Friday, May 15, 2015

Moody’s casts cloud over Malaysia’s credit outlook amid warning of 1MDB loan default

15 May 2015


KUALA LUMPUR — Government support for troubled investment arm 1 Malaysia Development Berhad (1MDB), which is now at risk of defaulting on its reported RM42 billion (S$15.6 million) debt, could jeopardise Malaysia’s sovereign credit rating, Moody’s Investors Service said.

The ratings agency said it could not spell out how a loan default would directly impact Malaysia’s credit outlook, but noted that government guarantees for the firm’s borrowings ultimately derails efforts by Putrajaya to narrow the country’s fiscal shortfall.

“Given the fluidity of the situation currently surrounding 1MDB, it would be difficult to ascertain the impact of a 1MDB loan default on the government’s sovereign rating,” Moody’s vice-president and senior analyst of sovereign risk Christian de Guzman said in an email to Malay Mail Online.

“We do not consider 1MDB’s debt liabilities as obligations of the federal government, with the exception of the guarantees that have been provided for a subset of 1MDB’s borrowings.

“Having said that, the provision of government support to 1MDB that significantly derails the current trend of fiscal consolidation would be negative for the sovereign rating,” he added.

He was commenting on Singapore Business Times’ report Wednesday (May 13) that lenders may be spooked by the controversy surrounding 1MDB and are contemplating demanding the full settlement of a US$975 million (S$1.29 billion) loan ahead of its due date in August.

More worrying for the state-owned investor is that the consortium led by the Deutsche Bank Singapore could trigger cascading defaults on the remainder of 1MDB’s reported RM42 billion debt if they declare the firm to be delinquent.

The consortium’s fears are said to be prompted by “incomplete” documents that 1MDB provided as a form of security, rendering the terms of the loan unmet.

This alleged breach allows the banks to rescind the loan ahead of the August due date.

1MDB has since declined comment as the issue relates to a confidential banking matter but promised to update the marker as soon as it is in the position to do so.

Last week, Fitch Ratings warned ahead of its coming second-quarter review that the rally in oil prices over the past few months has not put to rest concerns over Malaysia’s flailing financials.

Speaking to international business wire Bloomberg on May 7, Fitch’s head of Asia Pacific sovereign ratings Andrew Colquhoun said little has changed in Malaysia’s outlook, although the rally had helped make Malaysian bonds Asia’s best performers over the past three months.

“We’ve had a negative outlook of the credit since the middle of 2013. The view since then has been that the changes in Malaysia’s macroeconomic fundamentals have left the credit more exposed to a potential shift in investor risk appetite,” he was quoted saying.

It was Colquhoun who had said in March this year that Malaysia’s credit rating is “more than 50 per cent likely” to be downgraded as its trade balance worsens and 1MDB continues to struggle to meet its debt obligations.

He had said then that Malaysia should sit “more naturally in the Better Business Bureau (BBB) range” due to the country’s deteriorating current-account surplus which exposes the country to volatility in investor sentiment.

Malaysia is currently rated A- by Fitch, the fourth-lowest investment grade, and two steps above BBB.

THE MALAY MAIL ONLINE

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