Event

An investigation from a government task force (gathering the central bank, the police and the anti-corruption commission) of the mishandled and over-indebted State Investment Fund 1MDB would have the evidence of USD 700 million transfers to PM Najib Razak’s personal accounts before 2013 elections. If this is confirmed and leads to the first criminal charges ever against a PM, he would probably have to step down. Nevertheless, Mr Razak promises to resist such a prospect and made a government reshuffle at the end of July, firing his critical deputy PM and replacing him by Home Minister Mr Hamidi, close to the PM.

Impact on country risk

As chairman of the 1MDB Development Fund, Mr Razak is directly involved and hit hard by the latest revelations. For Malaysians, this major scandal could be the straw that broke the camel’s back. Mr Razak has indeed seen his position much weakened by a series of negative events, from the Malaysian airlines probable crash mismanagement last year to the unpopular introduction of a national goods and services tax in a context of weakened economic conditions. At the moment, given the divided opposition and the absence of a leadership alternative within the ruling UMNO coalition, Mr Razak is likely to limit measures to his recent government reshuffle. Mr Razak has been in power since 2009 and determined to stay as he blames a political plot. However, more could follow if popular discontent intensifies. If Razak had to resign, the political crisis could deepen and see new deputy PM Mr Hamidi succeed to Razak which would probably ensure political continuity and pro-Malay policies until the 2018 elections. Snap elections remain unlikely in the current economic context. As a matter of fact, political instability comes at an awkward moment, as Malaysia is among Asia’s hardest hit by tumbled oil and gas prices – which incited Credendo Group to downgrade its short-term political risk rating from 1/7 to 2/7 last February – given the importance of energy commodities for exports and especially the budget. As a result, further budget adjustment is needed, foreign exchange reserves keep falling whereas the ringgit has been depreciating constantly since last September (-20% against a stronger USD). The political crisis is exacerbating the ringgit’s decline as investor confidence is affected by Malaysia, a traditional haven of stability, facing one of the most difficult times in years between political uncertainty and an economic slowdown.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com