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Economy

Rating agencies gloomy on political risk in Southeast Asia

KUALA LUMPUR -- In the aftermath of national elections in the Philippines and a state election in Malaysia's Sarawak, ratings agencies have been assessing political risk and its effect on sovereign credit ratings around Southeast Asia.

In the Philippines, S&P Global Ratings expect Rodrigo Duterte, who won a landslide victory in Monday's presidential election, to carry higher political risk due to his limited experience of national politics.

"Used to a hands-on approach in governing a city that is his political base, [Duterte] could take some time getting used to the many compromises required in the national leadership position," the ratings agency said.

S&P predicted that the mayor of Davao in the southern Philippines, a trained lawyer who favors federalism, may depart from the status quo and strengthen local governments. After a period of relative political stability since 2010 under President Benigno Aquino, there is the chance of political confrontation that could "weaken the improving trend for sovereign credit metrics".

In Malaysia, Prime Minister Najib Razak has been weathering calls for his resignation in the wake of a financial scandal. However, the ruling coalition, which includes his party, the United Malays National Organization, secured a landslide victory in the Sarawak state elections in early May. 

But S&P said political stability remains a concern for Najib, given pressure from within his party and from the opposition for him to step down. It said that if the government is forced out abruptly, Malaysian politics risked a period of significant uncertainty "that could unsettle investor and consumer confidence".

The financial scandal at 1 Malaysia Development Berhad (1MDB), a state fund, remains a major concern for Najib. The prime minister was chairman of 1MDB's recently disbanded advisory board. A second debt payment default was expected on Wednesday. Wholly-owned by the finance ministry, the fund defaulted on a $50-million coupon payment in late April on a $1.75 billion Islamic bond.

That followed a dispute with International Petroleum Investment Company (IPIC), Abu Dhabi's state fund and a co-guarantor on two 1MDB bond issues worth $3.5 billion. IPIC said it had not received a scheduled payment, but eventually paid $50.3 million in interest on behalf of 1MDB.

IPIC has also paid $52.4 million on Wednesday on the second bond issue. In a statement to the London Stock Exchange, it said it will claim "$1.2 billion plus accrued interest" from 1MDB and the finance ministry. In response to that, 1MDB reiterated it has more than enough funds for the interest payments, but refrained due to the ongoing dispute. 1MDB said it is "committed to working openly with IPIC" to resolve the problem.

Fitch Ratings also put out a note on Tuesday on Malaysia and 1MDB: "The risk to the sovereign credit profile lies more in the potential for the affair to weaken policy focus or contribute to political instability," it said.

S&P said political uncertainty also remains in Thailand, which has been under military rule since a coup in May 2014. An election has been promised by 2017 after a referendum this August on a constitution that will enable to military to appoint and control a more powerful senate.

"Even without a possible violent confrontation, a further slowdown in Thailand's economic growth trajectory could erode its sovereign credit metrics over the next few years," said S&P.

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