1MDB bonds pose no risk to Malaysia's fiscal strength: Moody's

KUALA LUMPUR: The 1Malaysia Development Bhd (1MDB) bonds guaranteed by the government are not a risk to Malaysia’s fiscal strength at the moment as the probability of debt crystallisation is low, according to Moody’s Investors Service.

“As far as 1MDB is concerned, we think that the debt consolidation plan has sort of proceeded as normal. We don’t have a rating on 1MDB so I can’t comment on that. What we do look at is the stock of guaranteed debt and the implications that would have for the sovereign,” said Moody’s assistant vice-president/analyst for sovereign risk group Anushka Shah (pix).

She said there is currently a RM5.3 billion bond outstanding by 1MDB that is guaranteed by the government and a US$1.75 billion (RM6.8 billion) bond that has a letter of support from the government.

“Those are the risks that we would take into consideration but at this point the probability of debt crystallisation is low so we do not view it as a risk to the sovereign’s fiscal strength,” she told reporters at a briefing today.

Anushka said for all sovereigns, Moody’s looks at the off-balance sheet items as to whether they present contingent liability risks to the government and in Malaysia’s case it believes that the risks that come from contingent liability are low.

Anushka said the government provides letters of guarantee to some government-linked companies and that stock of guarantee has been increasing at a very rapid pace. The stock of liabilities is currently about 16.6% of gross domestic product.

“However we find that they’ve adopted quite rigorous selection criteria when they grant these guarantees so they are granted to companies that are relatively healthy and have strong balance sheets, thus the probability of debt crystallisation at this stage is quite low,” she said.

Anushka said the government uses these guarantees as a tool to leverage on its ability to raise finances without actually taking debt on its own books. She added that this helps the government to optimise its expenditure profile while at the same time minimise risks associated with that spending.

Meanwhile, Moody’s views the upcoming 14th General Election as a low source of vulnerability to Malaysia’s fundamentals.

“One reason for that is that through electoral cycles in the past we’ve seen that the government has maintained its fiscal deficit reduction path and in general has been committed to a broader policy reform agenda and that’s irrespective of what’s happening on the domestic political front. So the reform agenda appears to be going ahead despite political events,” said Anushka.

While Moody’s does not take specific events like elections into consideration, she said it will look at the implications that any change in government or political surprises have on policies in the event that the ruling party loses the elections.

“We would specifically be looking at the new government’s stance on fiscal policies because the fiscal position is currently an important part of the rating,” she said.

“We don’t take specific events like elections into consideration but we look at broader political risks. Not just domestic politics but geopolitics as well and that is an explicit factor in our rating assessment for every sovereign,” she added.