Finance Minister Lim Guan Eng today reassured that the government will make payments for interest on 1MDB loans due by the end of this month.
"We honour the commitments, the legal commitments, the legitimate commitments made by the previous government.
"Otherwise, Malaysia will be in default," Lim told reporters at the Finance Ministry's "Malaysia, A New Dawn" conference in Kuala Lumpur.
Lim said the government will not default on the interest payments as there would be long-term consequences to the economy.
"We have taken advice from the attorney-general that we have to honour the commitments, legally. Also because there is a financial consequence.
"If you default, then you will get an automatic downgrade on your ratings. And not just one level but probably much more than that," he explained.
It is understood that the payment due to be made by Oct 18 will amount to RM211.31 million.
Shortly after taking up the Finance Minister's post in Ma, Lim had said that 1MDB had to pay RM143.75 million in interest by May 30.
Lim at the time also said that another RM810.21 million in interest from 1MDB's debts was due between September and November.
Asked whether 1MDB is still in discussions to pursue the settlement with Abu Dhabi's International Petroleum Investment Company (IPIC), Lim merely said the matter was best left to the lawyers.
"The attorney-general is on top of this so let it be handled by him. I do not want to comment at the moment unless necessary," he said.
Former premier Najib Abdul Razak had previously said that Putrajaya had more to gain by pursuing the settlement with IPIC than by selling off the RM1 billion mega-yacht Equanimity.
Despite repeatedly stating that Putrajaya could recover a "bigger amount" through the settlement with IPIC, Najib at the time was unable to state the sum.
IPIC had sought US$6.5 billion in payments from 1MDB which was formed by Najib's government in 2009. The matter went for arbitration in 2016 and a settlement was reached in April last year. The terms, however, are vague.
What had been established, however, was that the Malaysian government had to pay IPIC US$1.2 billion in two equal payments on July and Dec 31.