KUALA LUMPUR: There will not be any systemic threat to Malaysia’s banking system even if 1Malaysia Development Bhd (1MDB) defaults on its loan as local banks’ exposure to the state wealth fund is collateralised, said Moody’s Investors Service.

“We don’t rate 1MDB so we don’t know if it’s going to reform its debt or not. But if you look at the scale of its debt, it would not represent a systemic threat to the financial system. Firstly, we think the banks’ exposures are collateralised. So, if the worst-case scenario happens, the loss will be probably limited and they will take collateral,” Moody’s vice-president and senior credit officer for financial institutions Eugene Tarzimanov told The Edge Financial Daily.

He was met after a roundtable discussion on Moody’s 2015 outlook for Malaysian sovereign, banks and corporates yesterday.

Moody’s vice-president and senior analyst of sovereign risk Christian de Guzman also hinted that any failure by 1MDB to repay its loans would not affect Malaysia’s sovereign credit ratings as he does not see the government providing support to 1MDB beyond its contractual obligations.

“While we did note there is concern for the sovereign debt — there are contingent liabilities that are looming, in particular the case of 1MDB — we think the government will be hard-pressed to support 1MDB over and above its contractual obligations and I think these are well known [that] it’s limited to RM5.8 billion [in] explicit guarantee.

“But perhaps [even] the support of the RM5.8 billion won’t be as forthcoming, given the political sensitivity around this organisation,” he said, when asked how 1MDB’s debts would affect the country’s sovereign ratings.

Malaysian authorities said last year that the country had provided an explicit guarantee on only RM5.8 billion of 1MDB’s loans.

Malaysian banks are also stable despite global market volatility, said Tarzimanov, adding that Moody’s stress tests revealed that the banks “are pretty strong with lots of buffer, robust capital level and robust profitability”.

Moody’s also downplayed the threat of lower oil and commodity prices on Malaysia’s economy, with De Guzman pointing out that Malaysia’s diverse economy is more resilient compared to other oil-exporting countries.

He said Malaysia’s economy has always been portrayed as an oil and gas story, but the reality is that it actually relies more on the services and manufacturing sectors.

He added that Malaysia’s economy is just expected to slow down when there is an oil price shock. Comparatively, other oil-exporting countries such as Venezuela and Russia, may actually see contractions in their economies, which was why Moody’s downgraded the ratings of some of these countries in the past month.

De Guzman commended the Malaysian government for being “proactive” in revising its budget following the oil price slump, compared with other oil-exporting countries.  

Moody’s also thinks Malaysia’s corporate credit is resilient, but warned that there might be lower corporate earnings and dividends for commodities-related companies this year.

“The decline in CPO (crude palm oil) or the oil price means the top line is lower [and] the margin will be squeezed, so that will affect earnings. and dividends,” said Moody’s vice-president and senior credit officer for corporate finance Alan Greene, adding that CPO is expected to trade around RM2,240 per tonne.

This article first appeared in The Edge Financial Daily, on February 5, 2015.