1MDB's cost to Malaysia is just starting as sukuk shows: Gadfly editorial

[SINGAPORE] The cost of scandals can be hard to measure. In the case of Malaysia, however, this week offered a good glimpse of just how expensive the high-profile investigation into its state-backed fund 1MDB has become.

Malaysia's government raised US$1 billion selling 2026 bonds on Wednesday and another US$500 million selling notes that mature in 2046.

The 10-year debentures were priced at a 135-basis-point premium over similar maturity Treasuries while the 30-year securities were sold at a spread of 145 basis points, according to data compiled by Bloomberg.

At least 10 basis points could have been shaved off both of those were it not for fears 1MDB will default on its obligations. In April last year, for example, the sovereign sold 10-year debt at a 115 basis-point premium.

Amount Malaysia raised this week selling sukuk was US$1.5 billion. To be fair, Malaysia was able to reduce the amount it paid somewhat. When it initially started marketing the bonds to investors, the 10-year notes were being offered at a spread of about 150 basis points and the 30-year securities at about 165 basis points.

But the stream of negative headlines emanating from 1MDB can't have buoyed investor confidence. The fund is at the center of an international investigation into money laundering and is sparring with some of its creditors.

There's been a selloff in all Malaysian government debt, including the nation's dollar bonds due 2025 and 2045, the ones used as benchmarks to price the new notes.

1MDB has also been blamed for its part in the ringgit's wild ride. The currency, which has appreciated a 10.2 per cent against the greenback this year, was the worst performing in Asia last year and second-worst performing in 2014, ahead of the Japanese yen.

The yield on Malaysian dollar bonds, meanwhile, averaged 4.18 per cent in 2015 versus 3.70 per cent in 2014, JPMorgan indexes show. And the cost of protecting sovereign debt against default using credit-default swaps has almost doubled over the past 24 months.

In a world of negative interest rates, investors will still be keen to fund a country comfortably rated investment grade. But the cost of money is tied to confidence, and because of 1MDB, that's not something Malaysia is inspiring these days.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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