September 7, 2016
Assessing the investment climate in post-1MDB Malaysia
by Alexander Macleod
Malaysia’s No. 1 crook
Malaysia continues to grapple with the prolonged political and economic fallout from the 1MDB scandal, it is important to assess whether that scandal has influenced a significant shift in Malaysia’s investment climate.
Since investigations began into the debt-ridden sovereign investment fund 1Malaysia Development Berhad (1MDB), there have been signs of declining investor confidence in Malaysia’s usually robust stock market. In May this year, Bloomberg published a report detailing the end of Malaysia’s eight-month-long bull market run, as investors hurriedly sold their stocks and sought out other ASEAN markets with better growth prospects – particularly the ‘buoyant’ Indonesian economy.
Yet against the backdrop of a challenging global economic outlook, and given the historical resilience of the Malaysian economy, it is important not to allow alarmism to cloud our evaluation.
Malaysia rocked by the scandal?
The scandal, which has thrown Prime Minister Najib Razak into the international limelight, is indicative of the country’s failure to effectively tackle corruption in Malaysia’s top echelons. Malaysian politics has long survived in spite of this, although the sheer scale of the 1MDB saga makes it unique. Nevertheless, it is unsurprising to most political observers that Najib has gotten off scot-free, denying any wrongdoing.
The ruling United Malays National Organisation (UMNO) has a knack of weathering political crises, and this was reflected in a brutal yet masterful cabinet reshuffle by Najib in June, whereby key political opponents were expelled and loyalists were brought in. Although Najib’s hardening ruling stance is concerning, his party has delivered economically for Malaysia. The risks of doing business in such a climate continue to be outweighed by the attractive tax incentives offered by the government, Malaysia’s strategic proximity to the primary Asian markets, and its consumers’ growing spending power.
Rule No. 1: Don’t put Malaysia’s Money into your personal bank account and Rule No. 2: Go to Rule No. 1
One element that sets the 1MDB case apart is the level of foreign intervention. The U.S Department of Justice recently announced that it would move to seize more than $1bn of stolen assets in Malaysia; however, kleptocracy cases like this one have historically proven challenging, and many obstacles are predicted for a case of this magnitude. Despite ruffling some feathers between Malaysia and Washington, the case is unlikely to have a great impact on U.S investment in Malaysia, which has been and will remain strong.
Any negative outflow that does occur will be cushioned by China, which – after two Chinese firms launched multi-billion-dollar bailouts of 1MDB assets – leapfrogged Japan, Singapore and the U.S to become Malaysia’s largest investor.
The bigger picture
When examining the bigger picture, it must be noted that this scandal has coincided with a global slump in energy and oil prices, causing a slowdown to Malaysia’s economic growth. The country is the region’s only oil major exporter. The scandal has also coincided with a global economic downturn caused by stock market volatility due to uncertainty before, during and after the EU Referendum and Britain’s decision to leave the single market.
What is certain is that Malaysia’s economy is remarkably resilient; just as it successfully weathered the 1997 Asian Financial Crisis, it is likely to recover from its current position.
On top of signs that the ringgit is starting to recover, a recent World Bank report has forecast a GDP increase for Malaysia, albeit an incremental one, in 2017 – reinforced by Kuala Lumpur’s solid commitment to the Trans-Pacific Partnership (TPP) trade agreement. The government has already shown signs of becoming more outwardly focused by promoting investment initiatives such as the Malaysia Promotion Programme (MPP) – a strategic, public-private partnership aimed at boosting FDI and trade with key global financial hubs.
Although the 1MDB crisis continues to dominate headlines, it will not force a tectonic shift in Malaysia’s economic landscape. The country has begun to recover from last year’s events, when stock markets plunged, the currency was in freefall, and political tensions were palpable. Najib’s government has overcome internal divisions to reinforce party unity at a time when foreign regulators will be probing closely into its economic and political affairs.
Investors remain confident in Malaysia’s well-developed regulatory framework, and the stock market, despite wavering, is beginning to regain its stability. For now at least, Malaysia has seen off the worst of this political and economic storm, and will seek to renew its status as an exciting emerging market.