Malaysia Contractors Slide as Mahathir Deepens Spending Cuts

(Bloomberg) -- Malaysian contractors are plunging as the government intensified its efforts to rein in spending by reducing the cost of an almost $14-billion mass-rapid transit project.

Shares of Gamuda Bhd. slid by a record and MMC Corp. fell to the lowest in nine years, after the Finance Ministry rejected an offer from the MMC-Gamuda consortium to build an underground portion of the MRT2 project. The government also shaved 5.22 billion ringgit ($1.3 billion) from the above-ground portion that will be constructed by the same group, the ministry said in an emailed statement Sunday.

Malaysia Contractors Slide as Mahathir Deepens Spending Cuts

The Southeast Asian nation has been grappling with debt and liabilities exceeding 1 trillion ringgit and state revenue curbed by the removal of a sweeping consumption tax that was replaced with a more selective levy. Since Prime Minister Mahathir Mohamad swept into power in May, he has reviewed billion-dollar transportation projects, and canceled or deferred many of them due to budget constraints.

The MRT2 announcement “reinforces the government’s priority with cost-down of major infrastructure projects,” Adrian Wong, an analyst at Maybank Investment Bank Bhd., wrote in a research note on Monday as he downgraded his recommendation for Gamuda to sell.

“MMC-Gamuda’s decision to walk away from the underground package is due to too significant a cost-down required by the government, to the extent that the risk-reward is no longer tenable,” Wong wrote.

Construction Index

Malaysia’s infrastructure developers and contractors slumped across the board after the news, with the Bursa Malaysia Construction Index sliding 7 percent to the lowest since April 2009. Gamuda fell as much as 28 percent to 2.32 ringgit a share, while MMC lost up to 13 percent to 1.17 ringgit and IJM Corp. dropped 8 percent as of 10 a.m. in Kuala Lumpur.

The MRT2 is set to connect Putrajaya, where the government is based, to Sungai Buloh in the north of the nation’s capital Kuala Lumpur. The project was initially earmarked to cost about 28 billion ringgit, but the budget ballooned to 56.93 billion ringgit following a plan to extend a line to Bandar Malaysia, which the previous government sought to develop as a transportation hub.

The government holds “steadfastly to obtaining value for money” on all public expenditure, “especially when large borrowings are required,” Finance Minister Lim Guan Eng said in the statement Sunday.

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