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Malaysia in transition

Short-term squeeze forces Malaysia to issue debt and sell assets

Country fights to balance fiscal responsibility with sustained growth

KUALA LUMPUR -- Malaysia said on Wednesday it will issue debt and sell noncore assets to meet short-term financing needs to counter sluggish growth and the high debt load inherited from the previous administration.

Finance Minister Lim Guan Eng explained that the government will balance "between the need to be fiscally responsible and continuous spending to sustain growth." He vowed to reduce national debt over the next three years by strengthening public finance through a medium-term fiscal strategy and by tapping the debt market.

"If Malaysia can successfully navigate the fiscal challenges over the next three years, those who invest now can expect a substantial return on investments later," said Lim.

The government of Prime Minister Mahathir Mohamad inherited 1.08 trillion ringgit ($261 billion) worth of debts and liabilities at the end of last year, amounting to 80.3% of gross domestic product. This has prompted the government to cancel China-backed infrastructure projects and trim public spending after assuming power in May.

The 93-year-old leader also requested yen credit from Japan in June to refinance some of Malaysia's borrowing, as interest payments were deemed too high.

Malaysia's export-oriented economy is also facing sluggish growth and a weakening currency, both of which are weighed down by the economic downturn in China -- the country's biggest trading partner -- and the uncertainty caused by the U.S.-China trade war.

GDP growth slowed to 4.5% on the year in the April-June period from 5.4% in the first quarter, as the ringgit declined 1.95% against the U.S. dollar so far this year.

Market analysts have voiced concern over the country's finances after the government replaced the broad-based Goods and Services Tax with the narrower Sales and Services Tax, causing a loss of 23 billion ringgit in tax revenue. Despite this, Malaysia remains determined to keep the fiscal deficit at 2.8% in 2018, a goal that some analysts say may be out of reach.

Japanese investment bank Nomura in a report on Sept. 7 warned of a looming downgrade to the country's sovereign credit rating next year due to declining revenue.

Lim said the government was "aware" of the challenges and is banking on debt issuance to meet financing needs.

"This is the simplest, most reliable and easiest method to manage due to the size of our institutional investors," said Lim. Sovereign wealth funds, including Employees Provident Fund, held 70.5% of total debt in 2017, according to government data.

In a Sept. 4 report, Moody's Investors Service said the Malaysian government had increasingly turned to Islamic bonds, or sukuk, issued in the domestic market to fund its budget deficit. Government-issued sukuk accounted for about 41% of outstanding debt at the end of June, up from 14% at the end of 2008.

In the first half of 2018, Malaysia's total sukuk issuance grew by 9% to $22.4 billion, the largest in the world.

Malaysia has been a leading proponent of Islamic finance since the 1980s, implementing regulations and standards to encourage adoption of sukuk as an alternative to conventional banking.

Sukuk debt instruments comply with Islamic law, which bans the charging of interest and speculation. Islamic bonds replace coupons, with payout derived from profit-generating tangible assets, including leases and joint-ventures.

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