Government guarantee of 1MDB's debt will not hurt Malaysia's sovereign ratings: Moody's

March 22, 2018 | By | Reply More

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KUALA LUMPUR: Global ratings agency Moody’s Investor Service Inc (Moody’s) does not expect that the government’s guarantee and letter of support amounting to over RM5 billion for strategic investment fund 1Malaysia Development Bhd (1MDB) to have an impact on the country’s credit ratings.

 “As far as 1MDB is concerned, the debt consolidation plan has sort of proceeded as normal. We don’t have a rating on 1MDB so I can’t comment on that,” said its assistant vice president Anushka Shah at the “Moody’s Inside Asean: Spotlight on Malaysia” roundtable here yesterday.

“What we do look at is the stock of guaranteed debt and the implications that would have for the sovereign. As of now, there is one bond outstanding by 1MDB that is guaranteed by the government and there is also another bond that has a letter of support from the government.

“Those are the risks that we would take into consideration but at this point the probability of debt crystallisation is low so we do not view it as a risk to the sovereign’s fiscal strength.”

 Anushka explained that the letter of guarantee was in support for a 1MDB bond amounting to RM5 billion, while the letter of support was for another 1MDB bond amounting to US$1.75 billion.

She noted that although Malaysia debt to gross domestic product (GDP) is relatively high at 51 per cent versus the average of 41 per cent, it is still manageable as 97 per cent of the debt is in local currency.

“To a certain extend, Malaysia do have a fundamental credit constraint but since 97 per cent of its debt is in local currency, this has become a mitigation factor to a potential credit or a currency shock,” she said.

 Bank Negara Malaysia’s large foreign reserves also play a role as a mitigation factor, according to Anusha.

 “The international reserves is now at  US$103.7 billion, which is sufficient to finance 7.2 months of retained imports and was 1.1 times the short-term external debt. At these levels, we view the international reserves as a source of stability, which underpinned the external account and can hamper the downside risk.”

 Malaysia’s current credit ratings by Moody’s of “A3 stable” is supported by its large and diversified economy, ample natural resources and robust medium-term growth prospects.

 “The outlook is very much positive for Malaysia in 2018 as we do see Malaysia as the fastest growing sovereign in this part of the world and these features support the credit profile and assessment,” said Anushka.

 ”We are aware that there are several downside risks such as growth stalls,  especially in exports because of protectionism measures; the country’s debt continue to rise at a rapid pace; and external issues beyond the country’s control. But other than that, the outlook is positive,” she added.

 

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