KUALA LUMPUR: Prime Minister Datuk Seri Najib Razak revealed to Parliament yesterday that as at end-2014, the government issued letters of support (LOS) totalling US$3 billion (RM9.5 billion then).

Najib, who is the Finance Minister, however, said the government is cautious about giving guarantees.

The issue of LOS has been criticised by opposition lawmakers as a LOS is usually issued to a lending institution by a parent company acknowledging support for a subsidiary company’s attempt for financing.

But a LOS, however, creates a moral obligation for the parent company rather than a legal one, especially because in the worst-case scenario, in which the subsidiary is unable to repay the debt, the parent company would be liable for the full amount.

“(According to records), LOS  given by the government until 2014 [amounted to] a total of US$3 billion [then].

“As of today, the loan repayments are good and are [in] accordance with the fixed schedule without any defaults,” Najib said in his written reply to Indera Mahkota MP Datuk Fauzi Abdul Rahman.

Fauzi had asked Najib to state the country's total debt at present, including any form of letters of guarantee, or LOS and letters of comfort.

But he opined that the government continues to be committed to ensuring that the debt of the government is not above 55% of the gross domestic product (GDP).

This is to ensure that the debt level of the federal government is low and manageable, he added, pointing out that fiscal consolidation is ongoing to reduce the deficit in stages.

Meanwhile, Najib also said that the government guaranteed debts totalling RM172 billion or 14.7% of the GDP as at end-2014. The guarantees were given to public entities implementing infrastructural projects like DanaInfra Nasional Bhd and Prasarana Malaysia Bhd, which are involved in infrastructural development and public transportation, he added.

Najib said the federal government, from time to time, gives its guarantee to statutory bodies and government-owned companies so that they can take loans for development projects that benefit people.

As at end-March, the total debt of the federal government was RM596.8 billion or 51% of the GDP, said Najib, adding 97% or RM579.2 billion of which is categorised as domestic debt, while the balance of RM17.6 billion or 3% is offshore loans, he added.

Najib said the federal government debt is manageable and that it is a country categorised as having average debt.

However, some economists have voiced concerns about the government’s contingent liabilities and off-balance sheet expenses that are adding a burden to public coffers. 

Bank Negara Malaysia’s statistics show that over the past three years, debt guaranteed by the federal government rose an average of 10.16% annually to RM173.17 billion at end-March 2015 from RM129.5 billion at end-March 2012. 

Together, public debt and the guaranteed debts stood at RM769.96 billion, or 69.6% of Malaysia’s 2014 GDP, and 65.9% of the projected 2015 GDP of RM1.17 trillion. 

It is worth noting that items such as LOS and off-balance sheet borrowings are not included in government-guaranteed liabilities. 

This article first appeared in The Edge Financial Daily, on June 19, 2015.