1MDB default puts Malaysia's balance sheet at risk, says Moody

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The failure by 1Malaysia Development Board (1MDB) to service a coupon payment on a US$1.75 billion notes heightens the risks on Malaysia’s balance sheet.

These damning comments came from Moody’s, the ratings agency, said Malaysia’s government inability to rein in these off-budget risks stand in contrast to the on-budget improvements to the government’s fiscal position.

Christian de Guzman, VP-Sr Credit Officer at Moody’s in a statement seen by Worldfuturetv.com said the cross-default triggered on instruments guaranteed by the Government of Malaysia, as well as an indemnity associated with the IPIC guarantee, raises the risks of the crystallization of contingent liabilities on the balance sheet of the Government of Malaysia.

“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.”

Moreover, the inability to rein in these off-budget risks stand in contrast to the on-budget improvements to the government’s fiscal position,” said Guzman.

He said the default has prompted a review for downgrade of the Abu Dhabi based sovereign-wealth fund International Petroleum Investment Corp (IPIC).

Guzman said the notes issued by 1MDB Energy (Langat) Limited (1MDB Langat), due in October 2022, have triggered a default that has prompted a call on a guarantee by the International Petroleum Investment Corporation (IPIC, Aa2 ratings).

“Holders of these notes will ultimately be backstopped by IPIC, but will not have recourse to the Government of Malaysia (A3 stable).”

However, the cross-default triggered on instruments guaranteed by the Government of Malaysia, as well as an indemnity associated with the IPIC guarantee, raises the risks of the crystallization of contingent liabilities on the balance sheet of the Government of Malaysia,” said Guzman.

Guzman said he estimates the total size of contingent liabilities associated with 1MDB’s recent default to be around 2.5% of Malaysia’s GDP.

1MDB’s total debt, according to latest publicly available data, which date back to 2014 is around RM42 billion, less than 4% of GDP.

However, this figure does not incorporate the progress made by 1MDB over the past year in paring its debt through various asset sales. As such, we assume that 1MDB’s total current liabilities to be much smaller,” said Guzman.