KUALA LUMPUR (Oct 14): Whichever political bloc takes over Putrajaya after the 15th general election (GE15), it will definitely need to raise US$3 billion plus interest expense to redeem one tranche of 1Malaysia Development Bhd (1MDB) bonds that are due in March next year.
The new government would risk being downgraded by rating agencies if the bonds are not duly paid upon maturity, said economists contacted by The Edge.
“Yes, there will be market implications if [the government] does not fulfil this financial obligation that carries government guarantee. So, it has to be settled,” said UOB Global Economics & Markets Research senior economist Julia Goh.
“There will be repercussions on sovereign rating,” said another economist who declined to be named, adding: “At least, there will be (a downward) revision in the country’s rating outlook, if not an outright downgrade”.
There will be additional downward pressure on the ringgit, which has been weakening to a record low level against the US dollar. Furthermore, the government will need to pay more to raise debts to fund its annual budgets.
The ringgit was trading at 4.6925 against US dollar at the time of writing, and based on this exchange rate, the US$3 billion allocation would translate into RM14.08 billion. On top of that, the interest expenses are roughly RM1 billion, including the coupon payment for the other tranche of 1MDB bonds that mature in 2039.
The 1MDB bonds, which are due for redemption in March next year, carry a 4.44% coupon rate.
The 1MDB Assets Recovery Trust Account was left with about RM8.8 billion as at end-June, according to the 2023 Fiscal Outlook Report, and this will be prioritised for the upcoming settlement of 1MDB Energy (Langat) Ltd’s bond maturing this month, where the principal amounted to US$1.75 billion, or RM8.21 billion, based on the current exchange rate.
The sizable US$3 billion bond redemption has been included in the National Budget 2023, tabled by the caretaker government on Friday last week (Oct 7), three days before the Parliament was dissolved on Oct 10.
Putting things into perspective, the allocation is nearly double the RM7.8 billion allocated for Bantuan Keluarga Malaysia 2023 (BKM2023) in Budget 2023. The amount is 41% higher than the estimated RM10 billion cash assistance for the B40 group via the Social Welfare Department.
Socio Economic Research Centre (SERC) executive director Lee Heng Guie said it is likely that the allocation would be funded via the issuance of government debt paper, given the ballooning operating expenditures.
The 10-year Malaysian Government Securities (MGS) has a trading yield of 4.43%, based on Bank Negara Malaysia (BNM)’s data on Wednesday (Oct 12).
Lee pointed out that the country had never defaulted on any of its financial obligations.
“The government has always serviced its debt on time; we have never delayed or defaulted. The only question here is why [the RM3 billion allocation] is being placed under development expenditure, instead of debt servicing under operating expenditure,” he said.
“It should not be parked under development expenditure because that is meant for long term projects and it is a form of capacity building for the country. 1MDB debts are essentially a bad debts issue and therefore, it should be treated differently in the context of the national budget,” commented another economist who requested anonymity.
UOB’s Goh however, said the treatment did not break any rules, as development expenditure also covered amortisation payments for guarantee commitments, payment of private finance initiative liabilities, and any reclassification of operating expenses.
“1MDB bond is a guarantee commitment. [Whatever] the outcome of the election, the bond matures in March 2023,” she added.
The Ministry of Finance (MOF), in its fiscal outlook report, said 1MDB’s outstanding financial obligations were estimated at RM31.6 billion as at end-June, comprising a debt principal of RM25.9 billion and projected interests or profits of RM5.7 billion.
The amount could be higher, given that the ringgit has depreciated 6.45% against the US dollar since June.
The estimated financial obligation of RM31.6 billion is sufficient to distribute RM987.50 each to the entire 32 million Malaysian population, rich or poor, through helicopter money.
If it is divided among the 8.7 million recipients of BKM2023 highlighted in Budget 2023, these households would get roughly RM3,632 each.
The compromise to government fiscal spending does not end in March next year, as Putrajaya has also provided guarantee for another RM5.0 billion of sukuk by 1MDB, maturing in May 2039 with a 5.75% coupon rate.
It is also worth noting that apart from the bond redemptions, the government needs to service the interest expense of about RM290 million a year, until 2038.