Growing debt pressure with recession risks

PETALING JAYA: While the government’s current debt level is manageable, there is growing pressure for the debt burden to increase in the wake of looming recession risks in the United States and developed economies.

Exacerbated by rising global inflation, economists agreed that it was necessary to adopt the right strategies to keep debt levels at bay over the medium to long term.


The government has kicked off the ball by announcing the austerity drive, but more is needed, they said, noting that rising debt levels would impact fiscal space and lead to higher debt costs. debt servicing.

Federal government debt at the end of June 2022 stands at RM1.045 trillion, or 63.8% of gross domestic product (GDP).

AmBank Group Chief Economist Anthony Dass told StarBiz that while government debt fell slightly to 63% of GDP in the first quarter (1Q22), from 63.4% in 4Q21, there is still a pressure for the overall debt burden to increase this year. That could happen if the budget deficit widens above 6%, he said.

The government is targeting a budget deficit of around 6% of GDP for the year, an improvement from 6.4% in 2021.

Dass, who is also a member of the Economic Action Council Secretariat, said: “Even if Malaysia’s public debt burden increases, it is unlikely to exceed its debt-to-GDP ceiling of 65 % in 2022. The debt burden threshold is set at a debt-to-GDP ratio of 70% and a gross financing need to GDP of 15%,” he noted.

Rising debt levels would lead to higher debt service charges, he said, noting that this would have a ripple effect on maintaining the government’s ability to allocate other spending.

“What is crucial now is for the government to reaffirm its commitment to a concrete medium-term fiscal consolidation plan to bring its fiscal deficit back to pre-Covid-19 levels.

“There is a need to reaffirm the commitment to medium-term fiscal consolidation as outlined in Malaysia’s 12th plan with a deficit target of 3.5% of GDP by 2025.

“The continued provision of medium-term fiscal support should lead to a more gradual pace of fiscal consolidation, leading to a more moderate decline in the debt-to-GDP ratio.

“However, the planned fiscal reforms, anchored by the introduction of the Fiscal Responsibility Act, the adoption of the medium-term revenue strategy and the expenditure reviews, will accelerate the recovery of fiscal consolidation after the crisis” , said Dass.

These initiatives, he said, would create sufficient reserves to ensure medium- and long-term fiscal and debt sustainability.

Meanwhile, Fitch Solutions Country Risk and Industry Research has revised its budget deficit forecast for Malaysia for 2022 to 6.5% of GDP, from 6.3% previously.

He expects the government’s overall debt burden to increase this year, especially in light of the expectation of a larger budget deficit for this year.

Fitch Solutions has also revised its 2022 spending forecast upwards to RM364 billion (21.7% of GDP), from RM334 billion (21% of GDP) previously, to reflect additional government spending for maintain fuel and food subsidies.

He noted that the government’s lack of a concrete medium-term fiscal consolidation plan to bring its fiscal deficit back to pre-pandemic levels poses a downside risk to debt sustainability.

Juwai IQI’s global chief economist, Shan Saeed, said the government could take two options to manage its debt. It could undertake either debt restructuring or debt structure profiling.

Juwai IQI Global Chief Economist Shan SaeedJuwai IQI Global Chief Economist Shan Saeed

He said the first changes the financial structure of liabilities to reduce their net present value. The latter covers the overall schedule of the country’s present and future repayments through refinancing, debt substitution and renegotiation with financial institutions and multilateral institutions.

Furthermore, he said that pre-emptive negotiations are becoming more fashionable to avoid the risk of default.

However, Shan does not expect a higher debt-to-GDP ratio for this year. With rising oil and commodity prices, an upsurge in trade and commerce and an increase in the size of GDP, he said debt levels would decline and the government would be able to shore up the side. balance sheet budget.

“The debt-to-GDP ratio can be expected to decline to 61% or 62% while the budget deficit will remain below 6% from the current level of 6.4% this year.

“Any debt to GDP ratio above the 90% threshold can lead to an economic disaster for the country. Malaysia’s sovereign debt level is well below the threshold stage. In addition, investors have a strong confidence in the country and its leaders,” he said.

On another note, he said he expects the government’s statutory debt to remain at 60.4% of GDP, thanks to rising commodity prices and strong trade performance.

Under the Temporary Public Finance Measures (Coronavirus Disease 2019) (Amendment) Act 2021, it is stipulated that the statutory debt ceiling shall not exceed 65% of GDP.

OCBC bank economist Wellian Wiranto said that in the short term, the decision to make the higher debt ceiling arrangement permanent would give the government more breathing room, particularly in light of the need to subsidize food and energy products because of the risk of inflation.

OCBC bank economist Wellian Wiranto said that in the short term, the decision to make the higher debt ceiling arrangement permanent would give the government more breathing room, particularly in light of the need to subsidize food and energy products because of the risk of inflation.

“In the medium term, however, much more needs to be done to address the root cause of the problem, namely the undiversified sources of government revenue that contribute to the high budget deficit.

“To finance such a deficit deficit, the government must inadvertently borrow more, which translates into a net increase in the already relatively high debt stock.

“Therefore, to that end, we see the likelihood of a reintroduction of the Goods and Services Tax to close the fiscal gap and ultimately reduce the marginal addition to debt,” Wellian said. .

Economist Shankaran Nambiar said the government needs to carefully manage its debt, fiscal policy and growth path because managing debt is not the same as avoiding it.

He said with the United States set to enter recession next year, it is even more important to keep an eye on Malaysia’s debt levels and be prepared with the right accumulation strategies. and debt management.

“There is also a need to prepare a strategy to reduce debt and return to balanced books,” said Nambiar, research director at the Malaysian Institute of Economic Research.

HELP University economist Paolo Casadio said the optimal level and management of debt depends on the scenario the country finds itself in.

“In our base case of slow growth, we should think about selected measures to stimulate the economy with a good coverage of the total level of debt relative to GDP.

“In the riskiest scenario, where there could be a slowdown in growth, the government should be ready to intervene much more decisively, with additional budget to avoid a hard landing of the economy,” he said. -he declares.

Geoffrey Williams, a professor at the University of Science and Technology Malaysia, said the government needs to reform the subsidy process by introducing initiatives such as tiered petrol pricing and major supply-side reforms to remove monopolies, cartels and regulatory restrictions.

“We must not follow a narrative that the solution to today’s problems lies in higher interest rates, austerity, or cuts in government spending and debt.

“The solution lies in supply-side reforms, freeing up the market and accommodating policy while making those reforms,” ​​Williams said.

Casadio predicts the economy will slow or enter a recession in the second half, while Williams maintains its forecast for growth of around 3.5% for the year.