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Malaysia’s sovereign ratings poised to move south………But Why?

February 4, 2015

The 1MDB debts may trigger a downgrade in the sovereign ratings, dealing yet another blow to a country already hit by the falling oil prices.

1MDB2KUALA LUMPUR: Investors wouldn’t pay too much attention in normal times to the 1Malaysia Development Berhad (1MDB) issue, but given the oil-related challenges Malaysia faces and concerns about its budget deficit, the issue of contingent liability has added to concerns about fiscal improvement, according to a report filed by CNBC.

The role of billionaire Ananda Krishnan, Malaysia’s second richest man, in the 1MDB saga also remains unclear and adds to the uncertainty.

1MDB, whose chief adviser is Prime Minister Najib Abdul Razak, has missed a deadline to repay a US$550 million loan to creditor banks three times over the past three months, fuelling worries the company won’t be able to service the rest of its obligations.

“It’s really too early to call 1MDB’s situation a debt default,” said Rahul Bajoria, regional economist at Barclays, on a more optimistic note. “Looking at the numbers, the amounts aren’t large at all; so it won’t have a big impact on Malaysia even if the government does have to step in.”

1MDB’s situation may not even require government intervention. Last week, the firm announced it may sell some of its property assets, worth more than US$5 billion, to pay off its debt load, Reuters reported.

But other experts aren’t so optimistic.

The company’s entire debt load stands at US$11.6 billion, out of which nearly US$2 billion is guaranteed by the government.

Experts say that makes it a serious liability risk for an economy whose finances have been strained by oil’s plunge by 50% in the past six months. Crude-related income accounts for 30% of government revenues.

Andre De Silva, Head of Asia-Pacific Rates at HSBC, says the delay of a loan payment by 1MDB or its inability to repay its debts may trigger a downgrade in Malaysia’s sovereign ratings, dealing yet another blow to a country already hit by the falling oil prices.

Public debt

If 1MDB is unable to meet its obligations, the government will have to step in, and that’s likely to inflate the country’s massive public debt, already the largest in Southeast Asia at 55% of gross domestic product.

“The government’s guarantee may be a small amount, but keep in mind that the budget is already stretched,” warned Wellian Wiranto, economist at OCBC Bank.

“Certainly, the risk is there for a downgrade,” said Hak Bin Chua, Asean economist at Bank of America Merrill Lynch.

Ratings agency Moody’s warned last week that a worsening in Malaysia’s debt dynamics or the crystallization of large contingent liabilities could exert downward pressure on its current A3 rating.

Meanwhile, Fitch has an A- rating with a negative outlook on the country, which means a cut is likely within the next 12 to 18 months, according to a recent statement from the agency. “Fitch views 1MDB as a close contingent liability of the sovereign because of the nature of its operations and leadership, as well as explicit sovereign guarantees,” the agency said.

“Our sovereign credit team also has a negative outlook on the country. From an economics perspective, you can really see the cracks starting to show,” said Su Sian Liam, Asean economist at HSBC.

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One Comment leave one →
  1. najib manaukau permalink
    February 4, 2015 11:45 pm

    Is it a surprise that the credit rating of Malaysia is going south ?
    It would be if it is going north. What is going north ? Nothing, as long as it is under the administration of the Umno schmucks especially ever since the half breed repugnant & avaricious Mahathir took control of this country. Now it is the time all his policies he implemented are beginning to bear fruits, he knows that and that is the reason why he quickly resigned.
    He didn’t resign, just look at how pro active he is since his ‘retirement’. He thought h found in AB a puppet but when AB didn’t do the things he desires. He began to plan and scheme to have AB replaced and again when he things are not going his ways he is up to his nonsense again. Was there anyone out there to say criticize about the policies he implemented when he was the PM ? No one dared because whoever dared they know where they would end up in.
    Just like the saying all of you are ‘helping him to count the loots he took’. One other thing just look around the world even the Presidents of U.S or China are only allowed to hang on to their positions for only a maximum of two terms. Why then this half breed was allowed to remain as PM for 22 years ? Isn’t that proof enough that he was and still is a dictator plus why was it that he could not achieve the 30% that was allocated to the Malays during the tenure as the PM ? According to him everything is possible !

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