Subservient to Subsidies in Financial Capitalism

Under a financialised capitalism regime, after a premature de-industrialisation in the 1990s, consumer income is diverted by debt expansion away from the purchase of new goods and services into FIRES (Finance, Interest, Real Estates and Service) like debt interest on mortgages, car loans, credit card debt, student loan debt.  With such a large share of household income spent on debt service, little physical resources is left for driving the economy.

1. INTRODUCTION

With a shortfall to the subsidies – even with a top-up from Petronas – the state of nation is staring at an empty bowl after +60-year of “economic development” with no likely growth path in years ahead (Sudhave 2020), submerged in clientel capitalism (Weiss 2020) to pacific electorates with goodies,  directionless with Vision 2020 blinded (Jomo 2020), and the Malay community has lost its conscious soul.

That the IMF has not indicated the country going bankrupt is not reassuring especially when the ratio of debt service payments to revenue accrued had reached 16.3% in 2021, and likely – based on the Budget 2022 – to exceed 18%. This means that for every RM$1 of government revenue, almost 20 sens is used for paying interests on debts. Of that amount is apart from the ability to repay the principal amounts on loans taken by the nation.

The federal government needs to borrow RM$181.49 billion, which is equivalent to 12.6% of gross domestic product (GDP) in 2020 according to the Ministry of Finance’s (MoF) Fiscal Policy Review 2021, of which, RM86.45 billion is allocated for deficit financing in 2020, which is substantially higher than RM51.49 billion in 2019. 

2. STATE OF NATION

A nation consciously used to constant and consistent handouts will not survive for long. More so, when the subservient to subsidies has become a national ethos of burden privilege – a dependency to handouts and continuous assistance that not only bleeds the country but drops its growth path into a deepening hole :

A) The seriousness of politico-economic situation is that general government debt jumps to 76.0% of GDP in 2020 from 65.2% of GDP in 2019. The debt figures used by the Fitch Consultancy include officially reported “committed government guarantees” on loans, which are serviced by the government budget, and 1MDB’s net debt, equivalent in September 2020 to 12.6% and 1.3% of GDP, respectively. As at June 2022,  RM10.84 billion had been used – from the 1MDB’s asset recovery funds kept in a trust account under the MOF, known as the Asset Recovery Trust Account (ARTA) – to repay 1MDB’s debt of RM$30billion outstanding as on 30th. June 2022; this ARTA fund still has a balance of RM8.83 billion currently, (theedgemarkets, 22/07/2022).

Overall, the debt burden is significantly higher than the medians of 59.2% and 52.7% for other firms in the ‘A’ and ‘BBB’ rating categories, respectively; we have since degraded to BBB by Fitch in 2020. Malaysia debt is close to 400% of revenue, around three times peer median. The ratings were weighed down by Malaysia’s high public debt, a low government revenue base and lingering political uncertainty. 

Once downgraded, a national government would likely still be able to secure commercial loans, but at a higher rate – meaning more interest payments due every month.

B) Two years ago, the Federal debt and liabilities had already risen to RM$1.2569 trillion, or 87.3% of GDP, as at end-September 2020 — up 7.5% in the first nine months of the year compared with RM$1.1692 trillion as at end-2019.  Indeed, country’s revenue is not rising as fast as the increase in operating expenditure that is more than 95% of revenue since 2008. 

C) Indeed, out of the RM$332.1 billion allocated under Budget 2022, RM$233.5 billion or 70.3% have been designated as operating expenditure :

D) With the expenditure for subsidies and assistance projected to reach, by 2023,  RM$77.7 billion which is more than double compared with the RM$31 billion given in the Budget 2022, the operational expenditure shall well exceed 90% of the national allocation for the year.

E) At a time of slow growth and surging inflation, where is the bottom 40% of population – the B40 who only get 16.4% of the national income share of wealth as in 2020 – but likely to deteriorate further because 20%  of the M20 middle-income earners are now displaced to the B40 category.  The wealth disparity gap had not closed much since two decades ago, but instead, more inequality has accentuated :

3. CONCLUSION

The undeniable fact as to why many bumiputera had not attained parity despite +60 years of neo-liberal-enforced economic development is the existence of a new class of compradore capitalist. According to the UNDP 1997 Human Development Report, and the 2004 United Nations Human Development Report, Malaysia has the highest income disparity between the rich and poor in Southeast Asia, greater than that of Philippines, Thailand, Singapore, Vietnam and Indonesia. From past performance, one can safely say that the future capital-led vehicle on an uneven route ahead is going to be calamity in crisis with government direct and statutory debt going up :

Malaysia National Debts; whereas, capital accumulation, averaging 16% annually from 1989 to 1997, fell to around 6% yearly from 1999 to 2019

In addition, the economic downturn challenges emerging countries capacity to service their existing debts. Therefore, despite widespread concerns about the current escalation of public debt and its sustainability, we should not lose sight of the potential risk from possible surges of private debt, too.

The Malaysian Federal Government Debt and liabilities rose to RM$1.2569 trillion, or 87.3% of GDP, by end-September 2020 – up 7.5% in the first nine months of that year compared with RM$1.1692 trillion as at end-2019.  Indeed, country’s revenue is not rising as fast as the increase in operating expenditure that is more than 95% of revenue since 2008.  Assuming the economy is set to expand by 7.5% in nominal terms during 2021 to RM$1,521.3bil, Malaysia’s official debt to GDP and  total debt to GDP is expected to rise to 64.1% and  77.9%, respectively.

[It is a fact that governments in high-income developing countries are often unable to issue long-term government securities at a sustainable rate of interest, yet they need to be able to pay off or roll over maturing short-term obligations.]

With the national household debt-to-Gross Domestic Product (GDP) ratio had already surged to a new peak of 93.3% as at December 2020 from its previous record high of 87.5% in June 2020, according to Bank Negara Malaysia (BNM), Malaysia’s debt-to-GDP ratio could stabilise at 65.5% in 2022, but the outlook for the country’s fiscal policy is highly conditional upon the growth recovery this year. Though current household debt to GDP is at 89% as at December 2021 as compared to 89.6% in June 2021, it remains on the higher end when compared to regional economies such as Singapore (69.7%); Indonesia (17.2%); Philippines (9.9%). 

Moody’s assistant VP and analyst Nishad Majmudar said the outlook for Malaysia’s fiscal policy is highly conditional upon a good growth recovery. The political-economic scenario is not that as fortuitous as projected by the Finance Minister. Research For Social Advancement (Refsa) and the Malaysian Institute of Economic Research (MIER) agreed that any stimulus must be at least over RM$90 billion.

Always remembering that subsidies stimulus is a class war waged against the 99 per cent by the elite 1 per cent. Often the money extracted from the working class through inflation is transferred to the rich as subsidies and tax cuts to promote capital accumulation.

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VULTURE CAPITALISM feeding carrions in low-income countries

20/07/2022

1. INTRODUCTION

Recently there are a number of content materials debunking the debt trap diplomacy myths in Sri Lanka and Africa. What is often not stated is the insidious role played by other private capital actors, too.

There are in a number of developing economies today when debt restructuring cannot inevitably occur without the full participation of foreign private creditors.

2. THE BOND-HOLDERS

Indeed, the low- and middle-income economies owed,  at the end of 2021, an estimated US$9.3 trillion to foreign creditors, mostly to private creditors and trans-bordering bondholders hovering globally across multiple countries. Since majority of the outstanding payable is private debt, more often than not, bondholders would consciously purchase the right to collect in secondary markets, too, at times very much like vultures in a kill-feed.

Among this flock of bondholders, a small minority are regarded as vulture investors. They tend to focus on the distressed debt of governments, buying their bonds at a deep discount with the ultimate goal of suing a ruling government to collect the full payment.

These investors have little incentive to participate in debt-relief initiatives. To maximize their return, they hold out until other creditors make concessions – in the expectation that concessions from others will free up cash that enables the holdouts to collect the biggest possible payoff.

This is an unadulterated form of free-riding that hurts all other creditors, too.

3. THE GOVERNING BODIES

Governments have an invoking public interest to end this imbalance on such unfair transactions. It is timely, and a long-overdue process, for national governance stepping up to protect rakyat2 from third party monopoly-capital financial capitalism exploitation which directly is an expropriation of national wealth in Global South countries.

Granting distressed governments even a few of the legal protections routinely granted to distressed businesses would fix much of the problem. However, enacting them in just a few jurisdictions – like in Global North New York and London, for example – would only perpetuate the sovereign-debt contracts of developing economies as governed by the laws of these monopoly-capital financial centres.

The Common Framework – the debt restructuring program endorsed by the G-20 for 73 of the world’s poorest countries – might be one good approach to try out their alternative techniques.

Under the terms determined by the Paris Club, non-ODA (Overseas Development Aids) claims can be written off in whole or in part, while ODA claims are restructured.

However, ODA poses more problems than it solves.

First, the amount.
Since 1970, developed advanced country (DAC) members had committed themselves to devote a minimum of 0.7% of their gross national income (GNI) to ODA. However, this threshold has never ever been reached. In 2019, total ODA was estimated at $155 billion, that is, only 0.3% of DAC GNI. This amount pales in comparison with the $485 billion remitted by the diasporas to developed countries during the same period.

Second, its composition.
Contrary to what its title would suggest, ODA is not unconditional, disinterested and “humanistarian” aid. It is composed of grants but also of so-called “concessional loans”. It is therefore not uncommon for the annual net transfer of ODA for a “recipient” country to be negative. Similarly, the country is not free to use these sums as it sees fit, but is subject to a programme defined by the donor countries and/or international institutions.

Finally, its opacity.
According to the data provided by the OECD, it is not possible to separate aid in the form of grants from aid in the form of loans. In order to artificially inflate its figures, the OECD has created a “grant-equivalent” category that includes not only said grants, but also low-interest loans with a long repayment period in order to supposedly better “reflect the real effort made by donor countries”.

see 2003 article by Damien Millet, “L’initiative PPTE : entre illusion et arnaque”: https://www.cadtm.org/L-initiative-PPTE-entre-illusion-et-arnaque (in French)

In fact, the application of large-scale statutory process such as the Sovereign Debt Restructuring Mechanism is most of the time regarded as being defeated by its own ambition.  Indeed, those recommendations by the World Bank and the International Monetary Fund are no more than loan-sharking along2 preying on unfortunate victims.

4. THE DEBTORS

2021: low- and middle-income economies owed an estimated $9.3 trillion to foreign creditors, mostly to private creditors and bondholders

Sub-Saharan Africa is the region of the World that is the hardest hit by the IMF and its austerity policies ¹imposed through structural adjustment plans since the 1980s, the HIPC initiative since 1996 and since April 2020 the Debt Service Suspension Initiative (DSSI). Among the worst hit countries are Côte d’Ivoire, Madagascar, Niger, Senegal, Congo (Democratic Republic) Togo and numerous Central African countries.

In a significant number of developing economies today, debt restructuring cannot occur without the full participation of foreign private creditors. Most of the private debt, moreover, is owed to bondholders who often, explored above,  purchase the right to collect in secondary markets.

About 40 low-income economies and six middle-income economies are either in debt distress or at high risk of it. For both types of economies, there is only one pathway towards restructuring unsustainable debt. This is either through the Paris Club for middle-income economies and the G-20’s  Common Framework for Debt Treatments for low-income economies

However, both approaches have certain process hurdles. Typically,   In return for debt relief from foreign government creditors, borrowing countries would have to wrangle equivalent concessions from foreign private creditors – the vulture capitalists – over whom they have no bargaining power.

Not surprisingly, progress has encountered problematic barriers. For instance,  just three countries – Chad, Ethiopia, and Zambia – have sought relief under the Common Framework. More than a year after they applied, little administrative movement nor process resolution has been resolved adequately.

That is also consistent with the experience of the G-20’s Debt Service Suspension Initiative (DSSI), which urged (but did not require) borrowing countries to secure comparable concessions from private and government creditors alike. In the DSSI, only one “private” creditor participated, but that was simply a national development bank that identified itself as a private creditor.

4. CONCLUSION

The right to a second chance is enshrined in the corporate bankruptcy laws of most leading economies. Yet the same indulgence is denied to low-income governments with predictably grave consequences for the poorest rakyat2 in the poorest countries. At the end of 2021, governments in low- and middle-income economies owed an estimated $9.3 trillion to foreign creditors, mostly to private creditors and bondholders scattered across multiple countries.

For them, no bankruptcy court exists to ensure a prompt and orderly restructuring if a debt crisis approaches. Instead, they often have to pick their way through a procedural maze that is governed more by quaint conventions than by statute.

Governments have a compelling public interest to  legislation to end this imbalance in foreign loan transactions. It is an overdue step to protect their own taxpayers from third party external monopoly-capital exploitation.

The time is urgent to rectify the imbalance in debt restructuring and its repayment.  This is more imminently at a time when global growth downturns and interest rates are surging.

Consequently, the risk of a spate of debt crises is also  rising  – and yet the available mechanisms for tackling them are deeply inadequate and inappropriate because vulture capitalism flies high.

Time is also too short to permit the type of large-scale statutory solutions – such as the Sovereign Debt Restructuring Mechanism – that are  designed in reality by a cohort of neoliberalism-is-neo-imperialism entities.