Amount includes some contingent liability and Public Private Partnership

Malaysia’s Ministry of Finance (MOF) has confirmed in a press statement issued on 24 May 2018 that the Federal Government debt and liabilities amounted to a total of RM1.087 trillion or 80.3% of the GDP as of 31st December 2017, see Fig 1.

According to MOF, the official total Federal Government debt is RM686.8bn as at end 2017, where the debt to GDP ratio was 50.8% of GDP. However, with the new PH Government basing the computation on the principles of competency, accountability and transparency (CAT) system for Government’s debt and liabilities, which establish the true baseline on the state of financial affairs, MOF has included debt committed by Government for government guarantees (GG), where these various entities are deemed to be unable to service their debts. This amounts to RM199.1bn (14.6% of GDP), with committed GG for entities such Danainfra Nasional Bhd (RM42.2bn), Govco Holdings Bhd (RM8.8bn), Prasarana Malaysia Bhd (RM26.6bn), Malaysia Rail Link Sdn Bhd (RM14.5bn) as well as an estimated RM38bn for 1MDB.

In addition to the above, the federal government also added lease payments (including rental, maintenance and other charges), for a whole list of "PublicPrivate Partnership" (PPP) projects such as the construction of schools, hostels, roads, police stations, hospitals, et cetera as government debt, which amount to RM201.4bn (14.9% of GDP).

Malaysia’s Macro Fundamentals and External Finances Still Strong

We believe major sovereign rating agencies have cautioned about Malaysia’s weakness in public finances under the previous BN’s government, where contingent liabilities were rising to an alarming level. Over the years, the Government’s off-balance sheet financing of megaprojects led to contingent liabilities (loans guaranteed by the federal government), amounting to RM238bn or 17.6% of GDP as at end-2017.

However, majority of the Government Guarantees debts are borne by Government Linked Companies (GLCs) and Statutory Bodies, which may have their own source of revenue to serve their debt obligations.

However, MOF highlighted that the government will likely need to pay for government guarantees for these identified entities such Danainfra Nasional Bhd, Govco Holdings Bhd, Prasarana Malaysia Bhd, Malaysia Rail Link Sdn Bhd, where their operating revenue will not sufficient to cover the debt obligations, where it will require the Government to step in to guarantee and make payment on the debt, if necessary. We believe that the new Government is able to improve on its fiscal position going forward, and remains committed toward fiscal discipline and consolidation. The Council of Eminent Persons already met with the three key sovereign rating agencies (i.e. Moody's Investors Service, S&P Global Ratings and Fitch Ratings) to also address their concerns raised, such as the country’s fiscal deficit position, after the abolishment of Goods and Services Tax (GST), as well as how Malaysia could meet its revenue requirements, where the new Government will honour its debt obligations, even after the removal of GST.

With Malaysia’s economic fundamentals remaining sound, as reflected in the improving economic outlook, sustainable current account surpluses, and steady increase in foreign exchange reserves, it is unlikely that international rating agencies, such as S&P, Moody's and Fitch, will adjust on Malaysia's sovereign rating outlook to negative (from stable) in the near to medium term. The new Government is confident that they are able to meet its revenue requirements by increasing the efficiency of the public sector, as well as exploring new sources of revenue. The new Government will provide further clarity on the country’s tax reform policies within the 100 days.

Source: Affin Hwang Research - 25 May 2018