Malaysia: 1MDB's missed major interest payment prompts increases in borrowing costs and political uncertainty
February 18, 2016
The now infamous 1Malaysia Development Berhad (1MDB) development fund made headlines again in April as the highly-indebted state-owned corporation faces renewed scrutiny over a missed interest payment. The news appears to have roused concern amongst investors as prices for Malaysia Islamic Bonds fell sharply at an issuance on 21 April. 1MDB’s financial distress has been exacerbated by fresh allegations of wrong doing by the board of directors and Prime Minister Najib Razak, who established the firm in 2009 and currently chairs the fund’s board of advisors.
The missed interest payment is associated with a loan issued last year to from a sovereign wealth fund in Abu Dhabi. Credit markets reacted by raising the cost of 1MDB debt on fears of a potential default. Should a resolution not be found between the two funds it could trigger cross defaults on 1MDB’s other obligations. Although 1MDB is owned by Malaysia’s Ministry of Finance, the loan in question is not backed by the government, therefore the missed payment is not directly reflected on the government’s credit rating. However, since the Ministry of Finance is the sole shareholder of 1MDB, a collapse of the fund itself would have severe implications for Malaysia’s borrowing costs and the fiscal position of the government. This has been demonstrated by the weak demand for the USD 1.5 billion worth of Islamic bonds that were issued on 21 April.
The recent missed payment may compromise the country’s seemingly-unshakable political regime, headed by Najib. Najib has survived allegations of graft before by unifying his party’s support and staunchly denying any wrong doing. However, investigations from more than five countries, as well as a domestic parliamentary inquiry, have uncovered details that implicate board members as well as individuals within the Prime Minister’s inner circle in the mishandling of funds from 1MDB. Against this backdrop, the Prime Minister is still under scrutiny over the transfer of USD 681 million into his personal accounts, which some media sources have claimed originated from 1MDB.
In response to the findings of the Parliamentary inquiry, 1MDB’s board of directors has resigned, however, the Prime Minister maintains his innocence. The new details have revivified opposition member’s calls for Najib’s resignation, casting uncertainly over Malaysia political landscape. Although the government faced a lower price for its debt at a recent Sukuk sell off, Malaysia’s economic fundamentals remain solid, as is reflected by the ringgit remaining relatively stable while the 1MDB debacle plays out. However, analysts will be watching the political situation carefully in the coming months to see if the opposition can gather enough traction to threaten the Prime Minister’s grip on power.
Author: Robert Hill, Economist