Growing strain in debt-laden corporate Malaysia stirs concern

Financial woes of Genting, Petronas signal challenges ahead for publicly listed firms

National oil company Petronas posted a quarterly net loss of RM21 billion (S$6.9 billion) for the period ended June 30, against a profit of RM14.7 billion in the same quarter last year. Economists note that the Malaysian government's reliance on Petr
National oil company Petronas posted a quarterly net loss of RM21 billion (S$6.9 billion) for the period ended June 30, against a profit of RM14.7 billion in the same quarter last year. Economists note that the Malaysian government's reliance on Petronas to provide financial lifelines for troubled firms and the general economy will be limited. PHOTO: BLOOMBERG

The financial woes of two large and prominent local companies are stirring concerns about the overall health of corporate Malaysia - particularly debt-laden publicly listed entities - amid the Covid-19 pandemic.

The problems facing casino tycoon Lim Kok Thay - Malaysia's richest businessman - of the Genting group, and record losses at national oil company Petroliam Nasional, or Petronas - the country's richest entity and its sole Fortune 500 listing - suggest companies in Malaysia that are heavy on debt and light on cash could be in for some challenging months if the international economic outlook does not pick up.

State support, particularly over the moratorium for corporates and households to service their bank borrowings, will be withdrawn by the end of this month, and this is set to have devastating effects for the wider Malaysian economy.

Mr Manu Bhaskaran, regional strategist of Centennial Group, argues that a number of other factors must come together for policymakers to design a soft landing for an economy already in recession.

"Government support in the form of the moratorium on loans needs to be phased out over time and not done abruptly. Also, banks need to be practical when dealing with borrowers, because pulling the plug on one (borrower) can have a dangerous knock-on effect," he said.

There is a general consensus among economists and bankers that business closures in the service economy will lead to widespread layoffs in the coming months, piling further strain on household debt, which, at nearly 83 per cent to gross domestic product, is already among the highest in Asia.

But how the fallout will hit Malaysia's corporate sector is provoking debate.

The optimistic view among bankers and investment analysts is that it will be limited because the majority of the country's publicly listed companies are better capitalised and its banks are in a stronger position than they were during the Asian financial crisis more than two decades ago, when regional currencies were hammered down by speculators, sending economies into a tailspin.

But long-term watchers of the Malaysian economy argue that the problems facing Mr Lim's Genting and the losses at Petronas indicate that the challenges facing both the government and the private sector are hugely different and more daunting this time around.

Mr Lim stunned investors last month when cruise operator Genting Hong Kong, a listed entity he personally controls close to 80 per cent of, declared it would suspend all payments to creditors because of serious impairments in its business, which has been battered by international lockdowns that forced the closure of its casinos and resorts worldwide.

While Genting's businesses in Malaysia and Singapore are weathering the rough economic headwinds, analysts fear the group's healthier units could be tapped to bail out Genting Hong Kong.

Petronas, which posted a quarterly net loss of RM21 billion (S$6.9 billion) for the period ended June 30 against a profit of RM14.7 billion in the same quarter last year, played a key role in repairing the economy during the crisis in the late 1990s.

The national oil company also spearheaded the development of the country's administrative capital Putrajaya during the crisis years, and this was vital in boosting a slumping construction sector.

Economists noted that the government's reliance on Petronas to provide financial lifelines for troubled companies and the general economy will be limited this time round.

The massive debt of other large, state-owned investment companies is also likely to limit the government's ability to carry out bailouts.

Leading the pack is Khazanah Holdings, the state-owned strategic fund that owns commanding stakes in many of the country's largest companies, such as power utility Tenaga Nasional, wireless telecommunications operator Axiata Group, telecommunications giant Telekom Malaysia and property group UEM Sunrise.

Companies in the Khazanah stable had a net debt position of RM57.6 billion as at the end of March, according to published accounts.

Other state-owned investment entities with commanding interests in public listed entities are Permodalan Nasional (PNB) and the country's armed forces pension fund, or Lembaga Tabung Angkatan Tentera (LTAT).

PNB groups of companies, which include conglomerate Sime Darby, auto and engineering giant UMW and companies involved in pharmaceuticals, property development and manufacturing, posted a combined net debt of RM23.8 billion.

The net debt position of LTAT companies, including the diversified Boustead Group, stood at RM7.8 billion.

Senior government officials acknowledge that the debt of many government-linked entities is large because of corporate expansion over the last decade. But they remain upbeat that the strain will not lead to any major fallout.

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A version of this article appeared in the print edition of The Straits Times on September 23, 2020, with the headline Growing strain in debt-laden corporate Malaysia stirs concern. Subscribe