KUALA LUMPUR: Markets are showing some level of confidence that the risks to the recent 1MDB default on its interest payment are manageable, says UOB Bank.
Spillovers have been `ring-fenced' by guarantees from Abu Dhabi's International Petroleum Investment Company (IPIC) and the government.
Economist Julia Goh said while rating agencies do not foresee an immediate negative impact on the sovereign ratings, there is some concern on the contingent risks associated with 1MDB's non-guaranteed liabilities.
IPIC has cited indemnity that obliges 1MDB and the government to reimburse it for any costs incurred.
The indemnity and potential claim could amount to US$6 billion (RM24 billion) for US$3.5 billion for the bonds, US$1.35 billion of interest and US$1.15 billion for the top-up security deposit.
If 1MDB does not pay, then the Ministry of Finance or government is liable under the debt-for asset swap arrangement in June 2015.
Total contingent liabilities associated with 1MDB potentially amounts to RM29.8 billion or 2.5 per cent of GDP includes explicit and implicit guarantees.
Explicit guarantee (RM5.8 billion or 0.5 per cent of GDP) includes government-guaranteed sukuk bonds and RM0.8 billion Socso loans while implicit guarantee is up to US$6 billion or 2 per cent of GDP.
To date, government debt stands at RM631 billion or 54.5 per cent of GDP at end-2015 while explicit
government guaranteed debt at RM178 billion puts consolidated government debt just below
70 per cent, she said.
"In the worst case scenario, if the government has to assume the RM24 billion implicit contingent liabilities, then total public debt could rise above 70 per cent. Much will depend on the outcome of the IPIC-1MDB negotiations and arbitration."
Goh said the research house's channel checks said that should the obligation arise, liquidation of assets follow before the government assumes the shortfall.
Another US$52 million interest payment due on May 11 for 5.99 per cent notes due 2022 was issued by 1MDB Energy Ltd and co-guaranteed by IPIC.