PETALING JAYA: Malaysia should not be too concerned about debt and deficit ceilings during the Covid-19 pandemic, according to economist Geoffrey Williams, who noted that both are “artificial” and should not be used as policymaking tools during a crisis.
Instead, the Malaysia University of Science and Technology (MUST) professor said that the country should focus on its capacity to repay debt if plans to increase the statutory debt limit come to fruition.
“Three things matter in Malaysia in this respect,” he said.
“First, the debt is mostly domestic, so it is Malaysians borrowing from Malaysians. Second, the debt is cheap at the moment. Third, we care whether the government can repay it in the future, and that depends on growth prospects.
“It is growth that we should be worrying about now.”
Williams was responding to reports on Friday that finance minister Tengku Zafrul Aziz is set to propose raising the statutory debt limit from the current 60% of the gross domestic product (GDP) to 65%.
Tengku Zafrul, who said the statutory debt-to-GDP ratio is currently about 58%, told members of the media that he would present the proposal to increase the statutory debt limit to the Cabinet next week before it is then brought to Parliament for approval.
Williams pointed out that even if the government did not borrow any more money, the debt and deficit ratios would rise because the country’s GDP has been contracting for almost two years due to the Covid-19 crisis.
“So because this (statutory debt limit) is a ratio, lower GDP causes it to rise even if there is no extra debt or deficit. It’s inevitable,” he said.
Williams also noted that of the RM530 billion in cumulative stimulus packages the government has announced since the pandemic, less than 20% is made up of direct fiscal injection.
“So ironically, it is too little – and not too much – spending and borrowing that we should worry about, as well as the continuing lockdown,” he said.
He added that many more micro small and medium enterprises (MSMEs) will fold, and then default on their debts, if the lockdown is extended.
“Also, households which have lost their sources of incomes during the pandemic would not be able to service their loans.”
Williams, who has held academic positions at London Business School and the University of Oxford’s Pembroke College, said that the government should focus on the “more risky” household and business debt instead of worrying about government debt, which is “perfectly manageable”.
Long-term strategy
Barjoyai Bardai of Universiti Tun Abdul Razak (UTAR) shared William’s view, stating that international financial analysts have expected most countries in the world to rack up bigger deficits, thanks to increased borrowing this year.
Emphasising that creating jobs and attracting foreign direct investment (FDI) must be key considerations for policymakers when discussing increased statutory debt limits, the economist also stressed that the country needs a long-term strategy to navigate out of the current recession.
Barjoyai described Malaysia’s current debt-to-GDP ratio of 58% as “actually very low” and pointed out the ratio is over 100% in developed countries such as Singapore – where it is currently 131% this year.
“The issue is how we spend the money. That’s the most important thing.
“We can increase (statutory debt limit) to be much higher, but we must have a good strategy to turn the economy around and repay this borrowing,” he said, adding that he only expects the country’s growth this year to be around 1%.
“If we don’t have any good strategies, then this (increased spending) will just melt away in the air, and we don’t want that to happen.”
Source: https://www.freemalaysiatoday.com/category/nation/2021/09/05/growth-ability-to-repay-debt-crucial-moving-forward-says-economist/