Monday, 24 October 2016

Tony Pua's (Not So) Hidden Bubble Exposed

I refer to the article written by YB Tony Pua of DAP published in Malaysiakini entitled “Najib’s Hidden Budget Time Bomb Exposed.”
Basically Tony Pua is saying that the government of Malaysia is manipulating the figures for its financial position particularly on expenditure and deficit (expenditure exceeds income) to mislead the investment community and the public.
According to him government has been and will be spending on multi-billion ringgit infrastructure projects through the off-government budget spending via Non-Financial Public Corporations (NFPCs) as he put it:
“In practically every budget in recent years, Najib had announced multiple multi-billion ringgit projects such as the LRT Extension Project, the MRT I and II Projects and soon, the proposed High-Speed Rail and the RM55 billion East Coast Railway Link.
However, these spending were never reflected in the government budget expenditure which showcased the “prudent” budget deficits. Where did these massive spending disappear to?
You will find part of the answer in the Non-Financial Public Corporations (NFPC) Financial Position (Table 6.13 p161 Economic Report 2016/7).”

NFPCs Financial Position: Economic Report 2016/2017

He explained how the deficit of NFPCs had ballooned from RM16.4 billion in 2013 to RM56.9 billion in 2015 which has become larger than government deficit (RM37.2 billion in 2015) itself because government has been shifting its spending to NFPCs to mask the true extent of government deficits.
First of all, NFPCs or formerly called Non-Financial Public Enterprises (NFPEs) have been around in Malaysia for decades.
Prasarana for an instance has been an NFPC since 2003:

List of NFPEs, 2003: Bank Negara 2003 Annual Report

NFPCs have been spending money on development projects (capital expenditures) on behalf of federal government since 1990 (earliest data available):

Consolidated NFPEs Finance: Bank Negara 1997 Annual Report
It’s not true that only recently government has been using NFPCs to spend on developments, in fact government has used NFPCs as early as 1990.
In absolute term NFPCs development expenditure has grown from merely RM13.6 billion in 1995 to as high as RM114.9 billion in 2014 before decreasing to RM89.4 billion in 2015.
But absolute numbers wouldn’t give an accurate assessment of growth so let’s look into the growth in NFPCs development expenditure in relative term to Malaysia’s economic output or better known as GDP:

NFPCs Development Expenditure to GDP Ratio
As you can see from the chart above, NFPCs development expenditure to GDP ratio hasn’t jumped to record high but in fact has been consistent with average ratios for the past 25 years.
But of course Tony Pua wouldn’t highlight this because it wouldn't fit his narrative that the current administration has been shifting development projects to NFPCs.
Tony Pua’s concern is the deficit of the NFPCs on which he said is the biggest time bomb to the Malaysian public finances.
The problem with his assessment is that he didn’t mention the fact that NFPCs has been recording a healthy current balance-operating surplus (revenue minus operating expenditure) and never once recorded a deficit in any year.
Unlike operating expenditure, development expenditure (CAPEX) is a balance sheet item that will become fixed assets in NFPCs book or Fixed Capital Formation in national accounts (GDP).
We can take comfort from the fact that NFPCs current balance is still in surplus and the overall deficits that have been recorded by the NFPCs were because of government investments in crucial development projects such as extension of LRT Line, MRT, HSR and many more.
Tony Pua added that the federal government’s debt service charges have increased every year which is true but as government invests to boost the economy, private sector will join and invest and the economy will grow which in turn will boost government’s revenue in the future.
Besides, part of government’s debt service charges are also flowing (interest payments) to future Malaysian retirees, pensioners and local financial institutions via EPF, KWAP, banks, DFIs etc which are holding almost half of total outstanding federal government debt of RM635 billion (as at 30th June 2016).
If the NFPCs deficit is the biggest time bomb which will explode in the years to come, investors wouldn’t buy or invest in government bonds and it would be reflected in government’s securities yields.
Here are the historical yields for the long term (3, 5, 10-year) Malaysian Government Securities (MGS) since 2013 until today:

Historical Long Term Conventional Malaysian Government Securities Yields: Bond Info Hub
If the time bomb is going to explode in coming years like Tony Pua imagined, why is it not reflected in the long term yields of government securities?
It’s not that the investors cannot access the data for NFPCs deficits, they are published by the MoF and Bank Negara every year.
If the government wanted to mask the true picture of government’s budget, why would they publish the NFPCs financial position and the consolidated public sector account every year? Shouldn’t they make the figures as government secrets under OSA? I don’t know Tony.
Financial investors aren’t as clueless as Tony Pua thought.
I’m pretty sure they are aware of this NFPCs financial positions and have no problem with them.
If they do, they wouldn’t buy any bonds issued by the government.
Even foreign investors have been ploughing into government bonds in recent years despite the negative publicity played by the opposition:

Foreign Holdings in MGS and GII: RENTAS — BNM
Since 2013, foreign investors have added roughly RM70 billion to their holdings in bonds and sukuks issued by the Malaysian government from RM134 billion in January 2013 to RM208 billion last month (September 2016).
They can’t be that shallow to buy more Malaysian government bonds even after the 1MDB fiasco, falling oil prices, Ringgit depreciation and all the bad news played by the opposition right?
All these indicators e.g. government bonds yields, foreign holdings in government bonds etc show that Tony Pua’s deficit and debt scare has been blown out of proportions.
Tony Pua could mislead some of the Malaysians, but he couldn’t fool the investors domestic or foreign.
Government is not hiding anything from the investors or the Malaysians.
If the figures such as NFPCs financial positions are hidden, how did Tony Pua manage to write such misleading article in the first place?
I don’t think there’s a biggest ticking time bomb whatsoever but I know for sure there’s a delusional bubble that Tony Pua lives in that has yet to burst until today.

  1. Najib’s Hidden Budget Time Bomb Exposed – Malaysiakini
  2. Non-Financial Public Corporation Financial Positions – Malaysia’s Economic Report 2016/2017
  3. List of NFPEs in 2003 – 2003 Bank Negara Malaysia Annual Report
  4. Consolidated NFPEs Finance 1997 - 1997 Bank Negara Malaysia Annual Report
  5. Historical Consolidated Public Sector Finance - Economic Planning Unit (EPU)
  6. Historical Long Term Conventional Malaysian Government Securities Yields: Bond Info Hub
  7. Foreign Holding in Malaysian Government Securities: RENTAS - BNM Monthly Statistical Bulletin

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