Oil slump major risk for Malaysia debt

The cash-crunched 1Malaysia Development Bhd (1MDB) is facing rough weather in the wake of continuous oil price drop. Malaysia's debt-ridden state-run investment company is in the process of selling assets worth $2.3 billion. However, sovereign default risk is around the corner as the 1MDB is suffering biggest quarterly drop in four years. Malaysia's Ringgit has the worst performance among the Asian currencies. Malaysia is heading towards high tax regime amid falling oil price.

Malaysia is Asia's only major oil exporter. Though 1Malaysia Development Bhd (1MDB) has listed buyers for its asset sale, investors say that slump in oil price is the major threat causing concerns over the nation's financial situation.

As Bloomberg reports, investors are concerned with 10-year government bond yields rising as they're hovering at three-month high. Three-year notes and the ringgit remaining Asia's worst performer this year so far.

1Malaysia Development Bhd is in the process of reducing its debt burden though asset sale, for which it has already identified buyers. If 1MDB is able to reduce debt burden, it'll send positive signals to debt-insurance market. Commodity exporters like Malaysia still remains risk aversion.

The 29 percent drop in Brent crude oil price is the major factor that took a toll on Malaysia's economy, as reported by Free Malaysia Today News. Oil-related revenues contribute to Malaysian government by 22 percent. Malaysian government is under the impression that through high taxes, it can compensate ringgit 30 million ($7billion) from oil price drop. The Malaysian government has already started implementing six percent consumption tax, GST from April onwards.

Nicholas Spiro, a London-based Managing Director at Spiro Sovereign Strategy, said: "Malaysia is hardly out of the woods. The 1Malaysia Development Bhd asset sales will do little to help bolster growth given the bleak external backdrop of a rapidly slowing Chinese economy and the persistent weakness in commodity markets."

According to a report published by malay mail online, ringgit slipped into pressure as the drop in crude oil prices below $40 per barrel. The ringgit's drop was largely driven by slump in oil prices. Ringgit eases 1.3 percent during the week and 0.4 percent on Friday to 4.2795 against the US dollar in Kuala Lumpur trading.

Prime Minister Najib Razak to lead his party amid political controversy over donations. Saying no to surrendering, Razak hinted that the 30 billion ringgit ($7 billion) loss from oil price drop next year will be compensated with higher taxes.