1MDB claims it has hand in Fitch's upgrade of KL's outlook

Malaysia's debt-laden 1MDB had played a part in securing Fitch Ratings' affirmation of the sovereign's long-term foreign currency A-rating with a stable outlook, a top official of the government-owned strategic development firm implied on Thursday.

Its president and group executive director Arul Kanda said in a statement that 1MDB had had talks with Fitch in advance of the upgrade; the company's current situation was discussed, and assurance was given on the reparative measures being taken.

"We were open about the challenges we face, outlined our efforts to reduce the company's debts as presented in our rationalisation plan, and provided information on the various actions that have already been taken, including the repayment of a RM3.6 billion (S$1.28 billion) loan in June," he said.

Fitch had, on Tuesday, sprung a surprise with its affirmation of the sovereign, after having said previously that it was more likely than not to downgrade its credit rating to BBB because of "structural weaknesses" stemming from its reliance on petroleum revenues.

Market sentiment has been more upbeat, but the concern is that it will be short-lived. The ringgit, remaining feeble, traded at 3.77 to the US dollar on Thursday.

Portfolio adjustments ahead of a forecast rate hike in the US could lead to a considerable outflow of funds, which would further hurt the ringgit, now already at a near 10-year low and badly eroded in value.

Coupled with the three-month-old 6 per cent Goods & Services Tax (GST), consumers have really seen their ringgit shrink and cut back on shopping, prompting the Malaysia Retailers Association to trim its forecast sales growth for the year to 4 per cent from 4.9 per cent - its third revision, The Star reported.

Many small to medium-sized enterprises, members of the Associated Chinese Chambers of Commerce & Industry Malaysia, reported a drop in sales of between 30 and 60 per cent in April, when the GST kicked in, said its socio-economic research deputy chairman Peck Boon Soon. Most of these businesses produce for domestic consumption and do not benefit from the resurgent US dollar.

Even so, the very implementation of the GST - which is expected to rake in RM23 billion in the first year and widen the country's tax base - and the termination of blanket fuel subsidies, were the main fiscal reform measures that persuaded Fitch to give the sovereign a second chance.

But as with other investors, the ratings agency remains concerned about the ballooning government debt, which stands at 54 per cent of GDP. If explicit guarantees on loans by its agencies are included, the debt swells to an alarming 70 per cent of GDP.

Other contingent liabilities include "letters of support" which Putrajaya has given on certain loans taken by its agencies, including 1MDB.

In its review, Fitch said that it "continues to believe that the Malaysian sovereign is incurring additional contingent liabilities beyond explicit guarantees because of quasi-fiscal operations of state-owned entity 1MDB. Fitch thinks there is a high probability that sovereign support for 1MDB would be forthcoming if needed".

After raking-up a whopping debt pile, the Ministry of Finance company is trying to pare it down to more manageable levels; it is now rationalising its operations and monetising its assets from power plant and land sales.

Still, it will have its work cut out, given the extent of its borrowings and persistent questioning by opposition lawmakers and taxpayers to explain how this could have been allowed to happen. 1MDB is now the subject of numerous probes, including one by the Auditor-General.

Mr Kanda said Fitch's rating action is evidence of the government's success in ensuring the continued economic stability of Malaysia.

"As a Malaysian, I am proud that the country has achieved a Fitch Ratings upgrade from 'negative' to 'stable outlook'. This is the result of an independent review by an external party and represents recognition of the growing strength of the Malaysian economy."

This article was first published on July 3, 2015.
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