At least Najib isn’t raiding Petronas for funds like Mahathir did

Dato’ Eric See-To

Another scare tactic of the opposition is that borrowing from China for the ECRL project will bankrupt Malaysia or put Malaysia under China ownership.

Let me tell you why this is wrong.

In the past, Tun Mahathir will raid Petronas for funds for his projects – KLCC, Sepang circuit, Putrajaya etc – or use Petronas to bail-out this or that person including his son.

That is why Petronas cash balances seldom exceeded RM30 billion under Tun Mahathir’s time.

As at the end of 2017, Petronas now has a cash balance of RM128.2 billion. This is likely to be more now due to the higher oil prices so far in 2018 as well as the full payment of US$9 billion (about RM30 billion) by Saudi Aramco to buy into the Pengerang project that was received by Petronas last month.

So, it means that Petronas can easily fund the entire ECRL project if it wanted to.

But why didn’t the government ask Petronas to do so instead of borrowing from China?

Simple. It makes commercial and financial sense.

Firstly, Petronas is not in the rail business.

Mahathir did ask Petronas to build a railway line on the east coast before but it ended up badly. The 77km Kerteh–Kuantan Port railway line was announced to be built by Petronas in 1998 and completed in the early 2000s.

However, it stopped operating in the year 2010 with a Petronas source saying “It stopped operating due to the sub-standard railway infrastructure and was also not safe,”.

Secondly, the financing model makes sense.

85% of the RM55 billion cost for ECRL is from a 20 years soft loan from China at an interest rate of 3.25% and protected from exchange-rate changes risk.

Malaysia Government 20 year bonds typically have an interest rate of 5% (it was 4.784% yesterday). Typically the longer the bond repayment period is, the higher the interest rate.

The difference between 5% and 3.25% interest per year to finance RM46.75 billion (85% of RM55b) over 20 years is substantial.

5% per year on RM46.75b over 20 years is equivalent to RM46.75b in interest cost.

Whereas 3.25% interest cost over 20 years is RM30.4 billion – meaning a saving of RM16.4 billion.

To account for the fact that the loan will only be drawn-down at different milestones of the project, let’s take 50% of that RM16.4 billion interest cost.

That would mean a savings of RM8.2 billion in interest cost alone over 20 years by taking advantage of the soft loan from China.

And plus, foreign money injected to do projects in Malaysia makes sense as Malaysia gets the economic multiplier effects which is higher than the cost of project.

Source: Eric See-To

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