Finance Minister Lim Guan Eng announced last Friday that the Japanese Government offered to guarantee a 200bil yen or RM7.4bil of Samurai bond issuance with a 10-year tenure, which is expected to be issued before March next year. My reaction?
A terrible, terrible idea that will no doubt be cheered by those who are not very well-versed in economics.
Our current national debts are largely denominated in our own sovereign currency. Approximately 97% of our national debts is in MYR, mostly from sovereign bonds that are issued by our own public financial institutions, and domestic debt that is owed to local banks in our own currency.
Why should we issue bonds that are backed by a non-local currency??
Firstly, this will increase the percentage of our national debt that is not denominated in our own currency, thus removing our ability to rollover the debt in future to extend its repayment period.
Secondly, it exposes a part of our national debt to currency appreciation that is beyond our control. In the 1980s, Mahathir did the same thing by securing Japanese Yen denominated loans to finance the construction of some massive infrastructure projects. When the Japanese economy boomed, the Yen appreciated and so did our loans. Some estimates put our total repayment with interest to be over 3 times higher than the amount we borrowed!
Thirdly, Japan has a higher level of national debt than Malaysia, with a significantly higher debt-to-GDP ratio than us. Their economy is in contraction and their local banks have repeatedly slashed interest rates over the years in desperate attempts to spur deposits. By taking up a Yen-guaranteed or Yen-denominated loan from Japan, we’re doing them a favor by “helping” their economy rather than them helping us.
Lastly, our total official debts is over RM700 billion, while this Yen-based loan is just RM7.4 billion. Not only is it a long way off from “repaying our debts” (of which there’s no need to repay anytime soon, because most of our sovereign bond maturity period is decades away), we are basically telling the world that our own government has no confidence in our national economy that we don’t intend to issue bonds denominated in MYR, backed by our economic strength and potential.
In other words, we’re telling the world that we feel our own bonds could be junk bonds, so we’re getting a more highly-leveraged economy to lend us money and guarantee the next round of bond issuance.
With such a long list of lousy outcomes and potentially terrible consequences, why are we proceeding with it? I think everyone has the right to demand for answers in Parliament in the coming weeks and months.