1MDB will haunt our financial capital markets and even contribute to a further depreciation of the Ringgit if BN Ministers continues to be in denial that there is no bailout of 1MDB even after RM600 million of a RM950 million BN Federal Government Standby Credit has been utilised by 1MDB. Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah is like an “ostrich in the sand” for insisting that the Government’s injection of RM950mil in standby credit for 1Malaysia Development Bhd (1MDB) does not in any way constitute a bailout, because 1MDB is not a failed organisation but is only facing a short-term cash flow problem.
Clearly Ahmad forgets basic high-school accounting that bankruptcy is most commonly caused by insolvency in not having enough cash to pay your debts, even when your financial accounts shows healthy accounting profits. There are many companies that have gone bust because they are unable to meet their short-term cash obligations despite having billions of dollars in assets.
For Ahmad to admit 1MDB to be unable to pay their short-term cash obligations is to concede that 1MDB would go bankrupt without the RM950 million standby credit provided by the BN Federal government. Without this standby credit, 1MDB would be unable to pay its short-term cash obligations, become insolvent and hence bankrupt. Clearly 1MDB has failed and the standby credit is an initial RM950 million bailout of 1MDB.
Ahmad is also contradicting himself when he had in Parliament admitted that 1MDB’s gearing ratio, which is a measure of debt against capital(where the higher the gearing ratio, the worst off the company), was 17 times and unsustainable at its present form.
For this reason, the Kuala Lumpur Composite Index(KLCI) will continue in 2015 its abysmal record in 2014 as the worst performing stock market in Asia Pacific. Despite recording economic growth of 6% last year. Malaysia KLCI in 2014 suffered a drop of 5.7%, the highest drop amongst all Asia Pacific bourses. Even countries like Thailand with lower economic growth rates of barely 1% in 2014, the Thailand stock exchange index rose by 15.3%, whilst Philippines was a star performer with a rise of 22.8% in the stock index in 2014.
Why should a country that is supposed to record healthy economic growth rates of nearly 6% in 2014 suffer from being the worst performing stock market compared to countries like Thailand or Philipinnes with lower economic growth rates? Clearly foreign investors are not interested in historical performance but in future prospects of the KLCI and Malaysia.
And the future prospects for KLCI is negative due in part to many disturbing questions posed on the RM42 billion 1 MDB scandal that raises doubts not only on transparency and compliance in our capital markets, but whether Malaysia’s credit ratings would be jeopardized should 1MDB unravel and default. For this reason, it is crucial that 1MDB and the Finance Ministry come clean on the whole scandal so that everyone knows the true cost should a worst-case scenario happens.