Fitch Warned of Weak Public Finances

The Malaysian Government must heed the warning call by Fitch Ratings on our debt levels or face the risk of a slowly but surely route to a Greek-style financial crisis

In a statement issued yesterday (19 November 2012) in London, global ratings agency, Fitch Ratings warned that “Malaysia's public finances are a weakness relative to rating peers and offer limited scope for counter-cyclical fiscal stimulus at the current rating level of 'A-'/Stable.”

Fitch added that “while this has not hindered the public sector's capacity to contribute to GDP, which grew 5.2% yoy in the third quarter according to Bank Negara Malaysia Friday, the growing provision of guarantees to government-linked borrowers is concerning.”

The report expressed the view that much of the growth was a direct result of higher than desired levels of government consumption and investment.  More specifically, the government’s expenditure is funded by “greater drawdown of existing federal government guarantees of debt issued by public sector enterprises suggests increasing use of quasi-fiscal policy to support economic activity and may apply further pressure on the sovereign credit profile.”

Hence despite the official government statistics that Federal Government debt is “only” at 53.7% of our Gross Domestic Product (GDP), the number does not include the sky-rocketing quasi-government debt or our contingent liabilities.

As at December 2011, our contingent liabilities have increased by 20.5% to RM116.8 billion from RM96.9 billion the previous year.  However, as reported by Fitch Ratings, this figure has increased by another RM23.4 billion or 20% to RM140.2 billion as at September 2012.  Such debt is now equivalent to 15% of GDP compared with just 9% at end-2008.

The rate of increase is also much higher than the 10% – 12% rate of increase of the official Federal Government debt over the past 5 years, signalling a clear attempt by the Government to hide its debts off the official balance sheet.

In fact, Fitch Ratings stated the obvious when it said “the increasing reliance on off-balance sheet funding could potentially call into question the meaningfulness of the 55% of GDP federal debt ceiling.”

CIMB Investment Bank economist Lee Heng Guie has also recently wrote that the computation of public debt should also include outstanding borrowings guaranteed by the federal government to give a clearer picture of policymakers’ debt dynamics.

We call upon the Government to follow the reform its outdated accounting practice of “off-balance sheet financing” and recognise fully these hidden debts as the Federal Government debt commitments.  This is especially since much of these debts are not financing projects which are commercially viable and hence will ultimately require Government repayment at some point in the future, such as the RM24 billion and RM11 billion of debt owed by PTPTN and Syarikat Prasarana Negara respectively.

Furthermore, the market is anticipating additional hikes in our contingent liabilities as the Government embarks on many mega-projects off its balance sheet – such as the RM50 billion MRT project which has yet to raise the necessary financing, and the RM25 billion Tun Razak Exchange spearheaded by 1MDB.
Without proper accountability, the apparent abuse by the current government in circumventing the legislated 55% limit of Federal Government debt by recklessly issuing debt guarantees to wholly-owned government agencies or GLCs, will only lead to Malaysia finding itself trapped in financial quicksand sooner or later.

Fitch had already in August 2012 warned that “fiscal trends may eventually lead to some form of negative rating action” and the BN administration must pay heed to its advice to prevent Malaysians from enduring another Greek tragedy.