What happens when public debt gets too high

Economics Malaysia Monday, July 16, 2012

Economics Malaysia

It doesn’t always result in a Greek tragedy, but high public debt (defined as exceeding 90% of GDP) results in a lower growth trajectory for, in most cases, over a decade.

I’m not overly worried about Malaysia’s public debt levels as they stand; that’s not to say I’d be terribly happy to see the debt to GDP ratio continuing to rise. As things stand now, given the limits to debt accumulation, more aggressive fiscal consolidation seems warranted.

Credit growth is at decently high levels, unemployment is low, and capacity utilisation is around its long term mean. All these signal an economy with a small to negligible output gap. With public and private investment expected to boom over the next few quarters, maintaining a non-inflationary growth trajectory argues for a stronger pullback in overall public expenditure (though not necessarily a budget surplus) unless we’re prepared to see a deterioration in the trade balance or higher interest rates. The latter’s unlikely given BNM’s dovish stance, so look for an acceleration in imports over the coming months.

Read more HERE.