Malaysians are shocked to learn that our country's debt is above 1 trillion Malaysian Ringgit. How did this happen? What is the impact on Malaysians?
The latest twist in the new Malaysia saga is that our country's debt is at an alarming RM1 trillion. Let's look into the details behind the high amount of debt.
The Malaysian Prime Minister (PM) Tun Dr Mahathir Mohamad has stated the cause of the RM1 trillion debt as abuses in the previous government led by former PM Najib Razak. This was confirmed by the Finance Minister Lim Guan Eng in a separate statement.
How did the Debt Increase?
Malaysian debt was previously at RM190b when Mahathir previously stepped down Prime Minister in 2003 (15 years ago).
Malaysian debt was previously at RM380b when Abdullah Badawi stepped down as Prime Minister in 2008 (10 years ago).
The debt increased from RM880b from 2018 Q1 to above RM1t today. It has been stated that certain "red files" were previously not accessible with many of these files rated to 1MDB.
Ministry of Finance paying for 1Malaysia Development Berhad (1MDB) debts since 2017.
Government-guaranteed debt excluded from the balance sheet estimated at RM238b.
Off Balance Sheet (OBS): asset, debt, or financing activity not on the balance sheet.
How much is 1 trillion ringgit?
What is the Debt Breakdown?
Prime Minister's Office (PMO) paid RM20b for operations with 17,000 political appointees which are to be axed and Permata Programme scrapped.
Leaner cabinet with ministers reduced from 35 to 25.
Ministers agree to salary cut by 10% (more of an example rather than significant savings).
Non-essential agencies and institutions such as the Land Public Transport Commission (SPAD), Special Affairs Department (JASA), National Council of Professors (MPN), Village Development and Security Committee (JKKK), Malaysian External Intelligence Organisation (MEIO), Performance Management and Delivery Unit (PEMANDU), National Innovation Agency (AIM), and Malaysian Global Innovation and Creativity Centre (MaGIC) to be disbanded due to overlapping functions and political influence.
Review of mega projects including East Coast Rail Link (ECRL), Bandar Malaysia, Tun Razak Exchange (TRX) and Pan Borneo Highway project.
A high interest on debt continues to snowball negatively adding to the government deficit every year. Creditors may be concerned about Malaysia's ability to repay debt and may charge higher interest rates. This is as creditor's risks are higher and poorer ratings by rating agencies. High interest costs can dampen economic growth.
Malaysia's high debt to GDP at 65% is above the recommended prudent limit for developed countries which is recommended at 60%. Developing and emerging countries are suggested at 40% with Malaysia's debt to GDP recommendation at 55%. Crossing the debt to GDP ratio may threaten fiscal stability, which is a fancy way of saying that public expenditure needs to be stable to smooth economic cycles and during times of crisis.
Malaysia's former PM Najib has criticized the government announcement of 1 trillion ringgit debt saying it will affect investors confidence and rating from credit rating agencies. The Finance Minister Lim Guan Eng has responded that the government holds to principles of competency, accountability and transparency (CAT) and want to establish a true baseline on state of financial affairs.
The Malaysian stock market has been having continued sell off by foreign funds since the new government change. The effect has been reduced with local institutional investors and retail investors continuing to have a net buy. Short-term pain is expected in the stock market as the clean-up continues with Bursa Malaysia dipping below 1,800 levels.
The new Malaysian government has shown signs of seriously tackling the high levels of debt. Various actions taken will help reduce the debt levels. However, the high amount of 1MDB debt and debt servicing interest payments are a major drag unless able to be resolved. The zero rated GST and temporary pause to SST may boost spending leading to economic growth.
Malaysia should be able to pull through even when the next recession hits by having high reserves, high liquidity, and reducing unnecessary expenditure. Every country, organization and individual must plan ahead for their finances.
Are you confident in Malaysia tackling the RM1 trillion debt?