Malaysia’s once fast growing economy – buoyed by cheap labour and high quality products – risks losing its attractiveness to foreign investors as probe into the 1Malaysia Development Berhad scandal unfolds.
Set up in 2008, the 1Malaysia Development Berhad, (1MDB) is a wholly state-owned company that aims to foster strategic global partnerships and promote foreign direct investment in Malaysia. However, barely a year into operations, 1MDB already drew criticisms regarding it’s credentials and the transparency of its bidding process.
In recent months the scandal ratcheted up to a new level when the Wall Street Journal on July 2nd reported that $700 million from an unknown source had been deposited into the Prime Minister Najib Rakaz’s account. This event in turn has added weight to allegations that the prime minister may be personally benefitting from 1MDB.
Prime Minister Najib has denied such allegations and argues that they are part of a campaign to throw him out of office. His claim may be correct, but the alternative is no less suspicious. The Malaysian Anti-Corruption Commission on August 5th said the donations had been verified, and did not come from the debt-ridden state investment firm, instead emanating from the Middle East.
Cabinet reshuffle may cause more problems than it solves
Allegations revolving around 1MDB are the biggest threat to the Prime Minister’s credibility since he came to power in 2009, and threaten his long-ruling United Malays National Organization, as party members become divided over the government’s handling of the scandal. Cabinet ministers and former Prime Minister Tun Dr Mahathir Mohamad have asked Mr Najib to explain the source of the $700 million and have repeatedly called for him to resign.
Seeking to maintain party unity, the Prime Minister has reshuffled his cabinet. Among those fired was the deputy Prime Minister Muhyiddin Yassin. Replacing cabinet members with individuals who are more loyal to him, the Prime Minister might have reduced internal criticisms; however, such a move in the long term, “will only raise concerns about the political stability in Malaysia”, said the law professor Eugene Tan of Singapore Management University.
If the situation deteriorates any further, Mr Najib might face uprisings in areas such as Jhor, Muhyiddin’s home state. Furthermore, the controversy is not going to disappear by installing pro-1MDB/pro-Najib ministers.
Instability rising in wake of scandal
In the wake of the graft scandal, Malaysia’s media crackdown has also widened. The Home Ministry has imposed three month suspensions on the two top Malaysian financial publications, (The Edge Weekly and The Edge Financial Daily), with the government describing their coverage of the scandal as “prejudicial to public and national interest”.
The two publications had reported extensively on the issue and the suspension brought about 400 people including journalists, lawyers, and human rights activists to the street protesting against the suspension and calling for freedom of speech and media. Furthermore, the scandal is acting as a catalyst causing other latent issues to surface, making more mass demonstrations increasingly likely.
The 1MDB scandal also involves funds in Mr Najib’s personal account that are suspected to have been used for vote-buying during the 2013 general election. In 2013, electoral irregularities led tens of thousands of people to join opposition rallies following the election.
While sentiments surrounding this issue have cooled down, as the 1MDB scandal unfolds, the issue of electoral fraud will likely to return to the public arena. In fact, Malaysian electoral-reform group Bersih has already called for mass street protests in Kuala Lumpur, Kuching and Kota Kinabalu for the weekend of Aug 29th to 30th.
The scandal has also increased resentment regarding the state of social inequality in Malaysia. Over the last few years, living costs in Malaysia have substantially increased, with many blaming the Najib administration for this trend. Furthermore, allegations of large-scale graft and embezzlement are certain to fuel social tensions and push the public into the streets.
Business confidence plunges amid scandal, structural problems
In response to the uncertainty in Malaysia, foreign investors are selling Malaysian stocks at the fastest rate in any Asian economy. Malaysia’s currency – the ringgit – has also declined to a historical lows not seen since the Asian financial crisis in 1998. Experts have warned that the stock market is likely to worsen if the scandal leads to further tensions: “[the] already shaky trust of foreign investors is being eroded. Further outflows are possible,” according to Nomura Holdings Inc. strategist Mixo Das.
The scandal has also distracted the government from dealing with economic issues such as the effect of falling global oil prices on oil-dependent Malaysia’s government debt. As if this were not enough, household debt in Malaysia is high, and the ringgit is one of the globe’s worst performing currencies. Unless the new cabinet is able to restore public confidence and stability, and focus their efforts on the economy, Malaysia’s status as a safe haven in the region will deteriorate further.
