April 27, 2016
A New Man at the helm of Bank Negara Malaysia
by John Berthelsen
With Malaysia in danger of defaulting on billions of debt obligations and the ringgit looking shaky, Prime Minister Najib Razak has moved to shore up confidence by appointing a professional to the leadership of the country’s central bank.
The appointment to a five-year term of Muhammad Ibrahim, the bank’s serving Deputy Governor, as the new Bank Negara Governor to replace the respected long-serving chief, Zeti Akhtar Aziz, had a positive effect on both the currency and the stock markets, at least in the short term.
Muhammad will take over on May 1 when Zeti’s term ends. Since early March, speculation had centered on Irwan Serigar Abdullah, the Secretary-General of the Ministry of Finance and others. Sirigar was considered close to Najib and critics expressed concern that his appointment would be tantamount to handing control of the now-independent institution to the Prime Minister.
The appointment comes at a time when Najib is in the fight of his life over a gigantic long-running scandal involving the state-backed 1Malaysia Development Bhd that culminated this week with a missed payment of US$50.3 million on bonded debt obligations of more than US$6.481 billion to units of the Gulf emirate including US$1.75 billion guaranteed by International Petroleum Investment Corporation (IPIC) of Abu Dhabi.
IPIC, believing the money was stolen, is refusing to cover the US$50.3 million payment. A cross default triggered by the affair is said to potentially pose a serious threat to Malaysia’s investment-grade ratings, with traders and lawyers scrambling to work out the implications.
One of the targets of bondholder ire is likely to be Goldman Sachs, the US-based investment bank, which engineered a US$6.5 billion bond sale to fund 1MDB acquisitions that netted it a commission of 7.69 percent, netting Goldman fees which are believed to have totaled US$500 million. Goldman recalled its Southeast Asia chief, Tim Leissner, several months ago. Leissner, now in Los Angeles, was subpoenaed by US officials in March.
A longtime western observer in Kuala Lumpur called the situation a “game of chicken” with Abu Dhabi officials and one that Malaysia is likely to lose. Given the fact that at least US$3.5 billion in payments appears to have been diverted into a fraudulent account in the British Virgin Islands, it appears likely that Malaysia is going to have to pick up all of the outstanding obligations.
“The Arabs are not going to back off,” said a businessman with close ties to the leadership. “We are going to have to resign ourselves to the fact that we will eventually have to bail 1MDB out. The money is going to have to come from the government of Malaysia.”
As often happens in such cases, the debt may well be discounted, with bondholders eventually collecting less than the full value on the bonds. The key is whether the bondholders demand immediate payment, which appears unlikely. If they did, it would trigger a major financial crisis in the country. It is more likely that they will renegotiate. They may well be asked to take a haircut, which could trigger lawsuits.
Despite assurances by 1MDB officials that the debt is manageable and covered by assets, bondholders are growing increasingly concerned about a default. Tony Pua, the opposition Democratic Action Party and others have estimated the unfunded liability at RM25 billion to RM30 billion (US$6.3-7.6 billion). The assets, including a former air base at the fringes of Kuala Lumpur’s downtown, have been repeatedly upgraded in value to cover the debt but most believe the real market price is far below its assessment.
Najib was at loggerheads for months with Zeti, the former Governor and one of the world’s most respected central bankers, over her insistence that financial irregularities revolving around both 1MDB and deposits in Najib’s own private account be investigated. In October, amid rumors that Najib was attempting to drive Zeti out of the bank, the central bank issued a statement saying it had requested a criminal investigation into 1MDB’s affairs despite the fact that Najib’s hand-picked Attorney General Mohamed Apandi Ali, to whom it had forwarded the case, said there was no reason for prosecution.
“As an investigative authority, the bank is duty bound to conduct its investigations with the highest professional care and diligence,” according to October statement. “The bank at all times expects full and accurate disclosure of information by applicants in considering any application under the ECA. On its part, the bank concluded that permissions required under the ECA for 1MDB’s investments abroad were obtained based on inaccurate or without complete disclosure of material information relevant to the Bank’s assessment of 1MDB’s applications.”
In an effort to forestall the domestic probe requested by Zeti and other investigations, Najib has fired his deputy prime minister, the attorney general and the head of the police special branch investigative unit and stalled or terminated investigations by the Malaysian Anti-Crime Commission, the central bank and a special parliamentary committee.
Bank Negara, however, responded with a statement contradicting the attorney general’s office and saying 1MDB had secured permits for investment abroad based on inaccurate or incomplete disclosure of information, breaching banking regulations, and added that it had revoked three permits granted to 1MDB for investments abroad totaling US$1.83 billion (RM7.53 billion) and ordered the state fund to repatriate the funds to Malaysia.
“I am confident that under Muhammad’s leadership, Bank Negara Malaysia can continue its service in helping the government, providing advice and views for catalyzing the country’s economic growth, as well as administer monetary policy and overseeing the country’s financial industry, including continuing Bank Negara Malaysia’s efforts to grow the financial industry,” Najib said in a prepared statement.