Thursday, December 26, 2013

Debt, Deficits, and Government Assets

I’ve been asked by a number of people to comment on this (excerpt):

Laporan Bank Dunia: Kerajaan BN Jual Aset Negara Untuk Capai Sasaran Defisit

Pentadbiran Dato’ Seri Najib Tun Razak terus mengumumkan angka-angka untuk meyakinkan orang ramai dan institusi kewangan bahawa beliau serius untuk mengekang tahap keberhutangan negara. Sasaran yang diletakkan ialah untuk menurunkan defisit ke paras 4% dari jumlah Keluaran Dalam Negara Kasar (KDNK)…

…Lebih memeranjatkan, Dato’ Seri Najib Tun Razak dilaporkan akan mengambil jalan menjual aset negara dan menerbitkan lebih banyak sekuriti hutang dari aset-aset negara semata-mata untuk menutup kegagalan pentadbiran ekonomi beliau mencapai sasaran defisit yang beliau sendiri tetapkan.

Laporan terkini dari Bank Dunia iaitu “Malaysia Economic Monitor: December 2013” pada mukasurat 10 menyatakan seperti berikut:

“… the government reaffirmed its headline deficit target for 2013 (4.0% of GDP vs 4.5% in 2012). This target will be achieved through additional tax revenues (Figure 13). Of the additional RM11.8 billion in revenues expected to be raised compared to budgeted estimates, RM7.4 billion originated from non-tax sources, including RM1.4 billion of proceeds from asset sales and RM4.2 billion from the securitization of government mortgages…”

Ini adalah pendedahan yang cukup mengejutkan kerana pentadbiran Dato’ Seri Najib Tun Razak sudah sampai ke peringkat menjual aset negara dan mencagarkan harta-harta negara (melalui securitization of government mortgages) untuk menampung keborosan dan pembaziran kerajaannya.

Saya syak rancangan menjual aset negara ini telah pun berlaku kerana ia bertujuan mencapai sasaran defisit 4% bagi 2013 yang sebenarnya telah gagal. Ini bermakna, harta-harta negara ini telah pun dijual dan digadai supaya hasilnya itu diperolehi dalam tahun 2013 untuk menutup jurang pendapatan dan perbelanjaan negara….

For those who don’t read Bahasa Malaysia, Rafizi is basically claiming that the government is selling and securitising assets to close the budget gap and meet its deficit target.

The Ministry of Finance has issued a rebuttal, in essence claiming that the use of assets is a normal part of operations, which of course got a follow-up post (excerpt):

Penjualan Aset Negara: Kerajaan Tidak Menafikan Malah Cuba Memberi Alasan

Kenyataan rasmi Kementerian Kewangan mengenai kontroversi penjualan dan penggadaian aset negara untuk mencapai sasaran defisit tidak sedikit pun menafikan laporan Bank Dunia bahawa perkara-perkara berikut telah berlaku…

…Sebaliknya, Kementerian Kewangan hanya memberikan alasan bahawa penjualan aset dan pensekuritian pinjaman perumahan kakitangan kerajaan adalah satu perkara biasa dan telah pun berlaku sebelum ini…

…Oleh itu, jelas bahawa Kerajaan Persekutuan telah pun mengakui bahawa laporan Bank Dunia itu benar dan aset-aset negara telah dijual dan digadai untuk mendapat pendapatan tidak dirancang bagi mencapai sasaran defisit negara….

…Walaupun ia amalan yang telah dimulakan sejak tahun 2004, pensekuritian pinjaman perumahan menjadi salah satu punca krisis kewangan subprima yang melanda Amerika Syarikat dalam tahun 2007 dan 2008. Ia mempunyai risiko tersendiri kerana rumah-rumah yang dibeli peminjam digadaikan pula kepada pelabur yang mereka tidak ketahui.

Here he makes the comparison between the government’s securitisation of civil servant housing loans with the sub-prime crisis. That’s plain silly – the “sub-prime” crisis was a confluence of events and market structure that doesn’t exist in Malaysia. We may or may not go there in the future, but what the government has done is hardly any kind of tipping point. Missing from this is the role of structured finance (bundling together of securities with different risk profiles), and the concentration of default insurance (in the form of AIG) that were equally characteristic of the 2008 US financial crisis.

If you’re really worried about a sub-prime crisis, s-t-o-p e-n-c-o-u-r-a-g-i-n-g h-o-m-e o-w-n-e-r-s-h-i-p. If prices are to heady for the majority, making it easier for people to own homes just gets us there sooner. Securitisation in this context is neither here nor there.

But to return to the main point, this is what MoF is talking about (RM millions):

01_assets

A positive value means asset were sold or securitised, while a negative value means assets were bought. Looking at the time series, this is what MoF means by common practice – this has been going on for a long, long time. But you’ll notice that the absolute amounts have been increasing over time, but also have been comparatively small since 2007, while being alternately positive and negative.

But you really need to scale these numbers against the impact on government revenue (% revenue):

02_assets_r

Here we see just how (ir)relevant the buying and selling of assets has been over the years. But since 2007, use of assets has never exceeded 2% of government revenue. Even going by the numbers being quoted in article, we’re not talking about much more than 2% of revenue.

Want to know what the current situation is? Up to 3Q2013, total sale of assets is negative RM66.6 million. In other words, there hasn’t been a net sale of assets so far this year. There were net sales of assets in 1Q2013 of RM8.98b, but that was more than offset by asset purchases in 2Q2013 and 3Q2013.

More importantly, there’s an accounting issue here that’s not at all addressed – in the Malaysian context, use of assets doesn’t offset the deficit, only its financing. Assets sales don’t count towards revenue, but reduces the need to borrow i.e. it goes in the books as a reduction in government securities issued, not as an increase in revenue.

The whole claim that the government is selling assets to meet its deficit target is on pretty shaky grounds. You can certainly argue that asset sales are being used to meet the government’s debt target (which it is very, very close to exceeding) and I might agree, but the deficit? Not so much.

Technical Notes:

Data on government revenue from the October 2013 issue of Bank Negara Malaysia’s Monthly Statistical Bulletin

14 comments:

  1. some personal observation

    1) The selling of govt assets has been going on for decades
    2) from 1990 -2009, the then Malaysian govt has sold more assets (% revenue) than the current Malaysian govt
    3) Finance Ministers from 1990 - 2009 = Tun Daim, Dato' Sri Anwar, Tun M & Pak Lah
    4) In mid 90s, Malaysia experienced budget surplus. so, based on rafizi's logic, did Anwar also use sale of national assets to manage budget deficit/surplus?

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    1. @anon 7.40

      Thanks for pointing that out. It's an obvious point, but I left it out lest I be accused of playing politics.

      Delete
  2. Bro!!! Saiko ini Rempit giler shallow.

    Does he understand what is with recourse n without recourse? Does he understand that the receivables are secured and that Govt employees DO NOT owe any money against the Bond Holders?

    Monkey dont think so if not Mat Rempit ni wouldnt be saying benda bahlul macam ni "Pensekuritian melibatkan kerajaan menjual portfolio pinjaman perumahan kakitangan kerajaan kepada pelabur melalui penerbitan bon. Ini bermakna bahawa kakitangan kerajaan secara tidak langsung berhutang dengan pelabur-pelabur yang membeli bon yang diterbitkan melalui kaedah pensekuritian ini. Walaupun ia amalan yang telah dimulakan sejak tahun 2004, pensekuritian pinjaman perumahan menjadi salah satu punca krisis kewangan subprima yang melanda Amerika Syarikat dalam tahun 2007 dan 2008. Ia mempunyai risiko tersendiri kerana rumah-rumah yang dibeli peminjam digadaikan pula kepada pelabur yang mereka tidak ketahui."

    Pelabur mana pulak dia merepek ni. The whole pool is sold to Caga..a known entity. Investors deal with Caga..never with actual obligors... as for the risk the pool is pretty secured refer PTC details

    In relation to the Portfolio for the Bonds, each
    Mortgage Transaction in the Portfolio must
    meet the following criteria:
    (a) the obligor/borrower under the Mortgage
    Transaction is a pensioner;
    (b) pension payments to the obligor has
    commenced and the Pensions
    Department has prior to the Purchase
    Contract Date received and has acted on
    instructions to deduct and make payment of the monthly instalment to the
    Originator;
    (c) the amount of the monthly pension due
    to the obligor/borrower is equal to or
    greater than the amount of the monthly
    instalment required to be paid to the
    Originator;
    (d) it has not been classified by the
    Originator in accordance with its usual
    practices as being currently in default (a
    default being a case where there are any
    arrears of instalments which are at least
    three (3) months overdue) nor has any
    payment in respect thereof been
    rescheduled, amended or changed to
    avoid or eliminate a delinquency or
    default or following a delinquency or
    default;
    (e) it is not a Mortgaged Transaction where
    the Mortgaged Property is Malay
    Reserve Land or Native Land or
    Customary Land;
    (f) each Mortgage Asset includes
    homeowner’s insurance (covering, inter
    alia, loss by fire) and Mortgage Reducing
    Term Assurance (MRTA) policy cover
    and each of such policies has had the
    premium thereon paid and the policies
    are endorsed with the interest of the
    Originator as “mortgagee” or “lender”;
    (g) the sum assured under the MRTA policy
    cover for each Mortgage Transaction is
    equal to or greater than the amount of the
    principal outstanding in respect of that
    Mortgage Transaction;
    (h) the MRTA policy cover for each Mortgage
    Transaction will remain in effect at least
    until the scheduled date for payment of
    the last monthly instalment of the relevant
    Mortgage Transaction; and (i) the obligor/borrower under the Mortgage Transaction is not a person identified in
    the records of the Originator as being or
    having been the subject of bankruptcy
    proceedings, as having been convicted of
    any offence capable of resulting in
    imprisonment or as being deceased.

    Can dwload from FAST Facility Info details

    ReplyDelete
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    1. Bro satD

      You're right, as usual. The characterisation of securitisation is way off. I'd add to that - most civil servant loans are by salary deduction, and civil servants almost never get fired. From an investor perspective, this is about as low a risk as its possible to get.

      Delete
    2. To brand this group of loans as sub-prime is plain wrong. They are supposed to be graded as prime loans for as long as the salary deductions are done before the government servants can get hold of the money

      Delete
  3. Thank you Hisham and SatD for for the info. We know for a certain that Rafizi is fast becoming a laughing stock with his shooting from the hip economic analysis. I recommended both of your sites to BN backbenchers council. Hopefully they will use your points accordingly.

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    Replies
    1. We need to explain this to the rakyat otherwise the people will easily believe the opposition. They sound so convincing when they stated figures to support their arguments. The government must ensure that the rakyat is given the right info. Thanks guys!

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    2. @RAHMAN DAHLAN & Hajah Nancy Shukri

      1) Satd wrote a good piece on how PR made its surplus in Penang through land conversion and land sales, whilst operating expense has been increasing. Wastage cutting measures, which are highly publicized, contribute to small savings.

      http://satdthinks.blogspot.com/2011/01/dividends-of-anti-corruption-measures.html

      2) BN has a trust deficit problem. PM is seen as public face of BN. If he takes salary cut (in the backdrop of Selangor and Penang govt pay rise) and stop using private jet, BN can win some trust back.

      3) BN Backbenchers Council should focus on addressing cost of living burden. Look at carpooling programs (eg Zipride) and encourage food stalls and mobile food business (eg food truck) near office. Push and implement these measures within 1-2 months.

      Delete
  4. Aku bukan pakar ekonomi. Aku bukan pandai berbicara tetapi ada yang ingin aku tambah. Ekonomi yang berteraskan dan berkiblatkan riba akan tamat ke lembah kebinasaan. Kristian faham akan perkara ini, islam apatah lagi. Malangnya, Islam-melayu-Malaysia lebih teruk mengalu-alukan sistem kewangan berasaskan riba (faedah) di atas landasan materialisme dan alasan menaik taraf hidup (well, good luck to you). Umum sukar memahami akan punca sub-prime, CDS dll. tetapi masyarakat dunia seperti grecee, Iceland dan sbgnya telah pun mempelajari kesan dan kebinasaan yang dibawa oleh sistem kewangan dan ekonomi yang dunia praktikan. Human already set a stage for its own distruction. Good luck!

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    Replies
    1. @anon 5.44

      Profit based banking has many merits, but suffers from an incentive problem - neither borrowers nor lenders are really interested in using it, because it doesn't really benefit either. Unless this incentive problem is solved, we're stuck with interest and debt-based banking.

      Delete
    2. Saya bukan hendak memandang rendah terhadap kamu, tapi rasanya kamu tak sesuai untuk memberi komen disini. Kalau setakat hendak memberi pandangan berlandaskan fahaman agama yang terlalu sempit, lebih sejahtera jika kamu cuma duduk diam diam saja.

      Delete
    3. @Hisham

      well, from a Muslim perspective, one would argue, adhering to Islamic teaching (ie avoiding interest based banking) is an incentive in itself.

      nevertheless the more interesting question, can an economy sustain in the current time with just profit based banking? is there any country that practices that (eg saudi arabia)?

      @Labu8455

      I think even non religious point of views can be 'terlalu sempit' (eg GST will only cause inflation, govt debt is unsustainable and we are gonna bankrupt)

      Delete
    4. @anon 2.53

      Yes agreed - which is what makes the whole thing troublesome. It's hard to make profit-based banking work with much of what we take for granted today, like consumer banking. It works best with trade, which is how modern Islamic banking really got off the ground - through trade finance. Otherwise, there are few historical precedents for things like mortgages and consumer payment instruments. Islamic banking before the modern era, much like interest based banking, was reserved for traders and the rich.

      Delete
  5. Thanks for useful info.

    May be if you possibly can at times write on economic basics such as gst, subprime, islamic banking etc to help the uninitiated to comprehend.

    With better understanding of economics and finance by the public at large, hopefully they will be better prepared to make informed decision esp. before plunging into debt commitment.

    tq sir.

    ReplyDelete