By Lee Heng Guie
SINCE the implementation of full movement control order (FMCO) under Phase 1 of the National Recovery Plan starting June, there were growing calls for the Government to dish out more stimulus through direct fiscal injection to shelter the economy, households and businesses from the ravaging impact of COVID-19 pandemic.
Since March 2020 till June 2021, the Government has rolled out eight economic stabilisation, stimulus and recovery packages totaling RM530 bil or 36.4% of gross domestic product (GDP).
Of the total, the Government’s direct fiscal injection is RM87.6 bil or 6.0% of GDP while the balance is coming from the Employees Provident Fund (EPF), Bank Negara Malaysia (BNM), financial institutions and development financial institutions, Social Security Organisation (SOCSO) and government-linked companies (GLCs).
Following a series of stimulus checks and spending amid lower revenue collection, the Federal Government’s overall fiscal deficit target is estimated to increase to 6.5%-7.0% of GDP in 2021 (2020: -6.2% of GDP).
Higher financing requirements have pushed the Federal Government’s statutory debt level to 58.5% of GDP by end-2021 (end-March 2021:RM856.7 bil or 54.6% of GDP), leaving 1.5% points below the debt ceiling ratio of 60%.
How much money is left to spend?
Table 1 indicates that since 2020, a sum of RM482.2 bil has already been spent, making up 52.6% of total amount approved to limit the economic and financial damages from the prolonged pandemic impact which has compelled multiple stages of lockdown and restricted containment measures as well as restricted mobility.
Our estimation shows a balance of RM435.3 bil to be spent this year.
Table 1: Estimated money already spent and the balance to spend
Source: PEMULIH speech on June 28; own estimates
Should the Government forget the deficit for now, and spend our way out of this pandemic if more relief checks expenditure is still needed?
Can the Government raise the debt ceiling of 60% GDP? Who can lend the government such large sums? At what cost? What are the potential implications? And how are Malaysians going to pay it all back? Is the Federal Government going to have to raise taxes and cut regular spending once the COVID-19 crisis is over?
- Debt Ceiling – Raise higher by how much?
Prior to the COVID-19, Federal Government’s debt of 55% of GDP is a self-imposed limit applied to both domestic and external debts.
However, to provide more fiscal flexibility, Parliament has approved the Temporary Measures for Government Financing [Coronavirus Disease 2019 (Covid-19)] Act 2020 (COVID-19 Act) to increase the limit to 60% of GDP for Malaysian Government Securities (MGS), Malaysian Government Investment Issues (MGII) and Malaysian Islamic Treasury Bills (MITB).
The Government is mulling to raise the debt ceiling by another 5% (or RM75 bil) to 65% of GDP if more funds are needed to meet more stimulus spending. Domestic liquidity remains ample. There remain strong foreign interests and demand for the Malaysian Government papers.
- Domestic vs external borrowings
The historically low borrowing costs give the Government greater scope to borrow domestically to boost spending. We believe that domestic and foreign investors’ (banks, insurance companies, pensions funds, investment funds and large corporations) appetite on Malaysian bonds still strong.
As of end-June 2021, foreign investors owned RM222.9 bil worth of Malaysian government debt securities, making up 25.7% of total Malaysian debt securities.
If there is a lot of demand for the government’s bonds relative to their supply, then interest rates will be low. This means that the cost to Malaysian taxpayers and beneficiaries of government services should be minimal.
BNM has owned Federal Government papers worth of RM11.4 bil in the secondary market (from financial institutions and corporations) as of June 2021, as opposed to directly from the government itself (the primary market).
In so doing, the central bank has indirectly pushed up the demand for Federal Government papers. In fact, it is as if BNM was lending directly to the government at very low interest rates.
There is limitation for the Government to source external borrowing as the External Loans Act 1963 sets the statutory limit for offshore borrowing ceiling to not exceeding RM35 bil.
As of end-March 2021, the Federal Government’s external debt stood at stood at RM28.2 bil. On April 22, the Government raised US$1.3 bil (RM5.3 bil) in the world’s first sovereign US Dollar Sustainability Sukuk, leaving a balance of RM1.5 bil to tap on.
The question: Does the Government want to raise its external borrowing ceiling now? We have to weigh on foreign exchange fluctuation exposure and higher US borrowing cost ahead as the Fed is preparing to taper bond purchase and increase interest rate in 2022-2023.
- Tax revenue
The narrowed tax revenue base (11.1% of GDP in 2020), declining revenue responsiveness to growth in national income (to 0.9% in 2019 from 2.1% in 2011), and a large tax gap (20% of GDP) constrained the revenue collection to meet higher committed expenditure.
Higher crude oil price is a windfall gain for the budget revenue. An additional oil revenue of RM5.4 bil (RM300 mil for every US$1/barrel) can be expected if oil price is averaged US$70/barrel compared to the 2021 Budget’s assumption of US$52/barrel. However, this is partially offset by RM7 bil for the stabilisation of fuel prices and cooking oil price subsidy.
In the Budget planning post COVID-19, it is time to re-introduce the Goods and Services Tax (GST), says at 4.0%; plug revenue leakages on the illegal smuggling of cigarettes and tobacco as well as counterfeit products; stem illicit outflows; as well as plug the shadow/black economy estimated at 21% of GDP (RM300 billion).
Further rationalisation of non-critical expenditure; clamping down leakages and wastage; public pension reforms; and the rationalisation of social protection system are among the policy priority of reforms.
We believe that the Government will be conscientiously engaging with global rating agencies to reassure that Malaysia remains committed to gradually consolidate its deficit level and contain debt sustainability trajectory in the medium-term without disrupting the momentum of economic recovery. – July 12, 2021
Lee Heng Guie is the executive director of the think-tank, Socio-Economic Research Centre (SERC).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
