Malaysia – 1MDB

Malaysia is getting a lot of press these days, and not much of it favourable.  Obama is fresh back from his trip to Malaysia where last week be attended the ASEAN-USA Summit in Kuala Lumpur (KL), the Capital of Malaysia. Some expected Supreme Leader to at least figuratively box the ears of Malaysia’s leaders over the on-going 1 Malaysia Development Berhad (1MDB)  scandal which had been well covered in the popular press (WSJ and other venerable publications). No such calamity ensued, perhaps given the tender stage of TPP discussions where President Obama needs all the allies he can muster, which could give Najib near term immunity (at least until the next challenge).

Tomfoolery has prompted foreigners to pull US$7bln of assets out of Malaysia in 2015. At this stage, it might be helpful to put all this in context. Malaysia is a big country. KL lies 9,400 miles from New York City. California is 1.3 times bigger,in terms of land mass, than Malaysia. CA’s GDP is US$2 trillion versus Malaysia’s $315bln. California’s population is 39 million versus Malaysia’s 30mm. In per capita GDP terms, California is $51,300 to Malaysia’s $10,500. The economy of Malaysia is the 3rd largest in SE Asia after Indonesia and Thailand. Malaysia is the 3rd richest, as measured by per capita GDP after Singapore and Brunei (Singapore at $55,200, Brunei at $38,500 with the USA at $53,000, for reference).

Not all the news is bad. For the first half of 2015 Malaysia’s GDP grew at 5.4% and is projected to grow 4.5-5.0% for the full year. Malaysia is growing at a pace well ahead of developed market economies (6% in 14′) despite headwinds. Malaysia has a sizeable ($100 bln+) and well funded pension plan, the Employees Provident Fund (EPF) which has upwards of 23% invested internationally (capped at that level near term, but up from < 10% less than a decade ago). Government debt as a % GDP stood at 53.9% as of the end of 2014. Federal explicit guarantees at the end of 2014 totalled 16% of GDP.

Within SE Asia, Malaysia is the most exposed to falling commodity prices (in terms of net exports and the government’s fiscal position). Global petrochemical prices have followed crude lower. Nat gas and palm oil make up 7.7% of exports in Malaysia. The famous Petronas Twin Towers were completed in 96′ at a cost of $5.6bln and held the record as the tallest towers in the world for 6 years through 04′. MYR, is the ticker for the Malaysian Ringgit which stands at 4.27 per USD and is down 27% from a year ago. Only the Brazilian Real has fared worse, down 57%. Other oil weighted economies have seen their currencies bruised as well; Norwegian Krone down 27%, Canadian Dollar down 17%, South African Rand down 27% and the Aussie Dollar with its’ iron ore derived umbilical cord to China, down 17% year-over-year.

1MDB is a “strategic development company”, wholly owned and controlled by the Federation of Malaysia (A3/A-). With approx. US$9bln in debt, 1MDB represents Malaysia’s largest contingent liability. A nearly perfectly timed (pre-Obama would have been ideal) lifeline has arrived with the inking of a deal to sell 1MDB’s prime Edra energy assets to China General Nuclear Power for MYR 9.83bln (US$2.3bln), plus the assumption of related debt the deal could be worth MYR18bln (US$3.9bln). Clearly the debt reduction was welcome, as some foretold something closer the magic beans under all that 1MDB debt. Malaysian CDS (5 year) has rallied to 176bp (in 56bp from October 5, 2015 when it stood at 232). 1MDB’s US$ debt has rallied smartly as well ($10.00+), OGIMK 4.4% 03/23 isin XS0906085179,(A- rated) yield 6.31% (+406 CT10), asset swapping (par/par basis) to 3 mth USD L+443. When Malay 5 year CDS was at 232 1MDB debt was yielding 9.44% eclipsing B rated Mongolia (Mongol 5.125% 12/22) which was yielding 8.53% (L+600).

There are more layers to this onion that I have time to write or you have time to read. Scaling the size of the problem can be useful. Pre-paydown from the recent Edra energy asset sale the 1MDB debt at $9bln was <3% of Malaysian GDP. Troublesome yes, lethal no. Perhaps the better question is why is a country endowed with relatively rich natural resources is languishing at 10k per capita GDP after gaining independence 55+ years ago. JCG