Nyshka Chandran
CNBC
30th July 2015

The hasty top-level reshuffle by Malaysia’s embattled Prime Minister Najib Razak in the wake of a corruption scandal will do little to encourage foreign investment amid an already tense political backdrop and a sustained currency crisis, analysts warn.
Announced on Tuesday, the Cabinet reshuffle involved the sacking of Deputy Prime Minister Muhyiddin Yassin after he called on Najib to explain the controversy surrounding a Wall Street Journal (WSJ)report earlier this month that revealed nearly $700 million from quasi-sovereign wealth fund One Malaysia Development Berhad (1MDB) was deposited into the Prime Minister’s personal bank accounts. The accusation is particularly explosive given that 1MDB is in debt to the tune of $11 billion.

The Prime Minister has denied accepting money for personal gain and is reportedly considering a defamation lawsuit against the WSJ.

Tuesday’s reshuffle also saw cabinet posts given to four senior members of the Public Accounts Committee (PAC) – the group overseeing the 1MDB parliamentary investigation.

“This reshuffle is definitely motivated by politics; it’s obviously an attempt to delay the 1MDB process. The Attorney General is also being replaced and that’s going to create a further bump in the investigation,” Wong Chen, a member of Malaysia’s parliament from an opposition party told CNBC on Wednesday.

Wong expects the conclusions from the 1MDB investigation will likely be delayed for several months as result of the Cabinet changes.

The PM released an official statement on Tuesday in which he briefly explained the motivations behind the reshuffle. He justified his decision to replace his deputy Yassin by stating that “I must have a solid and unified team moving in the same direction,” adding that he hoped the new Cabinet “ensures that the Government has the strength and unity to focus on my development plans.”

“It’s been pretty shocking to watch just how far Najib is willing to go to protect himself,” Adam Jarczyk, Asia Pacific practice leader at Frontier Strategy Group, told CNBC, referring to Tuesday’s move. “Frankly speaking, Najib’s actions have created more problems than they have solved.”

Looking ahead to Malaysia’s general election — due before 2018—parliament member Wong expects an improved performance from opposition parties if the 1MDB scandal goes unresolved.

The hit to confidence

Politics aside, Tuesday’s shake-up does not bode well for Southeast Asia’s third-largest economy either.

“This 1MDB debacle has raised questions about the government’s transparency and its ability to govern effectively, particularly when it comes to its own finances. It’s also been bad for the business environment and executive sentiment on the country,” Jarczyk said.

“While the overall effect of the 1MDB saga is hard to pin down, suffice to say that it is not something that Malaysia needs at this point, given that it already faces a number of substantial economic challenges ahead,” echoed OCBC economist Wellian Wiranto said in a note on Wednesday.

Currency volatility and bad economic news are other factors contributing to bearish calls on Malaysia.

Broad dollar strength and a rout in commodity prices have seen the ringgit tumble to levels not seen since the Asian Financial Crisis, making it the region’s Asia’s worst-performing currency with losses exceeding 9 percent year-to-date.

Commodities account for one-third of total exports, and lower energy prices have contributed to a thinning of the trade surplus. The latter is especially dangerous given the risk of global capital jitters ahead of a potential U.S. interest rate hike, and because foreign ownership of Malaysian government bonds remain lofty at 50 perfect.

“We expect domestic politics and cracking global crude price to sustain Malaysian financial assets as Asia’s underperformers,’ ING remarked in a Wednesday note.