World Economy

1MDB Mess Could Drag Down Malaysia Growth

1MDB Mess Could Drag Down Malaysia Growth1MDB Mess Could Drag Down Malaysia Growth

A premier financial magazine in the United States says Malaysia would have been one of Asia’s most vibrant economies if not for the ruling party putting its own interest above that of the people.

The Barrons report highlighted this because Malaysia’s vast resources and proximity to China and India was a boost that could raise the country’s economic standing, Yahoo reported.

On the contrary, the report added, Malaysia’s economy is now facing the threat of being dragged under following the mess created by the 1MDB scandal.

As the government dismantles the debt-ridden 1MDB that was established in 2009, it may have to assume some liabilities, Barron’s reported.

The US financial news site quoted Sian Fenner of Oxford Economics in Singapore as saying that such action would increase government debt.

“We find that it would have a material effect on asset prices and pressure on the exchange rate could see Bank Negara raising interest rates to support the currency despite weaker domestic activity,” she said.

In March, Fitch warned a downgrade was “more than 50% likely” as 1MDB struggled to meet obligations and the trade balance darkened. Last month, 1MDB defaulted, adding to what traders call “headline risk”.

At the same time, the report also said, corruption probes in at least seven countries were intensifying. Such actions do not boost investor confidence.

 Several Factors

According to Barrons, last week, Credit Suisse became the latest investment bank–joining JP Morgan and others–in downgrading Malaysian shares.

Along with “considerable political and governance risks”, Credit Suisse cited oil-price trends and an economy that “remains subject to negative growth revisions and a weak consumer” for its move to downgrade Malaysian shares.

Since late 2009, the share of debt held by foreigners has more than doubled, and amounted to more than a third of total debt at the end of the first quarter. “The drip, drip, drip of bad news” since then only increased Malaysia’s vulnerability to shifts in investor sentiment, the report said.

“While at these levels debt is still manageable, there are several factors that have increased Malaysia’s vulnerability,” Fenner was quoted as saying by Barrons.

One of the key factors was on how a government in full survival mode was still not restructuring the economy, which seems to be falling further behind. Another factor, according to Barrons, was how the ruling coalition was neutering government institutions to extend its reign.

The more Malaysia obfuscated on 1MDB, the more outside parties would pounce, the report said, adding that US law enforcement officials planning to talk with Goldman Sachs executives were looking at 1MDB’s transactions.