Here We Go Round the Mulberry Bush

Our PM in Japan (excerpt):

Malaysia asking for yen credit to help with national debt, says Dr Mahathir

MALAYSIA is asking Japan for credit as part of efforts to resolve its debt problem, Prime Minister Dr Mahathir Mohamad said today.

Speaking at a joint press conference with Japanese Prime Minister Shinzo Abe, Dr Mahathir said he was told Japan was considering the request.

“I have explained the financial problem faced by Malaysia, and towards solving this financial problem, I have requested for yen credit from Japan and Mr Abe, the prime minister, will study this request,” Dr Mahathir said.

I don’t have much time, so I’ll keep this short. I’ll give TDM the benefit of the doubt here – he could be talking about refinancing some of the USD debt under 1MDB, which makes sense since the yield on that debt was way above market. However, using JPY loans to cover MYR debt makes no sense at all.

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.

Fiscal Realities

A couple of things were raised last week that I want to address:

Issue 1: The Difference between Operating and Developing Expenditure

I’ve had to explain this at least twice over the last few days, so I thought I might as well spell it out. Malaysia is one of the very few countries that actually subdivides spending between operating and development expenditure – actually, I think Singapore is the only other country that does this. MOF keeps these accounts entirely separate (I’ll touch on how they intersect in a bit), whereas most other countries consolidate the two.

Government Debt and FX Reserves

From Bloomberg via The Edge (excerpt):

Malaysia raising $2 billion as worst Asia currency saps reserves

SINGAPORE/KUALA LUMPUR (Apr 14): Malaysia is tapping the U.S. dollar bond market for the first time in four years as it burns through foreign-exchange reserves defending Asia’s worst currency.

The government is poised to sell as much as $2 billion of Islamic notes this week, one month after state-owned Petroliam Nasional Bhd. issued a record $5 billion of sukuk and conventional debt in the U.S. currency. Malaysia’s foreign currency holdings fell 9.4 percent this year, the steepest first-quarter loss since the 1997 Asian financial crisis. The ringgit dropped 5.4 percent, compared with a 4.6 percent slump in the Indonesian rupiah.

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’.

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.

Idris Jala Sings The Bankruptcy Blues

In the papers today (excerpt):

Why Malaysia won’t go bankrupt

The Government is not in dire financial straits right now. By all measures its finances are good, but as in any situation involving finances, this is not to say it cannot be better.

I AM frequently asked why I said Malaysia could go bankrupt by 2019. I have had many queries asking for clarification and this has become one of my transformation blues…

3Q 2011 Government Debt Update

Net government borrowing in 3Q 2011 fell to its lowest level in 3 years (RM millions):

2Q 2011 Government Debt Update

As I covered in the last update, the borrowing binge of the last quarter was largely due to the need to rollover maturing debt from 2008. Although the pace of borrowing has not slackened, redemptions hit RM23.2 billion in 2Q, mostly in April (RM millions):

This is likely to be a continuing feature over the next year or so, as that covers the period between the onset of the commodities bubble of 2008, and the borrowing to cover the shortfall in tax collection during the trough of the recession.

The Inflation Debate

One of the ways of handling the Euro (and US) debt crises is slowly coming into focus – inflate it away. Since public debt is denominated largely in nominal historical terms, but public revenue is paid in current terms, inflation effectively reduces the debt burden. It’s an inequitable solution because it favours debtors over creditors, but it has traditionally been one of the main avenues for public debt relief – about half the reduction in the debt to GDP ratio after WWII was due to inflation (the other half from growth).

Since growth is obviously going to be lacking in developed countries over the near future, the inflation weapon is slowly moving into mainstream discussion:

Higher Inflation: Scourge or Savior?
The Federal Reserve and other central banks ponder benefits of higher prices

With consumer prices up 3.8 percent in the 12 months through August, you might think the Federal Reserve’s rate-setting committee would be taking stern action to lower inflation. Far from it. On Sept. 21 the Federal Open Market Committee announced it would make monetary policy even looser through what economists have dubbed “Operation Twist”—switching $400 billion worth of its Treasury holdings from short-term securities into long-term ones in a bid to bring down long-term interest rates.

1Q 2011 Government Debt Update

Even as the government is moving towards balancing the budget, we’re still borrowing as much as ever. In fact, 1Q 2011 net Federal government borrowing hit a near record RM24.6 billion, just a hair under the RM24.7 billion net borrowing made in 2Q 2009 in the depths of the recession (RM billions):

 

4Q 2010 Federal Government Debt Update

I feel a little guilty because I’ve been planning this post for a while now but just haven’t got round to it. To make that up, I’m jumping straight into the 4th quarter numbers, even if they aren’t out yet. Nevertheless, government borrowing was minimal in December, so I’m fairly sure my estimates won’t be too far off reality when they’re released next month.

I’ve already touched on the raw figures for the federal government budget up to 3Q 2010 (seasonally adjusted, RM millions):

2Q 2010 Federal Government Budget and National Debt Update

I’ve kept this on the back burner since last week because there have been more immediate news to attend to. But now I’ve had some time to go over the stats, the government fiscal position looks pretty decent if you’re a believer in fiscal consolidation (quarterly, RM millions):

Bill Mitchell Disses Morgan Stanley

I reported yesterday on a Morgan Stanley report that discusses the state of government finances. Bill Mitchell, a proponent of Modern Monetary Theory (MMT), has a fine critique of the piece:

There is no solvency issue for a sovereign government

…There is no debt crisis in sovereign nations. The only public debt problems that have emerged in the current crisis have been in non-sovereign countries and even then with appropriate “fiscal support” those crisis were managed. I am referring to the intervention by the ECB when they decided to purchase outstanding public debt in the secondary bond markets – which amounte [sic] to a fiscal act within a flawed monetary system.

But blurring the distinction between sovereign and non-sovereign nations is the starting gate for this absurd journey in self-importance that Marès has produced.

The report is “the first issue of Sovereign Subjects” which is “a new Morgan Stanley publication focusing on sovereign risk in advanced economies”. Please write to Morgan Stanley and tell them that the publication is a crock and they should save their time by not producing a second issue.

The first issue of this propaganda document perpetuates some classic myths and then some…

If you’ve ever been dissatisfied with some of the answers that mainstream economics serves up, this guy is required reading (along, I think, with Scott Sumner). I find myself attracted to some of the ideas behind MMT, which shares some characteristics with Post Keynesian thought, though I don’t know if I’d commit wholesale to this ideology…yet. But the more I read and explore economics, the more their ideas make sense – certainly the idea of fiscal austerity in the face of falling economic activity goes against my instincts, especially when monetary authorities aren’t doing enough.

But the read the whole piece…it’s worth your while.

Sovereign Debt Defaults And Financial Oppression

There’s a fascinating article on Morgan Stanley’s Global Economic Forum today, assessing the state of government finances in the West:

Ask Not Whether Governments Will Default, but How
By Arnaud Mares

The sovereign debt crisis is not European: it is global. And it is not over. The European sovereign debt crisis of spring 2010 was a misnomer in more ways than one: there was not one crisis but two. And it will continue well beyond 2010, in our view. The first crisis was, and remains, an institutional crisis of the euro, caused by a flawed multilateral fiscal surveillance framework. Steps have been taken towards a correction of the flaws with a move from peer pressure to peer control of fiscal policy. This is reflected by the acceptance by the Greek, Spanish and Portuguese governments of fiscal measures largely dictated from Berlin and Brussels. The second crisis was, and remains, a sovereign debt crisis: a crisis caused by sovereign balance sheets being overstretched, to the point where insolvency ceases to be merely possible and becomes plausible. This crisis is not limited to the periphery of Europe. It is a global crisis and it is far from over. We take a high-level perspective on the state of government balance sheets and conclude that debt holders have to be prepared to enter an age of ‘financial oppression'.

2Q 2010 National Debt Update

Having just watched Brazil crash out of the World Cup, I’m in need of some cheering up (all kudos to the Dutch for persevering though). Not that there’s much to cheer about in terms of government finances. 2Q numbers aren’t in yet, and won’t be for another couple of months, but the numbers don’t look terribly encouraging (RM billions):

Year-on-year seasonally adjusted revenue fell 22.1% in log terms, which was only partially offset by an 8.8% drop in expenditure. The deficit hit RM10.2 billion in 1Q 2010 – of course that ends up as being a positive for GDP, though that’s not a big fillip for a RM700 billion economy.

On the other hand, the Treasury hasn’t been all that aggressive in borrowing over the last three months, largely going to market only to rollover maturing debt. As a result, outstanding Government debt has barely budged from 1Q 2010, at approximately RM378.4 billion.

Instead, most of the action has been in the money market with BNM issuing a startling net RM37 billion in bills in April and May (typically for 3-6 month maturities) to keep the interbank money on track with the OPR. But since BNM’s open market transactions are financed (or paid off) by the issuing of currency, it doesn’t count towards the government’s debt level.

In any case, with the population increasing by approximately 150,000 every quarter, and as nominal GDP has increased in 1Q 2010, the national debt ratios have levelled off:

(Note: my Debt/GDP ratio is calculated on the basis of a rolling 4 quarter summation of nominal GDP, so it might not correspond exactly with the official figure).

Estimated debt to GDP now stands at approximately 53.6% as of last month, which puts Malaysia below the 60% alarm-bells-are-ringing level, while debt per capita retreated slightly to RM13,227 from RM13,292 in 1Q. I’m actually expecting government revenue to show slightly positive growth this year, as against the government’s projection of an 8.1% drop – which means that they’ll probably hit below the 2010 target of 5.6% of GDP easily (the increase in revenue will be offset by an off budget increase in expenditure, but I’m also expecting 2010 GDP to surprise on the upside).

So from my perspective, we’ll probably see some improvement on the debt front this year, but with growth prospects increasingly uncertain, I’m not putting any bets on 2011-2012.

Debt and Subsidies Clarified

What with the brouhaha over the actual amount of subsidies being paid, and the actual amount and definition of “national debt” as reported yesterday, PEMANDU felt it had to step in with clarification (in full from The Star):

Subsidy figures are correct, says Pemandu

PUTRAJAYA: Both sets of subsidy figures released by the Treasury and the Performance and Delivery Unit (Pemandu) are correct, the unit said in a statement.

It said the Treasury had only focused on direct subsidies because it took a public finance management approach in defining subsidy while the Pemandu lab had taken a macro-economic approach.

“The approach includes both direct and indirect subsidies as a necessary measure to increase competitiveness and remove market distortions,” it said here yesterday.

The Treasury had on Tuesday in a briefing to backbenchers announced total subsidies at RM18.6bil last year while Pemandu’s lab findings put the figure at RM74bil.

The unit said the definition of subsidy by Pemandu’s lab was based on that provided by the Organisation of Economic Co-operation and Development (OECD) in 1996.

“Some of these subsidies include contract obligations, financial support and rebates, assistance to Ministry of Finance Incorporated companies, and cost-based financial assistance which includes emolument for education and health.

“The substantial items under indirect subsidies which are not covered by the Treasury include cost-based financial assistance, assistance to MoF Incorporated companies and gas subsidy. “The subsidies defined by the Treasury are those which affect the Federal Government balance sheet directly,” it said.

The unit reiterated that as a gross domestic product (GDP) percentage, Malaysia continued to be one of the highest subsidised countries in the world, even higher than Indonesia and the Philippines.

“On average, the OECD subsidy level is 1.5% of the country’s GDP. Both the Treasury and Pemandu agree that Malaysia should increase its revenue or GDP and at the same time, reduce government expenditure in the next 10 years in order to stay competitive,” it said.

The unit said the Government would also continue to fight corruption, reduce wastages and leakages based on the Auditor-General’s report to reduce overall expenditure besides removing subsidies.

It said it also wished to clarify that the country’s national debt stood at RM234bil, which is defined as external debt and inclusive of both public and private debt.

“Our government debt stands at RM362bil, comprising domestic debt (96%) and foreign debt (4%).”

A Matter of Definition

When this report first came out yesterday afternoon, I thought it was a typo. But it turned up on the front page of the NST today in big bold letters, so someone has a very different idea of what “national debt” means than I do (excerpt, emphasis added):

Debt under control

KUALA LUMPUR: Malaysia’s debt is under control and steps are being taken to reduce it to prevent the country from suffering the same fate as Greece and Iceland.

Prime Minister Datuk Seri Najib Razak said last year, the country’s debt fell almost one per cent to RM233.92 billion from RM236.18 billion in 2008. This is because of the repayment of some loans and the stronger ringgit against the US dollar.

The budget deficit is also expected to drop and is under control in the medium and long term.

“These measures will ensure that the federal government’s deficit does not rise to the extent that we will be unable to settle our debt,” he told the Dewan Rakyat yesterday.

The government will reduce its external debt by tapping domestic loans because local investors are flush with money and the cost of borrowing is also cheaper. Malaysia also has a comprehensive system that detects financial risks and weaknesses early.

Here’s the coverage from The Star, in case NST changes the link.

I’ve always taken “national debt” to mean the total outstanding borrowing of the national government, which are the collective liability of all the country’s citizens. It appears in Malaysia’s case, “national debt” is something completely different – it’s the aggregate external debt of the country, comprising government, semi-government and private sector (source: 4Q 2009 Treasury quarterly economic report, pg 14-16).

The trouble is partly the way the news was reported (it appears to conflate “national debt” with government debt), and partly from the PM’s further comments on the subject – if you check the actual breakdown, direct external government debt is just RM13.8b, or 5.9% of the total. The bulk of this “national debt” comprises RM71.6b from Non-Financial Public Enterprises (NFPEs), RM70.0b from the private sector, and RM69.0b from the banking system. Of these amounts, only the NFPEs (e.g Petronas) could be said to fall under direct government influence. So talking about consolidating the federal government deficit is more than a little disingenuous, because it has almost no bearing over reducing the “national debt” as it is curiously defined here.

Silly Reporting, Sillier Analysis

From Bloomberg a couple of days ago (excerpt, bold emphasis mine):

Inflation Fears May Slow Malaysia Subsidy Cuts, Economists Say

By Barry Porter

May 10 (Bloomberg) -- Malaysia may cut subsidies slowly to prevent triggering record inflation as it prepares to revamp a system that’s hampered efforts to reduce the budget deficit, Standard Chartered Plc and Citigroup Inc. said.

A taskforce is exploring ways to revamp the government’s entire portfolio of subsidies that keep the cost of essential items from flour to highway tolls low for consumers. An attempt to reduce the amount the state pays to cap fuel prices caused inflation to surge to a 26-year high in 2008 as gasoline became more expensive.

The government will learn from past experience and ensure its subsidy cuts will be a “very tempered, gradual process,” Alvin Liew, an economist at Standard Chartered in Singapore, said May 7. “They still have time on their hands. It’s not a Greek situation where they need a bailout, not yet anyway.”

Malaysia spends about 73 billion ringgit ($22 billion) a year on subsidies, Prime Minister Najib Razak said on April 6, calling the amount “not sustainable.” The government, which has said it is considering a global bond sale, aims to narrow its budget deficit to 5.6 percent of gross domestic product this year from a 22-year high of 7 percent in 2009.

What’s wrong with this picture?

First, take note that in July 2008 crude oil reached over USD140 per barrel on the world markets. That’s about double the level it’s at now. The level of price increase necessary to equilibrate domestic gasoline prices with world prices are far lower right now than it was in 2008. Since the outlook for crude oil prices are still up, that means the time to cut subsidies is now, not later.

Second, Alvin Liew’s comments are so off base that I’m wondering if we’re looking at the same country. Greece has a public debt to GDP ratio of 125%, an external debt to GDP ratio of 170% (public and private debt), a budget deficit of 13.6% (all 2009 numbers) and external reserves of just USD3.5 billion (2008). Malaysia’s corresponding numbers are 53.7%, 36.1% and 7.0% (2009 numbers) and USD96 billion (as of end-April 2010). Huge, huge difference in terms of national and external liabilities, and the financial resources to meet them.

Greece also has the problem of having its entire national debt denominated in Euros or other currencies, whereas Malaysia’s is mainly in MYR. That means that in extremis Malaysia can print Ringgit to meet its national obligations, while Greece has to beg the European Central Bank to pick up its debt (which after much arm twisting and teeth gnashing, the ECB has finally committed to do) and rely on the EU and the IMF to provide short and medium term financing. While printing money is not an ideal solution as it risks a run on the currency and rising inflationary pressure, it does mean that near term debt obligations can always be met by a country issuing its own currency.

In addition, membership of the Eurozone means that a de facto devaluation of the currency cannot in fact happen (relative to other Euro members), which means that Greece has no chance to improve its external competitive position, unlike what occurred in East Asia during the 1997-98 crisis.

In short, Malaysia doesn’t – and won’t – need a bailout.

Third, I think our Prime Minister is guilty of hyperbole when quoting that figure of RM73 billion in subsidies. I can’t actually reconcile this statement with the actual published figures, and the only way I can get near that number is to add development expenditure to operating expenditure that’s classified as subsidies. Otherwise, spending on subsidies in 2009 was only RM18.6 billion.

Also on Bloomberg (not on Malaysia, but just as silly):

Fed Restarts Currency-Swap Tool With ECB Amid Crisis (excerpt)

The Fed’s swaps come at a time of increasing political scrutiny. Congress could ask why the U.S. central bank is expanding the supply of dollars to help smooth disruptions caused by fiscal imbalances in Europe.

Senator Bernard Sanders, a Vermont independent, wants the Government Accountability Office to look into Fed lending facilities during the crisis, including swap lines with foreign central banks, such as the $20 billion facility the Fed opened with the ECB in December 2007.

A vote on the Sanders amendment could come as soon as May 11 as Congress proceeds on the most sweeping overhaul of financial regulations since the Great Depression.

“Many members of Congress are deeply suspicious of the Fed’s interventionist instincts,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “Bailing out Wall Street caused enough resentment; appearing to bail out Greece would be even more problematic.”

“The Fed cannot afford to rile up its congressional critics while the financial reform bill is still in play,” Crandall said before tonight’s announcement.

I’ve commented on this before (read this post for details) – a swap line is not a loan in the conventional sense. And the Fed supplying USD to the ECB under the current circumstances simply means those Dollars go straight back to the US. Factual note: the Fed’s swap line with the ECB in 2007 was US$300 billion, not the paltry US$20 billion quoted in the article.

1Q2010 National Debt Update

The pace of my blogging has dropped off substantially the last couple of weeks, for which I apologise. I've been busy in Sarawak for the past week, and will be in Dubai until next month, so normal posting will only resume from about the first week of May or thereabouts (depending on how I deal with the jet lag). This post will have to do for now.

I’ve noticed that I’m getting a lot of Google hits about Malaysia’s national debt position and fiscal deficit. Since I haven’t done an update in a while, what’s the position with government finance and Malaysia’s national debt right now?

Up to the end of last year the national debt reached RM362 billion compared to RM306 billion in 2008, with about half the increase due to planned expenditure under the 2008-2009 budget, and the other half coming from the combined stimulus packages:

That actually comes in about RM18b below my rough forecast, which isn’t bad at all. Up to 22nd April, a further net RM16.64 billion was borrowed, which was a little off the pace of last year and includes RM10.9 billion in redemptions (mostly in April). That puts total national debt to date at around RM378 billion, or a little over RM13,000 per capita.

I put my thoughts on the government’s debt position in a recent post and won’t repeat my comments on that here.

However, as an interesting side note, there was a very short and ill-publicised report that the government has already broken fiscal discipline to the tune of RM12 billion over and above the 2010 budget:

An additional allocation of RM12 billion will be approved for the 2010 Budget, said Second Finance Minister Datuk Seri Ahmad Husni Ahmad Hanadzlah.

He said the allocation was to implement the six National Key Result Areas (NKRA) under the 10th Malaysia Plan (10MP) and to cater for additional funds sought by various ministries.

That’s an additional 6.3% over the planned budget and almost wipes out the projected savings over the 2009 budget. The only saving grace with this is that the government has almost always underestimated its operational spending in its budget proposals – so this additional outlay is just par for the course (budget proposals against actual realisation, RM millions, 1998-2010):

To offset this profligacy somewhat, the Treasury has, apart from last year, also systematically underestimated revenue every year as well. I think revenue will again surprise on the upside this year – 6%-7% GDP growth is well within reach – which will help defray the additional expenditure.

Technical Notes:

1. Federal Government finance and public borrowing data from BNM's February 2010 Monthly Statistical Bulletin
2. March/April 2010 public borrowing data from BNM's FAST
3. Budget estimates from various copies of the Ministry of Finance Economic Report