Malaysian Prime Minister Mahathir Mohamad signed an agreement Tuesday with his Japanese counterpart Shinzo Abe in Tokyo for a loan of up to 200 billion yen (U.S. $1.76 billion) to help Kuala Lumpur tackle its mounting debts.
The deal came as Malaysia braced for slower economic growth, challenges to boosting revenue and higher debt amid a widening crackdown on corruption. It also followed the unveiling of Malaysia’s expanded budget on Friday, which set a higher fiscal deficit target for 2019.
During a televised joint news conference, Mahathir thanked Abe on Japan’s decision to help Malaysia battle its financial woes.
“Prime Minister Abe also assured us that, in the future, if we have a need to seek Japanese support in solving our financial problems, he is ready and the Japanese government is ready to consider,” said Mahathir, who was on a three-day visit to Japan.
Abe confirmed that Tokyo would be issuing yen-denominated bonds to Malaysia with backing from the Japan Bank of International Cooperation.
Aside from financial cooperation, the two countries also agreed to look into improving Malaysia’s rail transportation using the expertise of Japanese railway advisers from JR Kyushu and JR Freight.
“Japan will study with Malaysia the possibility of extending yen loans with primary focus on transportation, education and human resources development,” Abe said.
“We launched a comprehensive study with the view to improving passenger and cargo transport. I hope this study will lead to a concrete cooperation in the future,” he said.
Abe told reporters that a team from both companies would be dispatched to Malaysia at the end of November. Mahathir thanked Japan for its proposal and welcomed its help and advice on how to run Malaysia’s national railway.
During his earlier stint as the nation’s leader between 1981 and 2003, the 93-year-old Mahathir would often turn to Japan as part of his Look East policy, which he vowed to revive after taking power after the May general election.
When Malaysia faced economic turmoil after the Asian Financial Crisis of 1998, the nation reportedly borrowed U.S. $5 billion from Japan. In a survey, Bloomberg economists forecast a Malaysian growth rate of 4.8 percent this year and about 4.5 percent in 2019.
Massive debt due to 1MDB scandal
Faced with massive debt obligations inherited from the previous government and the 1Malaysia Development Berhad (1MDB) scandal, Malaysia’s new administration is focusing on its election campaign promises to lower the burden for its citizens, including scrapping a 6 percent consumption tax that left a 23 billion ringgit ($5.5 billion) revenue shortfall.
Last Friday, the Malaysia government announced that it had received a tranche in the form of 10-year debt securities called samurai bonds from Japan at a low interest rate of 0.65 percent that would be used to refinance the country’s more expensive debts. The bond is a form of a loan issued in Tokyo by non-Japanese companies, providing the issuer with access to Japanese capital.
After his Pakatan Harapan alliance defeated former Prime Minister Najib Razak’s Barisan Nasional coalition, Mahathir said his government had inherited a 1 trillion ringgit (U.S. $240 billion) debt necessitating “cancelation” or suspension of several China-backed projects, including the multibillion ringgit East Coast Rail Link project.
Commenting on the incoming yen bond, Geoffrey Williams, an economist at HELP University in Kuala Lumpur, said the move to secure the Japanese loan at a lower interest rate allows Malaysia to be in a better position to manage its economy.
“A 200-billion yen bond is quite small actually compared to Malaysia’s one trillion ringgit debt,” he said. “But if Malaysia can manage its repayments well, it will demonstrate good creditworthiness to international investors which will sit well in the country’s future economic plans.”
Malaysia to be business friendly
Mahathir’s Tokyo visit is his second since June after the Pakatan Harapan coalition he led took power in a stunning election victory.
Later on Tuesday, Mahathir pledged to remove obstacles to doing business in Malaysia, especially for foreign investors, in order to attract more direct investments.
“I promise you the government will always look upon you, that is Malaysia under the new government,” Mahathir told about 600 businessmen in Tokyo.
He emphasized that under his new government, Japanese investors would be protected from corruption.
“Malaysia is going to be your profit center. You will gain much benefit for investing in Malaysia,” Mahathir said.