Lurking beneath Malaysia's solid investment-grade sovereign rating is a risk posed by a $14 billion investment fund that is not even generating enough cash from operations to cover interest costs.
Regarded as a cross between a sovereign wealth fund and a private investment vehicle, with Prime Minister Najib Razak chairing its advisory board, 1Malaysia Development Berhad (1MDB) is struggling under the burden of $11 billion in borrowed money.
The government says it only guarantees around 14 percent of the debt. The investment community assumes it would provide more if needed, and it is the potential strain on Malaysia's debt position from these contingent liabilities that raises concern.
"We don't know how well 1MDB is doing," said Christian de Guzman, senior analyst of sovereign risk group at ratings agency Moody's Investors Service. "It does pose a risk in terms of the amount of borrowing they have made over the past few years."
Controversy has dogged 1MDB almost since it was first set up months after Najib came to power in 2009, and used for funding projects that form part of his Economic Transformation Program.
Critics have questioned its investment choices, the size of its debt, $2.25 billion parked in a Cayman Island fund, hundreds of millions of dollars of revenue earned by Goldman Sachs for handling its bond issues, delays in its accounts, changes of auditors, and a perceived lack of transparency.
A $1.9 billion bridging loan that fell due in November has been rolled over twice, most recently two weeks ago, in order to give 1MDB more time to launch a $2 billion initial public offering that would reduce debt incurred buying 15 power plants. In a statement published on May 23, 1MDB said the IPO for its power division will take place in the second half of this year.
In 2013, 1MDB, with liabilities of more than $13 billion, generated cash flow of 860 million Malaysian ringgit ($267.75 million) from operations, far below the annual interest outgo of 1.62 billion. It would have made a 1.85 billion ringgit loss, but for a 2.7 billion ringgit revaluation of its property portfolio.