Fitch Ratings Revision of Malaysia’s Outlook to Negative

Global ratings agency Fitch Ratings have given Malaysia the starkest warning that the Malaysian Government finances are not in the healthiest of states by revising the country’s outlook from stable to negative. Fitch did not beat about the bush to state that “Malaysia's public finances are its key rating weakness”.

Fitch cautioned that if the Government does not carry out reforms and institute remedial measures heal our financial standing, our public finances will be “more exposed to any future negative shock”.

In fact, the revision isn’t surprising and is in effect a realisation of the earlier Fitch warning in August 2012 that “fiscal trends may eventually lead to some form of negative rating action”.

The latest report outlined the facts that “Federal government debt rose to 53.3% of GDP at end-2012, up from 51.6% at end-2011 and 39.8% at end-2008. The general government budget deficit is estimated to have widened to 4.7% of GDP in 2012 from 3.8% in 2011, led by a 19% rise in spending on public wages in a pre-election year.

As a result, Fitch doubts that the government can achieve its interim 3% deficit target for 2015 without additional consolidation measures. Fitch sees “risks even to the achievement of the agency's 3.5% deficit projection”.

Most pertinently, Fitch repeated its concerns over the Government’s off-budget expenditure and liabilities. Fitch highlighted that the Federal Government guaranteed debt rose to 15.2% of GDP by end-2012 from 9% at end-2008. This is a drastic increase to nearly RM150 billion in 2012 from RM96.9 billion in 2010. Based on current government accounting practices, the federal government debt and budget deficit calculations does not include “government guaranteed-debt”.

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. Already in December 2012, 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.” In reality, if both official government debt and government guaranteed debt are put together, our debt to GDP ratio will be a much higher and worrying 68.9%.

Fitch also hinted that Malaysia’s sovereign contingent liabilities will be even higher once we take into account the consolidated indebtedness of our state-owned enterprises (which are not explicitly government guaranteed, but are implicitly so due to the enterprises’ ownership status).

Despite the above, Dato’ Seri Najib Razak has however continued to ignore all warnings with regards to the spiralling levels of contingent liabilities (or hidden debts) for the simple reasons that this form of debt allows the Government to continue to spend money without increasing the budget deficit. As an example, the MRT which is expected to cost more than RM50 billion will be financed by Government-guaranteed debt, which isn’t part of official government budget, despite the blatant fact that it’s to be Government funded.

Furthermore, by channelling development expenditure to off-budget measures, it enables the Najib administration to paint a false perception of financial prudence, that his government has the necessary political will and financial discipline to reduce the country’s fiscal deficit.

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. 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.

Finally, Dato’ Seri Najib Razak must immediately announce measures to give confidence to the financial markets that the Government is serious about cutting wasteful expenditure and reducing the real Government deficit and not just put on a naked emperor show. He must announce concrete plans to ensure that all privatisation projects are tendered competitively amd that all government procurement are open and transparent.

In addition, he must signal to the markets that in the 2014 Federal Government budget expected to be announced in October 2013, he will cut down on unnecessary expenditures such as in “Supplies and Services” which have increased drastically from RM23.8 billion in 2010 to RM33.7 billion in 2013.