HAVING a debt-to-GDP (gross domestic product) ratio that is lower than other countries is not an assurance that Malaysia’s debt situation is in a healthy condition, an economist said.

Jarren Tam, a senior policy analyst at the Centre for Public Policy Studies (CPPI), said Prime Minister Najib Razak’s comparison of the country’s debt-to-GDP ratio with Japan’s higher ratio, for example, to prove that Malaysia’s economy was healthy, was misleading.

In Japan, while GDP has contracted, the country has had a high debt-to-GDP ratio for more than a decade without creditors losing faith in its ability to repay debts, said Tam.

“So the amount of debt which is considered ‘too much’ is country specific and must be assessed based on a country’s fiscal situation,” Tam told The Malaysian Insight.

He said Najib’s comparison with Singapore’s debt-to-GDP ratio of 112%, was also not “particularly accurate” in measuring dangerous debt levels.

Without including government guaranteed loans, Malaysia’s federal government debt has grown an average of over 10% a year from RM266.7 billion 2007 to reach RM681.5 billion in 2017.

At that rate, on-budget government debt could reach RM1 trillion by 2021, RM2 trillion by 2028 and RM3 trillion by 2032.

Last month, Najib said the total government debt of RM681.5 billion or 50.9% of the country’s gross domestic product as of June 2017, compared favourably against other countries as they amount to just half of Malaysia’s economy, such as Singapore’s 112%.

However, economists have pointed out that Najib did not mention debts accumulated by statutory bodies which are guaranteed by the federal government, but which were not revealed in Parliament.

The Edge had recently calculated such off-budget spending to be at least RM221 billion, or 16.9% of GDP.

“RM221 billion is one third of total government debt, so adding in this figure would result in government debt approaching 70% for the debt-to-GDP ratio,” Tam said.

“This figure has been increasing every year and it’s a convenient way for the government to shift the debt figures to statutory bodies so it does not look bad on paper with regards to ballooning government debt.”

Tam said an obvious example was the MRT (Mass Rapid Transit) project, which was not listed in government debt figures because it is undertaken by DanaInfra Nasional, which caused a 43.4% increase in government guaranteed debt.

The cost for the MRT could amount to RM93 billion by the time the MRT 3 Ampang Jaya-Sentul track is completed in 2027, according to estimates by CIMB Equities Research.

In The Edge’s compilation of federal government loan guarantees, the largest portion was for the National Higher Education Fund Corporation (PTPTN), which has debts of RM40.35 billion in 2016.

The next portion comes from DanaInfra Nasional Bhd which has loans of RM29.7 billion in 2016.

1Malaysia Development Bhd, which is owned by the Finance Ministry, reported in October that its outstanding obligations amounted to RM32.5 billion, comprising sukuk debt and long-term bonds, with some maturing in 2036.

Putrajaya is unable to reduce its operating expenditure, which has seen a steady increase over the years, even as a ratio to development expenditure, Tam added.

Malaysia’s operating expenditure for Budget 2018 was reported to be RM234.25 billion, up 9% from RM214.8 billion the year prior, even as the allocation for development remained at RM46 billion for two years running.

The government’s operating expenditure alone comprise 83.6% of the 2018’s RM280.25 billion budget.

“In other words, the government has relied on increasing revenue collection, primarily through implementation of the goods and services tax, and nurturing economic growth to increase GDP figures,” said Tam.

“This combination has allowed the debt-to-GDP ratio to decrease marginally as well as to facilitate the crawl towards a balanced budget,” he said.

Economist Jomo Kwame Sundaram has said higher government debt would mean that servicing just the interest for those borrowings would divert funds from other sectors, such as healthcare or education.

Jomo called such off-budget spending with “dubious” public-private partnerships “fiscally irresponsible” as it was less transparent.

According to the treasury department’s latest Economic Report 2017/2018, the federal government’s debt service charges are expected to be at RM31 billion for 2017, or at least 13% of GDP.

In comparison, Malaysia’s GST collection for 2017 was RM41.5 billion. – March 7, 2018.