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Economy 101: Seriously, Is Malaysia’s External Debt As Bad As Sri Lanka?

Sri Lanka Riot External Debt

COVID-19 pandemic, public funds mismanagement and corruption have driven some countries into severe external debts that they were unable to recover from and this saw massive public riots that had driven the politicians involved out of their country. One such example is Sri Lanka where the President of the country had fled the country and the country is in a major riot. Image source: BBC

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Factual Error In Twitter?

The statement that is often shared on social media is that Malaysia has the second highest debt next to Sri Lanka which is facing its worst financial crisis and external debts stand at RM697 trillion.

Another is that we are fast becoming another Sri Lanka due to one of the highest debts in the country.

So is it true that Malaysia has the second largest debts in Asia after Sri Lanka and is it true that Malaysia will soon be in the same financial crisis as Sri Lanka? Are the facts shared on social media true or it has been exaggerated? What is Malaysia’s true amount of external debt and how do we need to measure it so that we know that we are in deep trouble repaying these debts?

External Debt BNM Malaysia

More than half of the external debts in foreign currency amounting to RM730 billion equivalent in the country are locked in long-term bonds and interbank borrowings. This amounts to almost 70% of the total external debts with the remaining 30% in local currency. Chart source: BNM

Measurement Of Government’s Debt

This is reported in Wikipedia on how one measures government debts on the ability of the country’s financial standing:-

Government debt is typically measured as the gross debt of the general government sector that is in the form of liabilities that are debt instruments. A debt instrument is a financial claim that requires payment of interest and/or principal by the debtor to the creditor in the future. Examples include debt securities (such as bonds and bills), loans, and government employee pension obligations.

International comparisons usually focus on general government debt because the level of government responsible for programs (for example, health care) differs across countries and the general government comprises central, state, provincial, regional, local governments, and social security funds. The debt of public corporations (such as post offices that provide goods or services on a market basis) is not included in general government debt, following the International Monetary Fund’s Government Finance Statistics Manual 2014 (GFSM), which describes recommended methodologies for compiling debt statistics to ensure international comparability.

The gross debt of the general government sector is the total liabilities that are debt instruments. An alternative debt measure is net debt, which is gross debt minus financial assets in the form of debt instruments. Net debt estimates are not always available since some government assets may be difficult to value, such as loans made at concessional rates.

Debt can be measured at market value or nominal value. As a general rule, the GFSM says debt should be valued at market value, the value at which the asset could be exchanged for cash. However, the nominal value is useful for a debt-issuing government, as it is the amount that the debtor owes to the creditor.  If market and nominal values are not available, face value (the undiscounted amount of principal to be repaid at maturity) is used.

A country’s general government debt-to-GDP ratio is an indicator of its debt burden since GDP measures the value of goods and services produced by an economy during a period (usually a year). As well, debt measured as a percentage of GDP facilitates comparisons across countries of different size. The OECD views the general government debt-to-GDP ratio as a key indicator of the sustainability of government finance.

(Source: Wikipedia)

External Debt Malaysia BNM

The total debt standing as of March 2022 as reported by BNM in their quarterly financial reporting is more than RM1 trillion comprising short, medium and long-term debts. Data source: BNM

Central Bank Malaysia’s Assessment

In its quarterly bulletin as of March 2022, the Central Bank of Malaysia (BNM) reported:-

Malaysia’s external debt amounted to RM1,111.2 billion, or 69.6% of GDP as at end-March 2022 (end December 2021: RM1,082.1 billion or 70.0% of GDP).

The increase was mainly attributable to higher interbank borrowings, which was partially offset by net repayment of bonds and notes. Malaysia’s external debt remained manageable, given its favourable currency and maturity profiles. Ringgit-denominated external debt amounted to RM381.3 billion and accounted for 34.3% of total external debt (end-December 2021: RM373.0 billion and 34.5% respectively).

This was largely in the form of NR holdings of domestic debt securities (67.7% share of ringgit-denominated external debt) and ringgit deposits (15.9% share) in resident banking institutions. These liabilities were not affected by fluctuations in the ringgit exchange rate.

Foreign currency (FCY) external debt accounted for the remaining RM729.9 billion, or 65.7% of total external debt (end-December 2021: RM709.1 billion and 65.5%). Long-term bonds and notes issued offshore stood at RM193.7 billion, accounting for 26.5% of total FCY-denominated external debt, issued largely by non-financial corporates.

These are subject to BNM’s prudential and hedging requirements. Intragroup loans, which are issued between related foreign entities and accounted for 14.5% of FCY-denominated external debt, were generally on flexible and concessionary terms.

(Source: BNM)

In summary, total external debt in value had increased from RM1,042.0 billion as of March 2021 to RM1,111.2 billion as of March 2022. However, Malaysia’s external debt amounted to 69.6% of GDP as of the end of March 2022 which is an improvement over the external debt as of the end of March 2021 at 73.3% and this is generally expected as the country starts to recover from the stagnant & unemployment during the COVID19 pandemic for the year range 2020 to 2021.

External Debt Reporting in Other Sources

External debt in value itself is not a good indicator of the government’s ability to sustain and manage external debts. For example, CEIC reported that Malaysia’s external debt stands at USD264.5 billion as of March 2022 but when one compares it to countries that are having a serious financial crisis, they have lower debts, for example, Sri Lanka only has USD51 billion as of March 2022. Pakistan only has USD129 billion for the same period.

External debt GDP Malaysia IMF

When it comes to debt to GDP ratio, the country saw the worst in the late 1980s and it is spiking in recent years at the peak of the COVID19 pandemic. One commenter said that debts under the PH government were worse compared to the debts under the BN government but the chart shows otherwise. It started to spike up in 2009 after Najib was appointed as the Prime Minister and it has continued since then. Chart source: IMF

Thus one has to go back to using the government debt-to-GDP ratio to see if the country potentially will have a serious financial crisis.

Top 12 Countries with the Highest Debt-to-GDP Ratios (%)

Venezuela — 350%
Japan — 266%
Sudan — 259%
Greece — 206%
Lebanon — 172%
Cabo Verde — 157%
Italy — 156%
Libya — 155%
Portugal — 134%
Singapore — 131%
Bahrain — 128%
United States — 128%

As of December 2020, the nation with the highest debt-to-GDP ratio is Venezuela, and by a considerable margin. The South American country has what may be the world’s largest reserves of oil, but the state-owned oil company is said to be poorly managed, and Venezuela’s GDP has plummeted in recent years. At the same time, Venezuela has taken out massive loans, adding to its debt burden, and president Nicolas Maduro has made questionable moves to slow the country’s rampant inflation.

Japan occupies the second slot with a ratio of 266%. In 1992, Japan’s Nikkei (stock market) crashed. The government bailed out banks and insurance companies, providing them with low-interest credit. Banks were consolidated and nationalized, and other stimulus initiatives were used to help the struggling economy. However, these actions caused Japan’s debt to increase dramatically.

Another interesting entry on this list is the United States, whose debt-to-GDP ratio ranks 12th out of all the world’s countries. While the U.S. boasts the highest GDP in the world,, it nonetheless spends more than it earns.

Major contributors to the national debt include the world’s largest military budget, tax cuts (which reduce government income and rarely result in a corresponding increase in economic growth), COVID-19 relief efforts, and mandatory-but-underfunded programs such as Medicare.

(Source: World Population Review)

Malaysia’s debt-to-GDP ratio is at 69.6% so are we worse off compared to other countries namely Sri Lanka? This is the analysis of the debt situation in Sri Lanka:-

Despite the levels of domestic public debt remaining mostly stable, the foreign debt-to-GDP ratio (comprising mostly commercial borrowings) has surged from 30 percent in 2014 to 42.6 percent in 2019.

The latter has mainly contributed to Sri Lanka’s rising total debt-to-GDP ratio (domestic and external debt) which reached an all-time high of approximately 101percent of GDP in 2020.

Statistical estimations by a World Bank study shows that the ideal threshold for total debt-to-GDP ratio is 64 percent for emerging market economies such as Sri Lanka; and for each additional percentage point beyond this threshold is estimated to cost the annual real growth of the economy by 0.02 percentage points.

(Source: ORF Online)

Sri Lanka Malaysia Debt GDP IMF

Comparing Malaysia and Sri Lanka’s debt to GDP ratio, Sri Lanka saw two major spikes – one in the late 1980s same as Malaysia and another in the late 1990s when we had the 1997 Asian Financial Crisis which Malaysia managed to recover by enforcing the capital control and purchase of bad debts from the banks. Chart source: IMF

Final Say

To be frank, the financial crisis in Sri Lanka had caused serious anxiety for all of us mainly because we have the same symptoms and mismanagement that had taken place in Sri Lanka. We have seen how massive mismanagement of public funds, lack of enforcement & adherence to policies & rules and sheer corruption cumulating in the 1MDB scandal and how little effort despite the various committees & studies, has been taken to curtail the rising cost of living. Many have voiced the same concern until this was highlighted by the Finance Minister:-

Malaysia is stable and is not at risk of going bankrupt like Sri Lanka, Finance Minister Tengku Zafrul Aziz said, citing the International Monetary Fund’s prediction for the economy to expand 5.75 per cent this year as reason for confidence.

“The IMF has never said that Malaysia is facing economic troubles that could bankrupt the country,” he said in parliament on Tuesday (July 19). “If we compare our economic indicators with Sri Lanka, it is clear our economy is far more stable than theirs.”
Still, the government must continue to manage the country’s finances prudently and control the level of debt, he said.

(Source; Straits Times)

In summary, the financial facts do not show that Malaysia has the second largest debt after Sri Lanka in Asia. Other countries like Japan and Singapore have higher debts and their debt to GDP is higher as well. It is manageable at the present and with controls and enforcements with lessons learned from 1MDB, hopefully, it will remain manageable in the coming years. This with careful and prudent financial management by the Government should see an improvement in the debt to GDP ratio.

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