Second Samurai bond to restart mega projects

The revival of mega projects such as the ECRL and LRT3 earlier this year would require funds to be raised


THE proceeds from the second debt papers from Japan are expected to be used to finance deferred infrastructure projects as the government looks to kick-start the economy and prevent massive delays to key projects.

Malaysia is expected to issue a second Samurai bond from Japan after the successful issuance of the first debt papers.

Inter-Pacific Research Sdn Bhd head Pong Teng Siew said the revival of mega projects such as the East Coast Rail Link (ECRL) and Light Rail Transit Line 3 (LRT3) earlier this year would require funds to be raised as the government’s budget remains at a deficit.

“The government certainly needs some funding because of the renewal of these projects that we have just approved.

“Projects such as the ECRL and LRT3 are back, so we need funding to get them back on track,” he told The Malaysian Reserve (TMR) recently.

More than a year after Pakatan Harapan’s shock electoral victory, the federal government has resurrected billions of dollars’ worth of projects it pledged to review after discovering that the nation was saddled with debts over RM1 trillion. The projects include the China-backed property venture, Bandar Malaysia.

In a statement issued on Sept 8, the Ministry of Finance said Malaysia agreed with Japan on a second yen-denominated bond at a rate of 0.5% with a maturity term of 10 years.

Before that, TMR reported that the two governments had engaged in discussions on a subsequent debt sale following the success of the ¥200 billion (RM7.34 billion) 10-year Samurai bond issued in March.

The issuance of the Samurai bond, with a coupon rate of 0.63% per annum, has been a success with an oversubscription of more than 1.6 times at ¥324.7 billion.

“The proposed rates (of 0.5% per annum) reflect that the Malaysian government continues to enjoy good spending in global capital markets. There were some concerns in the earlier stage about debt, but we seem to be on the right track now.

“Malaysia is raising money from international capital markets. The fact that the government has not gone overboard to stimulate the economy is good news for investors as it minimises risks on an economic deterioration.

“As such, I expect good response on the second bond much like the first,” Pong said.

MIDF Amanah Investment Bank Bhd head (research) Mohd Redza Abdul Rahman said, while the low coupon rates are favourable for Malaysia, the strengthening of a “safe-haven” yen against the US dollar could lead to higher costs of coupon payment.

“We have to face foreign-exchange risks when issuing bonds in foreign currency but at a lower interest rate, we gain from having pay higher debt servicing payments. The rate is much lower than the rate for a bond issuance in ringgit,” he said.

Mohd Redza also said that Malaysia has to be prepared to take the risks should Japanese yen appreciate.

“As long as the movement isn’t significantly big across the tenure of the bond, this is one source of affor- dable fundraising for the government,” he added.

Meanwhile, Institute for Democracy and Economic Affairs research manager (economics and business) Lau Zheng Zhou said it is vital to ensure adequate foreign reserves to act as buffers against unexpected shocks, given fluctuations in the ringgit exchange rate.

“This should be well-managed given that only two-third of external debt is denominated in foreign currency,” he said.

As of end-June this year, Malaysia’s external debt stood at RM931.1 billion or 61.3% of GDP.

Bank Negara Malaysia governor Datuk Nor Shamsiah Mohd Yunus said the debt remained manageable given its currency and maturity profiles, as well as the presence of large external assets.

She said about one-third (31.7%) of the external debt is denominated in ringgit, mainly in the form of non- resident holdings of domestic debt securities and in ringgit deposits in domestic banks, which are not subjected to valuation changes.

The remaining external debt of RM636.1 billion (68.3%) is denominated in foreign currency.

The corporate sector accounted for slightly more than half of the amount and is largely subject to prudential and hedging requirements.