Rising concerns over debt

WITH the Covid-19 pandemic, debt has become a worldwide phenomenon where growth has not been strong enough to bring the debt levels back to below pre-pandemic.

For Malaysia, the concern is over a long-term spiral in the debt-to-gross domestic product (GDP) as growth may not be strong enough to offset the debt, while spending cuts and tax increases are difficult to impose at this time.

Higher GDP growth is supposed to help the government collect more taxes but the situation is made difficult with businesses closing, while there are not enough of new businesses opening.

Wealth has been destroyed by the pandemic and looking around at who can help, it is hard to shift the burden to the banks as they are not non-profit organisations.

Banks may do some corporate social responsibility; it gets tough when the burden they have to shoulder eats into their profits.

Also, the cost of supporting a large civil service and pension payments has become a big concern as issues on productivity comes into focus.

“In the long-term, this is a worrying situation; from a debt-to-GDP ratio of 60% last year, it is now 65%. The debt-to-GDP ratio tends to accelerate once it reaches a threshold and onto an unsustainable level,’’ said former Inter-Pacific Securities head of research Pong Teng Siew.

From 2010 to 2019, the debt-to-GDP had been hovering around 50% to 55%.

We do need a sudden spurt of growth to extricate ourselves from this situation but where is that going to come from?

In the meantime, all eyes are on taxation where the concern is it will hobble the economy and reduce growth, instead of increasing growth.

“Unless we can argue that the government spends more efficiently than the private sector and can generate better quality growth, that path may lead us to ruin eventually,’’ said Pong.

Allowing a higher rate of inflation in the economy may be an option, as nominal incomes rise, and people move into a higher tax bracket (even if real purchasing power is falling), or as companies post higher nominal profits.

A consumption tax being calculated on the nominal price of goods sold, will reel in more tax revenues as the inflation rate goes higher.

Malaysia’s fiscal deficit forecast for 2021 has been raised to 7.4% of GDP from 6.4%, by Fitch Solutions Country Risk and Industry Research, based on lower revenue and higher stimulus spending.

Fiscal deficit is the shortfall between government revenue and expenditure, and an indication of borrowings by the government.

The shortfall is mainly due to financial relief measures to mitigate the prolonged pandemic.

“Malaysia has the fiscal space (that is room in the government’s budget) amid revenue restraint to meet extraordinary stimulus to deal with the pandemic,’’ said Socio Economic Research Centre executive director Lee Heng Guie.

Medium-term strategies include managing leakages such as loss from smuggling and counterfeiting, increased tax compliance and a review of tax incentives.

The reimposition of the general goods and services tax (GST) may not happen so fast but some feel that the conversation should be started soon.

“Certainly, there will be costs associated with implementation of GST; it is best to have closer interaction with the stakeholders so that everyone is prepared for the changes,’’ said Bank Islam chief economist Afzanizam Abdul Rashid.

Dialogues should be held with businesses as they are the agents within the GST supply chain.

It is better to plan for the economy to rebound and help bring down the fiscal deficit.

“GST implementation will take time to explore and is not so politically acceptable, while the talk of a capital gains tax will spook markets.

“Providing the social safety net, even if it raises the fiscal deficit, will allow for a faster rebound in the economy, which will in turn, bring down the fiscal deficit,’’ said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.

OCBC Bank Malaysia has a baseline assumption of 7% fiscal deficit this year, which is at the top end of the 6.5% to 7% range expected by the government.

“While there are upside risks to the fiscal deficit ratio, we think they currently remain relatively contained,’’ said the bank’s economist Wellian Wiranto.

There is minimal risk, at the moment, of the government having to come up with a new round of stimulus in the final quarter of the year, although there have been so many surprises recently that we cannot take anything for granted.

But the improvement in the Covid-19 situation should allow for a continued reopening of the economy, hence lessening the need for new stimulus.

We pray for the safe and continued reopening of the economy, and as the crowds begin to rebuild, we should do our part in not forgetting standard operating procedures, social distancing and sanitation requirements.

Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.