Highlight Govt must press on with reducing fiscal debt
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Highlight Govt must press on with reducing fiscal debt
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[size=28]Govt must press on with reducing fiscal debt
By Sangeetha Amarthalingam / The Edge Financial Daily | June 13, 2016 : 8:55 AM MYTThis article first appeared in The Edge Financial Daily, on June 13, 2016.
KUALA LUMPUR: Having reached for the “low hanging fruits”, for example subsidy cuts and the implementation of the goods and services tax, to improve the fiscal position, the government has now started to tackle stickier issues, like the pension fund and housing loans for civil servants that have added to the ballooning public debts.
For further fiscal consolidation, independent economist Lee Heng Guie opines that the government is putting in effort to come up with a viable financing model.
Lee told The Edge Financial Daily that the government is striving to keep its debt below the 55% ceiling, although it has been revised several times in the past.
He was commenting on the government’s expectations to bring down the public debt to gross domestic product (GDP) ratio by 2% to less than 54% by transferring RM21.9 billion to its new statutory body, the Public Sector Home Financing Board (LPPSA).
Last Friday, finance ministry treasury secretary-general Tan Sri Dr Mohd Irwan Serigar Abdullah, who is also LPPSA chairman, said the RM21.9 billion was a fraction of the Housing Loan Division’s (BPP) total borrowings of more than RM50 billion, the remainder of which constitutes mostly sukuk servicing.
Irwan pointed out that the debt taken over by LPPSA was none too big as its assets are made up of loan collection from about 835,000 civil servants that amounts to RM42 billion.
To finance the undertaking, LPPSA signed its maiden RM25 billion government-guaranteed Islamic commercial papers and Islamic medium-term notes, and conventional commercial papers and medium-term notes with joint lead arrangers and managers.
They comprise AmInvestment Bank Bhd, CIMB Investment Bank Bhd, Maybank Investment Bank Bhd and RHB Investment Bank Bhd.
The three-year sukuk issuance programme with a 30-year tenure would be done in three tranches, with the first one expected in July, said Irwan, adding that LPPSA expects to have an annual loan disbursement of between RM8 billion and RM10 billion this year.
Nonetheless, some critics said the transfer of RM21.9 billion to LPPSA, which would issue government-guaranteed Islamic bonds to raise capital to take over the debts, would add more to the government’s contingent liabilities.
According to Irwan, the government’s current contingent liabilities amount to RM170 billion.
Meanwhile, Lee said while LPPSA was able to tap into the capital market to raise funds, there might be a need to negotiate the terms and conditions with loan financing.
“As long as the board can sustain and service the borrowings, which would not go directly into the government books because the government does not want to breach the 55% debt ceiling, which has changed several times in the past,” he said.
Another economist noted that the government must be committed to reducing its debt in order to maintain its sovereign credit rating.
At present, Malaysia’s public debt amounts to RM630.5 billion or 54.5% of GDP, and it has an “A-” rating by Fitch Ratings and S&P Global Ratings, and an “A3” by Moody’s Investors Service.
The economist said the RM21.9 billion borrowings transfer to LPPSA, which would remain self-sufficient by generating income internally through its assets and the issuance of bonds, was not a new move to reduce government debt.
“Civil servants’ housing loan forms a portion of the government’s debt. So transferring the borrowings will automatically reduce government debt by 2%,” the economist said.
On a lighter note, he said that even if public-service housing borrowings were added to the contingent liabilities, the economy would not be affected as long as people have jobs and they continue to finance their loans.
However, the current harsh economic conditions may dampen the job market.
Furthermore, Irwan said the government was also looking at reducing the debt-to-GDP ratio further by employing a similar model in LPPSA by transferring its pension fund debt to Retirement Fund Inc (KWAP) soon.
RHB Research’s Asean economist head Peck Boon Soon said in doing so, it would look like an “accounting trick” because unlike BPP’s loans, civil servants do not pay for their pension. The government is footing the bill.
Peck explained that for housing loans, the government borrows money to lend to civil servants for property purchases. Civil servants would have to service the loans. But in the case of the pension fund, the money is borrowed to pay pensioners, who are not obliged to pay back.
“It does not reduce the government’s debt because the borrowing is not paid off [by civil servants]. [The model for KWAP] is not sustainable,” Peck said.
Lee said KWAP should grow its fund to generate better returns to finance the pension liability to invest prudently, which could reduce the annual allocation.
In the 2015/2016 Economic Report, RM19.5 billion or 9.1% of operating expenditure was allocated for pension charges in 2016.
“KWAP must invest wisely and help to grow the fund size. However, employees should be allowed to define their contribution instead of the government paying for them. They (government) must think about sustainability,” said Lee.
Government statutory body LPPSA, established on Jan 1, 2016, will assume the role of approving up to 30,000 civil service loans with a flat 4% interest rate annually.
It will also take on forecast borrowings of more than RM100 billion for the next 30 years.
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