Persistent deficits in states

PETALING JAYA: Amid national liabilities of over RM1 trillion, Malaysian states generally report persistent deficits due to limited revenue-generating capacities and are dependent on borrowings from the federal government to support operational and development needs, according to RAM Rating.
In a report titled “State Implicit Strength”, the rating agency, however, said the debt-to-revenue ratio has improved significantly to 193.4% as at end-2016 from the 256.8% recorded 10 years ago, thanks to reforms in the water sector.
“Debt levels for states that have transferred their assets to the national water-asset-holding company have noticeably fallen. Since the transfer, debt accretion has been prudent for Penang where its debt-to-revenue ratio average 6.9% for six years after, while Johor’s ratio improved from 57.3% (end-2011) after the transfer to 32.8% (end-2016).”
On the deficit issue, RAM Rating pointed out that majority of revenue and income sources are first assigned to the federal government before they are distributed in a predetermined manner to the state governments according to the conditions stipulated in the Constitution.
Sarawak and Sabah have the highest revenue among Malaysian states underpinned by greater flexibility in raising their own revenue which is further boosted by their abundant natural resources.
However, dependence on commodity-based revenues resulted in declining revenues over the past few years.
“Sarawak’s sterling track record of fiscal surpluses (2011-2015 average: RM2.3 billion) turned red in 2016, while Sabah reported a marginal surplus in 2016 after a deficit in excess of RM200 billion the year before.”
As most states run deficit budgets, RAM Rating noted that reserve accumulation is generally lacking. Pahang, which accumulated operational deficits to the tune of RM235 million over 2014-2016, has the highest debt-to-revenue and debt repayment-to-revenue ratios of 519.8% and 11.1% respectively in 2016.
Sarawak’s consolidated state funds of RM29.3 billion as at end-2016 is a result of strong revenue generation backed by its wealth of resources and prudent budgetary management.
“This buys ample room for Sarawak to support its development needs and debt repayment requirements including its US dollar-denominated debt raised via special purpose vehicles.”
RAM Rating said most states improved their revenue collection rate as the proportion of revenue arrears to total revenue declined from an average of 24.7% in 2012 to 15.7% in 2016.
“In the case of Penang which has significantly reduced assessment tax arrears, measures taken include higher frequency of payment reminder notices, appointment of collection agents and widening of payment channels.”
While seven out of 13 states show deteriorating trends in terms of arrears in debt repayment in line with persistent or widening deficits, the rating agency said from a broader perspective, it reflects the supportive intergovernmental relationship that states receive from federal government.
Over the past 5 years from 2013 to 2017, Johor, Malacca, Penang, Sabah and Selangor exceeded the average national growth.
“Among them, Selangor outpaced Malaysia’s growth consistently every year over the period. This reflects Selangor’s economic structure that is concentrated in high value-added manufacturing and services that benefit from Klang Valley’s rapid population growth and infrastructure.”
Meanwhile, states with growth below the national average have relatively larger exposure to agriculture or mining sectors and lower household income.