Malaysia’s Controversial State Fund to be Dissolved?

A Reuters news service report that 1Malaysia Development Bhd., the ill-starred and debt-ridden state investment fund, may be restructured and possibly dissolved, has to be considered a devastating political blow for Prime Minister Najib Tun Razak, who has been under intense criticism for months over the fund’s debts and its opaque accounts.

Reuters quoted sources with direct knowledge of the matter as saying the investment fund, conceived in 2009 by Najib with the help of a family friend, Taek Jho Low, is to be left as a skeletal structure in a debt repayment plan in which most of its assets will be sold off.

Legions of critics including former Prime Minister Mahathir Mohammad, opposition Democratic Action Party shadow minister Tony Pua and others have been demanding answers about the fund’s finances over a near-default on a loan payment. Concerns over the fund’s finances led to fears it could lead to a default that would cripple the country’s entire financial system. The near-default drove down the value of the ringgit and affected the quality of government bonds.

“I think the prime minister has never been under this much pressure,” said a source with close ties to the government. “Cracks are showing and deep cracks at that. It all depends on whether he can marshal his forces to determine how long he can stay. He is a dead man walking, but he can still walk a long time.”

Najib has come under deepening criticism, including indirectly from his own brothers, for a prime minister’s office spokesman’s statement to the New York Times, that what appears to be a huge fortune stemmed from “legacy assets” from his family. The brothers issued a formal statement that there were no legacy assets and that their father, Malaysia’s second prime minister, died in relatively modest circumstances.

According to extensive reporting by the blog Sarawak Report, the fund appeared to be run as much by Jho Low, as he is known, as by Malaysian government officials, who often took a back seat to Low’s investment plans. In some cases, according to the report, which is run by Clare Rewcastle Brown, officials weren’t informed of plans until hours before billion-dollar deals were made. Jho Low, according to the article, diverted US$700 million of 1MDB money into his own accounts to buy a Sarawak bank.

Mahathir has called for Najib to resign, writing in his blog, Che Det, that “something is rotten in Malaysia." His allies, including former Finance Minister Daim Zainuddin and A. Kadir Jasin, former editor of the New Straits Times, have served up daily criticism of 1MDB and Najib for months. Rumors – apparently unfounded – have begun to spread that Najib would resign and go into exile with his wife, Rosmah Mansor, who has been widely criticized for her heavy spending.

That appears unlikely, however. A political risk analyst in Kuala Lumpur said that while the matter is damaging, it won’t bring the prime minister down on its own.

The state fund’s RM42 billion debt includes a US$3 billion (RM10.96 billion) bond sale in 2013 that was one of Southeast Asia’s largest issues and made a huge profit for the Goldman Sachs investment bank. Reuters reported that in order to partially meet the debt, the fund’s new CEO, Arul Kanda, has ordered the sale of its power unit Edra Energy via a stock market listing.

According to the Reuters report, 1MDB will also sell off the bulk of its land assets and stakes in two high-profile property projects – Tun Razak Exchange (TRX) and Bandar Malaysia – after splitting them into separate entities, as already partially indicated in a strategic review unveiled last month.

1MDB told Reuters in an email that Edra Energy would be “monetized” in 2015 and the TRX and Bandar Malaysia projects would be ultimately owned by the Finance Ministry.

“This process would turn 1MDB into a skeletal structure that could eventually be dissolved completely," one person, who spoke on condition of anonymity because of the sensitivity of the issue told Reuters. “It’s become a hot potato for the Malaysian government. It was just too much to handle,” another source told Reuters.

Malaysian tycoon T. Ananda Krishnan, who originally sold power assets to 1MDB at what critics said were substantially inflated prices, was called in last month to deliver a US$2 billion loan to the fund in order to keep it afloat. However, concerns continued that the Finance Ministry would have to come up with another US$1 billion before the carnage was over.

In an effort to forestall criticism, Najib told reporters yesterday that he had agreed to demands that the country’s auditor general verify 1MDB’s accounts independently.