In the Budget for 2015 announced today by Prime Minister, Dato’ Seri Najib Razak, he boasted of a continued decline in the Federal Government’s budget deficit from 3.5% in the current year to 3% for the next year. In absolute terms the shortfall in the Governments expenditure is expected to decline from RM37.3 billion to RM35.7 billion from 2014 to 2015.
While it was disappointing that the Government has postponed the zero deficit target from “after 2015” announced in 2012 to the new target year, 2020, what is more worrying is the shennigans that are happening behind these pretty numbers.
This seemingly healthier figure masks the fact that much of the Government-related expenditure today are actually carried out outside the “framework” of the budget. This means that the Government have found innovative accounting loopholes to continue big-spending and racking up billions of ringgit in additional debt without jeopardizing the much-studied figures like the official budget deficit percentage.
The clearest indicator of such expenditure is the level of the Government’s “contingent liability” which is tucked away in a remote corner of the Economic Report. The figure essentially refers to hidden debt which are not part of the official Federal Government debt figure, but are guaranteed by the Federal Government.
As at June 2014, the Federal Government debt has increased to RM568.9 billion from RM539.9 billion at the end of December 2013. The latest figure works out to 52.8% of Malaysia’s Gross Domestic Product (GDP), a shade below the legal limits of 55%.
While this figure is itself a concern, what is more worrying is the contingent liability figure which has increased more significantly from RM84.3 billion in 2009 (when Dato’ Seri Najib became the Prime Minister) to RM157.5 billion as at December 2013, or an increase of 86.8% over the past 5 years.
The figure is expected to increase further in 2014 and 2015 due to the numerous massive infrastructure projects carried out by state-owned corporations such as the MRT Corp and Syarikat Prasarana Negara Bhd. In 2013, the Federal Government guaranteed RM6.5 billion for the MRT construction, an increase of RM4.1 billion from RM2.4 billion in 2012. This figure is expected to increase much further this year as the on-going first phase of the MRT project alone will cost in excess of RM22 billion. The Prime Minister has also announced in his budget speech the launching of MRT Phase 2 from Selayang to Putrajaya at the value of RM23 billion.
The substantial increase to our contingent liabilities relative to the budget deficit highlight the extent to which our official budget deficit percentage is off-the-mark from the real deficits in our Government expenditure.
The above contingent liability figure is also an under-representation of our real hidden debts because much of these debts while not explicitly guaranteed by the Federal Government, are implicitly guaranteed.
1Malaysia Development Berhad (1MDB) for example, a wholly-owned investment corporation by the Ministry of Finance (MoF) has accumulated debts in excess of RM36 billion over just 5 years. Out of this amount only RM5 billion is officially guaranteed by the Federal Government. However, it is implicitly understood by financial institutions that in the event of default, the entire amount will be bailed out by the Federal Government due to MoF ownership. This is similar to the Port Klang Free Zone (PKFZ) scandal where the Government was forced to bail out the project with RM4.6 billion despite no such official guarantee.
It is disappointing that given the seriousness of the persistent deficits and growing Federal Government debt, the Prime Minister has failed to address these critical concerns in his 2015 Budget speech. 1MDB was not even mentioned in the Budget. The unchecked expenditure via off-balance-sheet government spending which belies the benign official budget deficit can have serious negative implications on our country’s financial system. The impact can certainly be devastating in the event of a negative external shock to our financial systems.