Moody’s: NFPE debt constrains fiscal strength

  • Economy
  • Friday, 13 Sep 2019

PETALING JAYA: Debt is still an issue plaguing the nation. Malaysia’s debt of non-financial public entities (NFPEs) is estimated to be the highest in the Asia Pacific excluding China (APAC).

The regional average is 10% of the gross domestic product (GDP) and Malaysia is currently at a material level of 30%, according to research by Moody’s Investors Service.

NFPEs are non-financial companies that are majority-owned or controlled by the government.

Where such debt is material – being over 20% of the GDP – Moody’s said it generally constrained a sovereign’s overall fiscal strength.

Government-linked companies (GLCs) finance a portion of public spending to help the authorities achieve their policy objectives as governments in the region have smaller tax bases.

“An increase in fiscal deficits and government debt across the region, which constrains some sovereigns’ ability to raise expenditure significantly, implies that some governments may increasingly rely on state-owned enterprises (SOEs) for public spending.

“This trend has already emerged in countries like Malaysia and Indonesia. Contingent liability risks will rise if investment is carried out by SOEs in poor or weakening financial health,” it said in its report yesterday.

Explicit contingent liabilities, particularly government guarantees, make up a large proportion of the overall NFPE debt and this has been on the rise in Malaysia.

The latest data from Moody’s showed that Malaysia also has the highest government-guaranteed debt in the region, at a rate close to 19% of the GDP when the average is only about 4% in the region.

Malaysia is among the three countries, including Sri Lanka and Maldives, where government guaranteed debt has grown significantly over the five-year period from 2013 to 2018.

Meanwhile, the profitability among listed SOEs in Malaysia is also the lowest in the region, with a return on equity (ROE) of about only 2%. Japan, which has weak SOEs, came in second lowest at 6%.

“In Malaysia, the state-owned investment holding company Khazanah Nasional Bhd has supported SOEs, most notably Malaysia Airlines Bhd.

“However, there have also been several instances where the government has supported entities through its own balance sheet, particularly more recently, such as strategic development company 1Malaysia Development Bhd (1MDB) and palm oil company FGV Holdings Bhd,” said Moody’s.

Among the weakest listed SOEs identified by Moody’s are ENCORP BHD, BINTULU PORT HOLDINGS BHD and FGV, which has a debt-to-equity ratio of 249.1%, 122% and 120.8%, respectively.

While Bintulu Port is able to generate an ROE of 11.4%, Encorp and FGV bleed their owners with negative ROEs of 0.6% and 21.4%, respectively.

Moody’s said the cost of the crystallisation of these SOEs would be small but non-negligible to some extent for Malaysia.

It also noted that Malaysia and the Philippines had taken additional gradual progress to protect themselves from future losses by reviewing the risks of guaranteed infrastructure projects, estimated their loss exposure and started to negotiate tighter contracts that pass on more risk to private developers.

While governance practices differ for individual SOEs, Moody’s also noted that companies in the Philippines, Indonesia, India and Malaysia rank weakest overall, based on the Asian Corporate Governance Association’s corporate governance index.

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Debt , gross domestic product


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