Tag Archives: Economy

Malaysia’s External Debt

Debt

MALAYSIA’S EXTERNAL DEBT

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It is normal to see people get frightened when they hear the word ‘debt’. It is so because when you’re in debt, it means you owe someone a sum of money.

But that doesn’t always be the case in a financial term.

First- let’s go to the definition.

External debt refers to a country’s debt that was borrowed from foreign lenders, including foreign commercial banks, foreign governments or international financial institutions such as the World Bank and IMF.

This is the debt undertaken in non-RM currency.

It is important to note that the country’ debt doesn’t confine to the government only. Rather, it is the combination of all residents comprising both public and private sectors.

A caveat: residence is determined not by nationality, but by where the debtor has headquartered their center of economic interest.

Therefore, if any Mat Salleh borrows some USD money from Cayman Island and invest it in Malaysia, that should be taken into account.

The same goes to Malaysian citizens who bought the Euro dominated bond from Citibank Jalan Ampang.

So we know that the external debt here means the non-RM debt taken by the government, the private sectors, the big companies, the investors, the riches, or possibly you and me. Semua kasi campur.

Second- what constitutes the debt?

As far as external debt is concerned, it is placed within four categories which are:

  • Loans taken from World Bank and IMF
  • Private non-guaranteed debt
  • Public debt and public guaranteed debt
  • Central bank deposits

For example- the Jambatan Kedua Pulau Pinang was built using Renminbi-loan from China. That is external debt.

Another example is the 1MDB’s bond that is guaranteed by the government. That is also the external debt.

Basically, whatever you owed in non-RM and any non-RM debt you become a guarantor, that have to be considered as external debt.

Now back to the RM740 billion questions- why Malaysia’s external debt is tripled than 2013?

The answer: It was simply because of the new definition in international debt reporting standard starting last year.

Previously, you only count the government and private non-RM debt.

But today, you must include external offshore loans, public enterprises and the private sector non-RM debt, government-guaranteed non-RM debt and also Ringgit denominator security debt held by foreigners.

In other words, the debt-bracket has been broadened and expanded.

To illustrate the point- the 1MDB’s bond is guaranteed by the government. In reporting country’s external debt, this has to be included. Previously it won’t.

But the sharp increase is merely on paper. It is considered on paper because the actual debtor is 1MDB, not the government. The government only acts as the guarantor.

It’s like when you become a guarantor for your son’s PTPTN, the amount owed is considered your external debt. In calculating your net worth, you actually become ‘poorer’ due to your son’s debt. But is it so? Or you just become ‘poorer’ on paper?

The same goes to the government’s external debt.

As a matter of fact, two-thirds of the increase is caused by foreigners buying Ringgit-denominated securities. This is not surprising considering all the billions raised from the sukuk/bond issuance for MRT and ETP projects.

Seems the figure is too big (well, almost a trillion Ringgit), should that be a concern?

No. Singapore’s external debt is RM3.13 trillion. South Korea is RM1.13 trillion. Indonesia is RM927 billion. And you can imagine how many trillions ‘debt’ are there for most of the developed countries.

So, since the external debt is the cumulative debt undertaken by all Malaysians and the sharp increase is due to the new definition of external debt, how much did the government borrowed externally? The real debt-lah.

The Government’s debt stood at RM582.8bil. Of the total, 97.1% or RM566.1bil was domestic debt, while the remaining RM16.8bil or 2.9% was external debt.

There you go- the real figure that you need to be concerned. RM16.8 bil. Not much ha?

MatRodi

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Budget Deficit- Judging by Sense or Cents?

It’s normal to turn on your twitter or read a Facebook status these days encountering someone declaring (or parroting?) that excessive spending and the resulting budget deficit is Malaysia’’s biggest economy problem. Such declarations are usually accompanied by comparative analysis between former finance ministers’ performance in balancing country’s budget. And this declaration-as they say is apolitical.

Well, whether it is apolitical or not is another question. But most importantly, whether the ‘excessive’ debt and budget deficit does make sense or not.

Firstly, the budget deficit isn’t our biggest problem. Furthermore, it’s a problem that is gradually being solved.

Admittedly right now we have a large budget deficit. 4.5 % or RM42 Billion to be exact. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand.

Here is the situation; the financial crisis has created a situation in which almost all of the economy’s major players are trying to spend less than their income. Since my spending is your income and your spending is my income, this means someone has to spend. Apparently right now everyone wants to save and nobody wants to invest. Yes, that includes the private sector and free-market preacher.

Therefore it is the duty of the government to keep the economy robust. Since revenue is falling and everyone hates to pay more tax, government has no choice but to borrow some money.

Psychologically, if the government also don’t spend, who will?

Strangely, far from credited for this effort, everyone loves to make this short-run deficit an issue. It would be good if these people can give a name which country has made surplus budget in this turbulent time.

Whatever, will economic recovery be enough to reduce the deficit outlook? The answer is, pretty sure. The budget deficit has fallen from 6.6% in 2009 to 5.6% in 2010. Later it was 4.8% in 2011 and 4.5% last year. How is that possible?

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The key is by growing the economy. With a growing economy, revenue is increasing. With that extra revenue, it can be used to servicing the debt thus, reducing the deficit.

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For anyone who keeps parroting our debt is worrying, please look at Europe.

See the disastrous effect of harsh austerity on weak economies. See what would happen if the government choose to cut spending. See whether we like it or not when there is no money for everything just because we think budget deficit is more important than creating jobs and generates revenue.

Had we choose to borrow less, save more and cut this and that, Malaysia would be in the same league with Greece, Iceland, Spain, Portugal,Italy and Cyprus.

So, after this, when someone telling you to voted out the current government because of ‘excessive debt’ and budget deficit issue, please tell them “the borrowed money has contributed to the increase of Government’s revenue by 31.5% since 2009. The extra revenue has been used to debt servicing and for the benefits of the people. Any wonder where the BR1M money comes from? After all, bear in mind that our reserves stand at all time high- RM430 Billion.”

You can always voted out the current government if you want to. It is democratic to do so. But obviously, you should not do that based on this reason. It just doesn’t make sense. As someone told me, ‘voting with sense does not cost us anything, but voting with cents may cost us everything.’

MatRodi

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