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.
KUALA 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.
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.