Monday, May 14, 2018

CIA says Singapore public debt even higher than Malaysia

Dr Mahathir says M’sia RM1Trillion in debt but CIA says S’pore public debt even higher.

Speaking at his inaugural press conference as the country’s 7th PM on Thu night (10 May), Dr Mahathir Mohamad said top on his list were the implementation of new economic measures as well as reducing the national debt of Malaysia.

Pakatan Harapan coalition headed by Dr Mahathir won the Malaysia GE14 decisively on Wed (9 May) to form the new Malaysian government.

Dr Mahathir said the new government will ensure that the ringgit’s value remains steady, adding that economic management and business finances will be its main focus.

On the national debt, Dr Mahathir said the country is in a "horrid financial problem" as Bank Negara Malaysia had stated that the amount owed by the government to financial institutions is RM800 billion.

"But I also know there's is a hidden figure that could be about RM1 trillion (S$340b)," he added. He said solving issues pertaining the country’s debt would be his administration’s priority.

"We have to reduce our debt and we have to pay off our debt. Now we are saying that we can pay off quite a big (amount of) debt because we know where the money is and I think we can squeeze some people off their money.”

However, he noted that some debts were too large and negotiations on the terms and amounts as well as the course of the terms were needed.

Dr Mahathir said his administration would be able to retrieve 1MDB fund as they have identified “certain places where they are hidden”. He cited these locations as the United States, Singapore, Switzerland and also with businessman Jho Low.

S'pore government indebtedness higher than that of M'sia

Chris Kuan, a retired banker who blogs regularly on financial matters, opined that despite the huge debt owed to external financial institutions, Malaysian government indebtedness is low.

"Malaysian government indebtedness is low, 51% of GDP which is only half of Singapore's (ours is high largely due to CPF)," he wrote.

"There is good amount of fiscal space for the new government to finance the fall in revenues due to the removal of GST through an increase in net debt issuance."

Chris also added that Malaysia is more flexible than Singapore when it comes to financing arrangements.

"Unlike Singapore, Malaysia isn't constitutionally constrained by prohibition against deficit financing. Our friends up north has more flexible arrangements," he said. "We can also have the same but we don't."

"Now shouldn't we have this kind of debate in Singapore, eh?" he added.

CIA World Factbook: SG ranks 11th, MY ranks 95 in Public Debt

Indeed, according to the information recorded in CIA World Factbook, the public debt of Singapore is 114.6% of GDP while Malaysia's is 52.5% (about the same as what Chris has calculated).

The CIA World Factbook compares the cumulative total of all government borrowings less repayments that are denominated in a country's home currency. In other words, it is the accumulated level of debt owed by the government of a country.

As revealed by Chris, Malaysian government's debt mainly came from external financial institutions while Singaporean government largely borrowed from Singaporeans, that is, the CPF holders.

Regardless, public debts are still money owed by the government to entities outside of the government. In this respect, Singapore is ranked by CIA to be 11th in terms of government indebtedness (as % of GDP) while Malaysia is ranked 95th in the world, far from Singapore's level.

So, whether the money is owed to financial institutions or to citizens, just like any other creditors, they expect to recover their principals with interests at the end of the day.

No need for Singapore govt to "kowtow" to CPF holders

But there is a subtle difference though between owing money to financial institutions vs citizens.

If the government "screws-up" in using the borrowed funds and is unable to pay its installments in time, it will have to renegotiate with the financial institutions to change the repayment schedules. Now, the financial institutions may or may not agree. In other words, the government has to "kowtow" to the financial institutions.

In the case of Singapore, there is no need for the Singapore government to "kowtow" to its citizens. The Singapore government "borrows" money from Singaporeans through their CPF, which is covered under the CPF Act.

It's relatively easy for the Singapore government to change the CPF rules, should it want to delay any repayments. For example, it can easily change the minimum sum for CPF draw-downs to do that. No negotiations are necessary with the CPF holders, unlike the Malaysian government who would need to negotiate with the institutions. In fact, that was what Dr Mahathir said on Thu, that some debts were too large and negotiations on the repayment terms were needed. No country would want to default because it would suffer drastic economic consequences, which in turn would surely cause the government to suffer politically.

For Singapore, as said, since the government is borrowing from Singaporeans through their CPF, it's relatively easy for the government to deal with any financial crisis which may impact repayments to the CPF holders - just change the CPF rules and Singaporeans, by law, will have to abide by it. Best of all, by law, the younger Singaporeans who enter the workforce will have to contribute their CPF monthly, giving the government a constant stream of funds to borrow from without asking.

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