THE special dividend of RM30bil by Petroliam Nasional Bhd (Petronas) that was announced in Budget 2019 was a surprise.
It caught ratings agencies by surprise. Moody’s Investors Services maintained Petronas rating at A1 but with a negative outlook on concerns that the government could continue to tap on the coffers of the national oil company to fund its shortfall in revenue.
Petronas will pay out the regular dividend of RM24bil and special dividend of RM30bil in 2019.
The amount to be paid next year is the highest in recent years. Not since 1998 has Petronas paid out special dividends in addition to the regular dividends to the government.
This year, Petronas will pay regular dividends of RM26bil compared to RM16bil that was paid out in 2016 as well as 2017.
According to Moody’s, Petronas’ net cash position was RM97bil as at end-June 2018. It was RM42.8bil in December 2016.
After paying out the special dividend, Petronas’ net cash position is estimated to remain at RM75bil to RM80bil over the next two to three years. This is based on oil price at US$50 to US$70 per barrel in 2019.
Coincidentally, the special dividend comes just a few weeks after the sudden departure of Petronas group chief financial officer Datuk George Ratilal.
In a sudden announcement on Oct 8, the Prime Minister’s Office announced PricewaterhouseCoopers Malaysia (PwC Malaysia) partner Tengku Muhammad Taufik Tengku Aziz as the Petronas group chief financial officer effective Oct 15.
Not many were expecting Ratilal to leave suddenly. And the second surprise was that the announcement came from the Prime Minister’s Office when such announcements normally come from the national oil company itself.
Petronas has always maintained that it cannot continue to pay the government hefty dividends.
However, considering that it has cash of almost RM100bil and oil price is unlikely to drop below US$60 per barrel next year, it should be able to give out the dividend without impacting the finances.
Valid concerns only arise if the government continues to tap on Petronas to fund its expenditure.
On this score, would the one-off special dividend be a regular feature?
It should not be. The new government was elected on the platform of better governance and transparency in public institutions and funds.
Towards this end, Petronas is one of the key institutions and its finances are always watched carefully.
Both Moody’s and Fitch has expressed caution on Malaysia’s new debt levels and its reliance on income from Petronas to fund its expenditure.
Moody’s did not downgrade the rating of Petronas, which commands a rating of two notches higher than Malaysia itself. But it gave a warning of a negative outlook on fears that the Pakatan Harapan government would rely more on Petronas to meet its expenditure.
However, both Moody’s and Fitch credited the Pakatan Harapan government for being transparent in its public finances and stated that the benefits of improved governance would start to materialise in the longer term.
Both rating agencies felt that the improvements in governance and transparency would eventually support Malaysia’s credit rating, which is now below “A”.
What does this recognition by rating agencies means?
Viewed from another perspective, the rating agencies acknowledge the previous government was not transparent in its disclosure of public finance numbers. Nor was it serious in enhancing the standard of governance and reducing corruption in the public sector.
Both Moody’s and Fitch expressed concern on the ballooning federal government’s fiscal deficit, which has been re-set at 3.8% of the economy this year and 3.4% next year. By 2020, the fiscal deficit is expected to come down to 3%.
The concerns raised by Moody’s and Fitch on the new fiscal deficit numbers do not hold water because the previous numbers were disputed.
Under the former government led by prime minister Datuk Seri Najib Tun Razak, the official fiscal deficit number was trending down and supposed to hit 2.8% in 2019.
However, the growth was funded largely by debt. Interest service charges incurred by the federal government increased gradually to 13.1% of GDP by 2018.
Rating agencies knew all along the federal government debts carried through government entities such as Prasarana and DanaInfra were not stated as part of the official debt numbers.
The rating agencies are also well aware that the government steps in when its entities fail to service its obligations, as seen in the case of 1Malaysia Development Bhd (1MDB).
It was not a cause for concern then. Why should it be a cause for concern now?
Rating agencies and strategists have expressed concern on the fiscal deficit of 3.4% next year and that the falling oil prices would impact government coffers.
While it is true that the volatile oil price does not help boost sentiments for the ringgit, the government scores points on its transparency in the handling of public funds.
For instance, Petronas’ special dividend would go towards paying off RM35bil in income tax arrears and goods and services tax refunds that the federal government owes to businesses and individuals.
It is a huge cash infusion into the system when the global economy is slowing down. It is not money going into hugely inflated rail project or a gas pipeline to nowhere or into drawers and bank accounts of individuals.