Friday, February 17, 2012

Off Balance Sheet, Contingent Liabilities and Hidden Debts

Based on the Government’s Economic Report 2011/2 published last year, our Federal Government debt will hit RM455.7 billion as at the end of 2011.  This was a 11.9% increase from RM407.1 billion incurred in 2010.  Our debt levels have been increasing rapidly in recent years compared to RM242 billion in 2006 and RM146 billion in 2002.

As it stands, our Federal Government debt has hit 53.8% of our Gross Domestic Product (GDP) compared to 53.1% in 2010 and 44.6% in 2006.

However, what is of greater concern is the Government “off-balance sheet” financing which isn’t reported as Federal Government Debt.  In recent years, the Government has increasingly issued debt papers via its statutory bodies and corporatized entities.  These loans are obtain with guarantees provided by the Government, but are not reflected as Federal Government borrowings.

In 2010, the “off-balance sheet” financing activities has hit a record high of RM96.9 billion in 2010, a 14.9% increase from RM84.3 billion in 2009.  These are loans which have been taken with a Government guarantee, which the Government is obligated to pay should the borrowers fail to settle the debts.  As an example, if the Federal Territories Foundation is unable to repay the proposed RM300 million loan from EPF to provide financing for the low-cost housing purchasers, then the Government will have to step in to make the RM300 million payment to EPF.

Hence for all intents and purposes, even though these loans are not taken by the Government, they are essentially government debt or otherwise known as contingent liabilities.  Adding RM96.9 billion to the current debt of RM455.7 billion, the effective debt which Malaysian tax-payers are liable for is RM552.6 billion.  This expanded figure would then constitute 65.2% of our GDP, well above the 55% federal government loan limit as defined in the Loan (Local) Act 1959 and Government Funding Act 1983.

The list of statutory bodies and corporate entities which have been given Government guarantees are as per the table below.  Based on the list, there are some serious concerns over the performance or non-performance of these loans which will require bail outs by the Federal Government.




For example, the PTPTN and Syarikat Prasarana Negara Bhd owes RM17.0 billion (17.5%) and RM9.1 billion (9.4%) respectively and they have both been heavily criticized by the Auditor-General for their weak financial management and their inability to repay their loans.

The list also includes Syarikat Penerbangan Malaysia Bhd (RM7.0 billion) which was set up to bail out Malaysian Airlines System (MAS); 1MDB (RM5.0 billion) which in turn lent nearly all its money to a questionable foreign company, PetroSaudi International Limited and Silterra Bhd (RM1.0 billion) which has made more than RM2 billion in losses to date.

What is interesting is also the fact that loans of Tan Sri Syed Mokhtar Al-Bukhary-owned Port of Tanjong Pelepas (PTP) also received financial guarantees from the Government.  PTP’s “guaranteed” loans have in fact increased from RM715 million in 2009 to RM1.275 billion in 2010.

Expert testimonies in 2009 in the United Kingdom Parliament has heavily criticized Government guarantees to statutory bodies, government-linked companies or “private-finance initiatives” as an attempt to hide real debt levels in order to achieve better credit ratings.  Professor Dieter Helm of Oxford University said that such initiatives had succeeded as "an exercise to get investment off the public balance sheet so that the debt numbers look better than they otherwise would have done."  The Greek financial crisis has similarly unraveled as a result of hidden contingent liabilities not reflected as official government debt or reported in its balance sheet.

For a start the BN government must reflect all its guarantees and contingent liabilities in the annual Economic Report and Budget to be debated in Parliament and it must impose measures to slow down the rate of growth of Malaysia’s debt levels.  Malaysia should not wait for a major financial crisis of Greek proportions before attempting to reform our public sector finance.  At the pace which our debts are increasing, we are accelerating headlong into a financial disaster.
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