Moody’s: 1MDB’s failure to pay interest will impact country

Ratings agency says cross defaults on financial instruments guaranteed by the government not good for country’s balance sheet.

KUALA LUMPUR: 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.

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.”

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.