Moody's take on 1MDB

Moody's take on 1MDB

KUALA LUMPUR - There is a worry that Malaysia's fiscal consolidation may be derailed should the Government be forced to assist 1Malaysia Development Bhd (1MDB) financially.

While Moody's Investors Service analysts do not consider the government-linked strategic development company's RM42billion (S$15.5 billion) debt as a sign of distress amongst government-related companies, government finances would eventually deteriorate should commitments to 1MDB be covered.

Moody's senior analyst Christian de Guzman said the concern was over how far the Government would go to honour 1MDB's debts, as this would affect the ongoing fiscal consolidation.

"We know that support is possibly forthcoming, in fact support has already come in the form of a line of credit to 1MDB earlier this year. The question we're asking ourselves is if the magnitude of support will eventually derail the trend of fiscal consolidation and that may cause us to re-look our outlook," he said. Moody's in January affirmed Malaysia's A3 rating with a positive outlook.

Earllier this year the Government gave 1MDB a standby credit line of RM950mil. The rating agency acknowledges that besides the RM5.8bil that the Government explicitly guarantees, it views the conditions underlying the Government's letter of support for 1MDB Global Investments Ltd's US$3bil bond issuance as "quite strong" although not an explicit guarantee.

De Guzman said at a media briefing that the opacity surrounding 1MDB and its accounts made it hard to say whether recent developments including the inquiry by the Public Accounts Committee can be viewed as positive because the Government's handling of the 1MDB issue had not been as transparent as hoped for.

He noted that the issue had had a disproportionately large effect on the political situation, which had spilled into sentiment and had made it politically difficult to extend support for the company.

However, de Guzman said political risks was not the same as policy risks. He does not see important fiscal reforms such as the goods and services tax or the fuel subsidy cuts being rolled back.

He said the issue from a fundamental perspective "is not systemic for public finances, the economy or the banking system" and did not see how it could affect the country's sovereign ratings at this moment.

"I think we've to see a significant deterioration across a wide range of matrices for a sovereign downgrade to happen. Its not going to be growth, as this has proven to be quite resilient despite the commodity price downturn or even sentiment arguably," de Guzman stressed.

He said contingent liabilities remained a concern as it had grown as a share of the economy. The country's contingent liabilities stood at around 16 per cent of gross domestic product as of last year.

"We also have to bear in mind that traditionally the extension of these explicit guarantees by the Government has proven to be quite safe, a seal of good housekeeping," de Guzman said, adding that none of these guarantees have crystalised on the Government's balance sheet.

The contingent liabilities without explicit guarantees were the ones to worry about. This included the indirect exposure to Malaysia Airlines and Port Klang Free Zone.

Meanwhile, Moody's expects Malaysia to run a current account surplus over the next two to three years on the pick-up in manufacturing-sector exports. De Guzman said electrical and electronics (E&E) exports would get a boost from a weaker ringgit.

"The share of E&E exports compared with total exports moves with the ringgit. Over the past decade as the ringgit has gotten stronger, the share of E&E exports has gotten smaller, so if ringgit weakness were to persist, we could see a pick-up in E&E exports and data supports that," he added.

The current account would be helped by the removal of the fuel subsidies while the commitment to bring government debt down to 45 per cent of GDP implies continued fiscal consolidation.

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