Moody’s Sees Malaysia Soft Landing With 1MDB Pain Contained

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Malaysia's Prime Minister Najib Razak
Najib Razak, Malaysia's prime minister. Photographer: Charles Pertwee/Bloomberg

Moody’s Investors Service said financial woes at state investment company 1Malaysia Development Bhd. aren’t a sign of broad-based distress, with government-linked corporates and other debt issuers seen withstanding the country’s economic slowdown.

The Malaysian economy is expected to have a “soft landing” with growth easing to 4.8 percent in 2015 from 6 percent last year, Moody’s said in a report Wednesday. Risks include low commodity prices, currency weakness and contingent liabilities, according to Rahul Ghosh, a vice president with the ratings company.

“The majority of Moody’s-rated entities will absorb adverse external conditions over the coming quarters due to their low exposure to commodity prices and exchange rate volatility,” it said. “Malaysia’s sovereign rating of A3 incorporates a prolonged period of subdued global energy prices in 2015.”

Prime Minister Najib Razak has trimmed expectations for expansion this year as his government cut expenditure amid lower expected revenue from oil. While Moody’s has a positive outlook on Malaysia’s sovereign ranking, Fitch Ratings said the country’s fundamental picture remains clouded in part by the buildup of contingent liabilities related to 1MDB’s debt.

Energy Exports

A plunge in crude oil prices has contributed to the ringgit’s slump of more than 11 percent against the U.S. dollar in the past year. Officials have sought to downplay the importance of energy exports to the economy, and the government targets reducing dependence on oil-related revenue to 15.5 percent by 2020 from 21.5 percent this year.

1MDB’s borrowings amounted to 41.9 billion ringgit ($11.5 billion) as of March 2014 in part for the purchase of power plants and land. Amid the company’s rising debt threatening Malaysia’s rating, Najib has faced calls from former premier Mahathir Mohamad to step down as leader because of the performance of 1MDB, whose advisory board he chairs.

The escalation of political risks in recent months arising from 1MDB was unforeseen by Moody’s, its sovereign analyst Christian de Guzman told reporters in Kuala Lumpur Wednesday.

Even so, the development has limited impact on Malaysia’s rating because Moody’s doesn’t see a roll back in important fiscal reforms implemented in recent years even if there’s a change in leadership, he said. Malaysia is ranked at its fourth-lowest investment grade.

Insufficient Transparency

While the government’s handling of 1MDB is not as transparent as Moody’s expected and concerns surrounding the company have affected investor sentiment, it doesn’t pose a systemic risk to public finances and the economy, de Guzman said.

Should global commodity prices, and oil in particular, “correct significantly and remain depressed” in 2015 and 2016, Malaysia could see twin fiscal and current-account deficits and renewed capital outflows, Moody’s said.

“While not Moody’s baseline scenario, such a situation would lead Moody’s to reconsider its core views of relative stability for the sovereign and rated entities in Malaysia over the coming quarters,” it said.

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