National debt close to critical level, says don

Dr-Yeah-Kim-Leng-economyPETALING JAYA: An economist has warned that Malaysia’s debt is fast reaching the maximum level for a developing country, saying much of the blame lies with the government’s fervour for large-scale infrastructure projects.

Yeah Kim Leng, a professor at Sunway University’s Business School, noted that the nation’s direct debt now stood at 52% of its gross domestic product (GDP) and contingent liabilities guaranteed by the government, such as for loans taken by government-linked companies, were between 20% and 30% of GDP.

He said total debt should not be higher than 80% of GDP, warning that anything beyond that would expose the country to an economic crisis.

“When we reach 80%, it is not like we will go into economic crisis, but it has reached a maximum level and it is time to be prudent as the economy will become more vulnerable to the economic crisis or sovereign debt crises after that,” he told FMT.

He said mega-scale projects like the High-Speed Rail (HSR) connecting Kuala Lumpur and Singapore and the East Coast Rail Link (ECRL) connecting the east and west coasts were likely to increase the country’s debts.

He also said he was concerned that the national debt might rise more rapidly than expected if such projects didn’t bring in returns soon enough.

The cost to build the 350km HSR is expected to be more than RM60 billion, according to an estimate by the Institute of Southeast Asia Studies.

The ECRL, for which Malaysia has secured Chinese construction expertise and financing, has been estimated to cost RM55 billion. The opposition has claimed that it will eventually cost Malaysia more than that because 30% of the amount would be financed by the government through the issuance of sukuk and bonds and because interest payments had allegedly not been factored in.

Yeah also warned that economic growth would slow down once the national debt shoots above 80% of GDP and the government would then have less money to spend on education, health and other essential services.

In such a situation, he added, a government would normally start selling off its assets and privatising some services and projects.

He said high debt levels would also affect investment. “If there is no confidence in the sustainability of a country’s growth, there will be an erosion of confidence.”

With less investment, he pointed out, there would be fewer jobs and salaries would not rise, adding to the vulnerability of the economy.

He urged the government to improve on governance and reduce leakage in the system so that it could use the money thus saved to pay off its debts.

He also said the government should aim to achieve a balanced federal budget as soon as possible.

Government debt at RM685 billion

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