SINGAPORE - The default by 1Malaysia Development Board (1MDB) on a US$1.75 billion (S$2.36 billion) bond issue heightens the risks on Malaysia's sovereign balance sheet, said credit ratings agency Moody's.

1MDB on Tuesday confirmed it defaulted on the bod issue after missing a coupon payment, triggering cross defaults on two other Islamic notes totalling RM7.4 billion (S$2.55 billion). The default also prompted a call on a guarantee by Abu Dhabi's sovereign-wealth fund, International Petroleum Investment Company (IPIC).

Its vice-president and senior research analyst Christian de Guzman estimates the total size of contingent liabilities associated with the Malaysian state fund's recent default to be around 2.5 per cent of Malaysia's GDP, media reports said on Tuesday (April 26).

1MDB's total debt, according to latest publicly available data from 2014, is about RM42 billion, less than 4 per cent of GDP.

However, this figure does not incorporate the progress made by 1MDB over the past year in paring its debt through various asset sales, said Mr Guzman. As such, we assume that 1MDB's total current liabilities to be much smaller, he said.

Moody's on Tuesday did not change its sovereign credit rating or outlook on Malaysia. In January, it had downgraded the country's rating outlook from positive to stable at A3.

Mr Guzman said the cross-default triggered on instruments guaranteed by the Government of Malaysia, as well as an indemnity associated with the IPIC guarantee, raises the risks of the crystallization of contingent liabilities on the balance sheet of the Government of Malaysia.

"The contingent risks associated with 1MDB's non-guaranteed liabilities may be as high or even higher than the government's actual explicitly guaranteed exposures," he was quoted as saying.

Moreover, the inability to rein in these off-budget risks stand in contrast to the on-budget improvements to the government's fiscal position," said Mr Guzman.