FW: Malaysia: Contingent Liability and GG Bonds - Assessing Dynamics Post-GE14

 

Contingent Liability and GG Bonds: Assessing Dynamics Post-GE14 and Changing Supply Profile

In view of changing domestic landscape after GE14, we review the debt profile of Malaysian government debts especially on GG, coming up with forecasts for future supply to reflect the changing dynamics and its potential impact on spreads. As a full crystallisation of 1MDB debt has become highly likely, we also estimate its debt service obligations and assess the potential fiscal risks and option.

Diverging Trend: Contained Government Debt against Rising Contingent Liability

Malaysian government debt profile has diverged in the past few years. On one hand fiscal consolidation efforts capped the headline debt/GDP ratio at 50.8% (2009: 50.8%), but on the other hand fiscal expansion arising from the issuance of government-guaranteed debt has seen contingent liability ratio widening to 17.6% (2009: 11.8%). Additionally, the setting up of the Public Sector Home Financing Board (LPPSA) has also resulted in a debt transfer of about MYR22b/1.5% of GDP to contingent liability.

Surge in GG Supply Weighed on the GG Curve

GG bond issuance had proliferated to fund major infrastructures. Cumulative supply of GG bond rose from a total of MYR43b for the 13 years between 1996 and 2008, to MYR203b for the ~9.5 years between 2009 and 2018 YTD. In the corresponding period the ratio of GG/total PDS issuance increased from 9% to 25%. Surging supply had weighed on the GG curve, contributing to the underperformance of GG in spreads relative to lower-rated credit bonds.

Changing Dynamics:  Supply Profile of GG Bond is expected to Turn Favourable, Compressing Spread

Two key factors will contribute to lower GG supply. Firstly, the cancellation/review of mega projects curb funding need. Secondly, GG route of funding may restricted, if not “zeroised”, under the new administration, although there could be limited options for the time being with still ongoing projects and constrained fiscal space. We think some core GG funding may continue in the near term but eventually be funded through budget allocation. Depending the availability of budget allocations, total GG supply in 2019 may halved, or lower, from MYR38b in 2017. This could mean moderately tighter GG spreads, in our view.

Crystallisation of 1MDB Debt: Fiscal Risk and Option

A full crystallisation of 1MDB debts has become highly likely after being counted as the government committed contingent liability. Its debt service obligations may be added to the annual budget. The consolation is that its debt service, both coupon and principal repayment, is moderate at MYR1.7-2.7b in 2019-2021, but will become heavy at MYR15.4b in 2022 and MYR13.1b in 2023 by our estimate. Other fiscal option include buying back costly USD bond debt from open market, such as the 1MDB Global Investment bonds trading at 89% of par, which is cheaper than redeeming the bonds on maturity date at par.

Click link below for report:
Contingent Liability and GG Bonds - Assessing Dynamics Post-GE14 and Changing Supply Profile



Regards,

Winson Phoon, ACA
(65) 6231 5831
winsonphoon@maybank-ke.com.sg
 
Se Tho Mun Yi
(603) 2074 7606
munyi.st@maybank-ib.com

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