This article first appeared in The Edge Malaysia Weekly on August 8, 2022 - August 14, 2022

WHEN Malaysia priced the world’s first sovereign US Dollar Sustainability Sukuk in April 2021, the government ended up selling US$1.3 billion papers instead of US$1 billion on overwhelming demand.

“The strong demand [6.4 times oversubscription] resulted in the lowest-ever yield and spread for a US-dollar sukuk issuance by Malaysia, with the 10-year (US$800 million) and 30-year (US$500 million) Trust Certificates priced at 2.07% (T + 50 basis points) and 3.075% (T + 80 basis points) respectively,” the Ministry of Finance said in a statement dated April 22, 2021.

Those US-dollar debt papers — issued via special-purpose vehicle Malaysia Wakala Sukuk Bhd and based on Malaysia’s newly established SDG Sukuk Framework — are also unique, as their underlying assets are sustainable, being vouchers representing travel entitlement on Malaysia’s Light Rail Transit (LRT), Mass Rapid Transit (MRT) and KL Monorail networks, the MoF had said.

With the US dollar at 4.12 to the ringgit in April 2021, the US$1.3 billion raised RM5.35 billion for Malaysia. The strengthening of the US dollar to the current 4.45 levels, however, means that the ringgit-equivalent owed for the papers is now RM5.8 billion, or RM435 million higher — and that is just the principal alone. Including the cumulative interest payments, however, the weaker ringgit means that total interest payments over the respective tenures of the two sukuk are now about RM210 million more through 2052.

In short, Malaysia borrowed RM5.3 billion in April 2021 but would have to repay RM8.6 billion (principal plus interest) at the current exchange rate of 4.4545, instead of roughly RM7.94 billion if the ringgit had remained at the 4.12 level to the US dollar.

To be sure, the ringgit still has time to strengthen over the course of the 10- and 30-year papers.

Unfortunately for Malaysia, however, the three tranches of US dollar bonds totalling US$7.5 billion that were arranged by Goldman Sachs for 1Malaysia Development Bhd (1MDB) in 2012 (US$1.75 billion at 5.75% per year and US$1.75 billion at 5.99% per year) and 2013 (US$3 billlion at 4.4% per year) mature this year and next at a time of great greenback strength.

As the ringgit was around 3.35 to the US dollar when the three 1MDB bonds were issued, the principal amount of US$7.5 billion works out to about RM21.8 billion. At today’s exchange rate of 4.45, the principal amount due translates to just under RM29 billion — or RM7.2 billion more.

Even at the original forex rate (3.12), the cumulative interest on those papers would have totalled just over RM1 billion a year and RM10.5 billion in the past decade.

For this year, a weaker ringgit means that the annual interest cost is closer to RM1.5 billion. And there is still one more year of interest payment to go for the US$3 billion principal due next year.

Those familiar with the 1MDB bonds would know what happened to the bond proceeds and how the amount raised initially was actually significantly lower because of the fees paid to Goldman Sachs (which the US courts subsequently made Goldman return).

Going by how the ringgit-equivalent of Malaysia’s US dollar-denominated debt had largely remained at RM11 billion in 2012 and 2013, around the same level as 2011, it is likely that the three 1MDB bonds were not counted as part of direct federal government debt.

The US$1.3 billion Sustainability Sukuk in April 2021, however, is likely to have been included as part of the federal government’s direct debt. This is given that Bank Negara Malaysia data shows that the federal government’s (ringgit equivalent of) US dollar debt increased by RM5.4 billion in the second quarter of 2021 from the first quarter.

Similarly, the ¥200 billion (RM7.3 billion) Samurai bonds that Malaysia issued in March 2019 are also likely to have been included in the federal government’s direct debt pile. Yen-denominated debt (ringgit equivalent) rose RM7.2 billion to RM12.5 billion in 1Q2019 from RM5.3 billion in 4Q2018. There should be some benefit from a weaker yen exchange rate of around 3.35 currently from 3.56 when the Samurai papers were issued. But the yen had averaged higher at 3.6 to 3.7 versus the ringgit in 2021.

Fortunately for Malaysia, 97.1%, or RM976.6 billion of Malaysia’s RM1.0058 trillion debt as at end-March, is denominated in the ringgit — which means only 3%, or RM29.2 billion, is denominated in foreign currencies, according to Bank Negara data, which provides a quarterly breakdown in ringgit-equivalents.

As at end-March, RM18.09 billion, or 1.8%, is denominated in US dollars and RM11 billion, or 1.1%, is denominated in yen. Only RM111 million is denominated in other foreign currencies, central bank data shows.

Whatever currency Malaysia’s RM1 trillion debt is denominated in, what is certain is that debt needs to be repaid eventually. And, as the 1MDB papers show, a decade can past much faster than one thinks.

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