Budget 2021: Govt has room to borrow and spend

With sovereign bond yields at record lows, the govt is proposed to borrow its way out of the Covid-19 crisis

by AFIQ AZIZ / pic credit: pmo.gov.my

THE federal government can borrow its way out of the Covid-19 economic crisis as record low yields on sovereign bonds and a strong capital position make lending costs cheap, giving Putrajaya some fiscal space to support jobs and incomes.

A policy brief titled “Budget 2021: Ushering in the New Economic Paradigm” published by the Research for Social Advancement (Refsa) yesterday showed a decline in government bond yields since early 2019.

The latest monthly average yield for the 10-year Malaysian Government Securities (MGS) stood at 2.55% — its lowest in history.

“With yields at record lows, we propose for the government to borrow its way out of the crisis, with the caveat that money be used wisely and without the typical development expenditure restriction imposed on borrowing,” the report stated.

The current environment also allows the government to refinance its pre-existing bonds to cut down on debt servicing costs.

Based on reports from the Securities Commission Malaysia in 2019, the size of the Malaysian capital market is estimated to be RM3.2 trillion. Of the total, RM1.5 trillion was debt, of which 60% was government bonds.

Refsa said this would provide the capacity and the appetite to hold more local government bonds.

“Judging from these numbers and given the low yields on MGS and other related government securities, it is easy to conclude that there will be more demand for government bonds. Financing greater government spending will not be a large problem,” it stated.

Refsa lead researcher Darshan Joshi said the government should prioritise creating long-term sustainable job opportunities in the upcoming federal budget.

He said a broader and more generous social safety net must also be considered in Budget 2021, as the spread of Covid-19 and restrictions on movement had caused a massive disruption in the labour market with millions of job losses recorded in the first nine months of the year.

“There is a need for a social protection programme that streamlines transfers consistently across a person’s lifecycle, where they may fall into vulnerability.

“Given the acute needs triggered by the pandemic, in the short term, we propose a more generous household living aid scheme and a wider Employment Insurance Scheme coverage,” Darshan said.

Putrajaya has so far implemented support packages worth a total of RM305 billion to cushion the economic impacts of the Covid-19 pandemic.

Darshan said these short-term support packages are about to expire, which puts a heavy responsibility on Budget 2021.

“It should aim to ensure not only the short-term revival of the economy but also kickstart the transformation to an economy that fixes the major flaws exposed by the pandemic,” he said.

He added that investment in green infrastructure should also be emphasised to warrant a more sustainable economic development.

On Monday, Prime Minister Tan Sri Muhyiddin Yassin said a special focus on the country’s sustainability agenda would be included in the budget.