Andrea Tan and Pooi Koon Chong
Bloomberg
February 5, 2016

Bank accounts frozen. Bankers quizzed. As offshore authorities seek to track money flows involving Malaysia’s troubled government investment fund, fresh questions are rising about doing business in the country.

Crisscrossing countries from Switzerland to the U.S., Middle East and Singapore, investigators are chasing a trail of transactions linked to 1Malaysia Development Bhd. With the probes potentially running for years, investors and analysts say it may damage the perception that Malaysia is trying to become a more transparent place.

The risk is political, economic and commercial. Debt-ridden 1MDB, which is in the process of being broken up, was touted as the vehicle for the government to spur growth, investing mainly in property and power generation. Prime Minister Najib Razak — who has faced a separate furor over a $681 million personal donation from the Saudi royal family — sits on its advisory board.

The premier was cleared of any graft, and $620 million of the funds were returned. He and 1MDB have consistently denied any wrongdoing.

“The scandal has thrown Malaysia’s governance failings – both political and economic – into sharp relief,” said Nicholas Spiro, a partner at London-based Lauressa Advisory Ltd. “The 1MDB scandal raises the stakes significantly.”

State Companies

Malaysia’s economy has long been dominated by state-run companies like power producer Tenaga Nasional Bhd. and lender Malayan Banking Bhd., and the top 17 government-linked companies accounted for about a quarter of the nation’s stock market capitalization as of July 28, according to government data and Bloomberg calculations. While directors or heads of several GLCs have been associated with 1MDB, they and their companies haven’t been linked to alleged financial irregularities at the fund.

1MDB is currently the subject of overlapping investigations at home and abroad. Last week the Swiss Attorney General’s office said a probe revealed “serious indications” that about $4 billion may have been misappropriated from Malaysian state companies. Najib is not one of the public officials under accusation, it said.

Singapore authorities said in response to queries on 1MDB that they have seized “a large number” of bank accounts in connection with possible money-laundering in the country. 1MDB has said it is committed to fully cooperating with any lawful authority and investigation.

‘Game of Thrones’

The scandals, alongside months of political tensions for Najib, have unnerved senior figures in Malaysia. Najib’s brother, CIMB Group chairman Nazir Razak, wrote on Instagram on Jan. 30 that the future for Malaysia “terrifies him,” likening the current environment to the HBO series “Game of Thrones.”

Rafidah Aziz, Malaysia’s trade minister for more than two decades until 2008, mostly during the era of then-premier Mahathir Mohamad — a fierce Najib critic — said she was “mentally fatigued” and worried the country was “on a scary downhill course.”

“Some key parts of the system is indeed broken,” Rafidah said on Facebook Jan. 30. She declined on Wednesday to comment further.

The probes come amid a slowdown in growth and investment, with sliding oil prices taking a bite out of government revenue, limiting Najib’s ability to both rein in a fiscal deficit and stimulate spending. The economy grew at the slowest pace in more than two years in the three months through September from a year earlier.

Market Outflows

“It’s a difficult environment that needs to be improved and we seem to be a bit stuck,” said Gerald Ambrose, managing director of Aberdeen Asset Management Sdn in Kuala Lumpur. “It is difficult, having lived in Malaysia myself for 25 years. That does worry me.”

In 2015, foreign investors sold a net $7.4 billion of Malaysia stocks and bonds and the ringgit fell 19 percent. Outflows spurred in part by the rout in oil and China’s slowdown led Najib to announce in September he’d tap state funds for as much as 20 billion ringgit to bolster government-linked shares.

While it is early days for the overseas probes of 1MDB, Mixo Das, a Singapore-based strategist at Nomura Holdings Inc., says it’s damaged how investors perceive Malaysia.

“The market is pricing in a potential long-term investment climate deterioration,” said Das, who has an underweight rating on Malaysia given the poor corporate earnings outlook this year.

‘The Exception’

Malaysia’s global score worsened in Transparency International’s Corruption Perceptions Index for 2015, putting it on a ranking near Slovakia and Cuba. Issues related to 1MDB contributed to the nation’s fall to 54th from 50th in 2014, it said.

Malaysian companies have made strides in improving transparency, Economic Planning Minister Abdul Wahid Omar said Feb. 2 in an interview with Bloomberg Television.

“We must remember that 1MDB is the exception,” he said. “The norm for government-linked companies would be the massive transformation that we undertook some eleven years ago and we have seen this group of 20 large government-linked companies, they have improved in terms of their governance, their performance and their role in nation building. ”

Kedah Ousting

Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife Asset Management Services Bhd. who oversees more than $1 billion, said investors remained focused on fundamentals.

“What most investors are looking for is political stability and certainty — despite all the background noises, these two elements are still very much intact in Malaysia at this juncture,” she said. “I believe there are still plenty of opportunities for investors in Malaysia.”

The 1MDB difficulties are intermixing with political turmoil. This week Najib succeeded in replacing Mukhriz Mahathir — the son ofMahathir — as Kedah state minister with a ruling party ally. Najib has fired other detractors and curbed dissent.

Wong Wing Keong, who owns an information security services company in Malaysia, said the streets lack a festive Chinese New Year atmosphere as citizens fret over the falling ringgit and political squabbling.

‘Very Uncomfortable’

“There’s a lot of uncertainty,” Wong said. “People are wondering if they should park their funds offshore. All these probes — they’re making some very uncomfortable.”

Najib was cleared of wrongdoing by Malaysia’s attorney general last month. The probe found a “personal contribution” of $681 million from Saudi Arabia’s royal family that appeared in his bank accounts before a general election in 2013. His office did not respond on Thursday to requests for comment.

Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors Ltd., which oversees about $120 billion, said he won’t be allocating more funds to the country, though some economic headwinds hitting Malaysia are beyond its control.

“If you go back a decade ago, emerging markets were a favorite place to invest in, but now there are issues with commodities and governance,” he said. “It probably doesn’t change anything in Malaysia, but it does in a sort of way change the view of others towards Malaysia. It is something you need to be wary of. ”