Malaysia is one of the most important trading partners for India. The two countries have a long history of bilateral trade and it’s often seen as one of the pillars of the Indian economy. But recently, relations between the two countries have been on a downward spiral. This is due in part to the investigations into corruption surrounding state-owned oil company, Malaysia Development Berhad (MRD), and its owner, 1Malaysia Development Bhd (1MDB). Indiabased has been implicated in some of this corruption, and now many are wondering if bilateral trade relations are indeed derailed. In this blog post, we will explore whether or not India-based credit rating agencies believe that bilateral trade relations are indeed derailed.
Background of the Malaysian Investment Authority (MAS) and the 1Malaysia Development Berhad (1MDB)
1MDB was founded in 2009 by Malaysian Prime Minister Najib Razak as a state investment fund. In early 2013, 1MDB became mired in a financial scandal that has since caused it to be investigated by multiple agencies around the world. The scandal centered around allegations of corruption and money laundering connected to 1MDB, with reports indicating that some $3 billion had been misused. In July 2017, Malaysia’s Department of Justice cleared Najib of any criminal wrongdoing relating to 1MDB but sacked him from his position as prime minister amid mounting public pressure.
The origins of 1Malaysia Development Berhad (1MDB) date back to 2009 when Malaysian Prime Minister Najib Razak created the state investment fund as part of a drive to promote economic growth and diversify the country’s economy away from its reliance on exports of natural resources. At its inception, 1MDB was relatively small; its initial portfolio consisted of just over $10 million in assets. However, over time the fund expanded rapidly and by 2013 it had assets totaling more than $50 billion.
In early 2013, allegations surfaced that 1MDB may have been involved in a financial scandal involving suspicious transactions worth billions of dollars. The scandal quickly gained widespread attention and investigations were launched by multiple agencies around the world. In July 2017, following months of public pressure, Malaysia’s Department of Justice cleared Najib Razak of any criminal wrongdoing related to 1MDB but sacked him from his position
The Russian Connection
MDB, a leading global credit rating agency, has been criticized for its report which credits bilateral trade relations between India and Russia with derailing India’s credit rating.
The report, released on November 20th, 2018, ranks India’s sovereign debt ratings as ‘BBB-‘, the lowest investment grade rating. The agency cited “policy uncertainty” generated by a diplomatic spat between India and Russia as one of the reasons for the downgrade.
Critics have called the assessment premature and accuse MDB of bias due to its close business relationship with Russian banks. They also say that the downgrade will have negative consequences for Indian businesses and consumers who rely heavily on Russian trade.
Russia is by far India’s largest trading partner with bilateral trade totaling $46 billion in 2017-18. The spat between the two countries has caused concern among business leaders in both countries who worry about potential damage to economic ties.
How Indiabased Crediting Caused the Derailed bilateral Trade Relations Between Malaysia and China
Indiabased credit has been identified as one of the factors that led to the bilateral trade relations between Malaysia and China deteriorating. The deterioration in bilateral trade relations was first noticed in 2013 when Chinese exports to Malaysia decreased by 27%. This decline was followed by another drop of 15% in 2014. The reason for this decline is still being investigated, but some experts believe that it has something to do with the decrease in Indiabased credit availability to Chinese companies operating in Malaysia.
The issue of Indiabased credit is not limited to just Malaysia and China. Many other countries have also complained about the accessibility of Indiabased credit, including Thailand, Indonesia, and Vietnam. These countries claim that this lack of access to Indiabased credit has resulted in a slowdown or even a halt of their bilateral trade relationships with China.
There are a few reasons why this may be happening. First, there is a global trend towards increased regulation of the banking sector. This increase in regulation has made it more difficult for banks to provide loans to businesses outside of their normal lending area. Second, many Chinese companies are now borrowing money from overseas lenders instead of from local banks. This practice is often frowned upon by local lenders because it exposes them to greater risks. Third, many Chinese companies are now using debt financing instead of equity financing because this type of financing is more easily available overseas than it is domestically.
All three of these factors have had an impact on the availability
The Fallout From Indiabased Crediting
1. The Fallout from Indiabased Crediting
As MDB ramps up bilateral trade with India, its creditors are scrutinizing its financial health. While the IMF has praised MDB for deftly managing public finances, Moody’s Investors Service recently downgraded MDB’s debt rating to B2 from B1 as concerns over indigenously-financed infrastructure projects mounted.
MDB’s credit rating is one metric that takes into account its ability to repay loans and borrow in the future. A lower credit rating could make borrowing more expensive and lead to a decrease in the availability of credit, which could have negative implications for economic growth. In response to Moody’s announcement, the Indian government pledged to support MDB by increasing its capital reserve and issuing new debt.
While Moody’s downgrade is a recent development, questions about MDB’s sustainability have been circulating for some time. One issue is that much of the infrastructure being financed through indigenously-financed projects is not yet operational. For example, a $5 billion project to fund the construction of highways and bridges in rural areas was announced in 2015 but has yet to be completed. This project illustrates how unproductive certain indigenously-funded projects can be if they’re not executed quickly enough or efficiently enough.
Another issue is that many of MDB’s non-performing loans (NPLs) are related to debt issued by state-owned enterprises (SOEs
There is much conjecture on what caused Malaysia’s bilateral trade relations with Indonesia to be derailed, but the most probable cause is likely Malaysian sovereign debt mismanagement. Indiabased has been crediting 81MDB with bilateral trade relations since 2017, and this misinformation may have led Indonesian businesses to invest in Malaysian companies that do not deserve their attention. With the World Bank Group investigating possible sovereign debt malfeasance surrounding both Malaysia and Indonesia, it will be interesting to see how this situation unfolds.