KADIR IS RIGHT: With loans at 4% of GDP, 1MDB poses a real systemic risk

Strategic investment firm 1Malaysia Development Berhad (1MDB)‎ could become a source of systemic risk if it fails to repay its RM5.5 billion debt by June, triggering economic instability in the country, veteran journalist Datuk A. Kadir Jasin said.

Citing an anonymous source, the former group editor-in-chief of New Straits Times said that 1MDB's outstanding loans were now at 4% of gross domestic product (GDP), and noted that the firm had already extended its loan repayments twice.

"‎The country's financial and banking system is exposed to systemic risk if 1MDB fails to settle its huge debts," Kadir said in his blog yesterday.

"One source said the outstanding loan of 1MDB amounts to 4% of the country's gross domestic product (GDP) – nearly the same as the (debts of the) conglomerate Renong-UEM during the 1997/98 financial crisis which forced the government to bail it out by taking over the firm from Tan Sri Abdul Halim Saad."

According to financial website Investopedia, systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy.

It said a company that was highly interconnected with others was a source of systemic risk.

"Anyone who understands economics would become unnerved at the mention of ‘systemic failure’. That is nearly what happened to us during the 1997/98 crisis but, Alhamdulillah, it was averted by the prime minister that time, Tun Dr Mahathir Mohamad," said Kadir.

Kadir, who is also an adjunct professor at Universiti Utara Malaysia's Othman Yeop Abdullah Graduate School of Business, said 1MDB's ability to settle its debts relied on its listing of its power assets, which had already been delayed several times.

Kadir said that the banks most at risk should 1MDB fail to settle its debts were Maybank and RHB, which were both owned by government-linked companies (GLC) Permodalan Nasional Berhad (PNB) and Employees Provident Fund (EPF), respectively.‎

‎"I have repeated this many times. We cannot allow GLC and GLIC to become the source of 1MDB's funds.”

He added that the government would also have to bear the burden of the unpaid loans‎ because it had guaranteed bonds worth RM5 billion.

Kadir said that even if it did not become a systemic risk, 1MDB's debts and business "modus operandi" could threaten Malaysia's sovereign rating.

‎He noted that ratings agency Fitch Ratings had maintained its negative outlook on Malaysia's sovereign ratings, according to a report by The Star on January 12.

However, Kadir said a "highly placed government officer" who specialised in finance told him the banks would rely on appropriate covenant and security as part of its risk credit management.

He said the risks the bank underwrote must be within their appetite and guidelines.

"The conclusion is, whether we like it or not, the 1MDB issue has become an issue that affects us all and if it is not managed, it would burden us and our grandchildren for a long time to come," said Kadir.

"So we must understand and urge for the best action to be taken to prevent any disaster. This is one of the biggest burdens which tests the ability of (Datuk Seri) Najib (Razak) as the prime minister and finance minister."

‎1MDB has secured a RM2 billion loan from magnate T. Ananda Krishan to pay off its overdue debts, after the latter committed to inject the sum into Powertek Investment Holdings Sdn Bhd (PIH).

This would give Ananda a majority stake in PIH, with 1MDB losing control of it, The Edge Financial Daily reported last Friday.

It said 1MDB had racked up after-tax losses of RM665.4 million from RM4.26 billion in revenue for its financial year ended March 2014, while its long-term borrowings had ballooned to RM33.5 billion. – TMI