The scandal surrounding Malaysian government-owned investment fund 1Malaysia Development Bhd has been escalating since exactly a year ago when a Wall Street Journal article targeted the country’s prime minister Najib Razak as having received almost US$700 million into his personal bank account at Ambank from the company.
A resolution of sorts to the tangled tale arrived last Wednesday when the US Department of Justice filed civil charges for the forfeiture of assets worth around US$1 billion via its kleptocracy asset recovery initiative. That represents the biggest sum the initiative has sought to claim since its establishment in 2010.
The issue now for investors eyeing Malaysian credit is precisely how the entire matter will play out on the country’s political stage. Najib appears invulnerable for now, having consolidated his grip on the ruling UMNO coalition since the scandal broke a year ago.
Despite the opposition’s call for street protests as a response to the US DoJ’s action and Najib’s stubborn refusal to relinquish power in the face of evidence that around US$3.5 billion was looted from 1MDB, it seems, just as the previous street protests last year organized by Bersih that these will prove ineffective. Former Malaysian prime minister Mahathir Mohammad has cited the Malaysian populace’s “timidity” in respect of the issue – something which might well be explained by fear in a country in which draconian new executive powers are to be enforced on August 1.
These powers will allow Malaysian law enforcement to shoot to kill anyone suspected of sedition in the country, and no inquest into any deaths associated with the new law will be required.
It is a chilling scenario on the march to full blown dictatorship in Malaysia, but perhaps oddly, the country’s credit markets have barely batted an eyelid since the DoJ’s live press conference announcing the civil charges last week. Five-year senior Malaysia CDS added just around 5bp following the press conference, while, perhaps more tellingly, the 1MDB due 2023 dollar paper was largely unchanged at around 86 mid.
One can only assume that the markets see Najib as clinging onto power and that the ringgit will stabilize after coming under pressure last week with no deleterious effects on Malaysia’s economic fundamentals. More to the point, the cash price on 1MDB debt assumes that the Malaysian government will honour that debt.
My sense however is that the credit situation will deteriorate. Lawyers I have spoken to suggest that the DoJ’s actions are classic to its usual modus operandi concerning cross-border fraud and the laundering of money via the US dollar clearing system: initiate civil charges to secure assets and subsequently follow up with criminal charges.
Najib is cited in the civil charges as “senior Malaysian official 1” with few doubting in international circles that it could refer to anyone other than the Malaysian premier.
Criminal charges should they be filed will create a situation in which Najib’s stepson Riza Aziz and Malaysian businessman Jho Low who are named in the DoJ case become sought-after fugitives and where it is conceivable Najib himself could be arrested after setting foot on foreign soil.
This story is just beginning and represents a clear opportunity to short Malaysian credit. It’s somewhat ironic that having traded through Philippines CDS for most of the past decade, Malaysia 5-year protection is at a 30bp premium to its regional peer. Time to short Malaysia and go long Philippines via default swaps.
Jonathan Rogers is a contributing editor at The Asset.
