriate and one I’d agree with…

…except I don’t think it’s either practical or optimal. To expect political parties to provide reasonable non-partisan fiscal projections is expecting too much. They have neither the expertise nor the motivation to do so. Disclosure might be beneficial in terms of tempering some of the more excessive proposals via public criticism, but I don’t think its much of a deterrent to populist policies.

Second, only the Treasury would have the detailed data to make a reasonable stab at accurately defining the fiscal impact of individual policy proposals. But, since the Treasury is effectively under the control of the executive branch, that undermines the perception of its objectivity and hence the utility of using its resources.

Moving on to the specific proposals:

  1. Since 80% of the government’s debt is in marketable instruments, most of the info is already publicly available either through market information terminals such as Bloomberg or via BondInfoHub. Given the scale and complexity of government borrowing I’m dubious about the need for anything more than this for public consumption. Also, since the funds raised are 1) fungible, and 2) goes directly into the government’s development account, asking for the details on the usage of funds is a little strange since spending priorities are already set out in the development budget every year (which, unlike the operational budget, rarely varies much) and preceded by the 5 Year Malaysia Plans. Moreover the funds are already segregated from the operational budget. Progress against the development budget is already available in an even more accessible form via the ETP/GTP, believe it or not.
  2. A parliamentary committee to “approve” debt is a non-starter for me. Given the specific structure of the government’s debt issuance, as well as administrative and operational constraints, this would simply be rehashing the annual budget on a biweekly basis. To clarify – the government has since Independence adhered to the “golden rule” of fiscal policy i.e. only investment projects are funded by debt. Operationally, the government’s funding is segregated into two accounts, with government revenue going towards covering operational costs while borrowing is used to cover the development budget. Hence, any parliamentary debt oversight is effectively oversight over the development budget, which is set in advance through each 5 year Malaysia Plan. We’re not exactly talking about discretionary spending here.

Given the above, I’d much prefer another route, one I’ve brought up before – a non-partisan independent budget office, reporting to Parliament, or (for political economy reasons e.g. in the UK) reporting to the Treasury.

This has the advantage of concentrating tax, economic, and econometric expertise in a single body tasked with objective assessment of specific policy proposals, analysis of long term fiscal trends, and if we really want to go that far, responsibility for assessing fiscal debt sustainability.

I’d bet on the effectiveness of that structure more than I would the integrity of any fiscal proposals coming from political parties, or relying on either side to “police” the other. Even if a budget office would be reporting to Parliament, it would have no mandate to come up with its own fiscal proposals, only assess those made by others. The incentive structure makes better sense, and is more likely to be effective.


  1. Without being political about it, I am both amused and bemused why you are touching this garbage in the first place.

    Firstly, as the first nine bullets (in the above) has already left the government and by default BN accused based on erroneous and/or ignorant understanding of data, why bother with the proposals particularly those directed at the BN?

    Secondly, looking at the signatories can be a fair guidance as to where they are coming from.In fact, it is laughable to suggest that this a non-partisan group in the first place. Additionally, why now? why not say three months ago or even 1 month ago when the data would have been literally the same!!!

    My take is that, this group of small-time kopitiam nobody busybodies are just putting this out to make a faltering Pakatan look good. Bet yer last Dollar that PR will embrace this pronto to show themselves in good light but be thin on details. If it is truth they are after, they wouldn't have resorted to fatuous claims and accusations aimed at one half of the political divide. Entertaining them is akin to throwing a bunch of bananas at some itchy arsed frolicsome monkeys passing themselves as concerned academics who will surely be back for more with half eaten bananas still stuck in their gobs.

    And note too that these bastards(slang) are predominantly non-Malay Chingks and skin-color embarrassed keling WOGs with a sprinkling of pro-oppo pseudo-Malays, so you should have figured out why all this kerfuffle by now.....

    Warrior 231

    1. Warrior,

      You missed out the possibility that I might have my own agenda :)

      In this case, it gave me a chance for pushing the idea of an independent budget office. As much as I don't necessarily see a problem with deficit spending, some rationality and objectivity in public discussion of debt and deficits would be a welcome addition to the Malaysian scene.

  2. Man... I wish I could get paid getting data for them :P

    What's the going rate of a free-lance economist (is there ever such a thing?) or data-monkey?

    1. Jason,

      The operative word in "free-lance" here is "free", LOL.

  3. Warrior 231,

    I fully agree with you this time despite your sometime overly racist remarks.

    Happy campaigning or just enjoy the side shows.

    Zuo De

  4. While CPI gets it wrong with contingent liabilities (I'm also surprised that I could find it on CEIC, thanks to Jason!) I wish the Treasury would release the total domestic debts of NPFEs. Right now, we only have total guaranteed debts and external debts of these NPFEs. The disclosure of non-guaranteed NPFEs debt especially would do great with implicit contingent liabilities calculation.

    I've looked at other Southeast Asian countries and I am most impressed with Thailand, which discloses everything. Indonesia comes close with transparency.

    1. Hafiz, can I get a cut if I get you NFPE debt data? :D

      But seriously email me/let Barry know and let's see whether we can lend a hand.

  5. Thank you Zuo De. Overly? Nope, I am not a racist by a mile, that is unpopular perception at work. I tell it as it is with supportive data to boot and where I go off the straight and narrow, it is in response to vicious attacks against my race and religion disguised as anti UMNO rhetoric. The facts are clear on this.And my take on Singapork is based on incontrovertible evidence which is being acknowledged elsewhere. In fact, I am not the first, google 'Andy Xie' to find out.

    Campaign? No soirée not for me as I am no passionate believer of democracy. It's the most inefficient system of determining governance and freedom of choice is nothing but an overhyped illusion. In fact to put it succinctly, contemporary democracy is the sum of a progressive erosion of the knowledgeable elite with each iteration exposing society to the impact of the unenlightened hoi polloi's rational irrationality, a zero sum game where whole nations and civilizations end up as losers.

    Benevolent autocracy or enlightened theocracy or even progressive technocracy can do just as well if not better and efficiently at that.

    Be that as it may, I have assayed as to who will win based on ground realities as outlined in Rocky Bru 3 months back. It affirms my long held view of the likely post GE scenario, based on the 2006 Sarawak elections and the 2008 data and rest assured its not pretty. Essentially, it is buoyed by a collective desire on the part of a certain ethnic to renegotiate the Social Compact of 1957 and that includes jettisoning the NEP of 1970,a political reconfiguration of our Constitution and a radical reengineering of society. All tinder for spontaneous social combustion. My vote is for Najib and sober pragmatism but the outcome will leave Malaysia existentially anchored in a ethnically cleaved socio-political time warp.

    Warrior 231

  6. Just as a night cap.

    In 1991, when someone assumed the Fin.Ministership, the debt to GDP ration was 73.3% way above the much hyped statutory limit of 55%. I dint see any panicky open letters like the above then and Malaysia was not declared a pariah banana republic yet, the last time I checked. Though I do remember a few doomsday prophets (some of whom are still signing crap today) who went back into the woodwork when no financial armageddon materialised

    Go here for the facts:

    1990: 79.3

    and as GDP expanded, public expenditure drastically slashed at the expense of the rural poor (read Malays) and the Gini spiraled to its highest levels (sans external shocks)as inevitably the debt to GDP dropped, no one made any noise, nary even a whisper, like the scum below who latched onto today's news of the day like an opportunist c*&^leech (I told you guys I expected that in my first comment, dint I?):

    How about the pot calling the kettle black, numbskull kitty cos aint your side embarking on a mother all spendings too...(LOL)

    as did a discredited rag:

    It brings me to what I invariably conclude to be the cause of the ignorant garbage and the panicky rumor mongering as is always the case for many things we dont really know about :

    a choice cut to contemplate over breakfast would be:

    "We have a problem in American politics: an illusion of knowledge that leads to extremism. We can start to fix it by acknowledging that we know a lot less than we think." (from NYT above)

    Full paper here ( amust read for those eager to know why act the way they do about issues):

    So those pretentious know-it-nothing nobodies who signed that crap should ruminate over their stupidity but sadly that is what we will get when we overdo the damn politics, especially in a democrazy!!! during this mad season. You know,monkeys seeking attention or lil kids harping for some "heavy petting" comes to mind.....hahahaahahahaha

    Warrior 231

  7. 1)they are not unfortunately illegal under the current tax law. - i think it is illegal, otherwise why use the term illicit?

    2)The actual “trend” is a lot more sedate - hope u can elaborate with data.

    3)+4)+5) can we say this is failure to communicate and lack of transparency, perhaps not 3) but hafiz have a point.

    1. HuaYong,

      1. I'll have to do another(!) post to explain why, because this issue is confusing everybody (LGE made the same mistake in his open letter). But rest assured, 80% of these flows are NOT illegal. They are just unfair. GFI (the guys who came up with the estimates in the first place) do make the distinction between illicit and illegal, and they are not the same thing.

      2. Check the FAQ, Q7. and Q8.

      For the rest, agreed, the government could do a much better job of communicating these issues.

  8. Ok dude, sorry for spoiling yer plans as all scheming economists have one up their sleeves ;)D .in all seriousness, your proposal is well thought out and well thought of in this corner of Malaysia at least. But it's timing suck!

    In actuality, what had me bristling was the sheer audacity of nincompoops to stir shit with asinine antics. You would have self styled intellectuals to have more tact and sense rather penning off their angst in a fit of misplaced rage and to top it all with a set of dubious data at that. Whatever happened to discretion, consultative dialogue, clear the air sessions. Where did discrete enquiry bolt to, and what about civil exchange? Why an open letter instead of private correspondence. Obvious, these unthinking lackeys, lapdogs and cxxklicks have been set to the task by their handlers, if not why do it now? And their collective stupidity would have been comic if not for its implications to Malaysia. For one, it castrates any future rational discourse on governance, policy and the directions this country is orienteering itself. Discourse based on facts, solid data and informed opinion. To a large extent the continual erosion of such possibilities due to the monkey antics of a selective few bodes ill for inclusive, consultative , rational and progressivist civil engagement in future and that must be troubling to all sensible, patriotic Malaysians.

    More perniciously cheapskate publicity stunts like this indicate a deeper underlying rot. It merely reaffirms the poor state of local academia. A close friend of mine revealed that many of the non-Malay intelligentsia actually dint earn their stripes themselves but by paying off local hacks to compile their dissertations, research etc while they( the "intelligentsia") partied their university days away in London, Manchester. New York or Chicago.. Lil wonder you have morons massaging numbers like mad to fit their agenda...

    It troubles me that the socalled civil society we have here is nothing more than hodge podge group of idiots, half baked scumbags, and fully baked morons. Bersih is being helmed by one, this group of charlatans is another, and many more lunatics are about to be unleashed by democrazy. Democrazy has always been the terrible price Third World countries have to pay to ransom their whiteman's burden, I guess and when the demons of democrazy are unleashed, Allah save us all!

    Warrior 231