Surging debt at Malaysia's shadowy 1MDB fund emerges as sovereign risk
Lurking beneath Malaysia's solid investment-grade sovereign rating is a risk posed by a US$14 billion investment fund that is not even generating enough cash from operations to cover interest.
Lurking beneath Malaysia's solid investment-grade sovereign rating is a risk posed by a US$14 billion investment fund that is not even generating enough cash from operations to cover interest.
Regarded as a cross between a sovereign wealth fund and a private investment vehicle, with Prime Minister Najib Razak chairing its advisory board, 1Malaysia Development Berhad (1MDB) is struggling under the burden of US$11 billion in borrowed money.
The government says it only guarantees about 14 per cent of the debt. The investment community assumes it would provide more if needed, and it is the potential strain on Malaysia's debt position from these contingent liabilities that is raising concern.
"We don't know how well 1MDB is doing," said Christian de Guzman, senior analyst of sovereign risk group at ratings agency Moody's Investors Service.
"It does pose a risk in terms of the amount of borrowing they have made over the past few years."
Controversy has dogged the fund almost since it was first set up months after Najib came to power in 2009, and used for funding projects that form part of his government's Economic Transformation Programme.
Critics have questioned its investment choices, the size of its debt, US$2.25 billion parked in a Cayman Island fund, hundreds of millions of dollars of revenue earned by Goldman Sachs for handling its bond issues, delays in its accounts, changes of auditors, and a perceived lack of transparency.
A US$1.9 billion bridging loan that fell due in November has been rolled over twice, most recently two weeks ago, in order to give the fund more time to launch a US$2 billion initial public offering that would reduce debt incurred buying 15 power plants. On May 23, the fund said the power division offer will happen in the second half of this year.
Last year, the fund, with liabilities of more than US$13 billion, generated cash flow of 860 million Malaysian ringgit (HK$2.1 billion) from operations, far below the annual interest outgoing of 1.62 billion ringgit. It would have made a 1.85 billion ringgit loss, but for a 2.7 billion ringgit revaluation of its property portfolio.
In April, opposition leader Anwar Ibrahim warned: "If we continue with this culture of accumulating debts, Najib's 1MDB will fail and become a liability that should be called 1Malaysia's Debt of Billions."
The fund defended itself in February, saying its power assets had strong growth potential.
Malaysia's debt-to-gross domestic product ratio stood at 53.8 per cent at the end of last year, central bank data shows, up sharply from 43 per cent in 2008 and close to an official debt ceiling of 55 per cent, beyond which the government must seek parliamentary approval.
Contingent liabilities, however, stood at 15.9 per cent of GDP, up from 9 per cent in 2008, bringing total government and government-backed debt to 69.7 per cent of the economy, and the off-budget character of 1MDB raises questions.
