KUALA LUMPUR, Malaysia—A state investment fund is at the center of a burgeoning political and financial controversy that is roiling markets and leading to calls for the ouster of Malaysia’s prime minister.
The fund, 1Malaysia Development Bhd., or 1MDB, was set up to spur economic growth in Malaysia. But it has rolled up more than $11 billion of debt that it now struggles to repay, and has invested in such projects as power plants in foreign countries and an oil venture abroad that yielded no oil.
Another fund initiative: Amid a close election, it indirectly supported Prime Minister Najib Razak’s campaign, according to an examination by The Wall Street Journal.
The fund paid what appeared to be an inflated price for assets acquired from a Malaysian company; the company then contributed to a Najib-led charity that announced projects, such as aid to schools, that Mr. Najib was able to tout as he campaigned.
Concerns over 1MDB’s high debts and limited transparency have triggered four government investigations. The concerns also have set up a confrontation between Mr. Najib and his mentor, Mahathir Mohamad, who led Malaysia for 22 years.
Mr. Mahathir says 1MDB’s assets are too meager for its huge debts. “What happened to that money?” Mr. Mahathir said in an interview. “They can’t explain.” He has publicly called on Mr. Najib to resign, as have other former allies from the ruling party and opposition politicians.
Were the prime minister to heed such calls, the result could be a setback for U.S. interests in Southeast Asia. Under Mr. Najib, relations with the U.S. have improved as Washington tries to build up its alliances in the region to counter China’s rise.
Mr. Najib, who is chairman of 1MDB’s board of advisers, has said he did nothing wrong and has urged critics to wait for the results of the investigations. His office didn’t respond to specific questions about the fund’s activities, including about any role in election-related spending.
“Unfortunately, the prime minister’s political opponents, unwilling to accept his record or the facts, continue to try to undermine him with baseless smears and rumors for pure political gain,” his office said.
Debt levelsThough wholly owned by the government, 1MDB isn’t government-funded, except for a small initial amount; it has to raise money in the debt markets for its projects. In an “F.A.Q.” section of a news release in December, 1MDB said there was no reason to be concerned about its debt level.
Still, the fund has at times rescheduled its debt repayments. And in May, 1MDB got a $1 billion capital injection from a state fund in Abu Dhabi—a close ally of Malaysia—to help meet a looming loan repayment. Interest costs ate up half the fund’s revenue in the year ended March 31, 2014, the last for which the fund has filed a financial report.
Arul Kanda, 1MDB’s president and group executive director, said the fund hopes to repay debt by selling assets, which he said are worth more than its borrowings. In an emailed response to questions, he said the government has guaranteed only 14% of 1MDB’s total debt, limiting its exposure.
Mr. Arul, who was appointed in January, also said that “1MDB’s financial decisions are driven by the best interests of the business, not political considerations.”
Worries about 1MDB’s debt have helped make Malaysia’s markets among the worst performers in the world in recent months, according to investors. Malaysia’s currency, the ringgit, has fallen 6% against the U.S. dollar this year, to its weakest in almost a decade. Though credit-rating agencies consider Malaysia’s debt safe, government bond prices have fallen, and foreign investors are pulling cash out of the country’s markets at an accelerating rate.
Some investors are betting the Malaysian government will end up bailing 1MDB out.Moody’s Investors Service has estimated such a rescue could cost as much as 1.4% of the country’s annual economic output. Meanwhile, Malaysia is facing low prices for its major exports: oil, natural gas, palm oil and rubber.
“At the end of the day, this entire entity is owned by the Ministry of Finance,” said Dhiraj Bajaj, a fund manager with Swiss bank Lombard Odier Darier Hentsch & Cie., who bought more 1MDB debt after recent declines, betting the government will step in with a bailout if needed.
Prime Minister Najib faced political problems almost immediately after he took office in 2009.
His party, the United Malays National Organization, had only narrowly retained power a year earlier. UMNO has headed every government since Malaysia gained independence from Britain in 1957. It has been losing the financial backing of the country’s ethnic Chinese minority, who dominate the economy but have been growing frustrated with government programs that favor ethnic Malays. The ebbing support, according to party insiders, forced Mr. Najib to look for other sources of financing.
Mr. Najib formed 1MDB in 2009, saying the fund would develop lucrative industries and create a new financial district in Kuala Lumpur that later was named after his father, the country’s second prime minister. Besides its development efforts at home, the fund has poured money into investments such as power-plant purchases abroad and a since-liquidated venture with a Saudi oil company. The fund has said it made money on the oil venture but hasn’t disclosed details.
Paying a high price
In one power-plant deal, the seller was Genting Group,which calls itself Malaysia’s leading corporation. The sprawling real-estate, plantation, hospitality and casino company owns New York City’s only casino and just broke ground on a $4 billion Chinese-theme casino in Las Vegas.
The 1MDB fund in October 2012 acquired a Genting unit that owned a 75% stake in a 720-megawatt coal-fired power plant near Kuala Lumpur. The price, which was equivalent to about $740 million at the time, came to 2.3 billion Malaysian ringgit. Genting later reported it had a 1.9 billion-ringgit extraordinary gain on this sale, implying a value for its stake in the power plant of just 400 million ringgit—or less than one-fifth what 1MDB paid for it.
In a second sign that 1MDB paid a high price, the fund’s financial statement for the fiscal year ended in March 2013 said the power unit’s property, plant and equipment were worth a little under 500 million ringgit at the time of acquisition.
The fund cited 1.7 billion ringgit of “intangible assets,” which were the value of the plant’s agreement to sell power to a state-owned entity. But this valuation appeared to be contingent on Genting obtaining a renewal of its power-sale agreement, which was running out in 2016.
Genting announced the terms of the sale to 1MDB in August. Equity analysts at the time noted the size of the deal was positive for Genting given its contract to sell power was ending. In early October, Malaysia’s Energy Commission, an independent body which regulates the energy sector, announced Genting had won a 10-year extension to sell power through 2026. A few days later, Genting and 1MDB finalized the sale.
Soon after the purchase, 1MDB appeared to recognize that it had overpaid for power assets. In its financial accounts for fiscal 2013, the fund took an “impairment” charge of 1.2 billion ringgit, writing down part of the premium it had paid to acquire power assets from Genting and another Malaysian company.
The 1MDB fund said the premium it paid reflected the experience of the staff of the Genting unit. Mr. Arul, 1MDB’s president, said in a December news release that the valuation was “commensurate with their existing and future potential” at the time.
A few months after the sale, a unit of Genting called Genting Plantations Bhd. made a donation of about $10 million to a Najib-linked charity, according to a spokesman for Genting Plantations. The charity, Yayasan Rakyat 1Malaysia, lists Mr. Najib as chairman on its website. Stock analysts at the time said the surprise donation reduced the company’s net profit in the first quarter of 2013, and said they didn’t expect it to be repeated.
Though set up to help underprivileged Malaysians through education and sport, this charity soon got involved in spending that appeared designed to help Mr. Najib retain power in a May 2013 election.
It and other charities linked to the government spent millions of dollars before the voting in Penang, a northern state that was an important election battleground. Mr. Najib visited Penang during the campaign and announced that Yayasan Rakyat 1Malaysia would donate two million ringgit (about $660,000 at the time) to two local schools. These schools serve Chinese communities that are not a poor demographic, but whose support would be crucial to win voting in the area.
Mr. Arul, 1MDB’s president, referred questions about the matter to Genting and to the charity.
A Genting spokeswoman declined to comment on the charitable donation or the valuation of the plant sold to 1MDB.
The charity, too, declined to comment. Regulators say the charity has failed to file required financial statements since its inception in early 2013.
Before the election
Also active in Penang just before the May 2013 election was 1MDB itself. The fund purchased land in the state days before the voting.
Mr. Najib, campaigning in Penang, promised to build low-cost housing on the land.
Critics said 1MDB’s spending amounted to the use of state funds for electioneering. “They’ve shown they’ve got lots of cash to throw,” said Lim Guan Eng, Penang’s chief minister and a member of the opposition Democratic Action Party.
Mr. Arul of 1MDB declined to comment on the fund’s land purchase. He referred questions to Mr. Najib, whose office didn’t address such specifics in its response.
Opposition politicians also have criticized 1MDB for raising billions of dollars just weeks before the 2013 election. In March 2013, the fund sold $3 billion in bonds.
Goldman Sachs Group Inc. arranged the bond sale and took on extra risk to get the deal done quickly at 1MDB’s request, according to a person familiar with the matter, earning unusually high profits as a result. Goldman, which also was 1MDB’s financial adviser on the purchase of assets from Genting, declined to comment. The 1MDB fund, when asked about criticisms of the fund-raising, pointed to a past statement it had made in defense of the $3 billion bond, which said it was issued at a typical discount.
The results of the May 2013 election turned out to be the worst yet for UMNO’s ruling coalition. It not only didn’t prevail in Penang but didn’t win a majority of the national vote, either. Mr. Najib remained in power only because of electoral rules that give more parliamentary seats to candidates from UMNO’s rural heartlands.
Last month, in an election to fill a vacant seat in parliament, 1MDB used the Twitter feed of its foundation to promote the government’s candidate. A 1MDB spokesman declined to comment.
The financial situation appears to be deteriorating for 1MDB. The fund has shelved plans for an initial public offering of its power plants, a move it had hoped would raise $3 billion.
The government recently stepped in with a $260 million emergency line of credit after 1MDB had to renegotiate a loan payment to a consortium of banks.
“Like many companies, we examine our financial arrangements and restructure these from time to time in order to ensure that the company is receiving the best possible terms,” said 1MDB’s president, Mr. Arul.
The 1MDB fund recently sold some land to another state fund, one that invests money for Malaysians who want to make a pilgrimage to Mecca. Mr. Arul denied suggestions from critics that a sale to another government fund amounted to a partial bailout. The pilgrimage fund’s chairman said he expects to make a profit on the deal.
Malaysia’s police, auditor general and a parliamentary committee are investigating the fund’s investment activities. This month came word of a fourth probe, as Malaysia’s central bank launched an investigation of 1MDB’s offshore borrowings and foreign investments. .
sourced : Wall Street Journal
battle has revealed itself publicly in a nasty spat between two political titans. Mahathir Mohamad, a former prime minister who turns 90 next month, is the chief architect of a political insurgency aiming to oust the man he helped put into office six years ago, Prime Minister Najib Razak.
Having lost none of the combativeness honed during more than two decades in power, Mr. Mahathir is pressing allegations of malfeasance in a sovereign wealth fund, criticizing the “lavish” lifestyle of the prime minister’s wife, and has resurrected troubling questions about the murder of a Mongolian woman, the mistress of a former top aide to Mr. Najib
Malaysian Ex-Prime Minister Unleashes Criticism
CreditEugene Hoshiko/Associated Press
Mr. Najib “wants to leave his own legacy,” he said. “But what he does is verging on criminal.”
Mr. Najib has denied allegations of abuse of power and urged patience while the country’s auditor general completes a report on the transactions of the sovereign wealth fund. “If there is any misuse of power, we will not shield anyone,” he told a Malaysian television channel in April. The report is due at the end of the month.
The political combat has transfixed this nation of 30 million people, an officially Muslim country with one of the most developed economies in the region.
The latest round took place early this month when Mr. Najib was scheduled to address a public forum on the questions swirling around his leadership.
When Mr. Najib failed to show up, Mr. Mahathir took the stage. But he had just begun to speak when the police shut him down, cutting off his microphone and escorting him off the stage.
This is the third time in Mr. Mahathir’s career that he has turned on his former protégés, and he succeeded in sidelining the first two. Another former deputy, Anwar Ibrahim, is in prison on charges of sodomy, which is illegal in Malaysia. Mr. Anwar’s five-year prison sentence, affirmed by the country’s highest court this year, was the culmination of trials that began when Mr. Mahathir fired Mr. Anwar as his deputy prime minister in 1998,declaring “I cannot accept a man who is a sodomist to become the leader of this country.”
The second time was nine years ago, when Mr. Mahathir came out of retirement and lashed out at his successor, Abdullah Badawi, for what he said was poor economic management. Mr. Abdullah resigned, and Mr. Najib took over as prime minister.
Mr. Najib’s approval ratings have plummeted over the past year amid bleaker economic prospects and higher living costs, and Mr. Mahathir says he fears that the party will lose elections if Mr. Najib remains at the helm. But he also expressed little faith in the long-term prospects of the party, the United Malays National Organization, which has led coalition governments since independence from Britain in 1957.
“The little Napoleons in UMNO try to keep out people who are more intelligent than themselves,” he said.
Government ministers and members of Parliament have been pressed to declare their allegiance in the dispute, and many have been cagey, afraid to alienate either their current leader or the next one if Mr. Mahathir gets his way.
For now, the divided opposition poses little threat. Its leader, Mr. Anwar, is in prison, and the unwieldy three-party coalition he led appears to have dissolved this week.
The political imbroglio comes on top of economic problems. About a third of government revenues comes from oil and gas production, whose prices have fallen steeply, and the government has been forced to pass an unpopular sales tax to make up for the loss.
Murray Hiebert, an expert on Southeast Asia at the Center for Strategic and International Studies in Washington, says the country’s political troubles “could hardly come at a worse time.”
“The prime minister is focused on political survival when the country’s economy is slowing due to low oil prices and falling exports resulting from China’s economic slowdown,” he said. The combination, he said, is “giving pause to the foreign investors Malaysia is seeking to court.”
The sour economy has also thrown into relief what Mr. Mahathir and others describe as the Najib family’s jet-setting lifestyle of shopping trips in world capitals and the buying of expensive real estate in the United States.
Mr. Mahathir criticized Mr. Najib’s wife, Rosmah Mansor, for her “lavish lifestyle” and for acting “almost if she was a prime minister.”
Mr. Mahathir has also dredged up questions related to the case of Altantuya Shaariibuu, a Mongolian model who was murdered by two of Mr. Najib’s bodyguards in 2006. While the bodyguards were convicted, Mr. Mahathir has demanded to know who gave the orders.
But at the heart of his dispute with Mr. Najib is Malaysia’s sovereign wealth fund, which has debts running into the billions of dollars and is overseen by Mr. Najib, who is chairman of its board of advisers.
Mr. Mahathir says the fund, 1Malaysia Development Berhad, or 1MDB, is missing “huge sums of money” that Mr. Najib has been unable to account for.
The fund has been criticized for the last several years for taking on expensive debt as well as for some of its investments, which opponents say have benefited supporters of Mr. Najib’s political party. “He has never been able to explain how the money was spent,” Mr. Mahathir said Wednesday. “They give a list of payments, but nobody believes it.”
Mr. Najib did not respond to requests for comment emailed to his spokesman.
The fund has also drawn controversy for its close relationship with a financier named Jho Low, a friend of Mr. Najib and of his stepson. Mr. Lowhas been involved in the sale of tens of millions of dollars of luxury real estate to the stepson in the United States.
Though Mr. Low holds no official position with 1MDB, he has acknowledged advising the fund, and several of his friends have held senior positions there. In recent months, documents have been published by The Edge, a Malaysian newspaper, and Sarawak Report, a British blog, showing that Mr. Low was instrumental in a deal between 1MDB and a Saudi oil company, PetroSaudi International. The newspaper also said the documents show that a company, Good Star Limited, was controlled by Mr. Low and received hundreds of millions of dollars from 1MDB as part of the oil deal.
Mr. Low did not respond to requests for comment.
In a statement to The New York Times this week, 1MDB said that Good Star was owned by PetroSaudi and noted that PetroSaudi had confirmed that 1MDB said it had provided information about these transactions to the Malaysian authorities that are investigating the sovereign fund.
The payments by 1MDB are attracting attention in part because the fund is floundering. In recent weeks, the government announced a restructuring plan that involves the fund’s acceptance of money from the International Petroleum Investment Company, an investment fund affiliated with the Abu Dhabi government that has also made numerous deals with Mr. Low.
1MDB has issued statements disputing the notion that it is being bailed out. “This is a business transaction, not a loan, not any kind of debt and not a bailout,” the fund said in its statement to The Times.
Mr. Mahathir’s criticisms of the management of 1MDB, which he makes in regular blog postings and in public comments, are closely followed in Malaysia. But they have also been greeted with cynicism by those who say that money politics and bailouts of government-linked companies were very much a part of Mr. Mahathir’s 22 years in power.
“Mahathir is being disingenuous,” said Ibrahim Suffian, the director of the Merdeka Center, an independent polling company. “What we are seeing today did not happen overnight. It’s been heading this way for decades.”
Still, the concerns over 1MDB seem to have gained traction.
“We have been talking about and highlighting 1MDB for the last five years, and although it slowly gained momentum as a national issue, things changed the moment Mahathir picked 1MDB as an issue to bring down Najib,” said Rafizi Ramli, an opposition Parliament member. “For the first time, a government scandal has reached the attention of both sides of the political divide. In fact, it’s a bipartisan issue.”
Asia Sentinel has This Interesting read:
Malaysia’s PM Najib: Immovable Object
Wearinesswith PM Najib has extended into major sectors of the business community and the general public, with an April poll by the respected Merdeka Centre showing that nearly half of the voting public have no confidence that the government has the ability to clean up the massive scandal surrounding the 1Malaysia Development Bhd state-owned investment fund. Some 33 percent are undecided and only 18 percent said they had full confidence. Among younger voters, 57 percent say they have no confidence in the government’s ability to solve the issue. According to a six-month-old poll taken before the current round of criticism, his public approval rating had fallen to 44 percent, the lowest of his career.–John Berthelsen
And then there is this article on Bloomberg view that has got YB Idris Jala so riled up” he decided to engage William Pesek for what Idris describes as his recent “disgracefully biased and ill informed article “on Malaysia..
YB Idris is one of the few Ministers who boldly defends and also promotes Government policies.
Asia-based journalists have missed Mahathir Mohamad since he left office in 2003. The former Malaysian prime minister’s mercurial governing style and fiery rhetoric made for great copy. I was in a Hong Kong ballroom in 1997 when Mahathir — the man credited with turning the agricultural backwater Kuala Lumpur, which literally means “muddy river,” into one of Asia’s most impressive skylines — responded to his country’s crashing economy by castigating hedge fund managers. He singled out George Soros as a “moron.”
Mahathir now has a new target — Najib Razak, Malaysia’s current prime minister. The daily squabbling between Najib and his predecessor has unsettled Malaysian markets, with the ringgit falling to its lowest value in a decade. But Najib has nobody to blame but himself for the attacks, given the country’s underlying economic distress. Malaysia’s prolonged slow growth, which has Fitch now threatening a downgrade of the country’s credit ratings, traces back to Najib’s refusal, or inability, to make good on his pledges to dismantle race-based policies that strangle innovation, feed cronyism and repel multinational companies.
You don’t have to take Mahathir’s word for it — Malaysia’s most successful entrepreneurs say the same thing. Just ask Tony Fernandes of AirAsia.
The man often referred to Asia’s Richard Branson has been waging his own battle with the government on Twitter. Fernandes has been decrying, 140 characters at a time, the Malaysian government’s misguided priorities and its utter lack of accountability. “Government and opposition spend so much time on race and religion. Will there ever be a truly Malaysian party that puts people first?” he tweetedrecently. Another message reads: “Good education, good hospitals, fair distribution of wealth, an economy that creates jobs, honest clean government. Transparent leadership.”
My favorite was Fernandes’s take on the kind of national culture the government should be cultivating: “Where all Malaysians respect each other’s culture, religion but work together to benefit all. If you need an example look at AirAsia.”
This last point deserves closer attention. AirAsia has admittedly had a rocky six months, beginning in December with its first crash (killing all 155 on board) and culminating in today’s share-price plunge (its accounting practices are being questioned by GMT Research). But Fernandes has earned his status as a major player — and Malaysia’s most recognizable face — on the global stage. With his Bransonesque daring and social-media savvy, the billionaire Formula One team owner personifies the heights to which the Malaysian economy might climb if the country’s dysfunctional politics didn’t stand in the way.
Indeed, AirAsia might never have gotten off the ground if Najib had been in office at the time of its inception, rather than Mahathir. Fernandes had three big strikes against him when he started out 14 years ago: He’s not Malay (the majority ethnicity coddled by Malaysia’s affirmative-action policies); he was intent on challenging the flagship Malaysian Airlines; and he was starting an airline just as the Sept. 11, 2001 terrorist attacks in the U.S. was sending the industry into the throes of an existential crisis.
Nonetheless, Mahathir’s government gave Fernandes the green light to create the company. In the interim, AirAsia has literally changed the world. Although the company’s “Now Everyone Can Fly” slogan seemed somewhat trite at the time of its founding, it has gone on to inspire myriad developing-world copycats.
Malaysia needs more homegrown success stories that raise living standards and the country’s global status. Sadly, when Malaysia makes headlines these days, they’re often about the government’s dysfunction — whether the never-ending effort to jail opposition leader Anwar Ibrahim on sodomy charges, legal tussles over who exactly is permitted to utter the word “Allah,” or clueless castigations of foreign tourists (a group of whom allegedly caused an earthquake by taking nude photos atop Mount Kinabalu).
Since becoming prime minister in 2009, Najib should have worked to level Malaysia’s playing field for would-be entrepreneurs. Instead, he has protected race-based quotas and deepened the economy’s reliance on oil and gas production. Najib seems to be more concerned about retaining power for his ruling Barisan Nasional coalition, which has been in power for almost six decades, than attending to the aspirations of Malaysia’s 30 million people.
Meanwhile, some of his supposed reforms are dragging down the economy. A case in point is 1Malaysia Development, the state investment company Najib created, and which Mahathir claims is missing “huge sums of money” and buckling under debt. The scandal has contributed to the plunging of Malaysia’s currency some 13 percent over the past 12 months.
The ringgit’s fluctuations are a decent summary of the country’s wayward course in recent years. It’s now close to 3.80 to the dollar, the level where Mahathir pegged it during the 1997-1998 Asian crisis. Mahathir now says it may be time to peg the currency anew to stabilize it. That speaks to how little progress Najib has made internationalizing the economy — and how urgent new political leadership (or a return to old political leadership, as it were) would be for entrepreneurs like Fernandes.