Fashion
AmBank Research (AmResearch) which projects the gross domestic product (GDP) per capita recede by 0.007% with every 1% gain in public debt and debt service, also foresees a near-term volatility in the local and global equity markets, thanks to noises from the domestic and international front.
“From our analysis, we found an inverse and significant impact between public debt as well as debt service against the GDP based on per capita. It implies that a 1% gain each in debt and debt service, will lower GDP per capita significantly by 0.007% and 0.22% respectively. We also found that a government consumption presents a negative and significant impact on GDP per capita with a drop of 0.05% for every 1% rise,” it said while noting that the current debt level of RM1.09 trillion to the GDP was in line with its projection of over a trillion ringgit in 2018.
A high public debt will result in more spending on servicing the interest for the borrowings, thus straining resources. This is reflected in the low ratio of operating and development expenditure to debt at 0.20x and 0.04x respectively in 2017 from a high of 0.50x and 0.14x respectively in 2008 which is also the lowest reading since 1988.
Noting that public debt levels had been on an upward trend since 2004, the research house said the government’s inability to curb the growth in operational expenditure over development expenditure in its budget especially in Budget 2018, raised concerns on the risk of falling into a debt overhang situation which can potentially hamper the sustainability of growth and transformation measures.
The inability to reduce the operating expenditure, may lead to the need to improve revenue collection while simultaneously driving GDP, which in turn will help improve the debt-to-GDP ratio and fiscal balance position.
Meanwhile, the rising government guaranteed loans and Public Private Partnership (PPP) lease repayments that lacks transparency suggests an easy way to shift the debt figures, while holding public debt below the 55% level.
Since 2004, public debt saw an average rise of 10.2% or equivalent to an average of RM252 billion per annum between 2004 and 2009, while fiscal deficit widened from -4.3% in 2004 to -4.8% in 2008 due to higher spending on development activities amounting to RM27.5 billion in 2004 and RM41.9 billion in 2008.
Operating expenditure rose from RM91.3 billion in 2004 to RM153.3 billion in 2008.
The surge in total public debt was even more glaring from 2009 onwards as it jumped from RM362 billion to RM925 billlion, translating to an average growth of 13.4% or equivalent to RM639 billion per year.
Although the fiscal deficit as a percentage of GDP narrowed from -6.7% in 2009 to -3% in 2017 due to lower spending on development activities, which shrank from RM49 billion in 2009 to RM43 billion in 2017, operating expenditure rose from RM157 billion in 2009 to RM218 billion in 2018.
On lowering the public debt, debt servicing, and government consumption to improve growth, Ambank Research opines the focus areas should be (1) improving the monitoring of the expenditure in each area of the economic activities, especially at the micro level; (2) greater transparency on government-guaranteed loans under public-private partnerships that may not be fiscally responsible; (3) improving and effectively managing government consumption; (5) targeting high-impact and productive businesses to drive growth; (6) boosting investors’ and household confidence by addressing leakages; and (6) an attractive ringgit to support overall business competitiveness.
