‘More proactive measures to address debt levels’

Source: MoF, MIDF Research

KUCHING: The record-high RM332.1 billion national budget has been viewed as broadly positive given that it provides a holistic approach to rehabilitate Malaysia’s socio-economy but analysts say more proactive measures may be needed to address growing debt levels

According to a report by the research team at MIDF Amanah Investment Bank Bhd (MIDF Research), both operating expenditure (OPEX) and development expenditures (DE) will increase further next year following the expansionary government spending.

It further noted that as a result of the sustained deficits, the government has been incurring a larger amount of borrowing to cover the income shortfall and to finance development expenditure and Covid-19-related spending.

At RM332.1 billion, Budget 2022 is the biggest ever with RM75.6 billion allocated for development expenditure. The development expenditure figure is not unexpected as it is largely in line with the 12MP guidance (RM400 billion total development expenditure for 2021-2025) announced in September 2021.

“The net increase in total government borrowing for 2021 is estimated to be at RM100.4 billion (2020: RM86.9 billion), and the new debts are used mostly to cover the RM98.8 billion fiscal deficit. A similar approach is expected to be observed next year as the increased borrowing and changes in the government’s assets will be utilised to cover the RM97.5 billion fiscal deficit next year.

“So, if we estimate the net increase in the total borrowing by around RM98 billion to RM100 billion, this will push the total outstanding government’s debt to well exceed the RM1-trillion-mark next year,” the research firm said.

As of June 2021, the outstanding government debt was at RM958.4 billion (63.3 per cent of GDP). Nevertheless, it pointed out that the accumulated amount of domestic debts in the forms of MGS, MGII, and MITB was at 58.8 per cent of GDP, still below the statutory debt ceiling of 65 per cent of GDP.

The upward revision of the debt ceiling to 65 per cent from 60 per cent of GDP will also provide greater fiscal space next year, with the five per cent increase relative to GDP will allow the government to borrow around RM76 billion.

Meanwhile, on the OPEX under the Budget 2022, it noted that the major factor that will push OPEX higher will be a rebound in the government’s spending on supplies and services.

The spending on supplies & services is expected to rebound and increase by 30.5 per cent in 2022, after a sharp decline of -20.7 per cent last year. This will be driven mainly by the higher spending on medical supplies and payment for professional services.

“The allocation for the debt services will take up a larger portion (or 18.5 per cent) of OPEX, which has been on the rise over the years.

“We expect a more proactive measure will be taken to address the growing debt service charges because savings from the debt services can be redirected to a more productive and impactful spending plan,” it said.

The increased allocation for DE is consistent with expectations as it anticipated a continued execution of the infrastructure projects as outlined in the 12th MP.

“This has been the approach by the government to provide support to the business community, encouraging spending by the businesses and promoting growth in the economy. This is due to the higher multiplier effect as allocation for the DE will have a wider spillover effect as the execution of infrastructure developments will provide support to other businesses not only to the construction industry, and also to other sectors such as manufacturing and services sectors.

“The growth in business activities will also encourage the creation of more job opportunities for the local talents,” it said.

Apart from the transport projects such as Gemas-JB Electrified Double Track and Pan Borneo Highway, there are allocations for expansion of Kuantan Port and Sandakan Airport as well as spending on maintenance & repair for schools and hospitals, and other infrastructure projects such as road building and bridge replacement.

In a separate note, AmBank Group pointed out that there is a need for the government to design the medium-term narrative and fiscal transparency to address the worries of rating agencies.

Following the expansionary fiscal policy to support economic growth, the fiscal deficit projected in Budget 2022 would be at RM97.5 billion which translates to a fiscal deficit of six per cent of the gross domestic product (GDP) – lower than the 6.5 to seven per cent projected for 2021.

“The focus now is on the fiscal reforms via the Medium-Term Fiscal Projection (MTFP), Medium-Term Revenue Strategy (MTRS), and Fiscal Responsibility Act (FRA) to manage sovereign credit rating risk.

“With the government being unable to address the fiscal situation at the moment, there is a need to design the medium-term narrative and fiscal transparency to address the worries of rating agencies,” it said in a note.

“To this end, a rolling three-year projection would act as a solid guide and show the government’s commitment in addressing fiscal consolidation issues, reforms, and transparency.”

AmBank said in view of the tax revenue conundrum, the statutory debt limit, namely the MGS, MGII and MITB was raised to 65 per cent of the GDP from 60 per cent previously.

This would mean that the government’s borrowing ability would be around RM140 billion to RM150 billion for 2022.

Meanwhile, Standard Chartered Malaysia Bhd’s research team (Standard Chartered) noted that in terms of financing, the government said that it will focus on domestic sources.

“We estimate gross MGS and MGII supply in 2022 at RM60 billion (maturity: RM69 billion), largely similar to 2021,” it addeded.

It also pointed out that statutory debt to GDP is expected to rise to 63.4 per cent of GDP by end-2022.

However, it said, the statutory debt ceiling was temporarily raised in October 2021 to 65 per cent of GDP (ending in 2022) from 60 per cent previously.

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