Firstly, govt's debt in Malaysia largely involves govt borrowing from the rakyat via their proxies such as EPF, Banks, KWAP etc. This is an essential asset and often oversubscribe. Last year it was oversubscribe by 2.3x. Whenever government pays interest on their debt, it ends up as rakyat's income. If government were to pay off its debt ,which it can to do if chooses. EPF, Banks, KWAP wld have to find other investment assets which is not easy.Prior to 1985, all of EPF funds were held in form govt bonds. It provided arguably robust returns,and EPF has no issues in paying its pension annuity to its pensioners. This effectively makes EPF contribution payroll tax sequestered for old age pension purpose.
Lets look at Singapore. Their govt debt level is more then 100% of its GDP. Singapore govt issue debt for two reasons. Firstly its to provide a risk free benchmark to price other assets such as corporate debt& equity. Secondly, it satisfy the investment needs of its pension fund, the CPF. The Singapore govt than invests the proceeds of these bonds. The income derived from these bonds is used to pay off debt cost. In fact, bulk of CPF Assets is held in form of Sg govt bonds unlike EPF these days who has substantial stakes in equity & real estate.
This is similiar to us , we issue govt debts to satisfy investment needs of banks, EPF, insurance firm. Malaysian govt then invest it by building much needed public infrastructure. My point is that all this is conscious choice of public policy.
The cost of govt borrowing is basically the govt's bond yield. The govt bond yield is largely a policy choice. For instance Japan which is one of the largest economy in the world. Govt bond yield there is basically 0%. So is Germany. In fact, on some days yield drop to negative region. A while back FT reported that $9 trillion is held in negative yield bonds.
Negative yield bonds basically are debt whereby the lender is guaranteed to lose money. The lender(Bond holder) have to pay the borrower(Bond issuer). Yield has an inverse relationship to price. Price is consequences of supply & demand. We know that supply wasn't not curtailed to push price up except maybe in German. So, price increase is largely demand induced. Higher levels of demand push price up which push yield down. So question is why & who is buying govt debts which they are certain to loose money especially to the tune of $9 trillion. The answer is that government have been flexing its legislative muscle to induce demand.
In Japan for instance , its been part of quantitative easing policy to spur lending & therefore inflation. Its been rather unsuccessful. The Japanese govt also have been flexing its muscle to require commercial banks to hold higher levels of govt bonds. For the past few years, the Bank of Japan have pledged to buy $80trillion or USD712billion of govt bonds every year. For 2018, its said that BoJ will reduce its purchase to 44trillion yen or USD392billion. This push yield to negative region.
The purpose of this is to spur inflation which to date have been rather unsuccessful which I like to explore in some other blog-post. Anyway as of 2017, Japanese central bank held 40% of Japanese govt bond.
This is the case in China as well but its mainly as a respond to write off the bad loans from govt owned Chinese commercial banks. The consequences of this policy is that it pushes bank saving rate to really low levels. Low interest rate is effectively tax. In china's case, it is used to pay of the massive bad loans Chinese banks have accumulated.
I probably elaborate more on this later. But my point is this govt debt is not a problem per se. In fact its the cheapest therefore most efficient form of financing public infrastructure. Not only govt's can use policy levers as above to keep cost of public debt low. It also can choose to never repay its debt by rolling over to perpetuity. For instance, roughly 10% of govt debt is due in a given year which can be refinanced by issuing new bonds.
MoF(Govt) can also literally choose to issue 0% perpetual bonds to Bank Negara Msia(govt). This is basically govt borrowing from itself. In effect, its govt printing money. The flipside of this is of coz inflation.When too much money goes after little real goods such as raw materials, labor ; it creates runaway inflation the likes of Venezuela etc.
The caveat here being that to ensure govt debt is denominated in ringgit and to ensure it is use efficiently. We shouldn't build super expensive MRT when we can opt for BRT which is so much cheaper & provide us with better connectivity. Neither can we build roads to everywhere because apart from making congestion worst, it also deprive raw construction materials and labor away from other public infrastructure such as schools, hospitals etc. This means we get less hospitals , schools for the same ringgit(inflation). We also need to look at value add. For instance investing in an Iphone factory has much more value add to GDP than drilling oil.
Weaponizing fiscal policy has to be done effectively & efficiently to ensure productivity gain , thus boosting GDP & keeping debt/gdp ratio static
No comments:
Post a Comment