KUALA LUMPUR: The Malaysian banking system’s exposure to 1Malaysia Development Bhd’s (1MDB) debt is deemed a “manageable risk” as banks here have reasonably prudent lending practices, according to Fitch Ratings. Fitch said in a statement these banks’ prudent lending practices ought to limit the potential impact of a default by any single borrower.

“There is uncertainty about the level of 1MDB’s debt, while market estimates of an upper limit of around RM42 billion appear manageable when compared with the size of the banking system.

“Some of the exposure could be sensitive to currency risk, although these estimates represent approximately 20% of system equity or 3% of loans. This forms an upper limit for the banks’ exposure based on the estimates, since not all of 1MDB’s debt is held by the domestic banks,” Fitch said. According to Fitch, actual direct risk to the domestic banking system would be even lower. This is because the exposure to 1MDB’s debt is either guaranteed by the Malaysian government or collateralised in some way.

It added that issues at highly-indebted IMDB are “idiosyncratic” and not indicative of “broader systemic risk”. But Fitch warned that 1MDB’s troubles might add to the more challenging Malaysian operating environment in the near term.

“The build-up of household debt in the last few years may become a bigger medium-term challenge for the system if real credit growth is not contained, and if economic volatility intensifies,” Fitch said.

Fitch’s statement followed news reports on Wednesday that the rating agency is “more than 50% likely” to downgrade Malaysia’s credit rating.

Bloomberg quoted Fitch’s head of Asia-Pacific sovereign ratings Andrew Colquhoun as saying a “BBB” rating might be more suitable for Malaysia due to its level of income and development. Colquhoun said the nation scored weaker in terms of governance among its peers.

The nation is currently rated “A-”, the fourth-lowest investment grade, and two levels above “BBB”.  He also said 1MDB is a demonstration of what weak governance means.

Bloomberg also quoted Khoon Goh, a Singapore-based strategist at Australia and New Zealand Banking Group Ltd, who said that the ringgit had pared gains after Colquhoun’s comment. The ringgit was down to a six-year low of 3.7075 against the US dollar on Wednesday. It rebounded yesterday to 3.6530 against the dollar before closing at 3.7075, according to Bloomberg data.

This article first appeared in The Edge Financial Daily, on March 20, 2015.