Moody’s Investors Service has warned that 1MDB’s failure to pay interest on a US$1.75 billion (RM6.9 billion) bond may diminish Malaysia’s efforts to control its budget deficit.
But how bad is the impact gonna be?
The Nikkei Asian Review quoted Christian de Guzman, senior credit officer at Moody’s, as saying: “The cross defaults triggered on instruments guaranteed by the government of Malaysia, as well as an indemnity associated with the IPIC guarantee raise the risk of the crystallisation of contingent liabilities on the balance sheet of the country.”
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1Malaysia Development Bhd said yesterday it had defaulted on US$1.75 billion in company bonds after missing an interest payment of US$50.3 million (RM197.8 million) following a stand-off with Abu Dhabi sovereign fund IPIC.
This has triggered cross-defaults on RM7.4 billion worth of state-guaranteed sukuk or Islamic bonds due between 2021 and 2039.
IMDB said it was open to resolving this non-payment issue with IPIC in the best interest of stakeholders. It has also taken measures to reduce debts. The report said the unusual default had raised the eyebrows of investors.
Moody’s, it said, estimated that Malaysia’s total liability associated with 1MDB’s recent default is around 2.5% of its gross domestic product, while the fund’s accumulated debt of RM42 billion was about 4%.
However, the ratings agency said 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” and that such risks would weigh on Malaysia’s efforts to reduce the budget deficit.
Malaysian has maintained its fiscal deficit target at 3.1% of GDP this year, despite a drop in government coffers due to the commodities glut, the report said.
1MDB has said it had been talking to investors and trustees of its sukuk, assuring them that it had a cash surplus of RM2.3 billion, more than enough to pay the interest of US$50.3 million.
However, the situation surrounding 1Malaysia Development Bhd is not expected to have an immediate negative impact on Malaysia's sovereign ratings, says Fitch Ratings.
It believes there is an increasing likelihood that some of 1MDB’s debt will be formally assumed by the Malaysian government. Sagarika Chandra, who is associate director, sovereign ratings, said 1MDB has been long viewed as a close contingent liability of the sovereign, which limits the downside for the rating from such an eventuality.
"More broadly, these developments reflect Malaysia’s relatively weak governance standards, which the agency has cited as a weakness in the credit profile."
Fitch will be monitoring for any signs of a significant, lasting impact from the affair on domestic or international investor confidence that could affect Malaysia’s economic performance, she said, in a statement.
"We will also be monitoring for any effect on Malaysia’s political stability or the ability of the government to implement appropriate economic policies and structural reforms.
"These developments could be negative for the ratings if they occurred”.
But how bad is the impact gonna be?
The Nikkei Asian Review quoted Christian de Guzman, senior credit officer at Moody’s, as saying: “The cross defaults triggered on instruments guaranteed by the government of Malaysia, as well as an indemnity associated with the IPIC guarantee raise the risk of the crystallisation of contingent liabilities on the balance sheet of the country.”
This has triggered cross-defaults on RM7.4 billion worth of state-guaranteed sukuk or Islamic bonds due between 2021 and 2039.
IMDB said it was open to resolving this non-payment issue with IPIC in the best interest of stakeholders. It has also taken measures to reduce debts. The report said the unusual default had raised the eyebrows of investors.
Moody’s, it said, estimated that Malaysia’s total liability associated with 1MDB’s recent default is around 2.5% of its gross domestic product, while the fund’s accumulated debt of RM42 billion was about 4%.
However, the ratings agency said 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” and that such risks would weigh on Malaysia’s efforts to reduce the budget deficit.
Malaysian has maintained its fiscal deficit target at 3.1% of GDP this year, despite a drop in government coffers due to the commodities glut, the report said.
1MDB has said it had been talking to investors and trustees of its sukuk, assuring them that it had a cash surplus of RM2.3 billion, more than enough to pay the interest of US$50.3 million.
However, the situation surrounding 1Malaysia Development Bhd is not expected to have an immediate negative impact on Malaysia's sovereign ratings, says Fitch Ratings.
It believes there is an increasing likelihood that some of 1MDB’s debt will be formally assumed by the Malaysian government. Sagarika Chandra, who is associate director, sovereign ratings, said 1MDB has been long viewed as a close contingent liability of the sovereign, which limits the downside for the rating from such an eventuality.
"More broadly, these developments reflect Malaysia’s relatively weak governance standards, which the agency has cited as a weakness in the credit profile."
Fitch will be monitoring for any signs of a significant, lasting impact from the affair on domestic or international investor confidence that could affect Malaysia’s economic performance, she said, in a statement.
"We will also be monitoring for any effect on Malaysia’s political stability or the ability of the government to implement appropriate economic policies and structural reforms.
"These developments could be negative for the ratings if they occurred”.