Scandal in Malaysia

Wall Street Journal
July 5, 2015

Evidence that a state-owned fund diverted money to the Prime Minister.

The Journal broke the news Friday that Malaysian government investigators have discovered evidence of potential corruption involving Prime Minister Najib Razak. Almost $700 million linked to the state-owned investment fund 1Malaysia Development Bhd., or 1MDB, was allegedly transferred into his personal accounts. Neither the original source or ultimate destination of the money is clear.

Mr. Najib’s office put out a statement that “there have been concerted efforts by certain individuals to undermine confidence in our economy, tarnish the government and remove a democratically-elected prime minister.” It called the Journal article a “continuation of this political sabotage.”

The size of the alleged diversion is shocking, but the abuse of public entities for private gain is politics as usual in Malaysia. The scandal is a case study in the effects of one-party rule by the United Malays National Organization (UMNO) on the country’s institutions.

Mr. Najib helped set up 1MDB in 2008 when he was Deputy Prime Minister to facilitate investment from the Middle East. It quickly took on $11 billion in debt as it bought assets in energy and real estate. After a plan to sell shares in an energy subsidiary fell through, the fund has had difficulty servicing its debt and has switched auditors at least twice. The debacle has pushed up yields on Malaysian debt as it eroded investors’ faith in the government.

Many of the fund’s complex web of transactions raised troubling questions when they became public. The Journal reported last month that after 1MDB apparently overpaid for the assets of a company, that company donated to a charity led by Mr. Najib that spent heavily ahead of the 2013 general election in the battlefield state of Penang. The Prime Minister’s Office called the story baseless.

Much of the coverage of 1MDB within Malaysia has focused on the role of Jho Low, a young deal-maker and friend of the Prime Minister’s stepson who has described himself as a “concierge service” for investors. Leaked emails show he used a federal loan guarantee from Mr. Najib that didn’t have proper central-bank approval, and that he brokered a $2.5 billion joint venture with an obscure Abu Dhabi company called PetroSaudi that quickly fell apart. Mr. Low says he holds no position at 1MDB and denies wrongdoing.

An important facet of the 1MDB story is the allegation by UMNO and opposition politicians that 1MDB underpaid for public assets such as land and overpaid for assets bought from influential Malaysians. After the fund was forced to delay debt repayments and the political cost for Mr. Najib began to rise, the fund began to sell some of its assets to other public entities at suspiciously high prices.

This is a familiar story. A government investment scheme is launched with grandiose promises of moving up the value chain and other economic jargon. Then the asset stripping begins. If the project goes reasonably well, the ruling party has an accomplishment to point to, with the high costs conveniently forgotten. If it fails, public money bails it out in some form, with the state-owned oil monopoly Petronas the ultimate backstop.

The trouble of late is that the falling price of oil has drained the trough of public money out of which the politically well-connected are used to feeding. That has led to internal strife within the ruling elite. Former Prime Minister Mahathir Mohamad has become the public leader of a campaign to push Mr. Najib to resign. But many in the government remain loyal to the Prime Minister out of fear that if he goes, the whole system could come crashing down.

UMNO has ruled Malaysia for a half century by keeping the Malay majority loyal with racial preferences and patronage. As the country’s middle class has grown, awareness has spread of the true cost of the system and the ruling coalition’s electoral machine has begun to falter.

If the allegations against Mr. Najib prove true, Mr. Mahathir and others are right to call for his resignation. But incompetence and greed won’t be rooted out until Malaysia’s democracy matures into a true multiparty system.

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