Monday, July 6, 2015

The Malaysian Debt Myth Debunked


The following is a Facebook post by Venubalan Rajaram on the significance of the debt clock that has been making its rounds on social media.

By looking at this picture, your immediate conclusion will be : Malaysia akan Bankrap juga tidak lama lagi.

Seems to be a great public F.U.D (fear uncertainty, doubt) mongering tool, which is making the rounds recently. Seems like social media is finally wising up to the debt clock, it probably didn’t really see before.

But :

1) Note that all 195 countries have a debt clock. By appearing on a debt clock page, it doesn’t mean that you have to pay those debts from your wallet like you have to for your loans that you personally took. Just because there is a debt clock, doesn’t mean a default is imminent. We have to look at the exact causes of the default, and see if we have any similar resemblance, based on sound economic logic and principles. Not social media logic.

2) And it is not true that your children, or your grand children have to pay the national debt off (due to future probable increases in taxes). That is just a fallacy, due to the common perception that governments operate like households do (in an economic sense). Governments technically have no finite biological lifespan like people do. There’s no absolute timeline for the debts to be fully paid off and can be carried in perpetuity, so long as debt payments are serviced without defaulting on payments.
(Denmark actually has issued perpetual bonds with a 999 year maturity. )

3) Governments also have the sole monopoly of printing their own currency to pay off those debts. Unlike Greece, which belongs to a currency union (the EU), it doesn’t have control over its own currency. The European Central Bank controls the currency, in this case.

4) More importantly to note that, if government spending is directed towards investment which goes towards positive capacity building e.g. education, that raises the future tax yield, which indirectly allows a higher burden of present debt, in the future.

5) So who are we indebted to? If the debt is held by citizens of public agencies (for example EPF, SOCSO), then the taxes raised to pay for maturing debt comes from citizens and the debt payment goes back to citizens. All that occurs is a change in financial obligations and possibly some redistribution of wealth, but not a net burden on taxpayers.

6) That’s pretty much how Japan has managed to raise public debt to over 230% of GDP, yet they still haven’t tanked – as most of that debt is held by domestic agencies like the postal savings banks and pension funds. The Japanese people are in effect lending to their government so that the government can spend it on them.

Over in Malaysia, The Government’s debt stood at RM582.8bil. Of the total, 97.1% or RM566.1bil was domestic debt, while the remaining RM16.8bil or 2.9% was external debt. A manageable external sum, for a nation like us.

7) To the average citizen, national debt should not be an issue UNLESS we default. Till then that is just an indication of how much debt we are accumulating relative to the size of the economy. And remember, unlike households, debt from a government standpoint is not an issue so long it is sustainable and the economy grows. Note: Singapore has a GDP-Debt Ratio of 99.3%. Take a look at the countries with “insane” Debt-GDP ratios, in descending order here.

8) In a ranking of 172 countries, we rank # 55. So from a purely GDP-Debt ratio ranking standpoint, if we want to talk about defaults, there about 54 other countries which will bankrupt earlier than us first (those above us with higher debt-ratios), before we do. Some of the countries worthy of mention include : Japan, USA, Portugal, Italy, Singapore, EU, UK, Canada, Hungary, Germany, Netherlands, India, Israel, Finland, Brazil. These mentioned countries (and others have to bankrupt first, then us) if we are to prophesize the chances of defaulting based on the public debt-GDP ratio.

9) Was it also mentioned that we are gradually reducing our public debt position? From a recent high of 54.7% in 2013, we are now at about 52.8%. And we are projected to reduce further, after the 2015 Budget revision, earlier this year due to the oil price fall.

Prior to the 2008 Global Recession, we were only hovering at about 40% . Stimulus Package 1 worth about RM7 Billion &2 worth about RM60 Billion were launched to kickstart the economy from stalling. Had we not done that, we will still probably be in deep recession. That is the real makan rumput, hancur Malaysia, and makan pasiaq which we haven’t seen, thankfully.

Now, Greece. Why is Greece in a mess?

10) Greece has been borrowing a lot of money since 1981 to boost their economy, while having an ailing treasury due to a combination of factors including an overly generous social plan, misguidedly encouraged by the entrenched socialist culture of Europe. As it happens, providing generous subsidies and benefits to citizens is not free, and Greece quickly fell deep into debt. Their poor taxation system, loopholes and other economic structural deficits further reduced their government revenue and Greece was continuously on record high deficits year after year, even during high growth periods, prior to the Global recession.

11) And instead of borrowing the money to invest in competitive industries so they could pay off their future debt, they just spent it on fat social programs thinking that their economy will grow accordingly to fit their expenditure. After joining the Euro, Greece did not put much emphasis on keeping their public debt and budget deficit in certain ranges or reduce deviations from unhealthy levels even though they were obliged so by the EU intergovernmental contracts.

12) After the 2008 Global recession, when global lenders made lending far stricter just so the 2008 crash would not be repeated, Greece was told by global capital markets that because their debt was too high they had to pay higher interest rates if they wanted to borrow. (Particularly after their government bonds were rated “Junk” status, and a massive crisis of confidence among investors started) Greece then turned to the EU for a bailout who agreed in return for austerity (which further reduced their economic competitiveness), and where they now risk of defaulting and exiting the Euro zone altogether.

13) Another interesting point- Was it also known that Greece (among other EU nations), had statistical credibility problems? Particularly economic indicator statistics. Problems with unreliable data had existed ever since Greece applied for membership of the Euro in 1999.

In the five years from 2005 to 2009, Eurostat (EU’s official statistical bureau) each year noted a difference in data that was officially reported, vs Eurostat’s compilation and research. In regards to Greece’s crisis, the flawed statistics which were widely known and documented, made it impossible to predict accurate numbers for GDP growth, budget deficit and the public debt; which by the end of the year all turned out to be worse than originally anticipated. This further fed the crisis of confidence amongst investors and the members of the European union, further worsening the crisis.

14) Social media largely doesn’t have any respect for official statistics, particularly Malaysian statistics- But those of you who think that Malaysia reports false statistics need to understand that in today’s world, you can only lie marginally, not extravagantly. You will be sniffed out like Greece , just as fast as you try to massage the datasets. More so a Top 23 open trading nation like us, with thousands of observers, researches, analysts externally zooming in on us for the slightest scoop.

15) So please, dear Malaysians. Do not be over simplistic in your opinions, knowledge and generalization of whatever you see on social media. It is beneficial to you, the community and the nation if you can dissect the issues deeply before making conclusions and spread false rumours and cause unnecessary panic which is largely unfounded.

16) It’s not only painfully nauseating to read, but please consider the 15 million workers in the country, with another 15million people depending on them and their rice bowl making a living in this country. As much as some people want to see it fall and crash, I believe many will want to see it a roaring success.

Regardless of your political affiliation- If you really care about Malaysia, time to walk the talk to the nation and its people.

If it was solely focus on GDP debt ratio to estimate default which might be correct but my way was more non statistical ones such as the ability to pay back despite higher tax receipts due to GST and who is our creditors. Instead of improving condition those tax payer money is gone into debt ridden companies such as Pembinaan PFI/1MDB/MAS/PROTON and a few. Directly if u change the scope into those sector their inability to pay back might be justified. I prefer to look at microeconomy scale than macroeconomy well different reference. Most of the one who is getting the money is debt ridden company in the past and no good track record of ever getting profit. I still remember an article i didnt remember where saying government tend to protect those company/industry which is more likely to lose money than those who actually could expand. Well its subject to debate la but still I guess everyone hope that day doesnt happen.

4 reason of Malaysia likely to default or if default was due to this
1. Corruption. (Ease of doing business is to have a envelope with some content inside)
2. No infrastructure to produce income ok maybe Petronas is one of the few.
3. Government gross incompetence/ No one is educated(Brain Drain I would say), has the intelligence, has experience in finance, economics, business, management skills.(Remember Ahmad Maslan?)
4. Malaysian laws are written to discourage business(Monopoly still losing money industry, u and me know which industry we are talking about), and FDI in Malaysia. Malaysia can not prosper if these laws are not changed.

Greece bankruptcy is might be joining the eurozone but the main issue is very similiar to U.S, Cheap credit. Borrow too much and receives too little taxes. By comparison the way Greece works is like how Malaysian government works as well.

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