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December 26, 2008

Malaysia to set up agency to guarantee bonds
Malaysia's economic council plans to set up an entity to guarantee bond issues with lower ratings due to fears of defaults and a decline in the country's bond market, Reuters reported, quoting local daily the Business Times.

A member of the council, chaired by Prime Minister Abdullah Ahmad Badawi, said the entity could shore up the bond market, which is expected to shrink 10 percent to 25 billion ringgit ($7.2 billion) in 2009 from an estimated 28 billion ringgit this year.

"We would like to call it a financial guarantee institution," the paper quoted C. Rajandram, a member of the council, as saying. "It will be a new source of capital formation."

Rajandram said the new entity, which could include shareholders such as the central bank and the Employers Provident Fund, could stimulate the economy by guaranteeing debts raised by infrastructure and services sectors to finance projects.

Malaysia has cut its growth forecast for next year to 3.5 percent from a previous forecast of 5.4 percent, though most private sector forecasts are much more pessimistic.

Rajandram, who is also the executive deputy chairman of rating agency RAM Holdings, said the council was refining the proposal and the institution itself could start operations within the next several months once approved.

"It (the bond guarantee corporation) is not a new thing. In the US there are three or four such institutions," said Rajandram.

He said, generally, "AAA" and "AA" rated bonds have no difficulty to attract demand as there is little risk of default, but bonds with ratings of a single A and below get very little market play due to the turmoil in global markets.

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