Further Gov’t support for 1MDB carries risks

Fiscal consolidation trend that underpins Moody’s positive outlook on Malaysia's A3 sovereign rating needs watching.

KUALA LUMPUR: The RM 950 million ringgit line of credit that the Ministry of Finance extended to 1Malaysia Development Berhad (1MDB), earlier this year, carries a risk that further government support would materially undermine the fiscal consolidation trend that underpins Moody’s positive outlook on Malaysia’s A3 sovereign rating.

The Ministry of Finance had then explained that “the line of credit was necessary to alleviate 1MDB’s liquidity pressures”. 1MDB, a 100 per cent Ministry of Finance owned company, has been touted as a strategic investment arm.

Of 1MDB’s total debt, 5.8 billion ringgit (0.5 per cent of GDP) was backed by an explicit government guarantee and an additional 11 billion ringgit (1.0 per cent of GDP) was supported by a government-issued letter of comfort as of 31 March 2014.

Other borrowings were either collateralised – like those from the Malaysian banks or supported by third-party guarantees, such as from the International Petroleum Investment Corporation (Aa2 stable). “We do not expect these liabilities to migrate to the federal government’s balance sheet,” said Moody’s in a report.

The report said Malaysian banks’ exposure to the troubled-stricken 1MDB is credit negative, but manageable.

Prime Minister and Finance Minister Najib Abdul Razak said last Thursday that the country’s banks’ exposure to 1MDB (1MDB, unrated) totaled around 5 billion ringgit (USD1.36 billion) as of January 2015.

The credit rating agency said this reported exposure, which marks the first time that the government has publicly disclosed Malaysian banks’ exact exposure to the troubled government-owned company, is credit negative, but relatively small compared with Malaysian banks’ capital buffers, and the worst-case credit loss would be manageable for the banks.

The announcement addresses questions about 1MDB’s potential liabilities to Malaysian banks, particularly considering that the company’s total debt as of 31 March 2014 was 41.9 billion ringgit, more than eight times the amount of the banks’ exposure.

Although no Malaysian bank has publicly confirmed or denied its exposure to 1MDB, Moody’s suspects that some of Malaysia’s large banks have moderate exposures.

It also understands that bank loans to 1MDB are well collateralised, so any possible losses for the banks will be smaller than their exposures.