BANKRUPTCY INEVITABLE FOR NAJIB'S 1MDB: Investors on alert for massive govt bailout

KUALA LUMPUR - The financial situation appears to be deteriorating for 1Malaysia Development Berhad (1MDB). The fund has shelved plans for an initial public offering of its power plants, a move it had hoped would raise USD3 billion, notes the Wall Street Journal (WSJ) in an analysis. “Some investors are betting the Malaysian Government will end up bailing 1MDB out.”

Moody’s Investors Service has estimated such a rescue could cost as much as 1.4 per cent of the country’s annual economic output. Meanwhile, Malaysia was facing low prices for its major exports: oil, natural gas, palm oil and rubber.

“At the end of the day, this entire entity is owned by the Ministry of Finance,” said Dhiraj Bajaj, a fund manager with Swiss bank Lombard Odier Darier Hentsch & Cie. who bought more 1MDB debt after recent declines, betting the government will step in with a bailout if needed.

Malaysia’s police, auditor general and a parliamentary committee are investigating the fund’s investment activities. This month came word of a fourth probe, as Bank Negara launched an investigation of 1MDB’s offshore borrowings and foreign investments.

Former Prime Minister Mahathir Mohamad says 1MDB’s assets are too meager for its huge debts. “What happened to that money?”

Mahathir said in an interview. “They can’t explain.”

He has publicly called on Najib to resign, as have other former allies from the ruling party and opposition politicians.

Were the Prime Minister to heed such calls, the result could be a setback for US interests in Southeast Asia. Under Najib, relations with the US have improved as Washington tries to build up its alliances in the region to counter China’s rise.

Najib, who is chairman of 1MDB’s board of advisers, has said he did nothing wrong and has urged critics to wait for the results of the investigations. His office didn’t respond to specific questions about the fund’s activities, including about any role in election-related spending.

“Unfortunately, the Prime Minister’s political opponents, unwilling to accept his record or the facts, continue to try to undermine him with baseless smears and rumors for pure political gain,” his office said.

Najib faced political problems almost immediately after he took office in 2009.

His party, the United Malays National Organization (Umno), had only narrowly retained power a year earlier. Umno has headed every government since Malaysia gained independence from Britain in 1957.

It has been losing the financial backing of the country’s ethnic Chinese minority who dominates the economy but has been growing frustrated with government programmes that favour ethnic Malays. The ebbing support, according to party insiders, forced Najib to look for other sources of financing.

Najib formed 1MDB in 2009, saying the fund would develop lucrative industries and create a new financial district in Kuala Lumpur that later was named after his father, the country’s second Prime Minister. Besides its development efforts at home, the fund has poured money into investments such as power-plant purchases abroad and a since-liquidated venture with a Saudi oil company. The fund has said it made money on the oil venture but hasn’t disclosed details.

However, 1MDB has rolled up more than RM42 billion of debt that it now struggles to repay, and has invested in such projects as power plants in foreign countries and an oil venture abroad that yielded no oil.

Amid a close election, it indirectly supported Najib’s campaign, according to an examination by theWSJ.

Concerns over 1MDB’s high debts and limited transparency have triggered four government investigations. The concerns also have set up a confrontation between Najib and his mentor, Mahathir, who led Malaysia for 22 years.

Though wholly owned by the government, 1MDB isn’t government-funded, except for a small initial amount; it has to raise money in the debt markets for its projects. In an “F.A.Q.” section of a news release in December, 1MDB said there was no reason to be concerned about its debt level.

Still, the fund has at times rescheduled its debt repayments. And in May, 1MDB got a USD1 billion capital injection from a company in Abu Dhabi — a close ally of Malaysia — to help meet a looming loan repayment. Interest costs ate up half the fund’s revenue in the year ended March 31, 2014, the last for which the fund has filed a financial report.

Worries about 1MDB’s debt have helped make Malaysia’s markets among the worst performers in the world in recent months, according to investors. Malaysia’s currency, the ringgit, has fallen 6 per cent against the US dollar this year, to its weakest in almost a decade. Though credit-rating agencies consider Malaysia’s debt safe, government bond prices have fallen, and foreign investors are pulling cash out of the country’s markets at an accelerating rate.

Najib, campaigning in Penang, promised to build low-cost housing on the land.

Critics said 1MDB’s spending amounted to the use of state funds for electioneering. “They have shown they have got lots of cash to throw,” said Lim Guan Eng, Penang’s Chief Minister and a member of the opposition Democratic Action Party.

Opposition politicians also have criticized 1MDB for raising billions of dollars just weeks before the 2013 election. In March 2013, the fund sold USD3 billion in bonds.

The results of the May 2013 election turned out to be the worst yet for Umno’s ruling coalition. It not only didn’t prevail in Penang but didn’t win a majority of the national vote, either. Najib remained in power only because of electoral rules that give more parliamentary seats to candidates from Umno’s rural heartlands.

Last month, in an election to fill a vacant seat in parliament, 1MDB used the Twitter feed of its foundation to promote the government’s candidate. A 1MDB spokesman declined to comment. - FMT