Is Malaysia’s Debt Level to Hit 70% of GDP?

 A scary thought is how many generations of Malaysians will it 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 views that the 70% threshold is not far off. The debt limit was raised to 65% and will remain there provisionally until the end-2022, according to Fitch Solutions.

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.

Fitch Solutions believes 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. This would mean reduced spending for several years depending on how much rationalisation the government is prepared to undertake and may pose a direct headwind to growth.

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. With reduced long-term growth prospects (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.

The Modern Monetary Theory (“MMT”) on the contrary suggests:

• large government debt is not a precursor to collapse;

• countries like U.S. can sustain higher deficits;

• a small deficit or surplus is more harmful

They (MMT theorists) argue that comparing a government’s budget to that of an average household is a mistake. While inflation is possible, it is unlikely and can be addressed by policy decisions and through surplus resources (availability of real resources). MMT was developed by Mosler and Stephanie Kelton is now the high priest (of MMT).

Against the above is the thesis by Carmen Reinhart and Kenneth S. Rogoff (Harvard) who suggest that average growth rate will be 2% lower when the 60% debt threshold (debt to GDP) is breached and negative when the 90% debt threshold is surpassed. The underlying debt (private and public) is external in their thesis. And  if you look at Japan it has a debt to GDP of over 250%, largely domestic. Its external debt is 93% of GDP resulting in very tepid growth. 

Nevertheless, prudence will suggest our debt level needs to be addressed by better “checks and balances” on budget allocations; tax reforms; and, a widening of the tax base. Alarm bells on this “Titanic” is slow to sound! 

References:

Fitch Solutions: Malaysia’s debt level on course to hit 70% of GDP, Cheah Chor Sooi, Focus Malaysia (https://focusmalaysia.my)

Modern Monetary Theory (MMT), Deborah D’Souza, Feb 3, 2021

Growth in a time of debt (Digest Summary), Carmen M Reinhart/Kenneth S. Rogoff, American Economic Review