Business as usual for Najib after US alleges 1MDB fraud

KUALA LUMPUR — The day United States prosecutors alleged massive fraud at a Malaysian state fund, it was business as usual thousands of kilometres away for Prime Minister Najib Razak. Attending an evening feast for thousands of civil servants, he shook hands and posed for selfies.

The next day he showed up at the exhibition of a new sedan by the country’s top carmaker and held a national development-planning meeting. He only briefly addressed the US news, saying the Department of Justice (DOJ) action should be allowed to run its course. He also said on Monday (July 25) the government wanted those named in the DOJ’s lawsuit to clear their names to show that there was no misuse of public funds as alleged.

“Let’s not get carried away with the matter. Leave it to the judicial process for we believe that sooner or later the truth will prevail,” he said, adding that Malaysia takes a serious view of the lawsuit and was prepared to extend cooperation to all quarters in their investigation.

The message was clear: The Prime Minister is focused on matters at home, especially the economy, as he seeks to preserve support among his ruling party United Malays National Organisation’s (Umno) base of ethnic Malays, many of them in rural areas.

Having already weathered a year of scandals over multimillion-dollar political donations, it would take a major development domestically to put the Prime Minister at risk of losing his job in the near term. That is even as the US civil suits seek to seize more than US$1 billion (S$1.36 billion) in assets that prosecutors allege was siphoned off from troubled state fund 1Malaysia Development Bhd (1MDB), whose advisory board Mr Najib chaired until recently. Mr Najib has denied any wrongdoing.

‘FAIRLY SECURE’

“The market is quite clear that Najib is fairly secure at this stage and there isn’t too much of a political challenge to him,” said Mr Vaninder Singh, a Singapore-based economist at Royal Bank of Scotland. “As a consequence, what we’ve seen is that the impact from any 1MDB-related news stories on financial markets has come off significantly over the last few months.”

US investigators laid out their case on Wednesday that more than US$3.5 billion exited 1MDB fraudulently and was spent on paintings, luxury real estate and a Hollywood blockbuster, and at least US$700 million flowed into accounts controlled by an unnamed top Malaysian official.

The Prime Minister has previously acknowledged a similar amount went into his accounts before the 2013 general election. He has said the money was a private donation from the Saudi royal family and most of it was later returned. Among those identified in the US suit was Mr Najib’s stepson Riza Aziz and his associates. The US did not name any individuals as defendants.

There is no immediate indication of whether the US is readying criminal charges against Malaysian officials, and the chances of Mr Najib being indicted at home appear low. 

Domestic investigations into 1MDB and into Mr Najib’s actions have largely been wrapped up. 

The Malaysian Attorney-General concluded earlier this year that Mr Najib did not engage in any graft.

As markets wobbled last year on the revelations of the money that reached Mr Najib’s accounts — foreign funds sold a net RM30.6 billion (S$10.23 billion) of Malaysia stocks and bonds in 2015 and the ringgit fell 19 per cent — the Prime Minister moved swiftly to shore up support.

He fired detractors including his deputy prime minister, and curbed dissent within Umno. An opposition in disarray, marked by periods of public infighting, has helped him.

In the aftermath of the US move, senior officials in Malaysia were quick to close ranks around Mr Najib. History has shown the US can act too hastily and then be proven incorrect, said one minister, adding no 1MDB money is missing or stolen. There is no evidence from any probe anywhere that funds were misappropriated, said the Attorney-General, expressing “strong concerns at the insinuations and allegations” against Mr Najib.

Other officials said the US suit is part of a wider plot by Mr Najib’s detractors to topple a democratically-elected government, with one warning foreign meddling may lead Malaysia to become like Syria or Iraq.

“What we don’t know yet is whether there is anyone left in Malaysia to convince one way or another,” said Mr Gregory Poling, a South-east Asia specialist at the Centre for Strategic and International Studies in Washington. 

Investors meanwhile are focused on the need for stability. The currency has see-sawed this year amid an uncertain economic outlook, turning Asia’s best performance in the first three months of 2016 to one of the region’s worst since then.

There is residual public anger over a goods and services tax implemented more than a year ago, and spending constraints could leave Mr Najib with less room to increase cash handouts that are currently given to seven million Malaysians, or one in every four citizens. 

The Prime Minister delved into the populist playbook last year for a budget sprinkled with handouts and subsidies, but lower crude prices have curbed revenue.

Still, foreign investment is holding up and rose 28 per cent in the first quarter from a year earlier, led by the services sector.

NEXT ELECTION

For Mr Najib, economic stability is crucial as he seeks the votes of rural and semi-urban areas in the next election due by 2018. At stake for Umno is the unbroken rule of its Barisan Nasional coalition since independence in 1957. He has had recent wins in local polls in Sarawak and two federal by-elections.

“1MDB seems not to be the top issue for rural voters and they eye more on economic and social welfare, which could be tackled by targeted fiscal measures,” said Mr Vincent Tsui, a Hong Kong-based economist at AllianceBernstein.

While the 1MDB drama has raised doubts about governance and accountability in Malaysia, the structure of domestic politics likely protects Mr Najib. His mentor-turned-nemesis Mahathir Mohamad, who was prime minister for over two decades, has repeatedly said Umno will lose the next election if Mr Najib is leader.

Electoral watchdog, the Coalition for Clean and Fair Elections, is considering another anti-Najib rally similar to one that brought out an estimated 300,000 people last August. The Prime Minister’s supporters say they will respond with their own march to show their allegiance.

As long as Mr Najib retains the backing of Umno’s powerful division heads — the bulk of whom have stood by him in the past year — fresh protests will carry little weight. The views of those chiefs will become increasingly important closer to an election, depending on whether they feel Mr Najib can carry the party to another win. 

Some economists have said Mr Najib may consider an early election for 2017, to take advantage of the opposition infighting.

Calling early elections could “completely put to bed” any political risk premium for Malaysia, said Mr Singh from RBS. 

“The political risk premium on Malaysian assets has come down quite a bit already,” said Mr Singh. “If there’s another election and there’s a strong showing by Umno, whatever’s left will also go away.” AGENCIES