WHEN we think about a country's finances, it's easy to focus on the federal government's budget, but that's only part of the story.
To truly understand the nation's financial health, we have to broaden our view to include the consolidated public sector account, which encompasses not just the federal government, but also the general government (state and local governments), and non-financial government corporations (NFGCs) - formerly known as non-financial public enterprises (NFPEs).
Why does this matter? Because these entities play crucial roles in the economy, and understanding their financial behavior helps paint a much more accurate picture of where the country is heading.
The Hidden Risk in NFGCs
Think of NFGCs like the engine rooms of the country. These are the companies that keep the lights on, the trains running, and the water flowing.
While they generate revenue and support essential services, they can also become financial ticking time bombs if they accumulate too much debt. For instance, if an energy company owned by the government starts losing money and needs a bailout, the ripple effect can strain the public finances and ultimately hurt the broader economy.
This means when we talk about public sector health, we can't ignore these players —they're the quiet giants whose financial health can make or break the bigger picture.
Domestic Debt: Government Bonds Are Not Just Liabilities, They're Assets
When the government issues bonds to raise money, it's creating debt, yes, but that debt is also an asset in the eyes of investors. And who are these investors?
Many are government-linked investment companies (GLICs) like the Employees Provident Fund (EPF) or Permodalan Nasional Bhd (PNB), which hold these bonds in their portfolios as long-term investments.
These bonds are essentially a bet on the government's ability to repay, and when handled right, they are seen as safe and secure assets.
Now, let's shift our focus to foreign institutional investors. They also buy up these bonds, and their confidence in a country's bonds is directly tied to how they perceive its financial health.
A good credit rating —given by agencies like Moody's or Fitch —acts like a seal of approval for these investors. But what happens if that rating drops? It's like getting a poor grade in school: suddenly, everyone questions your ability to manage your affairs, and borrowing costs go up, putting more pressure on public finances.
Conversely, an upgraded rating can flood the market with confidence and make borrowing cheaper.
Who Owns the Debt? And Why It Matters
Another important aspect is who holds the government debt - specifically, the share of non-residents holding government bonds. Why is this critical?
Imagine if foreign investors hold a large chunk of a country's debt, and then, for whatever reason - political instability, lower sovereign ratings, global economic downturn - they decide to pull out.
This creates a dangerous vacuum, pushing up borrowing costs and leaving the government scrambling to find domestic buyers to fill the gap. That's why governments like to keep an eye on whether non-residents' share of debt is rising or falling. Too much reliance on foreign investors can leave a country vulnerable to external shocks.
Managing Public Debt: It's a Balancing Act
When it comes to public debt management, it's a lot like balancing on a tightrope. On one side, you have the need to finance development - building roads, hospitals, and schools that keep the economy growing.
On the other, there's the danger of piling up too much debt, which could slow things down in the long run. This is where debt dynamics come into play - how the debt grows relative to GDP, inflation, and interest rates.
Getting this balance right is crucial. Governments can't stop borrowing entirely, but they need to ensure that their debt levels remain sustainable over time.
One way to judge whether a country is on the right path is to look for a primary surplus - when a government's revenues exceed its expenditures before paying interest on its debt.
Achieving a primary surplus is like hitting a financial sweet spot: it shows that the government is making enough to pay down its debt, which is a good sign of fiscal health. But as any government official will tell you, getting to that point requires careful planning and discipline.
Debt Monetisation: The Double-Edged Sword
Then there's the issue of debt monetization. This is when a government essentially prints money to pay off its debts - a strategy that can provide temporary relief but often comes with serious risks.
Think of it like borrowing from tomorrow to pay for today. Sure, it might work in the short term, but over time, printing money to cover debt can lead to inflation, which eats away at the purchasing power of ordinary citizens.
The result? Prices go up, people struggle to make ends meet, and the economy faces a new set of challenges. It's a risky tool that should only be used with extreme caution.
The Big Picture
At the end of the day, managing a country's finances is about more than just keeping the books balanced. It's about ensuring that the economy grows in a way that benefits everyone while keeping debt levels manageable.
This means thinking beyond the federal budget and looking at how public sector corporations, domestic and foreign investors, and public debt dynamics interact. By understanding these complexities, we get a clearer view of how the government is not just managing its finances but planning for the future.
The writer is an adjunct lecturer at Universiti Teknologi Petronas, international relations analyst and a senior consultant with Global Asia Consulting. He has a background as a senior researcher at the Malaysian Institute of Economic Research.