It was really tough understanding the 1MDB, the effect of Malaysia being the guarantor, Bonds, 'Sukuk', Moody Ratings, etc - so I made an effort to get a better understanding. Anyway, what is stated below is an attempt by me to simplify the issue...but best do your own further study/verification...
When Moody brought down Malaysia's sovereign rating - risk of BIG PROBLEMS increases...
Well, for a start, we need to understand BONDS - which are very different from Shares
DEFINITION of 'Bond'A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.
How Bonds Work
The stronger the issuer's financial position the higher the credit rating assigned to the company.The top rating is "10" which is for AAA ratings -- the gold standard. These securities set the benchmark for safety and all other bonds are rated relative to the safety of owning them.The ratings table is divided into two primary categories. "Investment grade" and "speculative" grade ratings.The risk of owning a security increases as you go down the rating scale. The risk of the security is that the issuer will renege on their obligation to repay you the principal amount of the bond and the interest that was promised. This is called "defaulting".Ratings are opinions about the risk of an investment. Ratings do not indicate anything about the price of a bond.
Moody’s cuts Malaysia’s sovereign rating outlook due to growth risks
The ratings agency said the change in outlook reflects a deterioration in Malaysia's growth and external credit metrics due to external pressures over the past year.
It affirmed Malaysia's issuer and senior unsecured bond ratings at A3.
Moody's said the changes in the external environment have reduced government revenues over the period. "Those environmental changes have also undermined Malaysia's external position, with large capital outflows, a falling current account surplus, sharp exchange rate depreciation and falling reserves," the ratings house said in a report.
Alongside a worsening external environment, material domestic imbalances continue to pose a risk to growth and household debt levels remain high, it added.
Despite progress in relation to fiscal consolidation, Moody's expects Malaysia's public debt burden and debt affordability will see only limited improvement.
Today, Malaysia's November industrial production slowed to its weakest pace in 16 months, hurt by weaker global demand and a decline in mining production. – Reuters, January 11, 2016.
Does Moody's downgrade or revision really matter?
He insisted that it is a 'revision' in the outlook which is reflecting the current global economic scenario.
Moody’s has affirmed the government of Malaysia’s issuer and senior unsecured bond ratings at A3 and changed the outlook to stable from positive.
In fact Moody’s revised the ratings of three other government-linked companies - Malaysia Airports Holdings Bhd, Tenaga Nasional Bhd and Penerbangan Malaysia Bhd - to stable from positive.
Does it really matter whether the minister admits it as a downgrade or a revision?
But what is important to the business community is whether this action on rating by Moody's and all other rating agencies later, will impact adversely on the cost of borrowing for the business community in Malaysia.
Bloomberg has actually reported that borrowing costs on Islamic bonds will climb to a record.
The Maybank Islamic Asset Management, according to Bloomberg, said that benchmark sukuk yields will rise to five percent.
That is what Wahid should be concerned about than to be pedantic on terminologies of a 'downgrade' or a 'revision'.
The outlook for higher borrowing costs has also hurt Malaysia’s Islamic bond sales in 2015.
This trend is set to stay, as opined by investment banks like RHB Investment Bank.
That is what is arguably worrying to the business community and particularly the sukuk and Islamic Financial market.
DR DZULKEFLY AHMAD is secretary of Gerakan Harapan Baru.