PETALING JAYA: The increase in Malaysia’s government debt ceiling to 60% of the gross domestic product (GDP) is seen as a necessary measure for the country’s economy to ride out the Covid-19 pandemic-induced downturn, according to analysts.
Inter-Pacific Securities head of research Victor Wan opined that the increase in the statutory debt ceiling by 5 percentage points, which translates into an estimated RM72.37 billion, is done out of necessity as the country needs stimulus to fund infrastructure projects and pump prime the economy.
“However, there is a need for the government to strike a balance between its financial standings or sovereign ratings and its needs for funds, as a downgrade in rating would raise its borrowing cost,” he told SunBiz.
In regard to Malaysia’s debt-raising ability, Wan related that consensus expects Malaysia to remain in FTSE Russel’s World Government Bond Index following its annual review this month, which would staunch further outflows from the country.
Moving forward, he cautioned that Malaysia’s tax receipt is expected to remain weak unless it reintroduces the broad-based goods and services tax, although there is some room for expansion in the tax receipt with the inclusion of online service providers to the sales and service tax regime, earlier this year.
In July, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said government debt, including guarantees and other contingent liabilities, amounted to RM1.2 trillion (82.9% of GDP as of Q2’20) and RM854 billion (59% of GDP) excluding those two items.
However, MIDF Research’s economist Abdul Mui’zz Morhalim pointed out that the sharp increase in the debt-to-GDP ratio was not solely a result of increased government borrowing, but was also contributed by the large contraction in growth.
He said Malaysia’s growth figure is expected to recover in the third quarter of this year, as more businesses are allowed to reopen, which will be a positive development for the government’s fiscal position.
“Based on our calculation, a 3.5% growth in GDP could reduce the ratio of government’s debt to GDP by approximately 2 percentage points. Given recent signs of economic recovery and improving growth momentum, we do not foresee constraint to the government’s fiscal spending from the high debt position,” said Abdul Mui’zz.
Furthermore, he pointed out that an immediate cash payment of US$2.5 billion (RM10.36 billion) that was agreed as part of the US$3.9 billion (RM16.16 billion) settlement with Goldman Sachs over mishandling of bonds issued by 1MDB in 2012 and 2013, will directly improve revenue and free up more fiscal space for the government.
In the medium to long run, he said, the fiscal sustainability must be improved to allow greater fiscal space for the government to support the economy if necessary.
Abdul Mui’zz stressed that such spending plans need to be geared towards areas with high multiplier effect, such as education, technology and improved connectivity, and at the same time the government needs to explore any initiatives that may improve fiscal revenue, such as taxation on digital services and online trading.
Meanwhile, Sunway University Business School Professor of Economics Yeah Kim Leng believes that the worst is over, as local transmission of the Covid-19 has troughed, but external demand remains constrained as the pandemic infection is still rising worldwide.
Given Malaysia is an export-oriented economy, he said, the recovery projected to be gradual at a slower-than-expected pace as there is a demand deficit in the global economy.
For the future, Yeah called for a greater push in intra-Asean trade, given a potential decoupling of the US-China economy, with the world’s largest two economic powers entangled in a political, trade and technology tussle as well as the uncertainty over the US presidential elections in November.
“Malaysia has the opportunity to attract US firms that want to diversify out of China, although it should not place all its eggs in one basket and continue to foster a greater intra-Asean trade as well,” he said.
