RM1 trillion debt? Don’t Panic

I realise in writing this that I’ll probably be a very lonely voice in the wilderness, but I think this needs to be said and intellectual honesty forbids doing anything else. I also promised years ago that I would defend a Pakatan government when keeping an elevated level of government debt. I’m going to keep that promise now.
As the news of the Malaysian government’s real debt position has been slowly been revealed over the past two weeks, the reactions have predictably ranged from horrified to furious. Unfortunately, the prevailing thought is mostly about how this debt is to be paid back, and the burden on taxpayers as this is being done.
Let me flip my usual practice, and begin with my conclusion, before going into the reasons why.

The First 100 Days

I’ve had multiple requests to comment on this, but haven’t had the time. To be honest, I didn’t read either side’s political manifesto too closely, as most election promises are so hedged with operational realities that the likelihood of full implementation was never going to be very high, when political idealism meets unyielding economic realities. However, now that we have some clarity on the direction forward, it’s time to seriously assess Pakatan Harapan’s manifesto.

I won’t go over the whole thing, just the 10 items that were promised for the first 100 days, and even then only those that are economics related. So, no comment on investigating scandals or the stature of Sabah and Sarawak.

Thoughts on Budget 2018

I missed most of the Budget speech this year, having just landed from an overseas trip. That and jet lag meant I’m late in catching up on things, and today’s the first day I’m comfortable enough with the numbers and the anmouncements to actually comment on them. I’ll have something more to say about the opposition’s alternative budget(s) later.

First up, on the economic forecasts (2017: 5.2%-5.7%; 2018: 5.0%-5.5%). They’re eminently achievable, especially with the high frequency data coming in. The numbers continue to surprise on the upside, though some of that is coming from the low base we had last year. Even if we see just trend growth for the rest of 2017 and into 2018, the forecasts should bear out.

Corruption, Crony Capitalism and Growth

This is slowly making the rounds (excerpt):

Where Crony Capitalism Rose and Prosperity Fell (and Vice Versa)
By Matthew A. Winkler

With populists emulating autocrats from Azerbaijan to Zimbabwe, free markets are being forced to confront crony capitalism.

One response is visible in the reversal of fortunes of Malaysia and Indonesia. The two nations still wrestle with the politics of ethnicity and religion at odds with the capitalism of market competition….

…But the historic advantage that Malaysia, with just 30 million people, has enjoyed over its Southeast Asian neighbor of 250 million is disappearing amid a barrage of corruption allegations challenging Prime Minister Najib Razak….

Alternative Budget 2017

It’s that time of the year again!

I’m not going to comment extensively about the Alternative Budget (you can download it here), especially on the numbers. I’ve already spotted one whopper of an error, and another biggie that can be put down to lack of info (more on this later). Given the assymmetry in information between government and opposition, I’m not going to be too critical over these.

Rather I want to touch on the broad themes raised in the document. As an aside, I’d also note that mainstream media coverage on the Alternative Budget is far more widespread than it used to be. There was a time when barely anyone wrote about it.

Graeber on Sectoral Balances

I touched on this a few times before, but here’s David Graeber on sectoral balances and flows (excerpt):

Britain is heading for another 2008 crash: here’s why
David Graeber

British public life has always been riddled with taboos, and nowhere is this more true than in the realm of economics. You can say anything you like about sex nowadays, but the moment the topic turns to fiscal policy, there are endless things that everyone knows, that are even written up in textbooks and scholarly articles, but no one is supposed to talk about in public. It’s a real problem. Because of these taboos, it’s impossible to talk about the real reasons for the 2008 crash, and this makes it almost certain something like it will happen again.

I’d like to talk today about the greatest taboo of all. Let’s call it the Peter-Paul principle: the less the government is in debt, the more everybody else is. I call it this because it’s based on very simple mathematics. Say there are 40 poker chips. Peter holds half, Paul the other. Obviously if Peter gets 10 more, Paul has 10 less. Now look at this: it’s a diagram of the balance between the public and private sectors in our economy:

Live Blogging Budget 2016

I’m back at work, and just in time to catch the budget. In case anybody’s wondering where I disappeared to over the past month, I’ve been on a spiritual pilgrimage and only just got back a few days ago. It’s been a bit depressing having to come back to the real world (and the haze), but it was a simultaneously fun and scary break from work, responsibility, and everything else.

As has become traditional, I’ll be live–blogging (and tweeting) on Budget 2016 as the speech is delivered this afternoon, subject to my internet connection holding up. So stay tuned on this page.

• We’re almost live – PM has arrived at Parliament
• Some of the media outlets have jumped the gun already on the numbers
• Oh well, me too:
• 2016 Growth forecast at 4%-5% - no surprise
• Budget deficit at 3.1%, a little lower than this year’s 3.2%
• Revenue and Opex almost unchanged
• Development budget up by RM3b
• Inflation expected to remain between 2%-3%
• GST registration and compliance much better than expected (about twice as much as initially expected)
• Petronas dividend affected by oil prices – oil-related government revenue dropped 1/3 this year to RM44b
• RM21b drop in revenue, if GST had not been implemented
• 7 improvements to GST
• Controlled medicines and some others will be zero-rated (doubling the list)
• Zero-rated list for food also increased
• Decrease in registration threshold
• Approved traders scheme
• Temporary imported goods
• Vocational education
• Rebates given for prepaid telephony
• Income tax raised for the rich? 28% nice
• Investments – Malaysian Vision Valley, Cyber City Centre, Aeropolis, RAPID – doesn’t sound like much of it is actually borne directly by the govt
• Lots of other small projects, mainly rural
• MRT1/LRT extension to be completed next 2016
• Status updates on MRT2/MRT3/HSR/BRT
• RM1.2b for rural broadband
• Extension of income tax relief for tourism
• RM5.3b for agriculture
• Tax relief and exemptions for some agricultural projects – some aren’t new but extensions however
• Also for export-oriented SMEs
• 2016 – Malaysia Commercialisation Year (?)
• Focus on raising labour productivity
• A few small grants for innovation and entrepreneurship
• Taking on KRIS’ idea of industrial building system
• RM41.3b for education
• Cash and book vouchers students from for low income households
• Big money for vocational education
• Women’s corporate participation reiterated, but that’s it
• Bumi agenda – grants to existing agencies
• Sabah & Sarawak – Pan Borneo Highway (RM16.1b and zero toll), domestic air travel GST exempt, RM70m in zero-interest loans for longhouses (RM50k per unit), rice planting fertiliser subsidies, RM115 for special projects, mobile clinics
• B40 assistance
• RM600m for Bumis and Indians via Tekun
• RM60m for SME Bank
• RM200m for AIM
• RM100m for Indian NGOs
• RM90 for Chinese hawkers
• Waiting for BR1M (….)
• RM300m for Orang Asli
• RM852m for Risda and Felcra (for rice and rubber smallholders)
• Affordable Housing – Pr1ma, SPPK etc etc
• RM2b for social safety net
• RM17.3b for defence and security – quite a bit of procurement, including drones
• Civil service pay rise, minimum civil service wage set at RM1200, minimum pension at RM950
• No bonus?
• BR1M
• Under eKasih RM1050
• Under RM3000, up from RM950 to RM1000
• RM3001-4000, up from RM750 to RM800
• Single individuals below RM2000, raised from RM350 to RM400
• Total cost RM5.9b
• For the M40:
• Child Tax relief increased from RM1000 to RM2000
• Tax relief for single earner households raised from RM3000 to RM4000
• Tax relief for university going children, raised by RM2k
• Socso eligibility raised from RM3k to RM4k
• Minimum Wage Raised!!!!
• RM500 gratuity to civil service and RM250 for pensioners

And that’s a wrap.

I’ll post my first impressions here later tonight, so check back tomorrow morning.

Government Debt: Revisionism

Tengku Razaleigh made a speech in Parliament yesterday that made some waves.

I thought I might have a look back at the fiscal metrics during Ku Li’s time as finance minister (fiscal deficit and government debt as ratios to GDP; shaded area):

The truth is, fiscal management is and can be event specific. Ku Li had to deal with the biggest and sharpest collapse in global commodity prices in modern history. This government on the other hand had to deal with the longest and most severe global recession since the Great Depression.

Just sayin’.

Hey Fitch, What’s Up With This?

Just a follow up from yesterday evening’s post. To refresh your memory, here’s the data I posted:

	GDP growth (2014e)	Gross Debt to GDP	Fiscal Balance	Current Account to GDP
Australia	2.80%	30.60%	-3.30%	-3.60%
Canada	2.30%	88.10%	-2.60%	-2.60%
Malaysia	5.90%	56.60%	-3.60%	4.30%

2015 Budget Revisions

It’s neither as good as I hoped, nor as bad as I expected (you can read the speech here).

The government expects revenue to drop by RM13.8b in oil & gas related revenue, with some uptick from other sources. There will be cuts in operating expenditure along with the savings from the abolishment of petrol and diesel subsidies. Development expenditure will be held constant, based on the original budget estimates.

2015 Budget “Restructuring”

A quick note on this (excerpt):

Budget 2015 review

PETALING JAYA: Budget 2015 is to be re-examined, with spending cuts likely to be made in the face of plummeting global oil prices.

Prime Minister Datuk Seri Najib Razak said there was a possibility that the budget tabled last Oct 10 would be restructured.

Zombie Economics

I was going to cover this when it came out, but didn’t find the time. Still, better late than never (excerpt, emphasis added):

Prepare for tough times ahead
BY DATUK ZAID IBRAHIM

We have often heard the phrase ‘we must change our lifestyles’ and the truth is that it will be difficult to adjust – but adjust we must….

…I wish our leaders at all levels would come together and ponder what it would be like if our country were to face a deep economic crisis.

Ringgit Under Pressure? Markets Are Irrational

I was going to write about this last week, but it got put on the back burner by the suspension of the fuel subsidy (excerpt):

Ringgit down to four-and-half-year low

KUALA LUMPUR: The ringgit has fallen to a fresh multi-year low against the US dollar, as sentiment has been somewhat dented by Malaysia’s shrinking current account surplus and slower economic growth in the third quarter of 2014.

At 5pm yesterday, the ringgit was being traded at 3.3565 against the greenback – the weakest level since May 2010. The ringgit is the second-worst performer in the region after the Singapore dollar so far this year. Over the last two weeks, it had declined 2% against the greenback….

…Analysts said the narrowing current account surplus put Malaysia in a less favourable position compared with the other countries….

Debt, Deficits, and Government Assets

I’ve been asked by a number of people to comment on this (excerpt):

Laporan Bank Dunia: Kerajaan BN Jual Aset Negara Untuk Capai Sasaran Defisit

Pentadbiran Dato’ Seri Najib Tun Razak terus mengumumkan angka-angka untuk meyakinkan orang ramai dan institusi kewangan bahawa beliau serius untuk mengekang tahap keberhutangan negara. Sasaran yang diletakkan ialah untuk menurunkan defisit ke paras 4% dari jumlah Keluaran Dalam Negara Kasar (KDNK)…

…Lebih memeranjatkan, Dato’ Seri Najib Tun Razak dilaporkan akan mengambil jalan menjual aset negara dan menerbitkan lebih banyak sekuriti hutang dari aset-aset negara semata-mata untuk menutup kegagalan pentadbiran ekonomi beliau mencapai sasaran defisit yang beliau sendiri tetapkan.

3Q2013 Government Debt Update

As outlined in the previous post, debt growth has slowed this year (log annual and quarterly changes):

3Q2013 Government Finance

The latest data on government finance is now available (RM millions):

Budget 2014: Highlights and Lowlights

Well, its in the books now – metaphorically speaking that is, because it technically still has to pass Parliament.

First a look at the headline figures:

1. Growth is expected to be between 4.5%-5.0% this year, and 5.0%-5.5% next year.
2. Government operating expenditure is slated to increase 0.7% to RM217.6b, while development expenditure is expected to rise/fall to RM46.5b/RM44.5b depending on whether you believe the speech or the 2013-2014 Economic Report.
3. Government revenue is forecast to increase 1.7% to RM224.1b

Live Blogging Budget 2014 [UPDATED]

As usual, I’m going to try live-blogging the budget announcement, commenting on things as and when they are announced. The PM is scheduled to start his speech at 4.00pm, so I’ll begin around then.

[Refresh the page for updates]

1. PM is in the House, and we’re off in a few minutes
2. Wasting time til markets close, as usual
3. I don’t think the KLCI hitting an all time high really proves anything
4. Forecast 2014 GNI per capita RM34k
5. Forecast 2020 GNI per capita to beat USD15k target (told ya so)
6. RM217.6 billion for opex, RM44.5 billion for development – pretty flat over 2013
7. Budget deficit forecast for next year at 3.5%, right on track
8. GDP forecast for 2014 is 5%-5.5% – not ambitious
9. Talking about rail and oil & gas investment – looks like no postponement of RAPID
10. Logistics masterplan – given our trade openness, this probably should have been done much earlier. Still we’re 29th in the world
11. Tourist development fund offering subsidised interest rates
12. RM1.8b for high speed broadband
13. 10% matching government contribution for voluntary EPF contributions – good move
14. Private retirement scheme – RM500 one-off incentive for those between 20-30
15. 12 minutes to market close, and the bigger news items
16. RM2.4 billion in subsidy and incentive for padi beras and fisheries
17. Further incentives for agriculture R&D through Biotech Corp
18. New plan for entrepreneur development to be developed by new dept under MoF
19. Malaysian Global and Innovation Centre (MAGIC) to boost R&D and innovation (one-step centre) with seed capital of RM50 million
20. Dunno about that – why would this be more effective than what we’ve done before?
21. RM120 million for SME development
22. Here it comes
23. Committee to investigate government waste identified in the A-G report
24. Government to switch to outcome based budgeting (I think this has been part of the GTP targets)
25. MoF, MITI and Health Ministries to be pioneers
26. No need to file tax return if salary deductions are enough to cover tax liability
27. Subsidies to be restructured and better targeted
28. Comprehensive database covering welfare
29. SST to be abolished (haha)
30. GST is here!!!!!
31. Low inflation is the best time for implementation (that makes sense)
32. GST to be effective April 1 2015
33. GST rate at 6%
34. Public goods and services exempted
35. So is property
36. One-off RM300 for BR1M recipeints
37. 1%-3% income tax cut; RM4k households will no longer pay income tax
38. Income tax bands to be adjusted. Maximum tax rate only applies for incomes over RM400k, instead of RM100k  as now (effective 2015)
39. For companies; 1% cut in corporate tax (effective 2016)
40. Income tax for cooperatives also cut
41. ICT accelerated allowance from 2015
42. GST related investment, GST related training and others to be given tax relief
43. Enforcement of profiteering act to be raised
44. Markets are going to be REALLY happy
45. After all that, everything else is going to be a bit of an anticlimax
46. Details of GST will be available eventually through Customs – bookmark this link
47. Flexible work arrangement to be introduced for women
48. RM100 school assistance program to be continued
49. Book vouchers also to continue (RM250)
50. Lots of investment to ensure LRT, MRT, and Komuter are easier to use
51. RM4.1b for rural development
52. Nothing much on housing so far
53. Lots of smaller allocations now – health, crime, flood mitigation etc
54. 2.6 million Malaysians above age of 30 have diabetes – sugar subsidy to be cut. Yes!!!
55. I still think we should tax sugar…and petrol.
56. RM2.2 billion for women’s development
57. This is the last time I try following TV, Twitter, and Whatsapp while blogging!
58. RM441 million for the assisting the disabled
59. Indian community to be assisted with RM100 million for education, mainly for pre-school; RM50 million for Indian entrepreneurs (Not nearly enough I think)
60. Now for housing
61. RPGT to be reviewed. RPGT raised to 30% for 1-3 years, 20% for 4 years, 15% for 5 years
62. Floor for foreigners raised from RM500k to RM1 million
63. DIBS is banned!!
64. 200k new affordable houses to be built in 2014
65. Incentives for private sector developers to build affordable houses (RM30k per house)
66. Standards being given for low cost and medium cost houses
67. Lots of other smaller measures for housing
68. For middle income taxpayers – tax savings up to RM480
69. Wrapping up now…finally
70. One thing more…for the civil service, salary scales to be adjusted?
71. And one more thing…BR1M goes to 3.0, increased from RM500 to RM650
72. For single person households, RM250 to RM300
73. BR1M insurance scheme to be extended to all households members who qualify (worth RM50-100)
74. RM3000-4000, BR1M will be given RM450, plus RM50 insurance coverage
75. Allocation of RM4.4 billion for BR1M 3.0 all told
76. Pensioners to receive RM250
77. Civil servants to receive half month bonus, with minimum of RM500
78. All over bar the shouting now

And that’s a wrap. I’ll be looking more closely at the aggregate figures later tonight, hopefully with something coherent to say about it.

How To Spin With Statistics

Here’s a model article for all budding analysts and pundits out there (excerpt):

Malaise Is Ahead For Malaysia's Bubble Economy

I recently wrote about how Indonesia’s economy has devolved into a classic credit and asset bubble-driven growth story, and its neighbor Malaysia is on the same path along with most other Southeast Asian economies, which are part of the overall emerging markets bubble that I have been warning about in the last couple of years.

Who’s Doing The Saving?

This recent paper from the World Bank confirms something I’ve suspected and been concerned about for a long time (abstract):

What are the causes of the growing trend of excess savings of the corporate sector in developed countries ? an empirical analysis of three hypotheses
Leandro Brufman, Lisana Martinez & Rodrigo Perez Artica

Summary: This paper analyzes annual accounting data for a sample of 5,000 publicly traded manufacturing firms from Germany, France, Italy, Japan, and the United Kingdom. The analysis uses data from 1997 to 2011 and finds an increasing trend of excess savings (defined as the difference between gross saving and capital formation) and a gradual decline of gross capital formation. This trend is accompanied by a steady deleveraging process and a decrease in the share of operating assets in total assets. This process is more acute among the more credit constrained, the more volatile, and the less dynamic firms.