IBTimes UK

Malaysian state fund 1 Malaysia Development Berhad's failure to pay the interest on a $1.75 billion bond could hurt the country's chances of keeping the budget deficit in check, Moody's has said.

The state-owned investment company 1MDB, which is in the eye of a corruption scandal that rocked Prime Minister Najib Razak's government, said on Tuesday it defaulted on a 50.3 million interest payments for the bonds.

"The cross-defaults triggered on instruments guaranteed by the government of Malaysia, as well as an indemnity associated with the IPIC guarantee raise the risks of the crystallization of contingent of liabilities on the balance sheet of the country," senior credit officer at Moody's, Christian de Guzman, said.

The ratings agency said it estimated Malaysia's total liability from the 1MDB default is around 2.5 percent of its GDP. 1MDB's accumulated debt of 42 billion ringgit was about 4 percent of the gross domestic product of the country.

However, the contingent risks from 1MDB's liabilities could be higher than the government's actual guaranteed exposures, de Guzman said.

1MDB has said the debts are co-guaranteed by Abu Dhabi's sovereign wealth fund International Petroleum Investment Co, with which the Malaysian firm has a dispute.

According to 1MDB, it has sufficient funds to pay the amount but it is not doing as it was the responsibility of the co-guarantor IPIC.

1MDB said the failure in the agreement has exposed it to cross-defaults on 7.4 billion ringgit ($1.9 billion) worth of state-guaranteed sukuk or Islamic bonds due between 2021 and 2039, according to Nikkei.

Moody's and Standard & Poor's Ratings Services (S&P) did not change their sovereign ratings on Malaysia.

IBTimes UK