Govt’s Felda bailout a credit negative


The RM6.2 billion financial aid to the Federal Land Development Authority (Felda) is viewed as credit negative for the federal government as it further enlarges sovereign debt, said Moody’s Investors Service Inc.

The rating agency said the financial lifeline to the state-owned plantation agency will add to the government’s debt burden, which is currently above the median of other A-rated sovereigns.

“We estimate that the assistance will raise the government’s debt burden by 0.3% of GDP to 56% in 2019, substantially higher than a median debt ratio for A-rated sovereigns of 37.8%, and up from 50.7% in 2017.

“In our estimates, we include the debt of state-owned investment fund 1Malaysia Development Bhd and RM20 billion of funding provided to Lembaga Tabung Haji, the state-owned pilgrimage fund, at the end of last year through an asset-backed sukuk,” Moody’s noted in a report yesterday.

It added that a higher debt burden will weigh on Malaysia’s debt affordability, particularly because the share of revenue to GDP, at 16.3% in 2018, likely remains at or near record lows.

The country’s interest payments account for 13.3% of revenue, significantly higher than the A-rated median of 4%.

The government’s announcement of the aid followed the release of a white paper that detailed Felda’s deteriorating financial performance and outlined plans to restore its viability and strengthen its governance practices.

Moody’s said Felda’s financial performance has been deteriorating since 2013. In 2017, its losses reached RM4.9 billion compared to an average profit of RM700 million in the five years leading up to the listing of its commercial arm, FGV Holdings Bhd in 2012.

The accumulated losses were mainly due to declining operating income from plantations amid lower crude palm oil prices, financially unviable investment decisions, alleged corruption and weak governance practices.

Since the listing, Felda’s total liabilities have more than doubled to RM14.4 billion from RM6.5 billion.

“With its cash balance shrinking, Felda is unlikely to be able to meet its debt obligations without the government’s assistance,” Moody’s said.

Economic Affairs Minister Datuk Seri Mohamed Azmin Ali said in his speech at the Parliament last week that the financial aid will be given in the form of grants, loans and government guarantees.

The initiatives include introducing a new model for managing settlers’ land, developing skilled and innovative settlers and lessening their dependency on planting oil palm, introducing a new flexible aid scheme, abolishing interest rates on the cost of living loan and harvest advances taken by settlers, and completing the construction of homes for second-generation Felda settlers.