M’sia debt ratio nears ‘worrying levels’ and near the country’s mandated debt ceiling of 55 per cent of GDP: BOA; In the 1960s, the limit was made law by then-finance minister Tan Siew Sin to ensure fiscal prudence

PUBLISHED SEPTEMBER 07, 2013

M’sia debt ratio nears ‘worrying levels’: BOA

S JAYASANKARAN BTWORLD@SPH.COM.SG

A US bank has warned that Malaysia’s ratio of public debt to gross domestic product (GDP) “is approaching worrying levels”. In a report yesterday, Bank of America Merrill Lynch (BOAML) said that the country’s debt-to-GDP ratio had risen to 54.6 per cent at the end of the second quarter, from 53.8 per cent in the first quarter. If BOAML’s estimate is right, the figure is just shy of the country’s mandated debt ceiling of 55 per cent of GDP. In the 1960s, the limit was made law by then-finance minister Tan Siew Sin to ensure fiscal prudence.BOAML said that it could worsen. “Rising longer-term bond yields (and hence higher debt-servicing costs) may accelerate the climb,” said its economist, Chua Hak Bin.

Meanwhile, total debt including guarantees is piling up.

“Government guaranteed debt came in at RM147.3 billion (S$56.4 billion) in the second quarter, slightly lower than RM147.8 billion in the first quarter,” said Dr Chua. “Adding this to public debt brings the quasi-public debt to about 70.2 per cent of GDP at the end of the second quarter, up from 69.4 per cent during the first quarter.”

Prime Minister Najib Razak is expected to address the country’s public finances in his Oct 25 budget speech. A start was made last Monday when he raised petrol and diesel prices by 10 per cent while promising to stagger several big-ticket infrastructure projects to relieve the country’s current account.

Right now, however, the focus seems to be on preserving growth. On Thursday, Bank Negara Malaysia (BNM) left the overnight policy rate unchanged at 3 per cent, saying that domestic demand would continue to support growth. Meanwhile, private consumption would be anchored by sustained income growth and stable labour market conditions.

On the fuel price hikes, the central bank said that the effects would be “contained by targeted financial assistance”.

Mr Najib has already promised handouts to poor households. Even so, the central bank remained wary, cautioning that growth “could be affected by risks in the global economy and international financial markets”.

BNM has already lowered its 2013 GDP growth forecast to 4.5-5.5 per cent from 5-6 per cent. BOAML was a lot more pessimistic, forecasting growth at 4.3 per cent in 2013 and 4.8 per cent in 2014. The central bank also acknowledged that inflation would increase for the rest of the year due to domestic cost factors.

The increase would, however, be “mitigated by a stable external price environment, expansion in domestic capacity and moderate domestic demand pressures”.

BOAML agreed. “This is in line with our expectations,” it said, adding that the raised fuel prices would “impact headline inflation by about 0.3 percentage points”.

The weaker ringgit would add to these pressures.

“We expect inflation to average at a higher (but manageable) 2.3 per cent this year, versus 1.7 per cent in in 2012.”

BOAML also echoed the consensus view that BNM was likely to keep rates on hold for the foreseeable future. “Concerns over household leverage (83 per cent of GDP in the first quarter) and the potential capital outflows on (the US’s) QE tapering would probably rule out any rate cut.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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