National debts: the screw, screwing and screwed

Malaysia’s growing national debt is a matter of concern for many but it also baffles many. We know the amount is huge but what exactly caused it and what it is really about. What will happen to us if the debt becomes unmanageable?

APA ITU NATIONAL DEBT?

I dwelled into Ministry of Finance’s Q2 2011 report for some answers.

If a person spends more than he earns every year, he will owe a lot of money to a lot of people. Our national debts go on the same principle but just a little bigger in scale and consequence.

The BN administration has spent more than the taxes collected (and they collect a lot – company tax, personal tax, service tax, sales tax, customs, petroleum tax etc). If expenses is more than government income, then the government will issue bonds to local and foreign lenders.

In a nut shell, annual deficits are mainly due to

*  the oversized and under-delivering civil service,

*  huge subsidies on petrol (which I would blame it on a certain individual’s misplaced emphasis on developing national car over public transportation system) ;

and

*  unchecked waste of tax money over stuff like project overruns (PKFTZ, Istana Negara ,  fantastic by election budgets, crazy defense spending etc) and routine expenses (read the AG’s report and sob).

http://thestar.com.my/news/story.asp?file=/2011/11/3/nation/9829248&sec=nation

“MACC: No graft involved in purchase of binoculars”

From finance ministry’s website, the debt is getting bigger and bigger.

So the amount of repayment we have to pay is also getting bigger and bigger.

MALAYSIA IS FULL OF CASH AND DEBTS

On page 129 of the MOF report, it read,

“Federal Government gross borrowings are projected to increase significantly in 2011 mainly on account of higher redemptions, loan repayments and deficit financing requirements. Given the ample liquidity in the financial system, the Government will continue to source its borrowing from domestic sources”

Basically the mumble jumbo above means – government is going to borrow more money because they have to

1) pay back old loans and

2) pay for more wastage of funds.

Since Malaysia has a lot of cash (you might yell ‘where got?” read on….), the government will take more of those funds from local sources instead of asking from foreigners who are more demanding & powerful creditors. 

Further down below on the same page, the report stated that

“Total gross borrowings for the year are expected to amount to RM96.6 billion. Of this, RM90.2 billion or 93.3% constitute domestic borrowings while RM6.4 billon is from external source. Of the gross borrowings, RM51 billion is for repayments of existing debts while the balance, RM45.6 billion will be used to finance the deficit.”

Basically it means that Najib’s MOF will increase total debts by another 1/6; more than half of the new debt is to pay old debt, and even though we have not cleared the old debts, the government is going to pile up some more debts.

So the question where is the “ample liquidity in the financial system” comes from?

If you look at the debt trend, the borrowings from foreigners goes up and down, meaning the foreigners do get paid back but when you look at the Hutang Persekutuan Dalam Negeri, the figures only go one way – which is higher and higher, meaning the rakyat who are supposed to be diutamakan really did not get paid. We as rakyat have no way to tell the BN administration to pay us back like a foreign creditor.

So really we are lending more and more to the fellow who recently propose to change the tax laws to say IRB can charge us any amount of tax the IRB thinks we should be paying*. And we cannot take those bureaucrats to court to dispute them.

*(I am talking about the proposed S107D of the Income Tax Act. You might get a lower court to rule this section as unconstitutional but the government can always appeal all the way to federal court)

We also gadai away........

 Foreigners enjoy security over Malaysians bonds they subscribe, take a look at this recently issued USD2billion debt on Islamic finance principle of Wakala:

Wakala principle roughly means that the borrower can fix a percentage of “profits” to the lenders, anything on top of that return, goes to the borrower as his/her profit/incentive/reward.

Note that in order to borrow from foreigners, the kerajaan has gadai some schools and a renounced medical institution, so next time when you pay your fees, the higher fees is explained by the need to pay “profits” and “incentives” to both borrowers and lenders.

Note that the Finance Ministry’s report, which read more like a “high five myself” advertisement, celebrate us borrowing more and more. Something does not feel right here. Who feels proud to have bigger debts?

How does Malaysia look like when we hit bankruptcy?

With the debt getting bigger and bigger, one day we will go burst like any yuppie who charge more to his credit card than his salary.

So, this is my prognosis in the event of a bankrupting/bankrupted Malaysia:

1.   Cutting of expenses – fuel and food subsidies will go first and we will see higher cost of living. Welfare to the poor might go too. The standard of public utilities will get worse and worse, e.g. doctors with no medicine.

2.   Risks of not able to honour withdrawals. The “high liquidity” i.e. our savings in banks, EPFs and unit trusts like amanah saham wawasan etc  are tied up in loans to the federal government. In the event of sovereign bankruptcy, we can’t withdraw and use our savings earned over the years of hard labour and sacrifice.

3.   The government will try to get more taxes in – whether from GST, imposing laws like section 107(D) which can mean “IRB tell you to pay whatever amount they want no matter what your accountant explain to the IRB and you can’t take the IRB to court” kind of thing. We are already hidden borrowers by letting the IRB collecting personal and company taxes in advance. Businesses will be forced to raise the prices of goods and services, adding on the cost of living and flogging citizens more. People on reduced welfare would really have a hard time.

4.   The government will be reluctant to reduce/remove civil servants despite the auditor’s general report but as compromise, will take in less to bolster their voters’ bank

5.   The foreigners will insist on getting their money back first, so they may take over the pledged assets, like the schools above or Institute Jantung Negara, and collect directly from paying customers/selling the assets off

6.   Foreigners will lose confidence on ringgit and insist us to pay for imports in other currencies and our ringgit would devalue further and further and the cost of imported items will be more and more expensive. Although Malaysian has fertile land and great weather, we still have to import rice and vegetables, and more than half of cost of production of chicken is depended on imported chicken feed made from corn, cost of living takes another beating and RM3 1Malaysia meal might consist of 1 spoonful of white rice with diluted ikan kembong curry.

7.   Companies suffering from high cost of business and loss of purchasing power of its customers will have to close shop. Default by debtors will lead to businesses closing down, domino effect will come in and we will have many people out of jobs. Banks, ah longs and old mother and fathers will not get their loans back. Properties would get repossessed or defaced (depends who you borrowed from)

The non-financial impact would be some blame game by certain quarters who are most eager to deflect responsibility (a most normal human nature) and try to blame it on other countries/any race but mine or manufactured some other irrelevant crises to shift the rakyat's focus from the real issues and brewing up some more tension.

Well, can you imagine how this “satu lagi projek kerajaan barisan nasional” will turn out? Bye now as I am tuning into that intriguing documentary series, “life after people”