1MDB default exposes govt contingent liabilities

PETALING JAYA: The total size of contingent liabilities associated with 1Malaysia Development Bhd (1MDB)’s recent default that the government balance sheet is exposed to is estimated at 2.5% of gross domestic product (GDP), according to Moody’s Ratings Services.
Its vice-president and senior research analyst Christian de Guzman said the troubled Malaysian state fund which was in default after missing the deadline to make its bond repayment Monday has raised the risk on the contingent liabilities which the government balance sheet is exposed to.
The international ratings agency did not change its outlook on Malaysia. Back in January, Moody’s downgraded Malaysia’s sovereign credit rating outlook from positive to stable at A3.
Yesterday, 1MDB released a statement confirming that it defaulted on a US$1.75 billion (RM6.83 billion) bond issue, triggering cross defaults on two other Islamic notes totalling RM7.4 billion. The default has prompted a call on a guarantee by the International Petroleum Investment Company (IPIC).
“However, the cross default triggered on instruments guaranteed by the government of Malaysia, as well as an indemnity associated with the IPIC guarantee, raises the risks of the crystallisation of contingent liabilities on the balance sheet of the government of Malaysia,” de Guzman told SunBiz via email.
Moody’s noted that 1MDB’s total debt, according to latest publicly available data, which date back to 2014 was around RM42 billion, less than 4% of GDP.
However, de Guzman said, the figure does not incorporate the progress made by 1MDB over the past year in paring its debt through various asset sales.
“As such, we assume that 1MDB’s total current liabilities to be much smaller,” he said.
However, de Guzman pointed out the contingent risks associated with 1MDB’s non-guaranteed liabilities may be as high or even higher than the government’s actual explicitly guaranteed exposures.
“Moreover, the inability to rein in these off-budget risks stand in contrast to the on-budget improvements to the government’s fiscal position,” he said.
Meanwhile, Standard & Poor’s Ratings Services (S&P) does not expect 1MDB’s default to have an impact on the country’s sovereign ratings.
“We don’t see an impact on Malaysia’s sovereign ratings for now. The default on the interest payment may trigger an acceleration event on the other bonds of 1MDB,” its Malaysian sovereign analyst Yee Farn Phua said.
“On those bonds that carry a guarantee from the government or the 2023 bond with letter of support, we expect the government to make good on those obligations should 1MDB fail to pay,” he said.
The local bourse and the ringgit took a hit yesterday, with the announcement of 1MDB’s default.
The FTSE Kuala Lumpur Composite Index (KLCI) fell 0.58% in just 55 minutes after the opening bell. Heavy selling pulled the Malaysian stock benchmark below the critical 1,700-point level after the lunch break. The KLCI closed at 1,92.50, down 1.28% or 22.01 – its biggest loss in nearly a month.
The ringgit meanwhile, declined for a fourth day, falling 0.55 % to 3.9290 per dollar – its biggest slide in a month.
The Finance Ministry did not respond to a request for comment.