Back in August, it became readily apparent that the scandal surrounding Malaysia’s 1MDB threatened the political career and even the legacy of the country’s Prime Minister Najib Razak.
Street protests [9] in Kuala Lumpur emboldened by loud calls from highly influential former PM Mahathir Mohamad suggested that, much like Brazil and Turkey, Malaysia is yet another example of an emerging economy wherein deteriorating fundamentals are set to conspire with idiosyncratic political risks to create the conditions for a descent into full-on crisis.
As a reminder, the development bank at the heart of the scandal benefited from early financing provided by Goldman, which used its connections with the PM to help secure deals that saw the bank effectively write 1MDB several large checks while simultaneously taking newly-issued debt onto its own books at a discount to par.
The outsized underwriting “fees” have been the subject of some debate, but the real questions revolve around how some $700 million ended up in personal bank accounts linked to Najib.
The premier’s government has been variously accused of obstructing domestic investigations into 1MDB and now, the FBI is not only looking into the fund [10], but also into Goldman’s role [11] in the financing, while authorities in Switzerland are asking their own questions.
Meanwhile, the UAE has begun to look [12] for billions in collateral payments that a subsidiary of an Abu Dhabi wealth fund supposedly received from 1MDB but which have apparently disappeared.
In short, it looks as though this was nothing more than a slush fund that everyone was dipping into and now, the whole thing is about to unravel.
On Sunday we learn that the opposition in Malaysia has called for a vote of no confidence against Najib. Here’s Bloomberg [13]:
Malaysia’s opposition escalated pressure on Prime Minister Najib Razak over a multimillion-dollar funding scandal, seeking a no-confidence vote against him as parliament resumes after a four-month hiatus.
While the motion faces obstacles even getting heard, let alone voted on, the opposition is looking to gain momentum from the vocal criticism of former premier Mahathir Mohamad, who has called on Najib to step aside.
Najib retains the support of many divisional heads in his ruling party and in the budget is expected to increase handouts to the poor, many of them rural Malays, a core support base. Even so there are signs of discontent, including from former deputy premierMuhyiddin Yassin, whom Najib fired in July.
People’s Justice Party lawmaker Hee Loy Sian said he filed the no-confidence motion over Najib’s failure to address claims he received funds linked to debt-ridden state investment company 1Malaysia Development Bhd. in his bank accounts. Najib has denied any wrongdoing, and he and investigators have both said the funds were political donations from the Middle East.
“Najib has tarnished the country’s image in the world and caused investors to lose faith in the government,,” Hee wrote in the motion that was posted on the parliament website on Saturday. “Malaysians do not believe in this prime minister.”
The opposition needs the support of 25 Barisan Nasional MPs in order to pass a no-confidence vote. However, the opposition alliance has itself been wracked by infighting for months over issues including one party’s push for Islamic criminal law in a state it governs. It remains divided after former leader Anwar Ibrahim was jailed for sodomy, a charge he denies.
The no-confidence vote will be for “BN MPs to rebel if they would want any move against Najib to result in a new BN/UMNO majority government,” said Wong, referring to Najib’s United Malays National Organisation. “They will want the cake and eat it too, which then makes the mathematics of getting a rebellion much tougher.”
Here's a bit of color on the budget announcement (via Citi):
PM Najib will announce Budget 2016 on 23 Oct. To mitigate elevated political risks, the focus will be on cushioning the pain to lower and middle income voters from fiscal reforms, whilst continuing with a more gradual path of fiscal consolidation to avoid risk of sovereign ratings downgrade. The 3.2% of GDP deficit target for 2015 announced in January will likely be reiterated, as stronger than expected GST and corporate tax revenues should offset a slump in petroleum income taxes, whilst allowing for flexibility for some overshoot in operating expenditure. The smaller 3% of GDP deficit target for 2016 will be predicated on higher GST collections, which will both offset a lower dividend from Petronas and be used to fund larger direct cash transfers to the poor. BR1M handouts are likely to be expanded to RM5.5-6bn from RM4.9bn, but still significantly less than the RM10-11bn of fuel subsidy savings. Though there are calls for cuts in tax rates, it would be more prudent to offer one-off personal tax rebates and targeted tax/GST reliefs instead. Likewise, any minimum wage hike should be accompanied by productivity-enhancement measures so as to preserve competitiveness. Reducing EPF employee contribution rate is likely the most cost-effective way of boosting disposable incomes and shielding domestic demand without burdening employers or the fiscal position.
So ultimately, Najib will try to bribe poor voters with the budget in an effort to mitigate the political risks of the 1MDB scandal.
As we've said before, this is exactly what Malaysia does not need as it attempts to grapple with a ringgit that's down 16% on the year and as the fundamental picture for the world's most important emerging economies continues to deteriorate. The market hates uncertainty and the spectre of a no confidence vote certainly falls into the "uncertainty" category.
