Malaysia to Dismiss Thousands of State Workers to Cut Spending

(Bloomberg) -- Thousands of government workers in Malaysia will lose their jobs and state agencies will be dissolved as Prime Minister Mahathir Mohamad moves to curb spending and debt.

The government will dismiss 17,000 contractual employees and reduce ministers’ salaries by 10 percent, Mahathir said in a press briefing after his first cabinet meeting in Putrajaya on Wednesday. Contracts, including those for the search of aircraft MH370 and for the Singapore-Kuala Lumpur rail, will be reviewed, he said without giving a timeline.

Agencies, including the regulator Land Public Transport Commission and the Special Affairs Department, which is tasked with advising the state on maintaining public perception, will be dissolved.

“Most of these institutions founded which were not part of government, which were supposed to advise government, all these things will be disbanded,” Mahathir said. “We don’t need their intelligence. I think we are quite intelligent ourselves.”

Policy in Flux

Mahathir, who was swept into power in a surprise election win this month, is moving swiftly to stabilize the nation’s finances after the government reported that debt was higher than previously disclosed under the former administration. Credit rating agencies had warned of risks after Mahathir scrapped a goods-and-services tax to fulfill a campaign promise.

Click to read about Malaysia’s credit ratings at risk after GST tax was removed

Total debt stands at 65 percent of gross domestic product, higher than the self-imposed limit of 55 percent, Mahathir said.

Newly-installed Finance Minister Lim Guan Eng said on Tuesday that debt exceeds 1 trillion ringgit ($252 billion), inflated by borrowing by by 1MDB, a state investment company that’s at the center of a multi billion-dollar corruption scandal. The Ministry of Finance’s most recent economic report puts federal government debt at 685 billion ringgit in 2017.

“It is clear that the previous government has conducted an exercise of deception to the public about certain hot-button items, especially 1MDB, and even misrepresented the financial situation to parliament,” Lim, 57, said on his first day at work at the ministry. “A thorough investigation and discovery is still ongoing to uncover the necessary financial information and data.”

Credit Rating

Government debt in Malaysia has been flagged as a risk by economists and credit rating companies such as Moody’s Investors Service. While the previous government steadily lowered its budget deficit over recent years to 3 percent of GDP, debt is higher than other A-rated countries.

Once borrowing by state-owned companies is added, the debt burden climbs. Fitch Ratings said in a March report that debt guarantees provided by the federal government increased to almost 16.8 percent of GDP in September 2017 from 15.2 percent at the end of 2016.

Malaysia to Dismiss Thousands of State Workers to Cut Spending

“Frankly speaking, this is not surprising,” said Trinh Nguyen, a senior economist at Natixis Asia Ltd. in Hong Kong. “We are just getting something that was, in a way, off budget and it is now getting on budget.”

She added that “investors weren’t fooled to think that Malaysia’s debt is what it is” and “the issue has always been its contingent liabilities and what does that mean in terms of debt repayment ability for Malaysia.”

Sales Tax

Lim, the former chief minister of the northern Penang state, said the government is considering reintroducing a sales-and-services tax this year and the levy will be set at 10 percent if a pledge in the manifesto of Mahathir’s coalition is followed.

Mahathir is tackling corruption related to 1MDB, whose full name is 1Malaysia Development Bhd., ordering the reopening of investigations into the state fund as one of his first steps since taking office two weeks ago.

1MDB is one of the main reasons for the government’s high debt, Lim said. Set up by the government in 2009 to build infrastructure with borrowed money, 1MDB amassed more than 50 billion ringgit of debt in just over six years, largely from assets in the energy sector. Its borrowings clouded the sovereign credit rating, weighing on the government’s contingent liabilities. Its current debt level is not immediately clear.

“Some of this information was not fully disclosed, so I think it’s important that we get on with our discovery so we can get all information on the table,” Lim said.

©2018 Bloomberg L.P.