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Malaysia to pay the price for 1MDB fiasco
VIEWPOINT – Malaysia continues to descend into farce amid the 1MDB fiasco, as ratings agency action underscores the material impact of the scandal on investors’ perceptions of the country’s credit-worthiness, writes contributing editor Jonathan Rogers.
Jonathan Rogers 28 Jun 2017

Malaysia continues to descend into farce amid the 1MDB fiasco, as ratings agency action underscores the material impact of the scandal on investors’ perceptions of the country’s credit-worthiness.

The protestations from talking heads in the country’s ruling elite appear risible in the utter extreme. They claim that actions from foreign jurisdictions in connection with alleged money laundering at the investment fund are politically motivated. Malaysia increasingly looks like the banana republic of a badly written theatrical farce.

Consider this: the country’s public debt at the last count had surged to 54.5% of GDP, up from around 40% in 2008, and just a sliver away from the mandated government-imposed 55% ceiling. That’s public debt mismanagement in action.

It puts the country to shame in relation to its Asean peers Thailand and Indonesia, where debt stands in relation to GDP at 31% and 29% respectively. It’s the worst tally for Malaysia in 25 years and appears unsustainable without some significant policy input from Malaysia’s government.

Standard & Poor’s has stated that the 1MDB imbroglio presents political challenges to Malaysia’s government such that it endangers the country’s sovereign credit rating, particularly as a general election is mooted by Malaysia’s prime minister Najib Razak.

The agency cited the rising refinancing risk on the country’s hefty external financing requirements as well as divestment by foreign holders of Malaysian government bonds. S&P also cited the risk of rising contingent liabilities on Malaysia’s balance sheet in connection with 1MDB, specifically in the short term, and the US$3 billion guarantee letter from the Malaysian government on 1MDB debt. Malaysia has contingent liabilities in the form of guarantees amounting to 15% of GDP. S&P suggests that this could rise in the face of deficits at the country’s state-owned enterprises.

On the face of it, the market seems not to care, at least in relation to prices on Malaysian government debt and that of 1MDB, which have remained stable in recent months. Still, cracks appeared to be showing last week, if two rounds of equity raising for mobile phone giant Maxis and Lotte Chemical Titan are anything to go by. The former managed to ink the country’s biggest follow-on offer this year, while the latter closed an IPO. But each came at the bottom of initially indicated price ranges and flew in the face of a generally perky Malaysian equity market, which has registered a gain in the region of 8% so far this year.

That appears an impressive gain, but is an underperformance versus Asean peers in the Philippines, Singapore and Indonesia, which have chalked up gains of 15%, 11% and 10% respectively, so far in 2017.

Meanwhile the various Colonel Blimps of the Malaysian establishment have recently pronounced on 1MDB in their habitual farcial fashion. The leader of opposition party PAS, Abdul Hadi Awang, has warned of “foreign meddling” by overseas jurisdictions into 1MDB as a means of swinging the election result.

Come again? Explain that motivation in detail or you are at the same time forced to claim that the successful criminal convictions in Singapore of associated 1MDB parties for money laundering in recent months are based on false evidence? Put some meat on the bone for these allegations, for goodness sake.

In any event, the 1MDB heat is set to rise, not only as the US Justice Department case gets closer to a hearing, but as criminal charges are likely to soon be levelled at Jho Low, the alleged mastermind of the 1MDB shenanigans, whose whereabouts are currently unknown (although he is rumoured to be somewhere in China).

If he gets his collar felt in court, one wonders precisely how the whole proceedings will be cast from his mouth in relation to Malaysia’s prime minister, otherwise referred to in the DOJ case as Public Official 1. Hedges on Malaysia positions should already be in place.

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