The default on payments to bond holders by 1MDB last month could lead to weaker focus on policy and political instability in Malaysia, said Fitch Ratings Agency.

“However, there is little sign of these risks materialising as yet,” the agency said in a statement today.

Fitch said this was the only possible risk to Malaysia over the 1MDB default because the bonds are not explicitly guaranteed by the government.

The risk is low despite the fact that a default of the bonds in 2022 could trigger a cross default on 1MDB a government-guaranteed US$5 billion sukuk in 2039, Fitch said.

“Payment under the guarantee would only be required if bondholders vote to require acceleration under the cross-default clause.

“We believe that there is unlikely to be a majority among bondholders for acceleration,” it said.

Fitch said 1MDB will only drag down sovereign ratings if it impedes Malaysia’s efforts to cut the deficit and keep federal debt in check and spook investors.

“The 1MDB affair has not had a discernible impact on policy-making, as the government has maintained fiscal consolidation and budget reforms.

“However, if its ability to implement economic policy weakens, this could be negative for the sovereign rating,” it said.

1MDB is heading to a second default tomorrow, after announcing that it has appointed financial advisors to engage with bondholders over the issue. It missed a US$50 million coupon payment in April.

The default was prompted by a dispute with Abu Dhabi’s International Petroleum Investment Corporation.

IPIC guaranteed the bonds in 2015, but is now refusing to pay the coupon payment following a dispute with 1MDB.

IPIC said 1MDB owes it a fee for guaranteeing the bonds, but 1MDB said it paid IPIC’s subsidiary registered in the British Virgin Island. IPIC denies links to this BVI firm.