Malaysia has asked Japan for yen-denominated loans to pare down its hefty debt load of RM1.09tril or 80.3% of GDP. At the same time, Kuala Lumpur is also seeking Tokyo’s assistance to improve existing railroads to increase the frequency of freight and passenger trains running on underused tracks and stations with the aim of reducing traffic and enhance rail transport. The high-speed rail (HSR) system will only be considered in the future due to the high costs.

We have been seeking financial aid from the Japanese government since the First Malaysia Plan, and would have been exposed to a total of more than US$2.8bil. We expect the potential credit line to be used for economic development and support small and medium-scale industries with the aim of ensuring continuous growth while “cleaning up the red files”. We expect the loans to be on a special rate of around 1% or even lower, depending on the type of projects, over a long-term period of 30–40 years.

• Malaysia has asked Japan for yen-denominated loans to pare down its hefty debt load of RM1.09tril or 80.3% of GDP. The country has also requested Japanese assistance to improve existing railroads to increase the frequency of freight and passenger trains running on underused tracks and stations with the aim of reducing road traffic and enhance rail transport. The high-speed rail (HSR) system will only be considered in the future due to the high costs, suggesting upgrading the existing rail lines will suffice for the near term.

• The decision to seek credit from Japan resembles the scenario of the 1997 Asian financial crisis (AFC). After a four-year halt of the Japanese Official Development Assistance (ODA), Malaysia sought help in 1998 following the AFC as the country ran into difficulties.

• We have been seeking financial aid from the Japanese government since the First Malaysia Plan, and would have been exposed to a total of more than US$2.8bil. We feel that the latest request suggests the country could potentially run into difficulties due to the huge public debt and the need to balance the books with a fiscal deficit-to-GDP ratio at 2.8%.

• In our view, the potential credit line from Japan will be used for economic development and support small and mediumscale industries to ensure the economy continues to grow at a sustainable pace without straining liquidity. While the credit facility should help support the domestic economic activity, it also provides room for the government to continue “cleaning up the red files” without disrupting the economic growth. We expect the loans to be on a special rate of around 1% or even lower, depending on the type of projects, over a long-term period of 30–40 years.

Source: AmInvest Research - 13 Jun 2018