Public debt reaching RM1.09trn or 80.3% of the GDP has raised concerns as to whether the borrowings will help improve growth or weigh on the economy and also future generations. A key concern is the rising governmentguaranteed loans and PPP lease repayments that lacks transparency, suggesting an easy way to shift the debt figures while holding public debt below the 55% level. Also, the inability to reduce operating expenditure could lead to the need of raising revenue collection and driving GDP to help improve the debt/GDP ratio and fiscal balance position. A high public debt results in more spending on servicing the interest for the borrowings, thus straining the resources, reflected in the low ratio of operating and development expenditure to debt at 0.20x and 0.04x respectively in 2017 from a high of 0.50x and 0.14x respectively in 2008, lowest reading since 1988.

Meanwhile, we expect near term market volatility driven by the combination of local and global noises. We reiterate our view that the global equity market may have reached the peak and is due for correction. With bond yields on the upside in fear of inflation, we expect the markets to correct. Our key concern remains on the emerging market with the growing debt and seems to have ignored the lessons of 1980s Latin American debt crisis, the 1997/98 Asian financial crisis and the 2000s Argentine default.

Though the current scenario shows some signs of similarities to the 1997/98 AFC, we are not concluding this time around is somewhat similar to the AFC. Our argument is that it is important to take note that one of the salient reason for foreign funds flocking into the emerging markets is the attractive growth rates and low inflation compared to the previous decades which are adequate tool to keep interest rates low. We believe the domestic emerging-market growth remains resilient. Hence, we expect Malaysian market to bounce-back in risk appetite in the coming months from greater transparency, governance and clarity on the direction of the economy.

On lowering the public debt, debt servicing, and government consumption to improve growth, the focus areas should be (1) improving the monitoring of the expenditure in each area of the economic activities, especially at the micro level; (2) greater transparency on government-guaranteed loans under public-private partnerships that may not be fiscally responsible; (3) improving and effectively managing government consumption; (5) targeting high-impact and productive businesses to drive growth; (6) boosting investors’ and household confidence by addressing leakages; and (6) an attractive ringgit to support overall business competitiveness.

Source: AmInvest Research - 25 May 2018