What is in Malaysia’s RM1.09 tril debt?

This article first appeared in The Edge Financial Daily, on July 18, 2019.
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*This article has been updated for accuracy

KUALA LUMPUR: The government’s debt and liabilities amounted to RM1.09 trillion as at end-2018. That sum includes government guarantees of RM132.7 billion worth of borrowings.

The government guaranteed debt that is currently on the government’s shoulder is almost half of the total RM266.5 billion borrowings that are guaranteed by the government, according to a report by the Special Parliamentary Select Committee on the Budget tabled in Parliament yesterday.

In short, the government is also servicing RM132.7 billion of borrowings that it guarantees (See Table 1 listing the five largest guarantees to be borne by the government).

Among the top government guaranteed borrowings are a RM52.74 billion guarantee granted to DanaInfra Nasional Bhd to fund the Mass Rapid Transit (MRT) project and the Pan Borneo Highway, RM18.86 billion for Malaysia Rail Link Sdn Bhd for the East Coast Rail Link (ECRL) and RM31.41 billion for Prasarana Malaysia Bhd for the infrastructure and operations of the light rail transit (LRT) and Rapid KL.

Other notable guarantees granted were RM3.6 billion for SRC International Sdn Bhd, a former subsidiary of 1Malaysia Development Bhd (1MDB), for investments in strategic sectors and a RM5 billion guarantee for 1MDB.

“The government has to bear these guarantees as these projects are unable to generate income to pay the principal and interest of their borrowings. For example, DanaInfra, which funded the MRT project, does not have sufficient income to repay the sukuk issued.

“Therefore, the repayment of the principle and interest is borne by the government,” said the report.

The remaining RM128.5 billion of guarantees is not borne by the government, as these entities had a stable cash flow.

That said, the government must step in, in the event that these entities are unable to service their debts (See Table 2 listing the top five largest guarantees but not borne by the government).

In terms of percentage, government guarantees accounted for 12.2% of the total debt and liabilities, and the commitments relating to the 1MDB account for about 3%.

The government saw an increase in total debt and liabilities between end-2017 and end-2018, largely contributed by higher government guarantees and federal debt, although the increase was partly offset by lower 1MDB-related liabilities and other liabilities relating to public-private partnerships (PPPs), private finance initiative (PFIs), Pembinaan BLT Sdn Bhd (PBLT) and facilitating the development of infrastructure for the Royal Malaysian Police.

The report showed the breakdown of the federal government’s commitments relating to the controversial strategic investment fund 1MDB totalling RM43.59 billion.

The commitments comprise payments for the sukuk issuance, global bonds issuance, for which the government had issued a letter of support, as well as payments of obligations on behalf of 1MDB Energy Ltd and 1MDB Energy (Langat) (Table 4 outlines the principal and interest payments for each of these items that 1MDB had borrowed).

As at May 31 this year, the ministry of finance (MoF) had loaned RM8.9 billion to 1MDB.

The report highlighted several ratios that must be monitored going forward — a debt-to-gross domestic product (GDP) ratio of 51.2%; debt and liabilities-to-GDP ratio of 75.4%; the federal deficit, expected at 3.4% for 2019; and the debt service ratio at 13.1% for 2018.

In summary, the report said the federal government has, starting in 2018, decided to report the total debt and liabilities based on the amount to be borne by the government, including the portions of borrowings guaranteed by the government, and projects under PPPs, PFIs and PBLT.

“The measure was taken as PPP, PFI and PBLT projects do not generate income to pay off their principal and interest.

“Given these payments are borne by the government, they are no different from projects directly funded under the development expenditure, in terms of implications for the country’s budget,” said the committee.

At a press conference yesterday, the committee’s chairman Datuk Seri Mustapa Mohamed said the government had adopted accrual accounting policies in 2011, in line with the International Monetary Fund’s (IMF) guide on public sector debt statistics.

The government began migrating from cash-based accounting to accrual accounting in 2015, which would be completed in a year or two, said Mustapa.

Accrual accounting factors in total assets and liabilities, including future liabilities, compared to cash-based accounting which only looks at transactions.

“The difference between then and now is the committee has decided that we need to take liabilities into account as the government is obliged to pay,” said Mustapa.

On whether the MoF would be called to explain the increase in the national debt, Mustapa said there is no such need as the ministry had explained the matter.

Committee member Khairy Jamaluddin, however, said the government has to take responsibility for the increase in federal government debt.

“1MDB only contributed RM32.2 billion in net debt. I am not saying it is a small amount but 1MDB is not the only cause for the difference in debt levels between this year and last year,” Khairy said.

Notably, the government’s debt has ballooned from RM501.6 million in 2012 to RM686.8 million in 2017, or nearly 37% in five years.