Saturday, February 18, 2012

Of Debt Ceilings and Creative Accounting

The Loan (Local) Act 1959 and Government Funding Act 1983 puts in place a 55% federal government debt limit relative to Malaysia’s Gross Domestic Product (GDP) as determined by the Ministry of Finance (MoF).  Based on the Government’s Economic Report 2011/2, our federal government debt will hit RM455.7 billion as at the end of 2011 which works out to 53.8% of our GDP, or a whisker away from the statutory borrowing ceiling.

However, what is worrying is the fact that the “statutory borrowing ceiling” has actually been raised multiple times by the Barisan Nasional (BN) Government over the past decade to “legalise” the federal government debt level which has been increasing at a much faster pace than our GDP.

The 55% statutory borrowing ceiling only came into effect in July 2009 by order of current Second Finance Minister Dato’ Seri Ahmad Husni Hanadzlah.  Prior to the revised limit, the limit was set at 45% in June 2008, barely 13 months before by the then Second Finance Minister Tan Sri Nor Md Yakcop.

It was 5 years before that when the limit was raised to 40% in April 2003 by the then Second Finance Minister Dato’ Sri Jamaluddin Jarjis.

Hence our statutory borrowing ceiling has been raised by 15% of our GDP in just 6 years.  The question is if the ceiling is repeatedly raised with such nonchalance, why did the Government bother setting a limit at all?  Given that our debt level is expected to increase beyond 55% over the next 2 years, are we expecting the Federal Government to once again raise the ceiling in Parliament to circumvent the breach?

In fact, we are extremely concerned that the Federal Government, which is mindful of their debt level relative to the GDP, is using all sorts of creative measures to by-pass the limit set by law.

It should be noted that the MoF will be raising approximately RM20 billion to fund the first phase of the Klang Valley MRT mega-project this year.  However, based on the fact that the MRT was never debated in the 2012 Budget tabled in Parliament for approval last year, it is clear that the funding will be raised by a wholly-owned “special purpose vehicle” (SPV) known as Dana Infra, and guaranteed by the Government.

This way, the BN Federal Government kills two birds with one stone.  Firstly, the debt raised will not be part of the Federal Government debt (because Dana Infra is “not” Federal Government) and hence will not be perceived to jeopardise our credit standings.  This is despite the fact that all parties are expecting MRT to be a financially loss-making project and that the Federal Government will have to fund Dana Infra’s debt repayments at some point in the future.

Secondly, by placing the debt and expenditure of the MRT project in a SPV, such expenditure then escapes the purview of direct parliamentary oversight because it is never debated in Parliament as an official Budget item.  As mentioned earlier, there is not a single line item in the 2012 Budget approved at the last parliamentary sitting for the purposes of constructing an MRT despite the fact that this will be Malaysia’s largest ever infrastructure project by far.

Such creative manipulation of our federal government debt and expenditure is not limited to just the MRT project but many other multi-billion ringgit projects such as the construction of 74 police headquarters with government-guaranteed RM10 billion debt by MoF-owned Pembinaan BLT Sdn Bhd, or the proposed RM20 billion sukuk plan by Pengurusan Aset Air Bhd (PAAB) to restructure the country’s water assets.

Governments all over the world, especially in developed countries like the United Kingdom and Germany, are now changing their laws to require such debts and contingent liabilities to be incorporated into the Government’s financial statement to ensure greater transparency and financial accountability.  This is to avert a financial crisis which has already enveloped the Euro-zone over the past 2 years.

However, it appears that the Malaysian government is still sitting back and resting easy, while making full use of the “loop-hole” in our government financial reporting standards to continue to recklessly indebt future Malaysians with none of the checks put in place.


Anonymous said...

People think govt accounting is like corporate accounting. Its not. The fact is there is a lot of truth that if the US were accounted like a corporation - they are bankrupt. But a country is not like a corporation - you can get away with a lot of things because to certain extent, they write some of the rules.

But only to a certain extent. More important is that people have to understand that Malaysian revenue profile is getting worst and worst - in other words, for each new revenue from commodities and oil, the debt it can support is more risky. There is an assumption that it will change in the future and the truth is BN does not have the political capital to make it happen..

OTL said...

Federal Government choices:

1) Next time in order to "save" time, cost, MPs resource... let repeal the debts ceiling limit...haha...

2) Or learn from US create Joint Select Committee on Deficit Reduction, do Malaysia willing to learn from President OBAMA?

3) Or just continue the attitude of "桥到船头自然直" - I do not how to translate it.

I would like to wish Malaysia, ALL THE BEST...

Sometime I feel that do I "stupid" to save money... should I borrow to spend? Haha.... lol... is time for Federal & State Government to ask themselves!!! Dear readers, do you think so???

OTL said...

I agree with the above person said, government borrowing not like a limited by shares corporation.... this only apply to Federal government, I think state government do not enjoy on par with federal... if I am wrong please enlighten me...

Federal government have the authorities to print money... that why if they can't pay the debts, just print it, and we all Malaysian bear the dilute, our value of RM decrease... but sometime decrease not happen... that why our government can a bit "action"...

If a corporation borrow at the 55% of their revenue... imagine how high the interest they have to pay??? I think YB Tony are more well know on this since he in businessline before.... kindly please give some comments YB Tony...

Do you realise that Malaysia bonds carry higher yield? Haha.. market price itself will calculate or weighte the risk for us...

But I strongly believe, if Malaysia willing to reduce corruption and leakage, we are a very good country... Malaysia once again I would like to say, I love Malaysia, hope that Malaysia love & take care me.

Anonymous said...

Semuanya OK if Rating Agency Malaysia is doing the rating. But once foreigh Rating Agencies target malaysia tha problem will start. So do not wait for them to do the rating for you. Do it yourself and that your figures are timely and accurate. Otherwise the Market Forces will do it for you.

Ellese said...

And this complain of our debt comes from a person who espoused increasing of debt in his proposal of deficit budget. Shame on you phua.

Anonymous said...

I have to agree that government accounting is indeed different but I also need to add this in, a country will not go bankrupt because there is another option, haircut/default. The thing with government bond is that it’s backed by the government's reputation rather than assets. So, like I said, if U.S. never default on its debt before, there will be no problem in issuing new government bond and raising the debt limit. I don't see a problem in raising debt limit but what I do concern about is how the government will use the money.

It is true that Greece's accounting method is sort of shady but do note that part of the European crisis is not due to accounting method but because of 17 EU countries are sharing the same monetary system while not the same fiscal system and debt system. Not to mention, the damage was amplified with banks' involvement of credit default swap. Greece cannot print money to pay the debt but Malaysia can.

By the way OTL, some businesses do have higher debt level. It all depends on the corporations' financing option. In some country, debt is tax deductible and it is a good method of financing. While there are also other options of financing for corporations but for government, there are only two options, taxation and issuing bonds/treasuries. You will be surprise that a lot of countries have high debt level but with low yield. Just like I what I said, it's all depends on the government's reputation to repay debt. If a country never defaults on its debt, then the yield will be low. If there is uncertainty with a country's future, the yield will be higher. As the time of maturity is longer too, the yield will also be higher to compensate the opportunity cost. For example, a 30 years treasury will have a higher yield compared to a T-bill. Factors like interest rate will also affect bond pricing and the yield.

Well, I do need to agree with Tony’s concern about the allocation of money and helping uncompetitive companies but not the way he links the European crisis with Malaysia’s debt limit and the explanation of government debt. The main thing all Malaysian should be concern about now is if the government continues to bailout uncompetitive companies, how will our local businesses going to compete with other foreign companies?

OTL said...

Hi Anonymous 3:55am,

Thanks for enlighten us.

1)But do you agree that Malaysia keep on increase the debt ceiling?

2) If yes, are this healthy grow?

3) Are we more competitive than others countries by growing our debts?

4) Moderate leverage I agree do bring benefits, by your experience and views, how much leverage is OK for Malaysia?

If Malaysia printing more moneys, normal to poor citizens have to bear the burden, and this actually bring fortune to rich peoples. Below are the eg: This will push up the price of "real" property. I do not think this is good, although I prepare for that to happen. But different peoples different views.

I agree with you the yield theory. But when crisis, the market will punish those corporation or countries with high leverage on their Balance Sheets.

Support if the government do willing to give up those uncompetitive companies, which they do not have "better future". Take a look on MAS or NFC.