PETALING JAYA: While government debt levels are expected to rise in the near term, this will not justify a downgrade of the country by global rating agencies, economists say.
Sunway University economics professor Yeah Kim Leng told StarBiz that government debt is currently rated one level above BBB investment grade, but at A- it is at one step from falling into the BBB category.
It is concerning that countries with similar sovereign ratings of A- have lower debt levels, he said.
So far, Yeah said Malaysia has been able to avoid a downgrade by two of the world’s three credit rating agencies due to its better gross domestic product (GDP) growth performance and low currency exposure.
“It will also need to demonstrate its commitment to fiscal consolidation and tax reforms to improve its fiscal metrics to avoid any potential downgrades that will increase borrowing costs and make public debt less attractive to investors,” he said. he declared.
In December 2020, Fitch Ratings downgraded Malaysia from A- to BBB+.
One of the reasons for the downgrade was its increased fiscal burden, which was high compared to its peers at the start of the health crisis.
Yeah said total government debt and liabilities, which include guarantees, 1MDB and other financing commitments, are estimated at 88.1% of GDP at the end of 2021.
Direct public debt below 65% of GDP and total liabilities standing at 88.1% of GDP are generally considered high for emerging economies, he said.
For the second quarter of this year (2Q22), total federal government debt stood at almost RM1.05 trillion, compared to RM1.01 trillion in 1Q22. In 4Q21, the debt level was around RM980 billion. (See table)
Juwai IQI’s global chief economist, Shan Saeed, does not foresee over-indebtedness or distress debt pressure on the national economy. He attributed this to strong GDP, robust consumption, investment flows and rising trade figures.
“At Juwai IQI, we are closely monitoring the situation in many countries. Global investors seek stability and prudence in managing the economy with a strategic approach.
“Rating agencies are losing their relevance as more countries and investors focus on the country’s macroeconomic stability, not the A, B or C rating status label.
“After Covid-19, markets are not obsessed with short-term analysis but rather with long-term impacting variables like infrastructure, domestic consumption and most importantly, trade and commerce numbers.”
Stable governments attract domestic and international investment into the economy, Shan added.
Based on the latest report from the Malaysian Investment Development Authority, the country’s total foreign direct investment (FDI) and domestic direct investment (DDI) stood at RM123.3 billion from January to June. .
FDI remained the largest contributor to total approved investment at 70.9% or RM87.4 billion.
Meanwhile, economist and CEO of the Center for Market Education, Carmelo Ferlito, said he was not too concerned about ratings from ratings agencies, as investments could still flow in with the right institutional and regulatory framework. .
He said a lot also depends on how funds are spent as well as structural and sound investments driven by market needs or subsidies and current expenditures.
“Debt becomes a problem when there is inflation (additional money flowing into the system) and therefore creating an artificial growth path, not supported by real fundamentals and such a situation would lead to a slowdown.
“Furthermore, increasing debt by undermining growth is seen as shifting the burden onto future generations, also in terms of fewer opportunities,” he noted.
Economist Shankaran Nambiar, who is also head of research at the Malaysian Institute of Economic Research, said there was no doubt that Malaysia was facing troubled waters with rising debt, recessionary pressures, a weakening ringgit and a challenging global scenario.
“There are several issues that need to be overcome such as the tight fiscal situation, weakening local currency, inflationary pressures and external economic conditions.
“The global economic environment is easing and external demand may not be strong heading into 2023. At a more disaggregated level, the electrical and electronics (E&E) sector cannot be expected to support the economy.
“The semiconductor industry in Malaysia will see weaker demand in line with the slowdown in global demand. As the E&E sector is a significant contributor to the economy, we will have to bear the impact,” said noted Nambiar.
So, does Malaysia have the right policies to ensure its debt situation doesn’t get worse?
Yeah said that in the last budget, the Ministry of Finance unveiled a revised medium-term fiscal framework that commits the government to a gradual approach of fiscal consolidation and strengthening public finances through tax reforms and a expenditure review.
A targeted fuel subsidy program is urgently needed to reduce the tax burden and unproductive use of scarce revenue and non-renewable natural resources, he said.
“On the revenue side, the structure, composition, tax base and tax rates need to be adjusted to arrest the decline in the tax revenue-to-GDP ratio of 11% in 2021 from levels seen in previous decades. .
“The tax-to-GDP ratio averaged 17% in the 1990s, 15% in the 2000s and 13% over the past decade,” Yeah said.
Shan de Juwai said that over the past two years, the government has used fiscal and monetary policies to boost the country’s economic growth.
He noted that the current debt-to-GDP ratio of 63.3% and the budget deficit at 6% are well below the red flag thresholds.
“The government has done a good job in managing the economy. Monetary policy seems stable at the moment and Bank Negara has taken good steps – strategic and tactical to maintain caution in the monetary landscape.
“The central bank has successfully fulfilled its price stability and growth mandate. It has ample leeway in monetary policy to raise rates to reduce inflationary pressures.
“The ringgit might be under pressure due to the rising dollar, but it will eventually rebound and soon reach its fair market value between 4.15 and 4.30 against the greenback,” Shan said.
Ferlito, however, felt that there were no good policies currently in place to tackle the debt situation.
For example, the plan to launch targeted grants is just a discussion at this point.
The same goes for actions to reform the tax system (to improve revenues) and rationalize public expenditure (to reduce costs), he said, adding that the discussions at this stage are more focused on the 15th general election.