The Edge Market: Govt guarantees rises by 9% from Dec 2017 to June 2018

The Edge Market

KUALA LUMPUR (Nov 2): Malaysia’s outstanding government guarantees have increased by 8.5% or RM20.2 billion in six months to RM258.4 billion at end-June 2018, from RM238.2 billion at end-2017, according to the Economic Report 2018/2019.

As a percentage of gross domestic product (GDP), the outstanding government guarantee debt expanded to 18.1% of GDP at end-June from 17.6% at end-2017, on the back of GDP growth assumption.

The average-to-maturity of the guarantees stood at eight years, with 58% of the guarantees expected to mature within 10 years, said the report.

Loan guarantees granted during the period include to finance the mass rapid transit (MRT), light rail transit (LRT), Pan-Borneo Highway, East Coast Rail Link (ECRL), PTPTN loans, as well as Public Sector Home Financing Board (LPPSA), which facilitates civil servant housing loans.

Of the RM258.4 billion, 47.8% were extended to infrastructure projects, followed by other sectors like services (22.7%), investment holding (13%), utilities (11.1%), financial (3.8%) and plantation (1.6%).

About 90% of outstanding loan guarantees are ringgit-denominated, while the balance is in the Chinese renminbi, Japanese yen and US dollar, thereby minimising foreign exchange risk exposure, the report said.

Government guarantees are governed under the Loans Guarantee (Bodies Corporate) Act 1965.

Under the act, the government can serve as the secondary guarantor for loans or financing raised by statutory bodies, government-linked companies, and state government companies or its subsidiaries, which will remain liable for the financing obligation.

The mechanism allows said entities to secure favourable financing conditions such as lower coupon rate, which will also trickle down to the public in the form of lower transportation costs, among others.

If the government ends up incurring any liabilities over the guaranteed financing, the entity is obliged to repay the government principle plus interests or profits under section 8 of the Act.

At times, the government needs to provide financial support in the form of profit payment - recognised as committed government guarantees - during an infrastructure project’s construction period and at its early stages of operation.

“For example, DanaInfra Nasional Bhd provides funds for the development of MRT infrastructure. As the MRT service only commenced operations recently, the fare collected is insufficient to service the debt of DanaInfra, thus requiring annual allocation from the government,” the report said.

Of the total, some RM117.5 billion falls under committed government guarantees.