Economic report 2015/16: Govt debt to GDP increases marginally as of end June 2015

PETALING JAYA: The Federal Government debt as a percentage of gross domestic product (GDP) has increased to 54% as of end-June this year, just marginally lower than the 55% threshold – the level that is considered prudent and manageable.
Last year, the Federal Government debt, comprising the cumulative total of all its borrowings, as a ratio of GDP stood at 52.7%.
However, total Federal Government debt was up from RM528.82 billion as of end-2014 to RM627.50 billion as of end-June this year.
The debt had increased mainly due to the higher domestic debt issuance to meet deficit financing requirements.
Domestic debt remained as the major portion of the total debt at 97% or RM608.7 billion with Malaysian Government Securities (MGS) and Malaysia Government Investment Issues (MGII) constituting 87.8% of the total debt or 47.45 of GDP.
The remaining 3% of the total Federal Government debt was from offshore borrowings which are mainly denominated in US dollar.
Despite the appreciation of the dollar, offshore borrowings remained manageable at 1.6% of GDP.
As at end of June 2015, MGS remained the largest debt instrument of the government with an outstanding amount of RM343.8 billion or 54.8% of the Federal government debt while MGII stood at RM207 billion, or 33%.
Financial institutions continued to be the largest holder of MGS and MGII at 31.3%, followed by the Employee Provident Fund (EPF) (23.2%) and insurance companies (5.5%).
Outstanding market loans of RM13.3 billion (70.9%) remained the largest component of accumulated offshore borrowings, while project loans stood at RM5.5 billion.
Malaysia's external debt stood at RM794.3 billion or 68.4% of GDP as of end-June 2015.
The bulk of the debt was contributed by non-resident holdings ringgit denominated debt securities and deposits at 26.2% of GDP, followed by debt at 11.8% of GDP.
Meanwhile, the public sector offshore borrowing accounted for 10.3% of GDP, of which the Federal government debt constituted only 1.6%.
The increased in Malaysia's external debt was partly due to the valuation effect following the depreciation of the ringgit, as about 60% of the external debt was denominated in foreign currencies.
Offshore borrowings increased to RM419.9 billion, or 52.9% of the total external debt, as at end-June 2015, on account of higher net borrowing of medium and long-term debt by non-bank private sector as well public corporations.
The Federal government offshore debt also increased by 12.2% to RM18.8 billion but remained low at 4.5% of total offshore borrowings.
Meanwhile, the increase in short-term offshore borrowings was due to higher interbank borrowings activities.
During the first six months of 2015, the debt service ratio for offshore borrowings registered 16.3%.
Non-resident holdings of ringgit debt securities, largely in the form of medium and long term securities increased to RM209.2 billion as at end-June 2015.
Foreign investors' holdings of MGS and MGII stood at 32.1% from 29.2% a year ago.
However, with increased expectations of the Fed's interest rate hike and the appreciation of the US dollar against the major and regional currencies, including the ringgit, there was a slight reversal of foreign holdings in MGS from 48.5% in June to RM45.6% in September 2015 but still higher than 44.9% as at end-2014.
Nevertheless, the large and long-term domestic institutions as well as the developed domestic capital market are able to absorb any reversal of capital flows in the market.
Meanwhile, foreign holdings in MGII have increased to 4.1% in September 2015 from 2.8% at the end of 2014 as MGII are more actively traded following its inclusion in major global indices.