KUALA LUMPUR, July 8 — Waning investor confidence may end up dragging Malaysia’s economy through the mud, economists have said, despite agreeing with a recent assessment by ratings firm Moody’s that the ongoing 1Malaysia Development Berhad (1MDB) debacle will not have a direct effect on Malaysia’s economy.

Financial experts acknowledged that while significant, 1MDB’s reported RM42 billion debt pile is relatively minor when viewed from a macroeconomic perspective.

Jayant Menon of the Asian Development Bank noted that in comparison, Malaysia’s foreign exchange reserves have remained above US$100 billion (RM308 billion) this year, even after “some intervention” by Bank Negara Malaysia to try and limit the depreciation of the ringgit.

“Therefore, any economic fallout associated with 1MDB is likely to be indirect, operating through perceptions of confidence and stability in the political leadership,” he told Malay Mail Online in an email yesterday.

On Monday, Moody’s was quoted by newswire Reuters as saying that Malaysia’s banking system and government finances are not under systemic risk despite the brewing controversy in state-owned 1MDB.

The ratings agency said the country’s sovereign rating will only be affected if 1MDB-related developments “materially affected the trend of fiscal consolidation that supports its positive outlook”.

Dr Lim Teck Ghee of the Centre for Policy Initiatives (CPI) warned that while 1MDB’s “expensive” liabilities are not large enough to bring down the country’s economy, the danger is in losing support of both local and foreign investors.

“Less easy to compute is the knock-on effect on investor confidence — local and foreign and other ripple effects related to political stability. These ripple effects if not contained could cost the economy dearly,” he said via email.

Lim said Moody’s assessment, along with Fitch’s decision against downgrading Malaysia’s sovereign rating, do not mean that the country is insulated from any negative press surrounding 1MDB as perception of the standard of governance and confidence in a government’s management of the economy are key considerations among investors.

“Foreign investors and the financial flows they engage in have a choice of countries to put their money in.

“If Malaysia is seen as unstable and is not able to meet the expectations of return or sustainability owing to a declining ringgit and other factors, they can take out their money just as quickly as the 1MDB key players have done,” he said.

Yesterday, Treasury secretary-general Tan Sri Mohd Irwan Serigar Abdullah told business wire Bloomberg that Malaysia plans to cut more subsidies and move billions of ringgit in government employee housing loans off the books to strengthen Malaysia’s fiscal position, amid questions over Najib’s ability to implement potentially unpopular policies.

Mohd Irwan said this will mean a gradual removal of subsidies for petrol, liquefied petroleum gas and cooking oil in coming years, after Fitch decided to pull back from downgrading Malaysia’s rating to give it space to reinforce its financial credentials.

Despite deciding to upgrade its outlook to stable from negative, Fitch noted on June 30 that Malaysia is incurring additional contingent liabilities beyond explicit guarantees.

Mohd Irwan, however, repeated Putrajaya’s position that 1MDB is not in trouble and has enough assets to pay off its debts.

The ringgit slid to its lowest level in 16 years Monday, plummeting to 3.8050 against the US dollar as of 2.15pm Malaysian time amid a report alleging some US$700 million in funds were funnelled into Prime Minister Datuk Seri Najib Razak’s personal bank accounts through 1MDB.

Bloomberg rated the ringgit as Asia’s worst-performing currency this year, having gone below the scrapped peg of 3.80 to the dollar — a rate fixed from 1998 to 2005 to protect businesses in Malaysia from the effects of the Asian Financial Crisis.

The country’s central bank was forced to intervene for a third successive trading day yesterday to support the ringgit, Reuters reported, adding that the currency lost only 0.8 per cent since a political storm broke last Friday in the wake of the latest allegation directly linking Najib to 1MDB’s dubious financial situation.

The ringgit closed at 3.8060 at the end of the trading day yesterday, helped off a low of 3.8100 by the heaviest day for intervention so far as foreign investors sold Malaysian assets.