Malaysia Says Government Debt Is Inflated by 1MDB Borrowing

(Bloomberg) -- Malaysia’s government debt exceeds 1 trillion ringgit ($252 billion), inflated by borrowing by a state investment company that’s at the center of a multi billion-dollar corruption scandal.

Newly-installed Finance Minister Lim Guan Eng told reporters on Tuesday that debt was higher than previously disclosed under the administration of ousted leader Najib Razak, partly masked by the way the accounts were reported. The Ministry of Finance’s most recent economic report puts federal government debt at 685 billion ringgit in 2017.

“It is clear that the previous government has conducted an exercise of deception to the public about certain hot-button items, especially 1MDB, and even misrepresented the financial situation to parliament,” Lim, 57, said on his first day at work at the ministry. “A thorough investigation and discovery is still ongoing to uncover the necessary financial information and data.”

Government debt in Malaysia has been flagged as a risk by economists and credit rating companies such as Moody’s Investors Service. While the previous government steadily lowered its budget deficit over recent years to 3 percent of gross domestic product, debt remains elevated at about 50 percent of GDP, higher than other A-rated countries.

Once borrowing by state-owned companies is added, the debt burden climbs. Fitch Ratings said in a March report that debt guarantees provided by the federal government increased to almost 16.8 percent of GDP in September 2017 from 15.2 percent at the end of 2016.

Malaysia Says Government Debt Is Inflated by 1MDB Borrowing

“Frankly speaking, this is not surprising,” said Trinh Nguyen, a senior economist at Natixis Asia Ltd. in Hong Kong. “We are just getting something that was, in a way, off budget and it is now getting on budget.”

She added that “investors weren’t fooled to think that Malaysia’s debt is what it is” and “the issue has always been its contingent liabilities and what does that mean in terms of debt repayment ability for Malaysia.”

There’s also uncertainty about budget financing. The finance ministry announced last week a 6 percent rate on the goods-and-services tax will be scrapped from June 1 to meet a campaign pledge, and investors are still waiting for details from the government on how it will fill the revenue gap.

Lim, the former chief minister of the northern Penang state, said the government is considering reintroducing a sales-and-services tax this year and the levy will be set at 10 percent if a pledge in the manifesto of Prime Minister Mahathir Mohamad’s coalition is followed.

Mahathir has moved swiftly to tackle corruption related to 1MDB, whose full name is 1Malaysia Development Bhd., ordering the reopening of investigations into the state fund as one of his first steps since taking office two weeks ago.

1MDB is one of the main reasons for the government’s high debt, Lim said. Set up by the government in 2009 to build infrastructure with borrowed money, 1MDB amassed more than 50 billion ringgit of debt in just over six years, largely from assets in the energy sector. Its borrowings clouded the sovereign credit rating, weighing on the government’s contingent liabilities. Its current debt level is not immediately clear.

“Some of this information was not fully disclosed, so I think it’s important that we get on with our discovery so we can get all information on the table,” Lim said.

©2018 Bloomberg L.P.