Today an article in The Business Times (Singapore) about a Merrill Lynch report on 1MDB:
"1MDB is an enigma that will be closely watched: economist"
A regional economist has described Malaysian state investment agency 1Malaysia Development Berhad (1MDB) as an "enigma that will be closely watched". While conceding that its linkages to the government's balance sheet and the banking system were "probably limited", Chua Hak Bin noted that its systemic importance and weight "is evolving and rising rapidly".
In a May 7 report titled 1MDB's rise, Dr Chua, the head of emerging Asia economics for Bank of America Merrill Lynch, outlined the growth of the once-obscure wealth fund, owned by Malaysia's Ministry of Finance, to its present asset size of RM45 billion (S$17.3 billion).
1MDB has been looming large on the business pages of the Malaysian local media recently because of concerns that it could be accumulating debt too rapidly.
The Merrill Lynch report, however, seems to be the first time the agency has come under the scrutiny of a regional research house. At present, 1MDB is a large player in Malaysia with two big property projects both in their infancy. It has also acquired power generation capacity in Malaysia and abroad and is likely to continue expanding quickly.
"What stands out however is 1MDB's high leverage, which has raised concerns that 1MDB could emerge as a serious contingent liability for the government," Dr Chua said.
"Compared to the six largest listed non-financial companies, 1MDB's total liabilities are the second largest, only exceeded by Tenaga (over RM 70 billion),"
"At end-2013, our estimates put the public debt to GDP ration at 54.8 per cent and quasi-public debt to GDP ratio (inclusive of government guarantees) at 70.8 per cent"
Was 1MDB a threat to the system? A qualified "not really" seemed to be the answer. "1MDB's size and liabilities probably do not represent a systematic risk yet" said Dr Chua. "The government can comfortably absorb any eventual losses, with the public debt to GDP ratio still far below ratios seen in most developed economies. The 90 per cent ratio is typically seen as a red flag."
In the end, 1MDB was, well, unusual. "1MDB remains an unusual creature and is difficult to categorize," mused Dr Chua.
"It is not constrained as a government-linked company and can readily tap on the government's balance sheet and guarantees.
"It is not exactly a typical sovereign wealth fund which invests in funds derived from central bank reserves, fiscal surpluses or natural resources," continued the economist. "1MDB's aggressive expansion and acquisitions have been financed largely by debt, rather than cash flow from reserves or existing businesses. Most sovereign wealth funds are not so highly geared."