KUALA LUMPUR, Nov 19 — The Najib administration’s ambitious Economic Transformation Programme (ETP) may be off to a shaky start as the spectre of defaulting Selangor water bonds threatens to cast its pall over the broader bond market.
Selangor water concessionaires, which are already in technical default owing to the shortfall of money in the reserve account, are inching closer to debt service default as several water bonds approach maturity.
The Malaysian Insider understands that the reserve account, meant to hold at least six months’ worth of bond repayment money, is currently short by some RM50 million. This shortfall may double in six months if the current water consolidation impasse remains unresolved.
RAM Ratings chief economist Dr Yeah Kim Leng said a default will have “very wide” market implications on the bond market, expected to finance at least 70 per cent of the ETP — particularly long-term, capital-intensive projects — through long-term issuances.
“In the event of a default... it will trigger a cross-default among other borrowings,” he said.
“It’s not good, given that the bond market now has become the major form of financing.”
Yeah said such an event will also threaten the future of water industry privatisation, which has long been on the books for Minister of Finance Inc’s wholly-owned Pengurusan Aset Air Bhd (PAAB).
“It affects not just the confidence in the bond market but the future of water concessionaires’ privatisation of the water industry,” he said.
PAAB had said in July that it intended to complete the RM3 billion takeover of water assets in Perlis, Perak, Kelantan and Pahang by year-end. The company had also hoped to take over Selangor’s RM10-12 billion water assets by the same time.
Lower confidence in the bond market in general, and water bonds specifically, will throw a spanner into PAAB’s plans to assume control of water assets in several states, spearheaded by a RM20 billion sukuk programme by CIMB Bank.
An analyst at a local investment bank agreed, and said defaulting bonds will “give some negative perspective” to investors looking to pick up long-term issuances, even if they are government-backed.
“End of December, if nothing solid comes from these parties, there’s going to be another downgrade,” he said.
“In future, it’ll be hard to gain investor confidence in the bond market. Financing the ETP through bonds might not be as cost effective in the event of a default as banks were likely to charge higher interest rates due to increased uncertainty over debt repayment,” the analyst said.
He added that refinancing and rescheduling of the bonds could buy some time for the water players but cautioned that this was only a stop-gap measure until the political deadlock in Selangor is broken.
OSK Research head of research Chris Eng, however, did not believe the potential water bonds default would adversely affect the ETP.
“That is a long tenuous connection to make... I don’t think it will directly impact the ETP,” he said.
He did not think there would be a major sell down of other bonds due to defaulting Selangor water bonds, pointing out that the market had been aware of debt payment concerns “for some time now”.
Eng added that the first round of issuances raised for ETP projects like the Mass Rapid Transit (MRT) will most likely be government-backed ones which will serve to assuage doubts about the local bond market.
“By the time the next round (of bonds) comes around, there will be less concerns,” he said.
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