And so, in the media, it is reported that Malaysia’s external debt (some were more careless by giving the impression that it was total debt, just to make a sexy, alarmist headline for the clicks) increased by more than three folds. This is one of those deplorable reporting:

Malaysia’s external debts grew by more than three-fold in less than a year, from RM196 billion at the end of 2013 to a whopping RM740.7 billion in the third quarter of last year. In a written reply to William Leong (PKR – Selayang), Finance Minister Datuk Seri Najib Razak attributed the spike to “new definitions” for external debts in 2014. Almost two-thirds of the increase was due to foreigners holding on to Malaysian bonds, now considered as part of the external debts. Leong warned that this is the scenario currently taking place with debt-laden 1Malaysia Development Berhad (1MDB) where a huge chunk of its RM42 billion debt is allegedly being held by foreigners. [Eileen Ng. The Malaysian Insider. Malaysia’s external debt tripled to RM740 billion last year]

From there on comes various accusations by a whole lot of laypersons, at a time the government is already under severe attacks for the fiasco that is 1Malaysia Development Berhad. I am not a fan of this government but in this particular case, the focus is misplaced and the criticism on external debt is based on a misunderstanding. The supposedly massive rise in the external debt is a non-issue, unless you are a wonk excited about the most technical of things. This is what it is, a technical matter.

The truth is that there is really no increase of that magnitude in Malaysia’s debt, totally, externally or internally. Malaysia has always owned all of those debts. What happened was that the term “external debt” was redefined to include all debts held by foreigners. Previously, the term was used to describe all Malaysian debts denominated in foreign currencies, regardless of ownership. The former is big, the latter is small. If you need a Venn diagram to understand them, here it is (the graph does not exactly correspond with the definitions but it is good enough to highlight the difference in definitions):

Malaysia's new external debt definition

This redefinition exercise had been recommended by the International Monetary Fund for the longest time and Malaysia only recently decided to adopt the proposed nomenclature. This in fact was announced last year, as early as March. When I first learned that last year, I made a joke that somebody would scream murder. Indeed, a year later, here we are. MP William Leong definitely fell into the layman’s trap, and a whole lot of others too.

There was only an increase if you used one definition at one point and then switched to another definition at the next point, and pretend the two definitions refer to the same thing. This is wrong. You need to compare points from the same definition for the growth figure to make sense. The supposedly dramatic jump-growth as reported in the media is just a garbage figure of no value. It was calculated by including a significant, large structural break.

While the media is utterly in the wrong and clueless even as they wrote the word “redefinition” in quotation marks as if it is a meaningless term, the Ministry of Finance is the cause of this misunderstanding. While it mentioned the redefinition exercise, the ministry compared the old definition with the new one and voila, a drastic increase just because they naively calculated the growth rate, despite, knowing a redefinition had occurred. So, it is a horrible answer, as horrible as the way the Finance Minister is handling the 1MDB issue. The media was just playing the role of a loudspeaker here, with no thinking in the middle.

I repeat. There is no increase as reported. If you keep the old definition and apply it forever, you will find any change from that will not come anything close to the sensationalist headlines featured by Malaysiakini and The Star all the way to, disappointingly, The Edge, which I consider as the most economic-financially literate Malaysian publication. I like The Edge but a mistake is a mistake. If you use the new definition and then stretch it backward, there will be no big change as well. Just keep the definition consistent if you want to calculate the growth.

Finally, there is really nothing sinister about the redefinition.

The reason for the redefinition has something to do with the evolution and the maturity of the Malaysian debt market. Twenty or thirty years ago, Malaysia did not have a big bond market and it was relatively unimportant to the economy, especially compared to today. So the old definition made sense then, in some ways. But since the 1990s, the Malaysian bond market has expanded rapidly to become one of Asia’s biggest. Foreign ownership of government debts also shot up as foreign investors searched for relatively safe assets. The debt market has become so large, that the newer definition becomes the more attractive one to use.

As in a lot of stuff out there, which definition to use really depends on your purpose. Just understand the data before using it.

So, ladies and gentlemen, please do not get too excited here. On this front, there is nothing to see really. Go, instead, to the next stage right across the road. Yes sir. A much more entertaining play called 1MDB is running there. Get your tickets. Sit back, and… be angry with 1MDB and not with the technicalities of debt redefinition.

One Response to “[2768] Just a debt redefinition and deplorable reporting”

  1. on 27 Mar 2015 at 07:31 Explaining Malaysia's External Debt

    […] Hafiz Noor Shams, an economist with Asean Confidential, a research house under the Financial Times, has a nice graph showing the difference between the old definition and the new one. I agree with him, the reporting on this has been deplorable, and not just from the local media (sorry guys, it has been pretty bad), but from the foreign media as well. […]

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