Jun 6, 2009

Malaysian Government Needs to Borrow Money

Standard & Poor has rated an A-minus for Malaysia and said that its credit standing was constrained by a weaker fiscal position and the government’s contingent liabilities.

One or two more notches downwards and we will be close to junk bond status, S&P ratings are from AAA (best quality) AA (good quality) A (can be affected by changing economic situation) and BBB (just satisfactory at the moment) and any other grades lower are known as non-investment grade also called junk bonds.

You can read the full report in the link below but let me translate it for you here in layman’s term is that the rating agency (S&P) is concerned with the ballooning budget deficit which is at 8.5% of GDP as per the budget for 2009 which will see a budget deficit of RM.53.8 billion for the year or more if we were to include earlier and other stimulus packages which might be announced if the GDP continues to decline in coming quarters. And the debt servicing for the year 2008 alone amounts to about RM 30 billion.

And it said that gross government debt would rise to 47.9 percent of GDP (GDP is approximately RM 740 billion for the year 2008) which is the sum total of our national debt. The National Debt as at 2008 is over RM300 billion as compared to the RM 80 billion in 1997 which has more than tripled since than and about 2/3 of the national debt was incurred during the last 10 years and since 1970 we have had budget deficits every year except for 5 years of surplus from 1993 to 1997.

'The stable outlook reflects S&P's expectation that, despite the increase in Malaysia's fiscal deficit and the delay of fiscal consolidation in near term, the government will be able to refinance without a significant increase in interest rates or negative implications for the economy,' it said.

S&P said it was because of Malaysia's reasonably deep financial market, the public pension fund and social security funds, which could absorb some of the new government securities, and the country's net external position.

When there is a budget deficit than you would need to borrow to cover the deficit and our government will presently turn to the domestic market for most of its funding needs but for this huge sum it will mop up liquidity in the system and less funds will than be available to the private sector which might restrict the financial efficiency of doing business. When S&P says public pension funds and social security funds they are referring to EPF, Petronas, PNB and etc.

One thing that worries me are the contingent liabilities (Contingent Liabilities are hidden or uncertain liabilities), we don’t know how much federal government guarantees are out in the market as the Malaysian government seems to be extending guarantees to both privateers and government link companies (GLC) like the PKFZ (Port Klang Free Zone) with its RM12.5 billion losses and how much of it has been accounted for? And don’t forget the Trengganu Investment Fund of RM 10 billion set up on the back of a federal government guarantee. What about the adventurous multi billion ringgit development of the Iskandar development region of the state of Johor and the Bakun project of Sarawak and how much of federal government guarantee or liabilities are we exposed to?

Why can't our government be more prudent with money and balance its budget or be like China or like its little neighbor Singapore that generates surplus budgets and have created a huge reserve of savings which they can dip into in times of crisis like this.

Barisan National don’t have to pay the debt and all this huge deficit that they have created will have to be paid by its citizen and future citizens to come which is all our children and their children.

Read S&P report HERE
note: all figures quoted are only estimate and approximate.
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