KUALA LUMPUR (June 13): Moody's Investors Service said today 1Malaysia Development Bhd's (1MDB) outstanding debt will play an important role in determining risks that contingent liabilities pose to the Malaysian government's credit profile. The Malaysian government wholly owns 1MDB.

In a statement today, Moody's said its assessment of contingent liability risks posed by non-financial sector public institutions has not changed following some statements by the new government. Moody's said Malaysia's contingent liability risk will also hinge on the government's treatment of large infrastructure projects that may be placed under review but have benefited from government-guaranteed loans in the past.

"The transition of power in Malaysia — following elections in May — away from the incumbent party that led the country for more than six decades has introduced some policy uncertainty. On the question of which of the new government's policies will affect the sovereign's credit quality, Moody's explains that, while it will examine any new policies holistically to gauge their impact on the credit profile, in the case of Malaysia, fiscal measures are a particular area of focus, given that the country's high debt burden acts as a credit constraint.

"Consequently, to what extent the new government achieves fiscal deficit consolidation will be vital in gauging the eventual effects on Malaysia's fiscal metrics and credit profile," Moody's said.

Moody's said its analysis is contained in its just-released report titled Government of Malaysia: FAQ on credit implications of the new government's policies.

According to Moody's statement, the report said the ratings agency maintained its estimate of Malaysia's direct government debt at 50.8% of 2017 gross domestic product (GDP).

Moody's said it has also evaluated the impact of Malaysia's move to remove the goods and services tax (GST) and reintroduce fuel subsidies.

"As for the impact of the new government's removal of the country's GST, Moody's says that in the absence of effective compensatory fiscal measures, this development is credit negative because it increases the government's reliance on oil-related revenue and narrows the tax base. Moody's estimates that revenue lost from the scrapped tax would measure around 1.1% of GDP this year — even with some offsets — and 1.7% beyond 2018; further straining Malaysia's fiscal strength.

"Moody's views the targeted reintroduction of fuel subsidies as credit negative because subsidies distort market-based pricing mechanisms, and could strain both the fiscal position and the balance of payments while raising the exposure of government revenue to oil price movements," Moody's said.