Thursday, August 15, 2013

Contingent Liabilities: You Ain’t Seen Nuthin’ Yet

One of my favourite econs bloggers, James Hamilton, has a new working paper (abstract; emphasis added):

Off-Balance-Sheet Federal Liabilities
James D. Hamilton

Much attention has been given to the recent growth of the U.S. federal debt. This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments. The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds. The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt. The paper reviews the potential costs and benefits of these off-balance-sheet commitments and their role in precipitating or mitigating the financial crisis of 2008.

And people are complaining when Malaysian government contingent liabilities hit 15% of GDP. Makes you wonder, dunnit?

Of course, it’s not a totally fair comparison. The Malaysian number only encompasses government guaranteed debt, not the full extent of explicit and implicit contingent liabilities as Prof Hamilton has tabulated for the US.

Nevertheless, the US numbers are staggering – it’s the equivalent of about 500% of US GDP. While the bulk is made up of "safe” contingencies through the Federal Reserve and the iffier actuarially estimated future liabilities of the US social security and medical assistance programs, guarantees for housing and student debt take up 50% of GDP, or more than three times Malaysia’s total government guarantees. US Federal deposit insurance takes up another 50% of GDP, compared to approximately 30%-40% of GDP for Malaysia (based on PIDM figures).

Any comparable exercise for Malaysia would show piddling numbers by comparison.

Technical Notes

James D. Hamilton, "Off-Balance-Sheet Federal Liabilities", NBER Working Paper No. 19253, July 2013


  1. Morning,

    I read with interest a recent article by Norhisham Hussein on Capital Gain Tax (CGT). This may be similar to RPGT with reduced tax rate as one hold the asset longer.

    Appreciate your view on this vis-a-vis GST as a possible widening of Malaysia tax base.

    Thank you.

    Zuo De

    1. Zuo De,

      Since I wrote that article, I can hardly offer an unbiased opinion of it :)

      But any revenue collection from CGT is unlikely to offer much of a replacement of GST, as it's too limited. Even RPGT doesn't contribute a whole lot to government revenues.

      Remember, CGT and RPGT are taxes on the the margins, not the volume, of transactions i.e. they're levied only on the profits. The main effect is to reduce speculative activity, and also indirect reducing inequality. But they are no replacements for a broad based consumption tax.

    2. Tax Profit on Capital!August 20, 2013 at 2:47 AM

      The no tax on capital is a historical working of the ruling capitalists.

      They made the rule because they own the capital. The Governments then were beholden to these groups.

      There is no reason for us Malaysians not to not tax profit on capital.

      If we have RPGT why not CGT?

      The power is in the hand of the government of the people by the people UMNO. Not capitalists.

      The no tax on capital transaction is exactly what it is meant to do, to enrich those who control the capital. But why should we allow it to continue. These are minority greedy group. Just like flippers will flock to property if banks loans are easy and RPGT are low.

      The rakyat must shout in the Finance Minister ear because the capitalists are whispering in his ear.

    3. The issue has been raised directly with MoF, rest assured.

  2. Ah, my apology for not recognizing you accordingly.

    Ok understood the differences between the two (CGT/RPGT vs GST).

    Zuo De

  3. the only way out is to inflate the debt?

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  6. Hi Hisham H,
    Some points for discussion after reading the comment.

    Lets first break the $70.1 tn into 3 tranches.

    Tranche #1 -Social Security & Medicare (Total Off Balance Sheet Commitment : $54.1 tn - 77%).

    Tranche #2 - Agency Debt (Housing, Student loan, Other trust fund) (Total Off Balance Sheet Commitment : $9.7 tn). (14%)

    Tranche #3 - FDIC (less some negative balance with the Fed) - $6.3 tn (9%)

    Now we can compare like for like.

    In Tranch 1, the US Government has committed to effect this transfer payment towards old people and unemployed for their daily living expenses and for their health care.

    In Malaysia, no such provision is maintained. If your old, without a pension, or unemployed - then, its tough. So it is a case of the Government making a commitment to ensure a better quality of life.

    In Tranche 2, its the Government stepping in again to reduce the cost of borrowing to obtain a house or student loan. The Government guarantees the debt (effectively) and once again its for the betterment of the people.

    In Tranche 3, we have the liability arising from deposit insurance. Whats the equivalent in Malaysia?

    The conclusion is this.

    We recognise expenses on Ministry of Health spending as accrued. The US Government does not operate hospitals and health services so they recognise the present value of the unfunded portion of this liability. Different accounting , so not comparable. Different social support structures, so you should take it out for the comparative purposes.

    Tranche 2 - Guarantee on debt owed by people vs. Guarantee on debt owed by cronies. In this case, the only comparable number is the OBS guarantee for PTPTN Debt. In 2011, it was around RM 14B. The US Govt has made housing affordability a central tenet in their system, but there is no like mechanism in MY.

    This is the key question. American Govt stands by the people, the Govt guarantees SPV debt, whose beneficiaries are a select few, without much oversight

    Tranche 3 - FDIC vs. our deposit insurance (PIDM). We have never included the explicit calculation on the obligations of the deposit insurance in ALL the OBS numbers cited for MY Govt debt.

    The Malaysian Govt OBS debt guarantees are for State Owned corporates, SPV Vehicles. Citing 2011 figures they are they are for 1MDB (RM 5B), Khazanah (RM 10B), KLIA Loans (RM 7.9B), TNB (RM 4.3 b), Putra LRT and Star LRT loans (RM 9B), Bakun (RM 4B) and Value Cap (RM 5B). These are the major ones and the data is 2011.

    In the meantime, 1MDB has issued something like RM 20b of USD denominated bonds. The OBS commitment is now RM 147 bn vs. RM 83 bn about 2 years ago. The increase is 33% annualized.

    1. Shadow Banker,

      I agree that its difficult to make like-to-like comparisons for contingent liabilities, which is why in the blog post I focused on deposit insurance.

      The whole question of contingent liabilities is a bit of minefield, as even in Prof Hamilton's tabulation future pension commitments are excluded (Malaysia's would be under KWAP; EPF currently has a surplus; I haven't looked at the situation at LTAT, but would not be surprised if it was in surplus too).

      There is in fact no way to do consistent, like-to-like international comparisons, because different countries have different approaches and different structures.

      The Philippines for example carries 40% of GDP as contingent liabilities in guarantees for highway bonds; Ireland's 100%+ GDP of contingent liabilities are entirely due to a blanket guarantee of bank deposits. Many other European countries carry contingent liabilities almost as high, but entirely in the form of future pension commitments.

      The point I was trying to make is less about a direct comparison, but rather the scale of contingent liabilities globally. Malaysia's 15% of GDP in government guarantees continues to be piddling in my eyes (no matter how much its grown), even by comparison with our implicit commitments via deposit insurance and further backstopping of the financial system (there's actually an IMF paper on this issue).

      But to comment on some of your assertions:

      1. Medicare coverage is narrow and incomplete - only about half of the health costs of the target groups are actually covered. But yes, in any comparison, it should be excluded (unless you're explicitly looking at sovereign credit worthiness, in which case it remains directly relevant). However, that still leaves the equivalent of 100% of GDP in non-health contingent liabilities.

      2. US Federal support for housing is extensive, but I think you haven't delved enough here. For one thing, you're forgetting Cagamas, which has been around for nearly 30 years. For another, the bulk of this "tranche" are actually guarantees for the direct liabilities and MBS guarantees of Freddie Mac and Fannie Mae. This isn't about "standing by the people", but bailing out irresponsible lenders - both institutions (which were privately held BTW before being bailed out) played a big role in the origination-securitisation model of mortgages that allowed banks to aggressively pump up the housing bubble. Cagamas bonds outstanding on the other hand are all of RM20b, so even if you include this as implicitly guaranteed by the Malaysian government, the contingent liability involved is approximately 2% of GDP, compared to nearly 50% of GDP in the US case. Student loan guarantees are also less than 30% of overall student debt, so its fairly selective and small relative to total contingent liabilities. But using your PTPTN figure, a direct comparison would be about 1.2% of GDP in the US case (after offsets), compared to about 1.4% for Malaysia.

      3. The reason why PIDM is not included in the contingent liability numbers is because there is no explicit commitment from the government, but then neither are the potential liabilities of the FDIC explicitly added to US government commitments either. That's one of the reasons why Prof Hamilton's paper is so interesting, as this is the first tabulation of explicit and implicit contingent liabilities I've seen of the US.