BY UNA GALANI

Malaysia is getting another sovereign lifeline. State-owned China General Nuclear Power will buy the energy assets of troubled sovereign fund 1Malaysia Development Berhad for 9.83 billion ringgit ($2.3 billion). That is a big step towards solving 1MDB’s debt troubles. But it will do little to ease the pressure on the currency or on embattled Prime Minister Najib Razak, who also chairs 1MDB’s board of advisers.

1MDB is selling the power plants, which stretch from Malaysia to Pakistan, for around 18 percent less than the equity value it paid for them between 2012 and 2013. People familiar with the process say the deal including debt could be worth as much as 18 billion ringgit. So this will help hugely with debt reduction. The fund had 38 billion ringgit of net borrowings in March 2014, the last period for which 1MDB published accounts.

The quid pro quo for China, which paid more than domestic bidders were willing to hand over, could be future power and rail contracts.

The next step financially will be executing on a $5 billion bailout from International Petroleum Investment Co, which is chaired by Abu Dhabi royal and Manchester City owner Sheikh Mansour bin Zayed Al Nahyan. His investment vehicle was forced to help because it had jointly guaranteed some bonds that 1MDB issued to fund its ill-fated spending spree. To conclude the rescue, 1MDB must now hand over assets – which it says will probably be in the form of U.S. dollar cash deposits and fund units – within six months.

Even then, a wider mess remains. The ringgit has slid 23 percent this year against the dollar. The fund is still at the centre of various probes from Malaysia to Switzerland and the United States amid allegations of graft and mismanagement. The scandal is a deterrent to foreign investors, and means increased political risk, as Najib fends off challenges from the opposition and disquiet from within his own ruling party. The slide in the price of crude oil, which Malaysia depends upon to finance its federal budget, adds extra pressure. 1MDB may be moving to fix its debt problems but Malaysia remains fragile.

First published Nov. 24, 2015

(Image: REUTERS/Edgar Su)

BY UNA GALANI

The world’s most troubled sovereign fund is scrubbing itself clean. 1Malaysia Development Berhad has been at the centre of allegations of graft which have sparked investigations from Hong Kong to the United States. Now a $1.7 billion deal with a Malaysian-Chinese group over prime real estate in Kuala Lumpur means 1MDB’s financial woes are close to resolution.

Malaysian politics has been in turmoil since July, when it was revealed that almost $700 million had landed in the personal accounts of Najib Razak, the prime minister. Najib is chairman of 1MDB’s board of advisers. He denies taking any money from the energy-to-real estate portfolio for personal gain. The country’s anti-corruption commission has said the cash came from an unnamed donor. Other officials that have probed the issue have been axed, including the attorney general and deputy prime minister. Opposition politicians have also asked whether 1MDB funds were used to pay for election campaigns.

The mystery has piled pressure onto 1MDB, which already had a poor reputation for mismanagement and overpaying for assets. Gross borrowings were nearly 42 billion ringgit ($9.8 billion) in March 2014, the last period for which the fund has published accounts. That may have risen to 49 billion ringgit after factoring in a 31 percent fall in the ringgit against the dollar, the currency in which more than half the debt was held, a Breakingviews calculation suggests.

Despite a turbulent year, 1MDB President Arul Kanda has made considerable progress. The former investment banker, who took the helm almost a year ago, has worked Malaysia’s sovereign ties to trim 1MDB’s debts even as institutional investors have cooled on an economy battered by low oil prices.

TWO DOWN, ONE TO GO

Last month, 1MDB agreed to sell its energy assets, which stretch from Malaysia to Pakistan, to state-owned China General Nuclear Power for 17.3 billion ringgit including debt. The transaction should bring closer ties with China, which wants more sway in the region.

In June, 1MDB agreed a debt-for-asset swap with International Petroleum Investment Co, which the fund says will reduce borrowings by around 16 billion ringgit. 1MDB plans to settle the deal with IPIC, which is chaired by Abu Dhabi royal and Manchester City football club owner Sheikh Mansour bin Zayed Al Nahyan, by handing over securities and cash.

Now 1MDB has agreed to sell 60 percent of one of Kuala Lumpur’s biggest real-estate projects, a 486-acre site called Bandar Malaysia that will become a key transport hub, to Iskandar Waterfront Holdings and its partner, state-run China Railway Engineering, for 7.4 billion ringgit.

Beyond that, Kanda has previously said 1MDB will focus on developing its remaining land assets, including a planned 70-acre financial centre. Excluding the leftover Bandar Malaysia stake, these may be worth more than 6 billion ringgit, two sources familiar with 1MDB say. The finance ministry could justify directly owning these, given their strategic value.

Proceeds from the deals could also help address one particularly awkward liability. 1MDB has a $3 billion bond outstanding that does not mature until 2023 but the fund has a strong incentive to pay this back sooner rather than later – even if it means paying bondholders a premium.

THE GOLDMAN PROBLEM

The $3 billion debenture is a glaring reminder of the distrust around the fund. The instrument carries a letter of support from the Malaysian government but trades at just 86 cents on the dollar, indicating financial distress. That stands in stark contrast to two Abu Dhabi-backed 1MDB bonds, which have always traded above par.

Early redemption would also draw a line under the fund’s controversial relationship with Goldman Sachs. The Wall Street bank helped 1MDB to raise a total of $6.5 billion in 2012 and 2013, including the two IPIC bonds. 1MDB paid Goldman roughly $590 million in fees, commissions, and expenses, according to a person familiar with the situation. The fees were more than 9 percent, or almost four times the typical rate for a quasi-sovereign bond at the time.

Goldman charged so much because it put its own balance sheet at risk to raise a large amount of money quickly for a fund that then lacked a credit rating. The bond issue also left the bank exposed to its client’s reputational problems.

1MDB hasn’t decided yet whether to buy back the bonds. Either way, if Kanda succeeds in his ambitious cleanup by completing the deals he has now agreed, 1MDB’s problems will not weigh as heavily directly on the finances of the government as many investors, analysts and politicians had feared.

Najib may never escape the shadow of 1MDB entirely but if the debts can be tamed then his critics will have one less stick with which to beat him.

First published Dec. 31, 2015

(Image: REUTERS/Edgar Su)

BY UNA GALANI

Najib Razak’s father feared his son was “too quiet and introverted for the rough and tumble of politics”. The irony of the quip was not lost on those attending an event in Kuala Lumpur last week to commemorate Malaysia’s second prime minister Abdul Razak Hussein, who died 40 years ago.

Just six months ago, it looked as if Najib might be forced out as leader of the predominantly Muslim country of 30 million people. But the grey-haired 62-year old appears to have dispelled his father’s doubts by winning a bitter power struggle with Mahathir Mohamad, the former prime minister who helped him into office almost seven years ago.

Najib’s political days looked numbered when it emerged last year that nearly $700 million had been deposited in his personal bank account in the run-up to the hotly contested 2013 election. Malaysia’s anti-graft agency has said the money was a donation from the Middle East. Mahathir, who remains influential 12 years after leaving office, insisted the funds were connected to 1Malaysia Development Berhad, a sovereign wealth fund that Najib had championed. At the time, 1MDB was struggling with $10 billion of debt that was threatening Malaysia’s sovereign creditworthiness.

Najib denied taking any public money for personal gain and moved quickly to squash internal dissent, firing his deputy and Malaysia’s attorney general. Meanwhile he turned to friendly foreign governments – particularly China – to take on some of 1MDB’s power and property assets and help the fund repay its borrowings.

The result is that Najib now looks like he is here to stay. Though foreign authorities are still probing aspects of the funding furore, last month’s annual assembly of the United Malays National Organisation, the country’s dominant political force since 1957, produced a strong show of support for the prime minister. The introduction of a tough new security law — supposedly to tackle groups like Islamic State — further reinforces the view that Najib has supplanted Mahathir as Malaysia’s strongman.

Yet the prime minister needs to do more than survive. His next task is to shore up popular support ahead of a general election which must be held by 2018. Last time the ruling UMNO-led Barisan Nasional coalition received a minority of the popular vote, only winning a majority of the seats thanks to some creatively drawn electoral boundaries. Najib’s party wants a more legitimate victory next time.

Global conditions will not help endear Najib to voters, however. The falling price of oil is squeezing Malaysia’s exports: the black stuff generated around 30 percent of the country’s federal revenues two years ago. The government is revising this year’s budget, which was drawn up on the assumption that oil prices would average $48 per barrel, well above the current price of $28. A goods and services tax introduced last year has limited the fiscal fallout, but has been extremely unpopular.

Economic policymaking is also in flux. The country’s long-serving central bank chief is due to retire in April. Governor Zeti Akhtar Aziz has led Bank Negara Malaysia for almost 16 years, steering the country through multiple crises. While her departure removes another thorn from Najib’s side, it comes at a time when the ringgit has lost 21 percent of its value against the dollar in the past twelve months and household debt is amongst the highest in the region.

Worries about further capital flight leave little room to cut interest rates to stimulate growth, which may slow to just 4 percent this year, Capital Economics reckons. The slowdown also undermines Najib’s much-publicised goal to make Malaysia a “high income” country by 2020.

Even if foreign capital can be convinced to stay, Malaysians are still leaving. Local businessmen complain of a chronic brain drain due to growing racial divisions. So-called “affirmative action” policies, which favour the majority ethnic Malays over those of Chinese and Indian ethnic origin, are outdated.

Najib has talked often about the need for national reconciliation, and there is still a lingering belief that he is more moderate than many others in his party. He promoted unity under the slogan “1Malaysia” shortly after he came to power in 2009. Some cabinet ministers in the administrative capital of Putrajaya, rich with Islamic architecture, still hopefully wear an enamel number “1” badge pinned to their jackets.

Yet Najib will struggle to live up to the ideal of racial harmony and the legacy of his father, who brought Malaysians together after race riots in 1969 nearly tore the nation apart.

The ruling coalition has lost many fringe voters to the opposition, whose leader Anwar Ibrahim, another protégé-turned-enemy of Mahathir, was jailed last year on charges of sodomy. That will likely force Najib to court more conservatives and hardline Islamists to prevent another electoral embarrassment. Political observers note that the leader has taken to citing the Koran more than before.

Malaysia’s prime minister may have defied predictions of his demise. But the political and economic cost of his survival is not yet fully clear.

First published Jan. 21, 2016

(Image: REUTERS/Olivia Harris)

BY UNA GALANI

Malaysian Prime Minister Najib Razak has won a bizarre exoneration. The country’s attorney general has declared that $681 million transferred into the prime minister’s personal bank account in 2013 was a “gift” from the royal family in Saudi Arabia. Even more astonishingly, he returned $620 million because it was not used. Though the ruling clears Najib of criminal wrongdoing, it won’t draw a line under the funding furore.

While it may be hard for outside observers to grasp, the news is actually a political victory for the 62-year old leader. Najib’s political opponents have failed to oust him using local laws and also failed to link the payments to 1Malaysia Development Berhad, an indebted sovereign fund the prime minister championed. This is not exactly a surprise given that Najib fired the chief prosecutor’s predecessor last July, in the middle of a probe into the fund. It is, however, more evidence that the prime minister has seen off a challenge from inside his own party led by Mahathir Mohamad, the country’s former leader.

Malaysia’s weak political funding rules allow plenty of room for political patronage. The country does not prohibit foreign donations. Past efforts to reform the system have failed, though the government is now revisiting the issue. Besides, Saudi Arabia is well known for liberally dispersing funds from Bahrain to Egypt to help prop up foreign governments that it deems friendly.

Yet even if the explanation gives Najib the legal all-clear, such overt buying of political influence is still embarrassing. It’s unclear what the Saudi royals expected in return, or why the prime minister decided to hand back all but $61 million of the “gift”. With so much money at his disposal, it also begs the question why his ruling coalition only managed to win a minority of the popular vote in the 2013 general election.

Incontrovertible evidence of direct foreign funding from a fiercely conservative Muslim country will further strain relations between the majority Malay Muslim population and ethnic Chinese and Indian minorities, many of whom are leaving the country in search of more equitable homes. Though Najib may have survived, the circumstances of his exoneration are no less awkward than the details of the scandal that threatened to topple him in the first place.

First published Jan. 26, 2016

(Image: REUTERS/Mario Anzuoni)