GOVERNMENT guarantees are quasi-fiscal instruments, in which a government acts as a secondary obligor to a commitment undertaken by an entity that receives the guarantee facilities.
Generally, a guarantee instrument is deployed by a government for various purposes including investments that can generate cash flows in the long run, hence reducing the burden on public expenditure.
This approach reduces the financing cost of strategic infrastructure projects undertaken by the private sector and increases viability and efficiency in the implementation of projects.
While government guarantees are a pertinent tool for economic development, there are risks that arise from deploying it.
Unmanaged risks can lead to substantial fiscal burden as well as compromise financial stability and investors’ confidence.
The potential liabilities arising from guarantees can strain public finances and ultimately affect a nation’s sovereign credit rating.
Therefore, it is crucial to establish a comprehensive and effective risk management framework to ensure prudent management of government guarantees and safeguard the nation’s financial health.
Guarantees can be deployed in the form of direct guarantees to an entity or to the financial obligation undertaken by an entity. In Malaysia, government guarantees are granted either by embedding specific provisions within an entity’s establishment legal framework or issued by the government to an entity for intended purposes.
Hence, government guarantees can be categorised as institutional or financial guarantees.
Institutional guarantees refer to the obligation of the government, which is distinctly specified in the establishment act of a statutory body. The institutional guarantee that is granted covers cash flows obligation, debt and liability as well as deposits and contributions to the entity, as stipulated in the related legislation.
There are six statutory bodies that fall under this category, namely Employees’ Provident Fund, Retirement Fund Inc, Lembaga Tabung Haji, Bank Simpanan Nasional, Lembaga Tabung Angkatan Tentera and Perbadanan Tabung Pendidikan Tinggi Nasional.
Additionally, the government may grant guarantees by exercising its discretion under specific law to guarantee a loan or borrowing instrument undertaken by an entity for strategic purposes.
As the government continues to pursue the national development agenda and ensure well-being of the rakyat, active participation of the private sector in complementing the development planning is pertinent.
Thus, alternative financing approaches through government guarantees can be utilised to expedite execution of projects, facilitate financing needs and create economic opportunities.
