NAJIB'S 'EXTENDED RULE' WILL HURT BUSINESSES, WARNS FORBES: HE WILL PUT POLITICAL SURVIVAL ABOVE EVERYTHING

The current scandals surrounding controversial debt-ridden sovereign investment fund 1Malaysia Development Berhad (1MDB) are proving difficult to shake off for Prime Minister Najib Razak, who set up the fund and chairs its advisory committee. In the latest development, the Wall Street Journal on March 30 cited Malaysian investigation documents which show that some $15 million of a larger sum of money in Najib’s bank accounts was allegedly used to purchase luxury goods across several countries. Global investigators believe that most of the money in Najib’s accounts originated from 1MDB via several foreign entities.

Taking center stage among the scandals is the alleged movement of over $1 billion through 1MDB-linked entities into Najib’s personal bank accounts from 2011 to 2015, which the Wall Street Journal has exposed so far. Najib denies that he took state funds through 1MDB, and claims that the money was a ‘political donation’ from a Saudi royal. However, the government’s reluctance to fully disclose the donor’s identity and motive has hurt Najib’s efforts to counter domestic skepticism towards 1MDB. The scandal has prompted more grassroots leaders, albeit still a small minority, from the ruling United Malays National Organisation (UMNO) to brave disciplinary action to call for Najib’s dismissal – an unthinkable prospect before the 1MDB scandal started to unravel in 2014-15.

A key barometer of Najib’s shelf-life is UMNO’s ongoing grassroots meetings that run until May; a critical number of branch leaders calling for his resignation will significantly raise the likelihood of his ousting by year-end. At the time of writing, however, early indicators point to Najib’s survival this year. Party warlords continue to back Najib, suggesting that dissenters remain a distinct minority that can be bought over, intimidated, ignored, or deposed. Najib has maneuvered himself into a stronger position today than at the height of the scandals last year because he has shed his non-confrontational manner for strongman tactics reminiscent of those exercised by Mahathir in his heyday. To Najib’s benefit, there are few indications that UMNO is actively considering an alternative leader for the next elections due to be called by 2018.

The price of survival

Najib’s extended rule is likely to exact a significant price on the business climate. The 1MDB scandal is likely to be the tip of the corruption iceberg, and its roots may reach deep and wide within the public sector. Significant reputational risks lie in wait for businesses dealing with state-owned companies and local partners closely linked to Najib’s administration. Swiss investigations into 1MDB have so far implicated two major Malaysian conglomerates in alleged ‘criminal activity’, even as details have been scarce. Investments in 1MDB made by at least two government-linked agencies have come under opposition scrutiny, and could yet be included into ongoing foreign probes as investigators dig deeper. Other government sectors also pose substantial corruption risks, with defense being highly vulnerable.

With Najib preoccupied with political survival, state institutions and top decision-making bodies on fiscal and economic policies are likely to be increasingly politicized, with Najib’s loyalists replacing independent figures and technocrats who would otherwise help steer Malaysia more capably through a period of global economic uncertainty.

The result is likely to be erratic policymaking at times, with larger foreign investment projects at risk of being ensnared in the politicking. The unexpected decisions in January and March to hike foreign worker levies and to indefinitely freeze all foreign worker recruitment may be nascent signs of a new normal to come.

- http://www.forbes.com/