Jitters over high public debt in Malaysia

Jitters over high public debt in Malaysia

Saturday, Aug 31, 2013

Yong Yen Nie

The Straits Times

MALAYSIA – With the Indonesian rupiah and Indian rupee plunging and economies in turmoil as foreign funds flee, economists are wondering if Malaysia is next. Malaysia, whose bond market now has a record level of foreign holdings, has not been spared as foreign funds return to dollar-denominated assets. As it is, the ringgit has already depreciated 7 per cent against the US dollar this year, to RM3.33 to the greenback.Economists are once again raising warning flags about Malaysia, saying its high public debt is putting the economy at risk of recession.

“The government will have to take steps to address concerns over rising public debt, including the sharp increase in government guarantees, and the worsening current account position,” Dr Chua Hak Bin, regional economist at Bank of America Merrill Lynch, told The Straits Times.

Malaysia, which has run a budget deficit for more than 15 years, now has the highest level of public debt in South-east Asia.

Government debt was at 53.5 per cent of gross domestic product (GDP) last year, higher than Indonesia’s 25 per cent but lower than India’s 68 per cent.

Recently, Fitch Ratings downgraded Malaysia’s credit rating from stable to negative, citing a lack of government clarity in reining in high public debt.

Meanwhile, household debt – loans to finance mortgages, cars and credit card spending – is the highest in the region at more than 80 per cent of GDP.

All these have raised concerns of a repeat of the 1997 financial crisis, when the collapse of the Thai baht triggered a regional recession.

Malaysia’s economy – which grew 4.3 per cent in the second quarter of this year, compared to 5.4 per cent in the same period last year – is dependent on domestic spending to fuel expansion, to make up for poor demand for its exports from weak economies in the United States and Europe.

Its current account surplus, reflecting the nation’s exports and imports as well as investment flows, narrowed to only RM2.6 billion (S$1 billion), or 1.1 per cent of its economy, in the second quarter of this year. That is the lowest surplus since the financial crisis that hit the region more than 15 years ago.

To be sure, Malaysia may yet avoid trouble. On Wednesday, the Malaysian Investment Development Authority, a government agency, said total approved investments increased to RM97.4 billion in the first half of this year, from RM75 billion in the same period last year.

But economists said the government must take drastic measures to cut spending, including reducing subsidies, such as those on fuel, sugar and cooking oil. These cost about RM40 billion annually.

Malaysia will also need to try to slow the growth of household loans by imposing higher restrictions on property financing, or risk hurting business growth instead.

High public debt tends to discourage private investment as financial institutions may take up more in government debt papers due to their attractive returns, leaving less for lending to private companies.

Some businesses are already staying on the sidelines.

According to central bank statistics, business loan growth slowed to 5.8 per cent in June, from double-digit monthly growth throughout last year.

Mr Teh Kee Sin, a manufacturer who supplies electronic parts to the US and European markets, said he is reluctant to borrow for expansion.

“At the moment, I am just concentrating on managing my costs,” he said. “They say a weak ringgit is good for exports, but don’t forget we buy raw materials using the US dollar too.”

Dr Yeah Kim Leng, chief economist of RAM Holdings, said the government is likely to focus on implementing structural reforms in the economy only after the Umno election – due by December – is over.

“The political overhang is not helping the business climate, and so GDP will be capped.”