BY UNA GALANI

Malaysia will bear most of the burden of its sovereign fund scandal. Abu Dhabi helped the Southeast Asian nation finance 1Malaysia Development Berhad  back in 2012. It subsequently looked like the Gulf emirate would share a large part of the multi-billion dollar fallout relating to the fund, now the focus of money-laundering probes around the world. But Malaysia is throwing its chequebook at the problem, paying up to try to repair relations between the two states before Prime Minister Najib Razak seeks re-election.

A debt settlement agreement announced on Monday addresses most of the lingering financial mess. 1MDB will repay a $1.2 billion loan to IPIC by the end of this year. It will also re-assume responsibility for two bonds, which will cost another $4.8 billion including interest.

The Malaysian investor had initially played hardball with Abu Dhabi. It stopped paying coupons on the notes last year after the pair fell out over a separate $3.5 billion payment that went missing. 1MDB paid that amount to an entity with a similar name to a unit of IPIC, which the latter has claimed it never received. Executives from the Abu Dhabi outfit were later named in U.S. lawsuits seeking to seize $1 billion of assets, which prosecutors claim were bought with money stolen from 1MDB. The pair have agreed to enter discussions about this final part of the dispute outside of court. But it is unlikely the funds will be fully recovered.

The entire agreement is backstopped by the Malaysian finance minister – Najib himself. So effectively the outstanding liabilities of 1MDB, now mostly a shell company, sit squarely with the taxpayer. That is, unless one or both sides renege on the deal, as they did with a previous settlement in 2015.

Najib is in a strong position ahead of a general election, which may take place later this year. The opposition is weak and he has few strong internal rivals within the ruling party. But the ongoing global investigations around the vehicle that he helped create could yet throw up nasty surprises – and this deal suggests Najib is uneasy of the threat that poses. Patching up relations with Abu Dhabi removes one potential source of bad news, and is the first step to repairing ties with a key ally, albeit at a high price.

First published April 27, 2017

(Image: REUTERS/Athit Perawongmetha)

BY UNA GALANI

Najib Razak is a marked man. With a shock election defeat as prime minister, his top defence against the multi-billion-dollar scandal at 1Malaysia Development Berhad has gone. Old inquiries into allegations of misappropriated money at the sovereign fund may now reopen at home, and overseas investigators have less reason to go easy on him.

There will be domestic pressure to go after the key architect of the fund. The country’s leader-in-waiting, 92-year-old Mahathir Mohamad, said on Thursday that if Najib has done something wrong he would face the consequences. Indeed, the scandal was core to the campaign waged by Mahathir’s alliance and the opposition benefited from public animosity toward Chinese investments, which flooded into the country as a result of the financial fallout from 1MDB.

Reopening inquiries probably requires a new attorney general. At the height of the scandal in 2015, Najib effectively replaced the chief prosecutor who was investigating the fund. His successor then exonerated the premier, declaring some $700 million that appeared in his bank account was a “gift” from the royal family in Saudi Arabia. Najib has always denied any wrongdoing.

Overseas agencies also have leverage. 1MDB has been probed in six countries, including Switzerland and Singapore. U.S. Attorney General Jeff Sessions called the scandal “kleptocracy at its worst” after his department alleged $4.5 billion went astray. The complaints didn’t name the prime minister but did reference a Malaysian official with responsibilities that matched the premier’s – and his stepson, Riza Aziz, is cited as having benefited from the stolen money.

By not naming him, the United States effectively went easy on Najib, rather than risk pushing him entirely into China’s embrace or destabilising the majority Muslim country. Now they may take their cue from the new government. The Americans could try to nail him as a gift to the new regime, in exchange for a promise to ally with the United States over China.

Yet if chased, Najib could be tempted into the dangerous politics of mutual destruction. Both he and Mahathir have been dogged by scandal. A Najib-led attack on the credibility of the new government could make an unpredictable situation much worse.

First published May 10, 2018

(Image: REUTERS/Athit Perawongmetha)

BY UNA GALANI

1Malaysia Development Berhad is back to haunt banks. Wall Street fingerprints were all over the scandal in which billions of dollars from the sovereign fund were allegedly laundered overseas. After a shock election defeat for Najib Razak, the former prime minister, a new government led by 92-year-old Mahathir Mohamed could reopen enquiries and come after lenders involved in raising and moving money. That stirs things up the most for Goldman Sachs and Deutsche Bank.

Goldman pocketed eye-popping fees arranging three offshore bond deals in 2012 and 2013 that raised $6.5 billion for the fund. At its client’s highly unusual request, Goldman even arranged to send almost half the proceeds to a small Swiss private bank. Even after the fee controversy, Deutsche arranged two further loans worth more than $1 billion for the already-indebted fund in 2014.

Investigative agencies have already done much of the digging. A local parliamentary report, in 2016, detailed suspect payments and the role of banks but stopped short of implicating Najib who denies any wrongdoing. Foreign agencies, led by the U.S. Justice Department, allege as much as $4.5 billion was misappropriated although they received little support from Malaysian authorities, which cleared Najib after he effectively removed the chief prosecutor investigating the fund.

With help, foreign agencies could turn their focus from seizing assets – including a yacht, jewellery and a Picasso painting – to nailing Najib and the banks. That’s an unwelcome headache for Deutsche, which is struggling to restore profitability and curtailing its global investment banking ambitions. For Goldman, renewed attention on its past dealings comes just as the bank is enjoying a trading revival and expanding its retail banking arm. However, with Gary Cohn, former Goldman president, out of the Trump administration, going after the bank will be less awkward.

The best hope of reprieve rests with Mahathir. He has also been dogged by scandal, and may decide it’s not worth the trouble of reviving the 1MDB affair and inviting a potentially damaging counterattack by Najib. If he does seek to hold people and entities to account, lenders will almost certainly find themselves in the firing line sooner or later.

First published May 10, 2018

(Image: REUTERS/Athit Perawongmetha)

BY CLARA FERREIRA MARQUES

Malaysia has a chance to rebalance its relationship with China. Newly elected Mahathir Mohamad has accused his predecessor of selling out to Beijing, and vows to review investment deals. The country’s strategic position and long-standing ties with the People’s Republic give him leverage to renegotiate. But the Malaysian economy still needs Chinese support, so the haggle will stay polite.

Outgoing Prime Minister Najib Razak bet heavily on cozying up to China. He capitalised on connections made by his father, Premier Abdul Razak Hussein, who established diplomatic ties with Beijing in 1974. When Najib was caught in a scandal around the 1Malaysia Development Berhad  sovereign fund, Chinese officials lent a hand, purchasing power assets and real estate connected to 1MDB at generous prices.

Enlightened self-interest, perhaps, given President Xi Jinping was pushing his “Belt and Road” overseas influence initiative, and Malaysia made a perfect regional beachhead.

Either way, Beijing’s largesse has been felt in this $300 billion economy. According to DBS research, China contributed roughly 20 percent of the increase in Malaysia’s foreign direct investment between 2013 and 2017. Chinese firms are leading projects like a $14 billion rail link connecting ports on the South China Sea to shipping routes off the west coast, while investing in new shipping terminals too.

Belt and Road money has been less controversial in Malaysia than elsewhere, at least until campaigning ahead of this election. Critics complain of Chinese firms importing workers and crowding out local rivals, as well as murky contract terms. There are grounds for reviewing loan rates, preventing cost overruns, and maybe killing some projects entirely. Indonesia has trimmed its list of investment targets to avoid white elephants, but Malaysia hasn’t quite gotten around to it.

Mahathir can push back. China needs an ally in a region where it has many acquaintances but few friends. The country is already a regional hub for firms like Alibaba. Malaysia is in a key position geographically too, on the Strait of Malacca through which most of China’s oil imports are carried.

But the middle-income country needs a boost to achieve the developed economy status it covets. Chinese cash, properly guided and priced, can help, especially if technological cooperation helps upgrade local manufacturing and exports. The two sides have every reason to wrangle over the details, then agree to get along.

First published May 11, 2018

(Image: REUTERS/Kim Kyung-Hoon)

BY CLARA FERREIRA MARQUES

It’s too soon to cash a Malaysian election dividend cheque. A muted reaction by investors to the shock election victory of Mahathir Mohamad suggests some optimism over potential reforms. Higher oil prices will help. His past record and some early moves, however, give reason for pause.

Fears of extreme market turbulence after Malaysians voted out the ruling Barisan Nasional alliance last week, ending six decades of rule, have turned out to be exaggerated. In the end, there was a smooth transfer of power. Soothing, if vague, noises from Mahathir on supporting the $300 billion economy played a part, as did the swift appointment of a “Council of Elders” and a core cabinet.

The appointment of former banker Lim Guan Eng to be finance minister is a good portent. A competent pair of hands who ran a successful state, he is also Malaysia’s first ethnic Chinese finance minister in 44 years, an important gesture from Mahathir, who backed Malay privileges as prime minister until 2003 and can now move away from such destructive policies. And it ends the structure implemented by Najib Razak, the long-time leader ousted by Mahathir, who was his own finance minister, too. Yet Lim also embodies the contradictions and tensions of the new alliance: he was twice jailed by Mahathir, in 1987 and 1998.

It’s far from clear that at 92, the man elected on a wave of discontent has changed into a reformer. Mahathir tolerated no opposition during his last tour of duty and consolidated power. There are already signs of strain in the new coalition, though. Senior figures from one party are suggesting cabinet appointments were made without broad consultation.

Keeping the alliance together is critical to strike the delicate balance between populist promises and the need to retain fiscal discipline, as well as to separate the state and business. Mahathir once backed large-scale projects like the Proton car at the expense of economic logic. Rooting out corruption in the country also requires more than just containing Najib and promising to investigate links to the $4.5 billion 1Malaysia Development Berhad  scandal: moving fast to regulate party funding, support whistleblowers and make the anti-corruption commission independent would reassure more.

There are some small signs of scepticism. Shares of Opcom Holdings, a fiber-optic cable company run by Mahathir’s son, are up almost 50 percent. It’ll take considerably more evidence to believe Mahathir 2.0 will be a significant upgrade from version 1.0.

First published May 14, 2018

(Image: REUTERS/Lai Seng Sin)