KUALA LUMPUR: Moody’s Investors Service says it sees the possibility that the government will have to bail out troubled 1Malaysia Development Bhd (1MDB), and it will be watching closely whether this will negatively impact Putrajaya’s plan to reduce its budget deficit.

Vice-president and senior analyst Christian de Guzman told reporters yesterday that the positive outlook Moody’s has given to Malaysia’s debt rating is based on the assumption that the government’s fiscal consolidation is on track.

“1MDB’s role in all of this is basically how it is going to affect that trend of consolidation by the government. We know that support is possibly forthcoming. In fact, support has already come in the form of a line of credit extended to 1MDB earlier this year.

“The question we are asking ourselves is, if the magnitude of support will eventually derail the trend of fiscal consolidation. That may cause us to relook our outlook for Malaysia,” he said at a media roundtable session on Moody’s outlook for Malaysian sovereign, banks and Islamic finance yesterday.

De Guzman noted that there is lack of transparency in 1MDB.

“The government’s handling of 1MDB isn’t as transparent as we would have hoped for or expected for a sovereign fund for which we assigned this credit assessment of institutional strength.

“There is a significant degree of opacity with regard to 1MDB, even its accounts. Even the prime minister says it is inappropriate to release anything that is dated past the last audited results from 2014,” he said.

De Guzman acknowledged that 1MDB does not pose a systemic risk to the government’s finances, the economy or the banking system for now. However, he highlighted that the issue on the government’s strategic investment fund has had an impact on the country’s political situation.

“From a fundamental perspective, we see that the 1MDB issue is not systemic for public finances, not for the economy, nor the banking system, but it does seem to have a rather disproportionate effect on the political situation,” he commented.

The ratings agency recently affirmed Malaysia’s A3 rating with a positive outlook.

Moody’s believes 1MDB’s financial troubles are not “a sign of broad-based distress among government-linked companies, as such companies have continued to service their outstanding debt due to their solid track record of corporate governance and profitability”.

The ratings agency also expects Malaysia to remain resilient to macroeconomic headwinds, such as lower crude oil and commodity prices, the weaker ringgit and a potential tightening of monetary policy in the United States.

Moody’s said the external risks will persist, but are manageable, and expects the external environment to remain challenging over the coming quarters.

The credit ratings agency said such an environment is likely to dent revenues for Petroliam Nasional Bhd this year and next year.

It also expects private consumption growth to slow in the coming quarters in the wake of the implementation of the goods and services tax in April, as well as high levels of household debt.

However, the impact of weak consumer sentiment on the banks and corporates is unlikely to prove a major credit stress, Moody’s added.

Despite this, Moody’s said a renewed commodity price slump and aggressive US Federal Reserve tightening would be credit negative for rated issuers.

The ratings agency also said in the event that global commodity prices, particularly oil, correct significantly and remain depressed over the course of 2015 and 2016, Malaysia could experience both twin fiscal and current account deficits and renewed capital outflows.

Moody’s macroeconomic assumptions for Malaysia factor in a slowdown in real gross domestic product (GDP) growth to 4.8% in 2015 from 6% last year, a narrowing in the current account surplus to 3.7% of GDP from 4.6% in 2014, and a slight improvement in the fiscal deficit to 3.2% of GDP from 3.5%.

This article first appeared in The Edge Financial Daily, on May 28, 2015.