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, Moody’s Investors Service said.

Moody’s vice-president and senior credit officer for financial institutions Eugene Tarzimanov told a local financial daily that if one were to look at the scale of 1MDB’s 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,” he said.

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 the government would not support 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.” Guzman was quoted as saying.

“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.

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

- Bernama