By Jason Loh,
Although a policy consensus has emerged since the Covid-19 outbreak over the need for more government spending to come out of what are unprecedented times on a firmer footing, some are still jittery over what they perceive to be a dearth of viable sources of funding.
Whilst it’s acknowledged, on the one hand, that the fiscal deficit needs to increase in order to accommodate greater direct injection by the government, on the other hand, there are still worries about the debt level which has breached the 60 percent self-imposed ceiling to reach 60.7 percent of the gross domestic product (GDP) – which translates into RM874.27 billion – by end of September.
This is expected to go up to 61 percent in 2021 according to The Edge Markets. In the same vein, the country’s deficit is expected to be at least 6 percent as already anticipated, which it has to be noted and stressed is nothing out of ordinary, historically speaking.
According to the Ministry of Finance’s (MOF) Fiscal Policy Review 2021, Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGIIs) or government bond issuance that is our national debt denominated in the ringgit mainly made up 96.7 percent of the country’s borrowings. And it has to be highlighted that government borrowing constitutes only 26.5 percent of the source of Budget 2021 – with 40.9 percent coming from direct tax and the rest, i.e. 19.4 percent derived from non-tax revenue.
It’s hereby submitted, however, that arguably the real concern should be our debt-servicing ratio. In 2019, our interest payments alone accounted for about 13 percent of revenue and the figure is set to rise together with a rising deficit – which represents a form of (deliberate) leakage.
According to the International Monetary Fund (IMF), Singapore has a much higher debt to GDP ratio than us, i.e. at a staggering 130 percent.
It has to be highlighted that Singapore Government Securities (SGS) and Special SGS have never been issued for fiscal policy but exclusively for monetary policy purposes and to develop and cater to the needs of the financial market in providing risk-free (i.e. government-backed) benchmark (for risky assets) and investments.
Singapore’s sources of funding are mainly taxation (direct and Goods & Services Tax/GST) and since 2016 increasingly also by “net investment contribution returns” (NIRC). NIRC are investment proceeds made by the Monetary Authority of Singapore (MAS) or in effect the central bank together with sovereign wealth fund Temasek Holdings and Government Investment Corporation (GIC). Lastly, a drawdown of past reserves also plays a critical role, particularly at this time of the Covid-19 crisis.
The point, however, is that the level of national debt is not necessarily the chief indicator of the government’s ability to repay.
There have been calls by some for our government to emulate Indonesia in doing debt monetisation which primarily means directly borrowing from the central bank by way of the Treasury issuing debt or public bonds to the central bank.
In the Malaysian context of Bank Negara, this would, however, represent a step too far and out of bounds. It would also directly blur the distinction between fiscal and monetary policy roles which would be unpalatable to the technocratic sensibilities of Bank Negara.
In addition to debt issuance and taxation, perhaps the following modest policy proposals – which aren’t exhaustive – could be considered in the future in view of the impact of Covid-19:
- Tapping into an overdraft
This requires amending Section 71 of the Bank Negara Act (2009) to shift from provision of temporary financing to a permanent overdraft facility – mimicking the UK’s Ways and Means (W&M) facility in relation to the Treasury’s account with the Bank of England – and limited to a specified level. However, overdraft extension shall be temporary with no deadline for repayment. Repayment to Bank Negara (for national accounting purposes) could involve issuance of perpetual or 50-year or even 100-year bonds to institutional investors.
In terms of spending, 30 percent could be channelled to our Covid-19 Fund to be used for our front-liners, personal protective equipment (PPEs), vaccine procurement and distribution purposes, among others.
- Borrowing from government-linked banks
Instead of going through the bond market, the government should be leveraging on its (indirect) ownership of government-linked banks (Maybank, CIMB, and RHB) by borrowing directly at favourable rates in this time which could be used to fund development/capital expenditure (devex/capex). At nearly 20 percent which far exceeds the 8 percent minimum capital adequacy ratio of risk-weighted assets imposed by Basel 3, our banks have more than enough liquidity buffer.
At the same time, quantitative easing (QE), i.e. purchase of government bonds in the secondary market, could be pursued by Bank Negara on a limited and temporary basis targeted at keeping government debt burden in the form of interest rates low.
It was reported by The Edge Markets (Oct 5, 2020) that Bank Negara’s holdings of Malaysian Government Securities (MGS) increased to RM10.9 billion as at end-August this year, which translates into merely 2.5 percent of the outstanding RM431.7 billion.
The current 10 percent policy limit of secondary purchases of MGS by Bank Negara should be increased drastically to 60 percent (reflecting the current self-imposed debt ceiling) on a one-off basis and fully taken up with the purpose of flattening across the yield curve of the bond market so as to result in lower coupon or interest rates as much as possible. It’ll be on a one-off basis before reverting back to a lower figure of 30 percent.
The MGS deposited with Bank Negara – as the government’s de jure (i.e. legally-appointed or statutory) banker – could also earn interest. Proceeds from the interest rate would be returned to the government to be absorbed by the Consolidated Fund or Covid-19 Fund.
By way of analogy, in 2012 it was reported that the UK Treasury received £35 billion from Bank of England as it surrendered interest earned on QE assets, i.e. gilts or government bonds, bought in the secondary markets as off-loaded by institutional investors. It has to be stressed that this is strictly just on a temporary basis.
In conclusion, the government is well-poised to be in a position to pull out all the stops to ensure that we successfully come out of the Covid-19 crisis on a sustained basis.
Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.