By: John Berthelsen

A perfect storm of bad economic news appears about to inundate a rudderless government in Malaysia as political squabbling paralyzes leaders, according to sources in Kuala Lumpur. Fiscal revenues are going through the floor, the currency is diving and inflation has risen from 0.1 percent in February to 3.3 percent in July and is expected to rise.

With a huge projected fiscal deficit and steep bond indebtedness, the country may be faced with borrowing on the international markets. But with a sliding currency and allegations of massive corruption threatening the government of Prime Minister Najib Razak, borrowing costs are likely to be through the roof.

Most observers in Malaysia believe that Najib remains insulated from political overthrow by the paid for loyalty of the 192 United Malays National Organization cadres in the Barisan Nasional, or national ruling coalition. But a major financial crisis could change the equation.

Najib skips town

As the economy grows weaker and the scandals percolate, Najib has left the country, first to London for a trade show, then to the United Nations, where he was to address the general assembly. From there, he and his wife, Rosmah Mansor, were due to fly on an official private jet to Milan, Italy, where she is to sponsor an Islamic fashion show.

“Malaysia is quickly entering into the throes of a financial crisis,” according to Focus-Economics, a consensus website of leading global economists. “External factors, such as the slowdown in China, concerns over how sound Malaysia’s financial markets are, as well as uncertainty regarding the extent of the impending Federal Reserve rate hike, have forced the Central Bank to reduce its foreign reserves substantially in order to support the currency. Investor confidence is being further tested by the political situation in the country.”

Malaysia has been almost paralyzed by a lengthy corruption scandal in which unknown Middle Eastern sources were discovered to have poured US$861 million into the prime minister’s private account at AmBank in Kuala Lumpur in 2013, only to have it disappear back out to a Singapore account, and then to disappear altogether shortly after. At the same time, the country is being rocked by the RM42 billion 1Malaysia Development Bhd. financial scandal in which billions allegedly have been siphoned off from the state-backed investment fund and billions more have seemingly been lost to bad investments. There is concern that the magnitude of the projected losses faced by government-linked banks could threaten the country’s financial system.

Stock market heads south

Attempts to prop up the stock exchange using RM20 billion from a revived government investment fund – regarded as too little, too late – bought a two-day bounce on Sept. 16 before the market slide resumed. At 1623.27, it is now 14.57 percent off its April peak, making it the worst-performing bourse in the region.

The ringgit fell in value against the US dollar from 3.5687 in August 2014 to 4.4570 this week before the central bank intervened, a 19.93 percent drop. The central bank has spent at least US$60 billion over the past several months buying ringgit – at least a third of the country’s international currency reserves.