Daunting times for Malaysia

By Leslie Lopez / Kuala Lumpur of The Edge Review

Malaysia’s risk profile is rising fast as controversy over the government’s debt-freighted sovereign wealth fund continues to snowball. Stability fears are growing amid concerns over Prime Minister Najib Razak’s hold on power, fragility in the economy and tensions among Malaysia’s multi-racial population over religious issues.

The problems combine to make the country Southeast Asia’s biggest trouble spot after post-coup Thailand, struggling under draconian military rule.  But the main focus remains the months-old controversy swirling around 1Malaysia Development Bhd (1MDB), a brainchild of Najib that is saddled with a debt of more than RM42 billion (US$11.62 billion).

The fund is struggling to service this huge debt load and analysts say any default on its borrowings, raised through international bond issues over the last six years, could undermine the country’s international ratings.

Most ratings agency have so far resisted openly voicing concerns, although Fitch warned in March that Malaysia had a more than 50 per cent chance of a downgrade from A- status, which would mean an added burden on government finances from an increased cost of borrowing.

The crisis surrounding 1MDB deepened this week with news that Malaysians may face hikes in their electricity bills of up to 20 per cent to raise funds to bail out the fund. Calls for an inquiry were also prompted on Wednesday amid media reports alleging that bank documents given by a 1MDB subsidiary, showing it had US$1.1 billion in assets, may have been faked.

1MDB has become a lightning rod in the campaign to remove Najib from office. Most notably, in recent weeks, former Prime inister Mahathir Mohamad has harangued Najib for the growing mess in the sovereign fund and describing Najib as unfit to lead the country.

Dr Mahathir has also piled on the pressure by reopening public debate into a number of personal scandals directly involving the Premier, including the unexplained murder of a Mongolian woman by two members of his private security detail and the lavish lifestyles of members of his family.

Najib has responded to criticism by saying he is judged by the country, not by his predecessor, and so far appears secure. But the political crisis is starting to spotlight deeper structural problems besetting the country.

“Malaysia’s troubles go beyond the personalities. The economy, its political system and its institutions need urgent reform, and, without all of this, Malaysia will continue to under-perform,” says Manu Bhaskaran, Chief Regional Strategist at Centennial Partners in Singapore.

The malaise is a product of more than three decades of policy missteps that began during Dr Mahathir’s 22 years in office. In that time, he pursued his own brand of command capitalism, with the government pouring billions of dollars into heavy industries and costly infrastructure projects that largely benefited cronies of the ruling United Malays National Organisation (UMNO).

He also put a check on dissent by cowing important institutions – such as the Judiciary and other regulatory agencies and the civil service – that largely became subservient to the National Front coalition government headed by UMNO.

That ambitious economic agenda is today in tatters. Over the years, the government has had to bail out many of the companies entrusted to carry out the big-ticket projects, while the push into heavy industries has been a major failure, with the collapse of the state-owned steel company, cement plants and ship-building facilities.

The limping national car project, Proton, is the sole vestige of Dr Mahathir’s ambitious economic blueprint and that too is struggling to stay afloat.

Economists and bankers say that the crisis unfolding at 1MDB is symptomatic of many economic fiascos that tarred the Mahathir administration: poorly conceived state-led ventures, often with questionable commercial merits, pushed through in a system bereft of proper checks and balances.

All of this has put the country’s US$303 billion economy on shaky ground. Even as it struggles with mounting household and government debt, Malaysia is one of the region’s biggest oil exporters and a recent downturn in prices has stripped the economy of a key growth driver. This is placing further strains on government finances, adding to fears of potential downgrades by international rating agencies.

The ringgit has also been battered to six-year lows against the US dollar and prospects of a further depreciation looms large as foreigners own nearly 40 per cent of the country’s ringgit-denominated debt.

The economic troubles have bred widespread public discontent towards UMNO, which dominates the coalition government that has held uninterrupted power since independence in 1957.

Independent polling outfit Merdeka Center recently reported that more than 60 per cent of Malaysians feel that Najib’s government is on the wrong track, compared with an approval rating of just 32 per cent.

This slump is the lowest since Najib took over the premiership six years ago and is largely due to sharp spikes in the cost of living, made worse with this month’s introduction of a goods and services tax – and by the attacks by his former mentor.

“The unrelenting Mahathir bashing of Najib is seriously damaging the National Front brand,” says Merdeka Center’s Ibrahim Suffian.

Dr Mahathir insists that his distaste for the Najib administration stems from the financial wrongdoings at 1MDB. But several politicians close to the premier argue that the animosity has more to do with Najib refusing to back several pet projects of Dr Mahathir, who is still revered within UMNO.

They include Najib’s refusal to build a new bridge to replace the causeway linking Malaysia and Singapore and the government’s refusal to provide Proton with a RM1.4 billion grant.There is also a strong political dimension to Dr Mahathir’s anger towards Najib. Close associates say that he believes the National Front, which suffered serious electoral setbacks in the 2008 and 2013 general elections, could be kicked out of power in the next elections, which must be held before mid-2018.

Dr Mahathir has genuine reasons to worry. The National Front’s stranglehold over Malaysian politics has sharply diminished. The coalition lost its long-held two-thirds parliamentary majority in 2008. Then at the 2013 election it lost the popular vote, securing only 47 per cent compared with the opposition’s 51 per cent.<

To restore its political clout, particularly among the country’s dominant Muslim Malay community, Najib has been pandering to rightist elements within UMNO, who have been pushing for greater cooperation with Islamic opposition Parti Islam SeMalaysia (PAS), which is determined to establish shariah law.

But Dr Mahathir believes UMNO’s dalliance with PAS could trigger a backlash from its coalition partners, particularly those in the Borneo states of Sabah and Sarawak, which together hold a crucial block of votes in parliament that could make or break the National Front at the next election.

The majority-Christian states are rich in resources and remain the country’s biggest producers of oil and gas. Now voters’ sentiments there are changing, with growing demands for more autonomy and a bigger share of natural resource revenues for the respective state governments.