ABU DHABI/HONG KONG (Reuters) - Abu Dhabi’s sovereign wealth fund has given 1Malaysia Development Berhad’s (1MDB) five days to make a $600 million payment, which the troubled Malaysian state fund failed to pay on Tuesday, further complicating a dispute hanging over Southeast Asia’s third-biggest economy.

FILE PHOTO: Men walk past a 1 Malaysia Development Berhad (1MDB) billboard at the fund's flagship Tun Razak Exchange development in Kuala Lumpur March 1, 2015. REUTERS/Olivia Harris/File Photo

The 1MDB fund said in a statement it was committed to meeting its obligations to Abu Dhabi’s International Petroleum Investment Company (IPIC), originally due on 31 July 2017, in August 2017. It did not specify a date in August.

It said all payments to IPIC would be made from the proceeds of the 1MDB rationalization plan, under which it is selling assets. It said the delay was also due to the need to get more “regulatory approvals”.

But Mubadala, which now owns IPIC, said in a separate statement on Tuesday that 1MDB and the Malaysian finance ministry (MoF) have just five days to resolve the non-payment.

“Under the Settlement, there is a five business day cure period for MOF Inc. and 1MDB to remedy their non-payment before MOF Inc. and 1MDB become subject to additional obligations to IPIC and Aabar,” Mubadala said.

Malaysia dissolved 1MDB’s advisory board last year, and its assets were either shifted to the government or sold off as part of the rationalization program, after the fund was linked to a multi-billion dollar global money laundering scandal.

BANDAR MALAYSIA SALE

One such asset sale -- a $1.7 billion Bandar Malaysia property deal that was executed as part of the rationalization plan -- collapsed in May.

As part of the agreement with IPIC, 1MDB was to pay $1.2 billion in two installments. A second payment is due by the end of this year. 1MDB and Malaysia’s Ministry of Finance will also assume responsibility for all future interest and principal payments under two bonds worth $3.5 billion in total.

The agreement was reached after the Malaysian fund defaulted on its bonds in 2016, sparking a dispute with IPIC, which asked a London court to arbitrate a claim totaling some $6.5 billion.

IPIC was merged with Mubadala earlier this year.

Bonds linked to 1MDB remained largely unmoved on Tuesday.

1MDB's 4.4 percent bonds due 2023 XS090608517=TE were trading slightly weaker at 91/93 while the bonds due 2022 XS078492627=TE were down half a point at 108.3/108.9 cents on the dollar.

“Despite the various guarantees and debt consolidation plans there is 1MDB debt outstanding, and the debt still presents a contagion risk to the government,” said Moody’s Analyst Christian de Guzman.

“We don’t have a clear picture of what the liability structure looks like but it is much smaller than the last publicly disclosed level of 4 percent of GDP in 2014,” he said.

RATINGS IMPACT

1MDB, founded by Prime Minister Najib Razak, is the subject of money-laundering investigations in at least six countries, including the United States, Switzerland and Singapore.

In civil lawsuits, the U.S. Justice Department alleged that about $4.5 billion was misappropriated from 1MDB.

1MDB has denied any wrongdoing and Najib has denied all allegations of corruption against him.

“We do not expect this bilateral dispute to impact Malaysia’s sovereign ratings at this point,” said S&P Global Ratings analyst YeeFarn Phua.

“That said, failure to reach a settlement between 1MDB and IPIC would increase the possibility of these contingent liabilities crystalising on the Malaysia government’s balance-sheet. Should that happen, it will worsen Malaysia’s fiscal metrics.”

Najib faced the biggest challenge to his leadership in 2015 after allegations that hundreds of millions of dollars was misappropriated from 1MDB.

He has resisted all calls to step down over the past two years, and is widely seen to have averted the crisis, as he prepares to call early elections this year for a fresh mandate.

For graphic on Malaysia's 1MDB scandal click: tmsnrt.rs/2sFXlBQ