KUALA LUMPUR (April 27): The default of the US$1.75 billion bond by 1Malaysia Development Bhd (1MDB) is expected to weigh down the ringgit in the near term and the issue that country's sovereign rating would be revised may also resurface, according to Hong Leong IB Research (HLIB Research).

1MDB confirmed yesterday that it has defaulted on a US$1.75 billion bond issue after neither it, nor Abu Dhabi's IPIC, made a US$50 million interest payment.

In a note to clients today, HLIB Research economist Sia Ket Ee said the default had made a new twist to the already subsided fiscal risk after Budget 2016 recalibration on Jan 28 this year.

"We now expect speculation of sovereign downgrade to resurface, despite a mini rally in crude oil prices that has removed the oil revenue uncertainty," he said.

According to him, in the scenario where IPIC decides to default and ultimately call on the guarantee of the Malaysian government on the US$1.75 billion bond, the additional liability (circa RM6.9 billion) could potentially balloon the fiscal deficit level by 0.6 percentage point to 3.7% of gross domestic product (GDP).

Sia also expects the ringgit to experience weakening bias to above RM4 to the greenback in the near term on macro concerns.

Nevertheless, he keeps his ringgit year-end forecast unchanged at RM3.804 to a US dollar.

At the time of writing, the ringgit gained 0.32% against US dollar at 3.9165 as compared to yesterday's closing of 3.9290.

Sia also noted that the drag on the announcement of Bank Negara Malaysia governor's successor would also further dampen market sentiment.

Pending further developments on the 1MDB saga, Sia maintained his end-2016 FBM KLCI target at 1,760 based on 15 times of one-year forward earnings.

"We advocate defensive stance in larger cap stocks with earnings certainty and re-rating catalysts to weather market volatility," he shared.

On stock picks, Sia said construction sector still remained as a clear winner.

"After the recent surge in contract awards, we continue to expect a strong flow of announcements in second quarter, reinforced by potential admission of both Gamuda Bhd and IJM Bhd as KLCI index component stock," he said.

He also favour Unisem Bhd given the resilience in earnings certainty while riding on the weakening bias of the ringgit in the near term.