High national debt and our future

"Houston, we have a problem" may seem like something scripted by Hollywood. But change it to Putrajaya, the gravity of the situation is several times more serious than Apollo 13 trying to return to Mother Earth - indeed, without any navigational tools or landing gear, except an untested parachute.

Yet this is precisely what Malaysia is facing, a putative hard landing if the national debt is not handled with great diffidence and dexterity. In other words, if the rationalisation of the government’s overspending and excesses are not reined in now.

Yet, blind defenders of the old regime, are echoing the same view of ex-prime minister Najib Abdul Razak, that high debt is acceptable if one can afford it. That a Gross Domestic Product (GDP) of over US$300 billion can have a debt of up to US$250.6 billion including interest since such payments can be brought forward to the next few decades anyway.

Not surprisingly, pro-debt advocates proceeded to offer the high debt to GDP ratio of the US and UK, even Singapore and Japan as prime examples of why high national debt is acceptable and fine. Thus a national debt of over 100 percent in each of these cases was not considered alarming at all. This is where the pro-debt, and ostensibly their paymaster, Najib Razak himself, are wrong on many grounds.

First of all, the UK, US, Singapore and Japan are all struggling badly. Every few years of progress, in terms of a bump in the number of menial jobs created, are concurrently marked by the lack of productivity gains and real growth in income. Thus, the growth in GDP almost never has any real meaning since every one step forward is marked by two steps back. This is the cost of high national debt.

In the UK, for example, Prime Minister Theresa May has had to negotiate a full “Brexit” in order to prevent more immigrants from Eastern Europe and elsewhere from free-riding on the shrinking welfare services of England. Unless the latter leaves European Union (EU), the overall integrity of the UK would meet an ignominious end. The reason is simple: there isn't enough development expenditure that can be spent on Scotland, Wales and Northern Ireland.

In the US, the economy is hollowing out too. Consequently, the votes have moved rightward. More and more Americans are required to maintain two incomes from the husband and the wife. Even white Americans are struggling with their lives, with a dilapidated infrastructure to make matters worse each day. Detroit, for example, is literally an empty shell, permanently forgone and forsaken as the American economy is faced with destructive, not creative, destruction.

In Japan and Singapore, lives among the bottom 80 percent are increasingly difficult. The fertility rate, too, has gone down over the last one decade if not more, necessitating their respective governments to either look to automation or emigration, to replenish the shrinking population.

The national debt, obviously, comes with great cost. How? When more is spent on the repayment of interest, less can be deployed as productive resources to enhance the soft and hard power of the country across the board. That's how one should see national debt: not merely as a set of gargantuan numbers but high and ever higher opportunity cost; which can have generational implications.

Rights models

Secondly, even in the era of cheap money, which follows each economic epoch when the petrodollars are recycled as cheap or syndicated loans, the regions that took advantage of the loose credit have found themselves unable to pay back both the principal and interest. This was the case in Latin America and Africa in 1980s, leading to a lost generation totally.

Now, if one assumes that the easy money was coming from Quantitative Easing I, II, III and IV over the last decade, still the government must not compete with the private sector to borrow from the available stock of money as each measure deployed by the government to dig deep into the financial market will lead to a spike in the actual cost of money. The latter is due to the crowding-out effect, with the government coming into the financial market to push the private sector out since the latter cannot operate its far-flung businesses with high-interest rates.

Thirdly, even if the sources of cheap money can come from various central and commercial banks in the West, even China, Malaysia must still avoid the tendency to indulge in them, especially when Malaysia or Malaysian government-linked investment companies (GLICS) have not found the right business models, either within the country or outside of the country, to make good use of the funds.

Take the research of Professor Terence Gomez on the Ministry of Finance, for instance. According to him, between 2004-2018, neither Abdullah Ahmad Badawi nor Najib Abdul Razak could find the right business models to significantly increase the profitability, and yield, of seven GLICS and 445 government-linked companies (GLCS) in Malaysia.

If these numbers are anything to go by, it is simply this: almost the entire ecology of Malaysian economy is led by public and private sector partnership, leading the Kuala Lumpur Composite Index to have a weightage of almost 75 percent of these companies. But just how the private sector in Malaysia can thrive on innovation and creativity, consequently, to embrace artificial intelligence and other collaborative economic platforms, as occasioned by the dawn of the many powerful apps and algorithm, is itself a challenge.

With a large debt overhang, Malaysia cannot attempt any deep and serious research and development to the tune of 5 percent or 10 percent of the GDP.

Fourthly, research by South China Morning Post has shown that mainland Chinese investments in Malaysia have totalled US$134 billion. They are distributed in eleven projects spanning the entire reach of Malaysia. At US$134 billion, these projects are nearly 50 percent of Malaysia's GDP. Are these Chinese companies spearheading genuine projects, or can they become toxic?

If so, the loans that cannot be repaid will be transformed into permanent liabilities; not unlike what had happened to Venezuela and Sri Lanka. Thus, cheap money does not necessarily come without geopolitical or geo-economic consequences, especially when these contracts were signed by the previous profligate administration that did not seem to know what the right and left hands were doing.

Fifthly, as a country that has oil and gas as the leading sector of its government revenue, Malaysia should be mindful of the peaks and valleys of this industry too. At US$80 per barrel Malaysian can make a profit. But the price of oil per barrel has also dropped by half before. Such gyrations can be disruptive. They will throw an immediate spanner into any five-year planning, necessitating the government to keep borrowing from contingency measures. Such non-stop borrowings can destroy any master plan to build the digital infrastructure of the open economy too.

Sixthly, high national debt is an open wound, literally. It invites foreign agents to short the national currency of Malaysia, with the belief that Malaysia does not have enough foreign reserves to defend them perpetually. Indeed, Malaysia doesn't. Research shows that Malaysia's current reserves stand at US$110 billion which is enough for 7.7 months of retained imports. Singapore, on the other hand, has close to a trillion US dollar worth of foreign reserves spread in various currencies to off-set their risks too. Clearly, Singapore is dipping into the cheap credit market with all eyes open, while Malaysia isn't.

Seventh, 80 percent of the Malaysian population is under the age of 50, which means in 2050, Malaysians can face the possibility of a greying crisis too. Indeed, statistics from the Employee Provident Fund (EPF) shows that 92 percent of the people who contributed regularly to their EPF retirement fund are earning less than US$1,500 or RM6,000 a month. Even if Pakatan Harapan can mandate the working husbands to provide 2 percent of their EPF contributions to the wives, many women in Malaysia will still be deeply affected by the lack of development expenditure or Bantuan Sara Hidup (BSH) from the government.

Deeply nationalistic

Eight, debt incurred by the government now, will be debt passed down to the next generation. Research of Dr Ong Kian Ming, the special officer to Minister of Finance Lim Guan Eng, has shown that Malaysians need to keep servicing the debt of 1MDB well into 2039, if not longer.

Lastly, there are also what we call productive debts and unproductive debts. Productive debts are when debts are taken for credible returns than the debt costs which will also create employment, growth and spillover economic activities that will benefit the nation and the people either in the short, medium or long term. In other words, the returns, be it tangible or intangible, far outweighs the cost of the debts. This is good.

However, the unproductive debts are debts raised to fulfil the ‘astonishing greed’ of the few at the expense of many. As we saw in the case of 1MDB where billions were raised to satisfy very few with the splurge on pink diamonds, yachts, private jets, designer bags and many other personal needs of the very few. Hence, the debt raised was used for the few at the expense of many and the people end up paying for it, sometimes trans-generationally. This is also sometimes referred to as the corruption tax, i.e. money syphoned from the people and depriving the people of the access and use of the money for the people and the nation building.

Indeed, Harapan understands all these implications and has set up a committee to work closely with Bank Negara to enhance the value of the Malaysian ringgit. The goal is to pare down the national debt. In fact, it is fortunate that 97 percent of all the national debts are in the form of ringgit, according to Anuskha Shah, the assistant vice-president of Moody's. If these debt exposures were in a range of foreign currencies, every little perturbation in Spain, Italy even, China and the US are adequate reasons to bring the Malaysian stock market crashing down.

Pro-debt critics are also wrong to ridicule the Tabung Harapan. When the Asian financial crisis hit S Korea, the nationalistic fervour of the S Koreans sent the currency speculators packing. They were shocked that S Koreans were so deeply nationalistic, to the degree many were even willing to melt their gold and hand over their jewellery, to the Korean government.

Their aim, not least, was to defray the extant nature of the financial crisis. Malaysians, within three days, have raised a notable RM30 million too. While this is not a huge amount viz the size of the national debt, its growing size has impressed the world. Even the British Broadcasting Corporation (BBC), has highlighted the fund. If anything, this goes to show that Malaysians can, and will do what they need, to defend the economic sovereignty of the country.

Doing the latter is much better than Najib Razak asking the High-Speed Railway and East Coast Railway Project not to be cancelled, even though the cancellation of these two projects can save up to RM200 billion according to our Prime Minister Dr Mahathir Mohamed. By this token, it is time for pro-debt groups to grow up and live in the real world, where national debts can indeed spiral out of control, invariably, to become the most lethal weapon of mass destruction, where the lives and livelihoods of the present and next generation are snubbed out.

More importantly, the quality of the underlying assets/projects being guaranteed by the government is critical too. In systems with good governance as in both the UK and the US, projects are carefully evaluated with clear lines of responsibility if things do go wrong.

In such situations, the probability of default is minimal and so truly contingent. But the same does not apply when you have guaranteed projects like 1MDB and SRC. In addition even in others, there may be padding of costs. So, pro-debt groups are not making a valid comparison with UK and US at all. Beyond compliance with sound accounting rules and good risk management, one has to be prudent too, indeed, be able to write down as much as one can, when an asset has deteriorated.

Both the UK and the US have currencies that are reserve currencies too. In the case of the US dollars, it is also a petrol dollar. As such there are certain advantages that accrue to them. The US has had a current account deficit during the last 50 years. They can even unhinge themselves from the gold standards in the 1970s, yet they don’t have a currency crisis.

But if one looks at what happened to Malaysia in 1997/98 following six or seven years of current account deficits, the dangers posed to Malaysia are real when national debts begin to pile.

In short, the pro-debt groups’ argument that a large national debt is acceptable, makes no sense at all. It is like saying a 50-foot wave has no impact on two aircraft carriers, thus, one does not need to worry about being a small sampan.

Relativity is important here in a rapidly global economy where huge amounts of money can go in and out of a country at the touch of a button.

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HAJI RAIS HUSSIN is a supreme council member Bersatu and heads its Policy and Strategy Bureau. -Mkini