Govt bond issues not at risk despite suspension of infrastructure projects

Rating agency maintains MGS and GII projection, supported by govt’s commitment to maintain budget de cit of 2.8%

By MARK RAO / Pic ByAFIF ABD HALIM

Despite the revaluation and suspension of major infrastructure projects in the country, RAM Rating Services Bhd (RAM Ratings) expects the build-out of many large projects to remain an integral component to spur long-term economic growth, supported by both the government and private sector, and thus will require support of debt financing.

“We are maintaining our projection for Malaysian Government Securities (MGS) and Government Investment Issues (GII) of RM100 billion to RM110 billion for 2018, supported by the new government’s commitment to maintain its budget deficit of 2.8% of gross domestic product for the year.

“Although some slowdown in corporate bond issuance is expected for the rest of the year, we expect gross corporate bond issuance projection of RM90 billion to RM100 billion for 2018,” it said.

The credit rating agency said this is on account of the higher than anticipated issuance in the first half of this year (1H18), while accounting for some potential slowdown in issuance momentum, especially for infrastructure-related entities.

Meanwhile, a fund manager in Malaysia said the current government will look to honour its liabilities and debt to avoid a downgrade in sovereign rating.

“The government will structure its debt and liabilities in such a way to comply to legal requirements and to avoid defaulting,” the source told The Malaysian Reserve (TMR), adding that this is to avoid a downgrade of the country’s sovereign rating.

Concerns remain over Malaysia’s ability to finance its high debt level, prompting foreign investors to flee Malaysia’s debt market this year.

In the 1H18, total net sell-off of Malaysian debt securities was RM20.8 billion.

Year-to-date, Malaysia has RM698.6 billion in outstanding government-issued bonds, according to latest government data.

Malaysia issued RM113.92 billion in government bonds — largely made up of MGS and GII in 2017 alone.

The newly minted government is now reassessing several infrastructure projects undertaken by the former administration due to suspected

hidden costs, mismanagement and misappropriated funds in light of the country’s RM1 trillion debt.

These include the East Coast Rail Link (ECRL), Kuala Lumpur-Singapore high-speed rail, gas pipeline projects Trans Sabah Gas Pipeline (TSGP) and Multi-Product Pipeline (MPP), and the third lines of the mass rapid transit and light rail transit (LRT) projects.

RAM Ratings expects the government to honour its agreements and liabilities despite the suspension and possible termination of these projects.

“Despite the project re-evaluations, we are of the view that the sanctity of past contracts signed, alongside the government’s obligation to honour outstanding debt and liabilities, will continue to be upheld and honoured,” the credit rating agency told TMR.

“That said, we can’t preclude renegotiation of financing terms and/or project scope.”

It said the decision to either review and/or cancel projects is predicated on the assessment of the individual project economics, associated costs and socio-economic merits.

“The call for costs reductions, project scope reviews or project delays is based on an assessment of the standalone financial viability of the project, alongside the economic urgency to undertake the individual projects,” it said.

Spanning 688km from Port Klang to Pengkalan Kubor, Kelantan, the ECRL was initially estimated to cost RM55 billion, but is now expected to run up to RM80.92 billion.

The third line of the LRT project was earlier cancelled after it was projected to cost RM31.45 billion to be completed, more than three times the initial RM9 billion estimate in 2015. The project is now resumed, but at a lower cost of RM16.63 billion.

Worth a combined RM9.41 billion, the TSGP and MPP projects awarded RM8.3 billion, or 88%, of the total projects’ value in contracts before it was discovered only 13%, or RM1.22 billion, of the works were completed to date.