What would it take, one wonders, for a financial scandal to create popular uproar in Malaysia?
Rather a lot, it seems. The confiscation of a large luxury yacht, allegedly purchased with money stolen from a Malaysian state fund, doesn’t quite cut it.
The super yacht Equanimity – 300-foot long and rumoured to have cost US$250m – owned by young Malaysian tycoon Low Taek Jho – was seized off the island of Bali last Wednesday by Indonesian police at the behest of the US Department of Justice as part of their investigation into alleged fraud at Malaysian state fund 1MDB.
Readers of this column will know that over the years I have reported quite a bit on the subject of 1MDB. But the likelihood of the event stirring political change in Malaysia seems scant.
One reason is news fatigue. The story has dragged on for the best part of four years, and life in Malaysia has carried on. A multitude of investigations have concluded or are ongoing in a variety of countries and persons connected with the alleged multi-billion dollar fraud are languishing in jail in Singapore after being convicted of, among other things, money laundering, forgery and obstruction of justice.
Tim Leissner, the former Goldman Sachs banker who helped oversee the sale of billions of dollars of private placements on behalf of 1MDB, last year received a 10-year ban from the Singapore securities industry.
Yet in Malaysia, where the whole story really counts, it seems no longer to resonate. A recent opinion poll found that only around 3% of potential voters in the country’s 14th general election due to be held by August regard the 1MDB issue as a critical input as to how they intend to vote.
I suspect the pictures in the media last week of the swanky boat’s impoundment off Indonesia’s party island will have little impact on Malaysian Prime Minister Najib Razak’s incumbent UMNO coalition.
Of course, I might be wrong. The seizure of the Equanimity might be the opening salvo in a reinvigoration of the whole 1MDB saga. The fact that the FBI were on the ground in Indonesia and had the full cooperation of the Indonesian authorities certainly suggests to me that a whole new chapter may be about to open. Late last year the Wall Street Journal reported that arrest warrants were imminent. That, were it to transpire, might well be a game changer as far as the election is concerned.
IT’S INTERESTING TO note that when the 1MDB story was rolling at its hottest, Malaysia’s five-year CDS was trading at a wide premium to regional peers, of as much as 100bp versus the Philippines and 140bp over Korea. While the Malaysian electorate might not have cared, the market did. Since then, spreads on regional CDS, including that of Malaysia, have converged in a spectacular fashion.
There’s barely room for a cigarette paper between the cost of five-year protection for Malaysia, the Philippines, Thailand and Korea, with only Indonesia and Vietnam trading at a meaningful premium to that complex.
If I were a betting man, I’d suggest that something will sooner or later break that relationship, and it will probably be the ability of the respective economies to absorb a Fed rate tightening and avoid the pitfalls of capital flight from local debt markets.
In this context, Malaysia is looking like something of a tinderbox. Some 40% of Malaysian households survive on less than M$3,000 (US$767) per month and are highly indebted. Malaysia’s household debt to GDP stands at 85% – massive in relation to the 21% average for emerging-market economies and the 63% seen in advanced economies.
Malaysia will have to keep in lockstep with Fed rate increases, and therein lies the danger for the incumbent government. While Najib might be the favourite to win the general election, things look potentially highly volatile.
A series of short-term rate rises in a highly leveraged household economy, which has been bruised by the imposition of a general sales tax almost three years ago, might well bring with it a surge of electoral discontent.
And if the US is serious about pursuing what Attorney General Jeff Sessions late last year described as “kleptocracy at its worst” – the 1MDB case – Mr Najib might want to shorten his odds of winning by going to the country sooner rather than later.
