Wednesday, 8 July 2020

What is Sustainable Maximum Sovereign Debt?

Lee Heng Guie in Focus Malaysia, June 22, 2020 reported that many governments have accumulated more debt than ever. At the end of 2019, global public debt stood at USD70 trillion or 27.5% of the total global debt (USD255 trillion). That’s 80% of global GDP (of USD87 trillion in 2019, IMF).

With Covid-19, fiscal response is in high gear and debt burden will rise significantly. Record low interest rates allow more borrowings. As at end 2015, debt to GDP ratio stood at 243% in Japan, 105% in the U.S., 92% in the Eurozone and 90% in the U.K.

Where is the limit? Reinhart and Rogoff in a best-selling book (This Time is Different: Eight Centuries of Financial Folly) examined the booms and busts that shape today’s global economy. A key finding was their 90% limit on debt to GDP. Exceeding that may lead to appreciably slower growth.

Academicians have worked on maximum sustainable sovereign debt for decades.  And what is maximum sustainable debt? It represents claims on future output. Figure below shows a country’s maximum sustainable debt and growth rates of 23 OECD countries for period 1980-2010.

The countries that grow more can afford to borrow more. They can depend on faster-growing output to service their higher borrowing cost. Whether they do borrow is another matter.

What about Malaysia?

The statutory limit of Federal Government’s outstanding debt must not exceed 55% of GDP.

As at end March 2020, Federal Government debt stood at RM823.8 billion or 58.8% of GDP, which exceeds the statutory limit. There is a need to seek Parliament’s approval for the stimulus packages and also for the 2021 Budget.

We did have a debt to GDP ratio of 60.1% to 93% of GDP during 1982-1991. The limit of 55% was effective from June 2009. In addition, the fiscal stability framework has set an administrative rule that debt service charges (DSC) must be kept below 15% of revenue or operating expenditure. As at end 2019, it was 12.5%. And the 2020 Budget had it at 14.5% of total operating expenditure.

To be within the self-imposed limit/rule, the Government has to increase selected taxes or cut expenditure, which looks unlikely in the current economic situation. But there are industries that do exceptionally well in this pandemic, glove and healthcare, food delivery, digital platforms (for goods/services), energy and communications. It is good to re-examine a “super” profit tax or a levy on glove manufacturing, digital platforms and others that may help build new capacity and ease burden of sectors that are in dire straits. Perhaps, the Minister of Finance could examine new and creative ways of increasing revenue!

1. Malaysia’s Government Debt: How Is It Sustainable?, Lee Heng Guie, June 22, 2020, Focus Malaysia
2. The Reluctant Defaulter: A Tale of High Government Debt, Fabrice Collard, Habib Michael, Jean-Charles Rochet, 13 July 2016 (
3. Rogoss: Why This Time Is Really Different, Caleb Silver, Jun 15, 2020 (

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