A SCARY thought indeed as to how many generations of Malaysians it will take to pay off the debts amassed by the country.
With government debt having hit 64.3% of gross domestic product (GDP) in 2Q 2021 – after rapidly escalating from 52.5% of GDP in 4Q 2019 – Fitch Solutions Country Risk & Industry Research is toying with the notion that the 70% threshold is not far off.
Given a large deficit of 6% of GDP or above in 2022, the third such deficit in a row after 2020 (6.2%) and 2021 (6.8%), government debt is likely to continue climbing at a fast pace over the course of 2022, according to the research house.
“Unsurprisingly, our view that the Government would once again raise the debt limit played out in October when the debt limit was raised to 65% and will remain there provisionally until the end-2022,” justified Fitch Solutions which is independent of Fitch Ratings.
“However, this puts the government in a similar position as it was near end-2020 when it was already over the debt limit. Therefore, we believe that there will likely be another hike to the debt limit before the next legislative elections in July 2023 to 70% of GDP.”
In Fitch Solutions’ view, the large government debt load presents two possible scenarios for the Malaysian economy over the medium-to-long term.
The first is if the Government embarks on fiscal consolidation, gradually improving the fiscal balance and even paying down debt once pandemic risks recede more completely.
“This would mean reduced spending for a number of years depending on how much rationalisation the government is prepared to undertake and would pose a direct headwind to growth,” justified the research house.
“However, the longer-term fiscal health of the country would be improved as a smaller proportion of revenue will have go towards interest charges.”
The other scenario is if the Government continues to run consistent deficits after the pandemic is over. If these are kept to around 3% of GDP, then the public debt load can be kept somewhat steady.
“However, given the reduced long-term growth prospects (we expect growth to average around 3.7% between 2023 and 2030) in Malaysia, any sustained fiscal deficits significantly above 3% of GDP would lead to a rise in the government debt load,” opined Fitch Solutions.
“Investor concern about the sustainability of government debt would mount and could lead to an increase in borrowing costs. Given the more competitive political landscape, we believe that fiscal consolidation is the less likely scenario over the coming years which would weigh on long-term fiscal health.” – Nov 10, 2021
