An anti-corruption probe has uncovered documents that appear to link Malaysian Prime Minister Najib Razak to 1Malaysia Development Berhad (1MDB) funds. The allegations have helped push the Malaysian ringgit to the lowest level in over a decade. Can the Malaysian economy survive the political fallout?
On 2 July, the Wall Street Journalreported that Malaysian investigators taking part in the 1MDB anti-corruption probe had traced funds entering into the personal bank account of what they believe to be Malaysian Prime Minister Najib Razak.
If the allegations are true, Najib could face a criminal investigation, and his future as Prime Minister may also be called into question. The allegations have already spooked investors. With the ringgit at a sixteen-year low against the dollar this week, can the Malaysian economy survive the scandal?
1MDB is a strategic investment fund wholly owned by the Malaysian Finance Ministry, which is headed by the Prime Minister Najib Razak. Set up in 2009, the fund was established to ensure economic development and promote foreign direct investment.
Reports suggest that the fund has accumulated $11 billion in debt following failed ventures abroad. Critics of the fund and of the Najib government have voiced concerns regarding the amount of debt, and the fund’s lack of transparency. The government investment fund is currently the centre of four official government inquiries, set up to investigate the funds activities.
Raids on three Malaysian companies by the investigating taskforce have uncovered documents that appear to link Najib to the troubled investment fund. According to Malaysia’s Attorney General Abdul Gani Patail, thedocuments received are ‘related to the allegations of channelling of funds to accounts owned by Prime Minister Najib Tun Razak’.
Investigators have traced almost $700 million in deposits into what they believe to be Najib’s personal accounts from entities linked to 1MDB. If the allegations are accurate, it might pave the way for criminal charges against Najib. It might also force Najib to step down as Prime Minister.
Malaysian authorities have frozen six bank accounts and the Attorney General has seized documents related to 17 accounts at two banks for further investigation. On 8 July, police raided 1MDB’s office to collect materials for analysis.
Repercussions for the Malaysian fiscal position
The financial scandal is the biggest in Malaysia’s modern history. Responding to the allegations, Najib stated that he had ‘never taken funds for personal gain’. He argued that ‘false allegations such as these are part of a concerted campaign of political sabotage to topple a democratically elected Prime Minister’. An interim reportby the Malaysian government stated that it has found nothing suspicious after vetting its accounts.
True or not, the allegations have already taken a toll on the Malaysian economy. The country had already been forced to slash its annual growth forecasts after a collapse in oil prices. According to a recent commentary in the Financial Times, foreign investors own approximately 40 per cent of Malaysia’s public debt.
Investors are worried that the government may have to bail out 1MDB, which would worsen its fiscal position. This is pushing the ringgit to a sixteen-year low against the dollar. This is unlikely to substantially improve unless Najib takes steps to enhance transparency of 1MDB, and cooperates fully with the ongoing investigation.
Increased transparency and cooperation with investigations may ease the concerns of foreign investors, and restore some faith in the Malaysian economy.