Malaysia looks to Japan for better credit terms to manage debt

This article first appeared in The Edge Financial Daily, on July 24, 2018.
-A +A

KUALA LUMPUR: Prime Minister Tun Dr Mahathir Mohamad hopes the Japanese government would offer Malaysia low interest rates and a reasonable repayment period as it had done before, compared with the 6% interest on 1Malaysia Development Bhd’s (1MDB) bonds.

“Malaysia once took a soft loan from Japan with a 0.7% interest rate, with a 40-year repayment period. We are not sure if the Japanese government can give the same rate as before, but if we get a lower interest rate, we won’t be burdened with a high debt that has an interest rate of more than 6% of the original loan.

“They (Japan) are already considering it, and we don’t know how much and what is the rate. We are already talking with the Japanese [government] and it is not easy for them to give soft loans to anybody; they have their own government to satisfy,” he added.

In 2012, 1MDB via Goldman Sachs Group Inc raised US$6.5 billion via two bond issuances with a coupon rate of 6% for the acquisition of energy assets. The principal of the bonds was guaranteed by Abu Dhabi-based International Petroleum Investment Company, which in return asked for collateral or deposits totalling US$3.5 billion from 1MDB.

At the same time, Goldman Sachs was said to have earned RM300 million in commission for setting up the debt.

“The previous government’s debt is too high at [a] 6% [interest]. Goldman Sachs took a 10% commission from the entire loan, which meant that the government only earned 90% of the loan, but had to pay back 100% of the debt,” Dr Mahathir said in reply to Bagan Datuk member of parliament Datuk Seri Dr Ahmad Zahid Hamidi during questioning time in parliament.

In a supplementary question, Ahmad Zahid pointed out that Malaysia was among the large yen credit beneficiaries via the Japanese overseas development assistance in the 1980s and 1990s.

“At that time, the financial crisis was bad due to the appreciation of the yen, and this resulted in a huge debt burden. I agree that the interest rate was about 0.7%, but what would have happened if the yen appreciated [and] the overall cost was high compared to our ringgit? What if the previous experience repeats itself?” he said.

Ahmad Zahid suggested that domestic borrowing is more effective, although the value is higher because the cost would benefit local institutions.

In response, Dr Mahathir said Malaysia’s national debt then was not more than RM300 billion, which was 27% of gross domestic product (GDP) then compared with RM1.087 trillion now.

Urging Ahmad Zahid to recheck the country’s annual reports in the 1980s and 1990s, which contained the “real figures” relating to GDP, Dr Mahathir said he knows “a little” about economic growth figures after being the prime minister for 22 years previously.

“If you have proof [to show that national debt was high in the 1980s and 1990s], please show [it]. We have never owed RM42 billion in one go. We have never had national debt of RM1 trillion.

“In fact, we had never heard of that word (trillion) then. I am not sure if RM1 trillion is less than RM1 billion but for me, RM300 billion is [definitely] less than RM1 trillion,” he said.

Dr Mahathir added that the government had to absorb the debts of its wholly-owned companies or government-linked companies, although there is a ceiling debt of 55% of GDP.

He said this in relation to 1MDB’s RM42 billion debts taken over by the government.

Meanwhile, Dr Mahathir contended that the value of yen credit is higher, although the conversion rate of the yen to the US dollar is lower, compared with ringgit-US dollar conversion.

The yen is stronger compared with the ringgit when converted to US dollars, which means the loan from Japan would not be cheaper, Dr Mahathir added. He said, however, that to overcome this problem, Malaysia plans to borrow Japanese credit in US dollars.

“One yen is one US cent [but] RM1 is 25 US cents. The lower yen value does not mean yen credit is cheaper. So, we will borrow yen in US dollars for the amount we owe,” he said.

Later, when asked by reporters at the parliament lobby as to how much Malaysia plans to borrow from Japan, he said: “As much as we can.”