Sovereign contingent claims analysis needed: Professor

PETALING JAYA: The government should conduct sovereign contingent claims analysis and include the estimates in the budgetary process, said Sunway University Business School Professor of Economics Prof Dr Yeah Kim Leng.

“I think the government should conduct that kind of sovereign contingent claims analysis so that we can estimate and include it in our budgetary process for those contingent liabilities that may crystallise in the future, and of course take measures to address them before they happen,” he told reporters on the sidelines of Rehda Institute's Budget Commentary 2017 yesterday.
He said these analyses are important given the large number of mega projects that need to be well coordinated in order to avoid a lumpy impact on the economy.
“It is important to sequence it properly so that there is no sharp increase in our debt that will derail our fiscal soundness,” he added.
Yeah, who was responding to questions on whether 1Malaysia Development Bhd (1MDB) should be included in government debt, said in terms of contingent liabilities the government must study the likelihood of the events crystallising that would lead to the government having to bear the debt.
“Some of the liabilities are very long term so what we need to do is assess the profile of the liabilities to ensure that there is no possible event risk when they are all lumped together, the repayment will exceed our current operating surplus that may derail our liquidity. It is more of a liquidity issue,” he said.
Yeah said rating agencies do consider the amount of contingent liabilities and assess the vulnerabilities and possibilities of the contingent liabilities crystallising as part of their due diligence, although they may not publish it.
“These are the hidden risks which if the rating agencies do not take into consideration it may affect the reliability and credibility of the rating,” he said.
On the property sector, Yeah said developers need to undertake some rebalancing in terms of focusing on the affordable segment.
“The overall Budget 2017 is likely to be neutral for the mid and higher end segments of property market largely because there is increasing supply of those houses that more than meet current demand. The imbalance is in the affordable segment where there is a need for higher supply,” he said.
He said it is timely to shift focus with Budget 2017 allowing that kind of shift and creating more incentives for developers to focus on that segment.
In terms of price trends, Yeah said prices are still holding up although price growth is decelerating.
“The latest house price indicators suggest it is still growing at around 5%, which is slightly below the trend. We are seeing a soft landing for the property sector,” he added.