Growing economy can take care of debt

Malaysia already has a GDP per person that is comparable to that in 7 member states of the euro-area

by EDUARD J BOMHOFF / TMR file pix

So, the national debt stands at 80.3% of gross domestic product (GDP); how ominous is that? For the past 25 years, politicians and economists have followed the guidelines for debt and de cit that were agreed at the time of the Maastricht Treaty that set up the euro.

Malaysia already has a GDP per person that is very comparable to that in seven member states of the euro-area, so the guidelines that apply to these seven countries (and to the richer euro members) could also make sense here.

In fact, Malaysia could even be more comfortable to satisfy the euro norms than many of these euro countries, since our economic growth is likely to be higher than in Western Europe and that helps in managing the debt.

This is where the euro-area norms come from: Assume a country has a GDP of 100 and a national debt of 60. The ratio of debt-to-income stands at 60%.

Now, assume a real economic growth of 2.5% and inflation of also 2.5%. Then, next year the GDP amount to 105.

If the deficit equals 3% of GDP, then the debt will increase from 60 to 63, leaving the debt-to-GDP ratio unchanged at 60%. All these numbers are arbitrary, but they make sense for developed economies.

Malaysia has the advantage of higher growth. Let’s say growth this year and next averages 5% and in addition there could be 3% annual inflation.

From a starting point of 100, the GDP would grow to 116.6 in 2020. If the deficit was to equal 5% this year and 4% of the then GDP in 2019, the debt would increase from 80.3 to 90.

In 2020, the debt-to-GDP ratio would come out at 90/116.6 = 77.2%, already on a healthy path down to the norm of 60% of GDP.

Another three years with the same growth and inflation, but a deficit according to the euro norm of 3% of GDP, would bring the debt-toGDP ratio down to just below 70% of GDP, and after another five years, the debt ratio would be at the norm of 60%.

A deficit of 5% this year — high because of the scrapping of the Goods and Services Tax — 4% in 2019 and 3% thereafter would work nicely to reduce the debt-to-GDP ratio, as long as Malaysia continues togrow.

Optimism is warranted if the new government manages to reverse the talent exodus of too many educated Malaysians. One important step to stop the brain drain would be to eliminate all harmful involvement of the state in the government-linked companies (GLCs), because then investment by the private sector will increase.

Research by Jayant Menon and Thiam Hee Ng of the Asian Development Bank has shown that investment has consistently been lower in sectors where businesspeople have to compete with GLCs, because the GLCs may at any time get unfair competitive advantages from the government.

That has to end, and the quicker the government withdraws from this industry, the more business optimism will increase in the private sector.

In addition to stopping the brain drain and getting the “G” and “L” out of the GLCs, Malaysians have expressed a clear desire at the election to make one further big change.

The Bumiputera policies should be recalibrated into policies for all poor Malaysians, irrespective of ethnic group or religion.

Policies are needed to help all poor citizens — especially the older ones — with their medical bills.

Support for training should also become available to all low income Malaysians, to right some of the injustice suffered by the poor non-Bumiputera.

The incoming government will want to work on these glorious but hard issues; if they manage to reduce the deficit to 3% of GDP from 2020 onwards, the growing economy will take care of the national debt.

  • Eduard J Bomhoff is professor of economics at Monash Malaysia [email protected]. The views expressed are of the writer and do not necessarily reflect the views of the newspaper’s owner and its editorial board.