This article looks at how government debt has evolved through the years and what it actually consists of in terms of who is holding it, the main currency it is denominated in, when it is due, and what is it used for.

1. Government debt rests in Malaysian hands

Most of our government debt is actually in the hands of Malaysians and not foreigners.

In 2020, local institutions, companies and ordinary Malaysians held about 76% of government debt and foreigners, 24%. Total government debt amounts to RM880 billion currently.

In 2016, foreign holdings of government debt were at its peak of 32%, increasing from 27% in 2011.

Since then, local players have mainly held the majority of government debt. The largest drop in foreign ownership occurred in 2018, possibly due to the US-China trade war.

So who are the local players holding government debt?

Financial institutions which include banks, insurance companies, and other financial-related companies are the biggest holders of government debt at 36%.

The Employee Provident Fund comes in second, holding about 24%. KWAP, which is the public sector pension fund, holds about 3%, while surprisingly, Bank Negara Malaysia (BNM) holds 2% of government debt.

BNM normally does not hold that much of government debt as it has traditionally maintained about 0.7% of it in the past decade.

2. Majority of debt is due in five years or more

In 2020, there was about RM609 billion worth of government debt that had data on its maturity dates.

The government has actively been trying to issue longer term government debt to manage its cash flows more effectively. Hence, most of the current debt is due a long time from now.

About 61% of debt in 2020 is only due more than five years from now. Debt that is due more than 15 years has increased from 5% in 2011 to 18% in 2020.

Meanwhile, debt below five years, which is shorter term, has decreased from 51% in 2011 to 39% currently.

Generally, longer tenures enable the government to push the principal repayment further down the line. This reduces the pressure to repay debt in the immediate time horizon and enables the government to better plan its cash flow.

That is part of the reason why the government pushes for longer tenure debts and loans. It can do so now because its credit rating has stablised in the past decade.

3. Government debt grew in the 2010s but has slowed down since

Malaysia’s government debt has continuously grown in the past decade, tripling in size within 12 years from RM306 billion in 2008 to RM880 billion currently.

The period from 2008 to 2012 saw the highest growth in government debt, growing at an average yearly rate of 13.2%. In just four years, government debt nearly doubled to RM502 billion in 2012.

From 2013 to 2019, government debt grew slightly weaker at an average yearly growth rate of 6.8%.

However in 2020, to counter the Covid-19 recession, the government took on more debt where it grew 10.9% in that year. Is this high or low?

The one measure that is commonly used to evaluate this is the federal debt-to-GDP ratio which is calculated as below:

Debt-to-GDP ratio = (Federal Government Debt / Gross Domestic Product) x 100

For Malaysia, its debt-to-GDP ratio has been consistently around 50% to 55% in the past decade.

The government imposes a statutory limit of 55% on the debt-to-GDP ratio but it is actually an arbitrary self-imposed limit. Recently, debt-to-GDP ratio has risen to 61%, in order to combat the recession.

According to data from Trading Economics, many advanced economies have debt-to-GDP ratios that exceed 100%.

Japan for instance, has a whopping 266%, while the US registers at 108%. In comparison to these countries, Malaysia does seem low. This is all a matter of perspective.

4. Most of it is in Malaysian Ringgit

Much of the Malaysian government debt is denominated in Malaysian Ringgit, and not foreign currency. About 97% of it is in Malaysian Ringgit, while 2% is in US Dollars and the remaining 1% is in Japanese Yen.

As the ringgit became more internationalised, the government made sure to issue more of its debt in ringgit over the years. In the early 2000s, only about 80% of its debt was denominated in ringgit. That proportion has gradually increased to about 95% by 2009.

Is this good or bad? It depends on how you look at it. Generally, it is considered good as the government mainly pays its debts in ringgit and thus is not exposed to fluctuations in foreign currency.

However, the interest from foreign investors could be higher if debt is denominated in foreign currency. After all, most of them have more confidence in more established currencies such as the US Dollar, Euro, or Japanese Yen compared to the Malaysian Ringgit.

5. The money funds investments for the economy

Over the years, government debt has been used extensively to fund investments for important projects.

Development expenditure averaged around RM47 billion annually from 2010 to 2020, culminating in a total of RM517 billion worth of investments.

Most of it was actually invested in transportation projects such as LRT extension, MRT, MRT2, and ECRL, which encompass about 22% of total development expenditure.

Education came in second at 14%, followed by the defense sector and trade and industry both registering 10%.

The rest of it is invested mainly into public utilities (8%), agriculture and rural development (5%), social and community services (6%), healthcare (4%), and housing (3%).

Is this good or bad? Like always, it depends on how you look at it.

Arguably, investments into transportation projects would improve the standard of living as it can reduce commuting time and traffic congestion.

Education is the core fundamental factor for the performance of the economy and is essential for all Malaysians. The rest of the sectors are deemed as also critical for the nation.

6. Government relies on debt to finance itself

The government’s “profit” has consistently decreased in the past decade, making it increasingly reliant on debt to fund itself.

From 2001 to 2010, the government consistently made about RM11.3 billion in profits annually, giving it a strong financial position to undertake investments in the economy.

However, from 2011 to 2020, that profit drastically dropped to about an average of RM1.9 billion every year.

For context, in 2019, the government generated its highest revenue of RM264 billion but only managed to register a profit of RM1.1 billion. What happened?

Government expenditure has been growing at an average of 6.3% every year from 2010 to 2019, compared to 5.8% for government revenue.

Hence, in order to continue investing in the economy, the government has been using more and more government debt.

This could be bad for Malaysia moving forward if profits continue to drop and it has to rely on government debt instead to fund its operations.

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.