In a written reply to a question by the Member of Parliament for Bagan, Lim Guan Eng yesterday, Dato’ Seri Najib Razak claimed that “the government only guaranteed RM5.8 billion of its loans… Besides this, 1MDB has not received any government guarantee for the rest of its loans,” said Najib, who is also Finance Minister.
However, the reply by Dato’ Seri Najib is only a half-truth as on top of the RM5.8 billion guarantees, the Ministry of Finance has also issued “letters of support” for other loans undertaken by 1MDB.
The Edge Malaysia weekly has exposed in its cover story this week that the Federal Government has provided a “letter of support” for 1MDB Global Investments Limited to borrow US$3 billion (RM9.6 billion) in March 2013.
The letter states that “The Government of Malaysia hereby confirms and undertakes to provide necessary financial assistance to the Issue in respect of the Debt as follows”:
(i) In the event the Issuer (1MDB Global Investments) is unable to pay the funds due under the debt or if there are any shortfalls in the payment of the funds, 1MDB shall first endeavour to inject the necessary capital to ensure that the Issuer is able to service its obligations.
(ii) In the event 1MDB, as shareholder of the Issuer, fails to provide the required funds, Malaysia shall then step in to inject the necessary capital into the Issuer or make payments to ensure the Issuer’s obligations are fully met.
Without outrightly stating that the Government of Malaysia is providing a “guarantee” for the US$3 billion debt, the letter of support has effectively guaranteed the debt! The difference between a “guarantee” and a letter of support where the Government “ensures the Issuer’s obligations are fully met” is purely a matter of semantics.
The existence of this letter of support opens up a whole new can of worms. While official government guarantees for debt are not deemed as “federal government debt”, they are at least documented as the Government’s contingent liabilities.
These dubious “letters of support” however, are not registered anywhere in the Government’s financial statements despite their grave, material and substantial implications. Malaysians and international analysts have no clue how much is the Malaysian Government financially exposed via these shady letters.
This is not the first time “letters of support” attracted controversy. In 2009, it was discovered that 4 similar “letters of support” were issued by the then Ministers of Transport, Tun Ling Liong Sik and Tan Sri Chan Kong Choy to enable Kuala Dimensi Sdn Bhd to raise RM4.6 billion in bonds for the Port Klang Free Zone (PKFZ) project.
While these “letters of support” were not explicitly guarantees, the Attorney-General, Tan Sri Abdul Ghani Patail has confirmed with the investigating Public Accounts Committee in August 2009 that the 4 letters “were tantamount to a guarantee”. As a result, the Malaysian Government bailed out the project by paying for the RM4.6 billion in bonds when they were due.
Clearly from the case of the multi-billion ringgit PKFZ scandal, Malaysians know that these “letters of support” are effectively guarantees. In this case, we know now that out of some RM38 billion of 1MDB debt, RM15.4 billion is guaranteed. We are not sure if the balance of the debt received any similar “letter of support”. For that matter, we are not sure if there are any other companies are government agencies, other than just 1MDB and PKFZ which “benefited” from such a letter of support.
To put the minds of Malaysians at ease, will Dato’ Seri Najib Razak refute the argument that such a “letter of support” is tantamount to a guarantee by categorically stating that in the event 1MDB is unable to fulfil its debt obligations, the Federal Government will not bail out its wholly-owned subsidiary?