Government Onlending and

Transfer Pricing
Malaysia

Asian Regional Public Debt Management

Forum
16 – 18 March 2011
Phuket, Thailand
Debt Management Policy/Strategy

 Government debt management policy involves

the establishment and execution of strategies
for managing the Government’s debt portfolio
in order to meet Government funding
requirements and to achieve the following
objectives:

• to lower cost and minimise risks;

• to promote investment for economic growth;
• to further develop the domestic bond markets;
• the level and growth of debt are fiscally
sustainable
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 Policy Implementation

• Borrowing is merely to finance development project

• To borrow mainly from domestic sources due to

cheaper cost of borrowing and minimise foreign
exchange exposure

• Strictly observe the law, rules and procedures

• To assist the Government in developing the domestic

bond market and to promote Malaysia as the premier
Islamic Financial Centre

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 Operational Debt Management

• Debt management function is not centralized but is

carried out by four agencies as follows:
i. Federal Treasury especially the Loan
Management and Finance Policy Division which has
the responsibility for processing all Government
borrowings
ii. Bank Negara Malaysia (Central Bank of
Malaysia)
— The Bank undertakes the issuance and
management of the Government’s domestic debt
— The Bank administers the Exchange Control Act
1953 and approves all foreign borrowings
equivalent to RM5 billion and above
— The Bank makes payments for outstanding foreign 4
Operational Debt Management

iii. Accountant-General Office which

maintains government accounts related to
public debt and executes all debt payment
transactions on behalf of all agencies covered
by the Federal Budget
iv. Economic Planning Unit (EPU), which is
the planning agency of the Government, is
responsible for drawing up the development
projects and also identifies projects for foreign
funding

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Governing Law / Legal Framework

1. Federal Constitution

Part VII, Financial

Provision
Provides the power to borrow and spend
(annually supply Bills where the MOF presents
the budget in Parliament

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 2. Laws Related to Borrowing

i. Financial Procedures Act 1957

ii. Development Fund Act 1966
iii. Loans (World Bank) Act 1958
iv. Loans (Asian Development Bank) Act 1968
v. Loans (Islamic Development Bank) Act
1977
vi. External Loan Act 1963
vii. Extended Credit (Amendment) Act 1973
viii. Loans Guarantee (Bodies Corporate) Act
1965
ix. Treasury Bill (Local) 1946 (Revised 1977)
x. Government Funding Act 1983
• Toxi.
provide
Loantransparency to the borrowing
Local (Amendment) Act 2005 process
(especially who has the power to borrow, the
institution involved)
• To ensure proper borrowing process
• As a check and balance
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 Restrictions Under The Laws and
Regulations
• Article 111 of the Federal Constitution allow the State Government’s to
only borrow from the Federal Government
• However, Federal Government allows State Government’s to borrow from
financial institutions for a period not exceeding five years subject to
conditions specified by the Federal Government
• Statutory Bodies (Power to Borrow) Act 1999 - all statutory bodies and
companies and corporations established by the statutory bodies are
required to obtain prior approval of the Minister from the relevant
ministries and the Minister of Finance.
• Public Authorities (Control of Borrowing Powers) Act 1961 (Act 383) – local
authority require prior approval of the Minister of Finance before entering
into a loan or guarantee.
• Local Government Act 1976 – impose restrictions for local authorities to
borrow to not exceeding 5 times of annual value of revenue and the
repayment period should not exceed 60 years
• Incorporation (State Legislatures Competency) Act 1962 – a corporation
can borrow or provide guarantee without prior approval from the Minister
of Finance for amounts below RM5.0 million, while any guarantee provided
should not exceed the percentage of equity holdings of that corporation in
the entity being guaranteed 8
Other Restrictions Under The Laws and
Regulations

• External Loans Act 1963 – Federal

Government caps foreign debt to RM35 billion

• Loan (Local) Act 1959 / Government Funding

Act 1983 – caps domestic debt by Federal
Government to 55% of GDP

• Treasury Bill (Local Act) 1946 – caps

issuances of Treasury bills to RM10 billion

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 Government Guarantee

• Loans Guarantee (Bodies Corporated) Act 1965 is

to authorise the Government to guarantee loans
raised by Government-owned companies,
statutory bodies and local governments

• Very selective in giving Government guarantee –

national and strategic projects

• Contribution to economic growth, employment

and business opportunities

• Projects which directly benefits the people

• Capacity to repay debts

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 Sources of Borrowing

Domestic Borrowing External Borrowing

i. Domestic market i. Market Loan

a. Bond
b. Malaysian Government b. Syndicated Loan
Security
ii. Multilateral
c. Government Investment
a. World bank
Issue
b. Asian Development Bank
d. Treasury Bill c. Islamic Development Bank
iii. Bilateral
e. Housing Loan Fund
a. Japan International
Corporation Agency (JICA)
b. Others

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 Domestic Market

 To secure funds from the domestic market,

the following is taken into account:

• Liquidity in the domestic market

• To develop the domestic bond market and
establish a benchmark for corporate bonds
• To promote Malaysia as an Islamic Financial
Centre

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 Domestic Debt Instruments
Malaysian Treasury
Bills (MTB)
• issued for the purpose of maintaining
benchmark bonds and raise short-
term funds for the Government’s
working capital
• mainly subscribed by commercial
banks to meet their financial liquidity
requirement
• is a viable form of financial
instrument due to being risk-free as
it is issued by the Government
• actively traded in the secondary
market
Malaysian Islamic
Treasury Bills
• issued for(MITB)
the purpose of funding
development expenditure
• BNM undertakes to arrange the
sale of the bond on behalf of the
Federal Government and traded
on a discounted basis
• enables Syariah-compliant
financial institutions to invest
their liquid funds
• is a viable form of financial
instrument due to being risk-free
as it is issued by the
Government
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 Domestic Debt Instruments
Malaysian
Government
• Securities
main (MGS)
source of the Federal
Government’s domestic borrowing
• was used to finance the development
expenditure from the 1970’s and 1980’s
• was used to finance part of the budget
deficit and the prepayment of external
loans in the 1990’s
• is used to create a benchmark yield
curve for the market
• issued to meet the investment needs of
the Employees Provident Fund (EPF),
Insurance Companies and local Banks
Government
Investment Issue
• (GII)
issued for the purpose of
encouraging investments in the
Islamic Financial Market
• BNM undertakes to arrange the
sale of the bond on behalf of
the Federal Government
• enables Syariah-compliant
financial institutions to invest
their liquid funds
• is a viable form of financial
instrument due to being risk-
free as it is issued by the
Government
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 External Borrowing Instruments

Sources:  Through the issuance of bonds

 Benchmarking
• International  To place Malaysia in the eyes of the world
Markets  To introduce Malaysia to international investor

 World Bank
 Asian Development Bank
• Multilateral  Islamic Development Bank

 Japan Bank for International Cooperation (JBIC

• Bilateral  Other Governments

-
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 Multilateral and Bilateral

• Project loans are taken via Government to

Government with countries as well as multilateral
institutions

• To finance specific projects comprising

infrastructure, education, ICT and others

• These projects have been identified by the Economic

Planning Unit which would then be forwarded to MoF
for further negotiations on the financing of the
project

• These loans are taken also as part of a bilateral

understanding between countries or with institutions
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in which we are members
 Summary

• The Government’s borrowing and debt

management strictly observe the Federal
Constitution, laws and regulations – with
stringent rules and procedures

• Borrowing is merely to finance

development project

• Approval from Finance Minister for loans

and guarantees is important to ensure
proper financial management and control
system
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Thank you