Murray Hiebert serves as senior fellow and deputy director of the Chair for Southeast Asia Studies at the Center for Strategic and International Studies (CSIS) in Washington. Earlier, Hiebert worked for the Wall Street Journal's China bureau and the Wall Street Journal Asia and the Far Eastern Economic Review in Washington, reporting on U.S.-Asia relations. From 1995 to 1999, he was based in Malaysia for the Far Eastern Economic Review. Before that he was based in Vietnam and Thailand for the Review. He spoke to Andrew Sheets on Feb. 19, 2016.
The 1MDB scandal has evoked much criticism of Prime Minister Najib Razak. Could you speak about the significance of this scandal and identify some of its implications for Malaysia’s current domestic political landscape?
Malaysian Prime Minister Najib Razak set up 1MDB in 2009 shortly after taking over as prime minister. 1MDB was intended to be a government investment vehicle that would help the government make money. It received various properties at a low price from the government with the intention that it would develop those properties and other assets and be able to make money. Malaysia runs several other government investment vehicles. The one factor making 1MDB unique is that the prime minister himself chairs it.
The issues began a year or two ago when 1MDB was clearly in debt, estimated to be around US$11 billion. Some of its debt came due and the fund had to find ways to pay these debts. It was then that the fund started to attract attention. Various government agencies in Malaysia started investigating 1MDB to try to find out what had happened. There were all kinds of media leaks, particularly to a small publication in eastern Malaysia called the Sarawak Report. The Wall Street Journal also started covering it very carefully.
One of the big issues that emerged was the finding that nearly $700 million in 2013 was apparently deposited in the prime minister’s bank account. Very recently we have heard claims that this money may have come from Saudia Arabia, which has denied knowledge of this. As the 1MDB issue became very politicized in the middle of last year a “clean” (Bersih in Malay) movement organized a large public demonstration. Deputy Prime Minister Muhyiddin Yassin and the attorney general began raising questions and subsequently they were both fired.
The government tried to get this controversy under control. At the same time, news broke that the Swiss were investigating 1MDB for inappropriate economic behavior. The Swiss, Singaporeans, Abu Dhabi, and the FBI have all begun investigations. There were international bankers, including from an American bank, that were suspended from their companies. It has become a complicated issue internationally and domestically, and inside Malaysia there are many calls for Najib to resign.
One of the most prominent voices is that of former Prime Minister Mahathir Mohamad. His calls for resignation prompted Najib to fire Mahathir’s son, Mukhriz Mahatir, who was the chief minister in the northern state of Kedah. The Prime Minister has ousted several other opponents from within the ruling party, the United Malays National Organization. Despite all the questions, the international investigation, and loss of popularity, Najib has managed to rally his core supporters in the Malay ethnic group. It looks like he is trying to power through the scandal and survive.
Will this scandal weaken his party’s control of the Malaysian government and how is Najib Razak reacting to the rising international pressure?
He has fired his biggest critics within the administration. Beyond firing his deputy and the Attorney General, he promoted the head of the corruption investigation commission to a parliamentary position so that he can no longer investigate what happened in 1MDB. Almost $700 million from 1MDB was allegedly deposited in the Prime Minister’s personal bank account. That is not terribly unorthodox in Malaysia. It has been common historically for party funds to be channeled through a prime minister’s bank account. I think in most countries that would be viewed as highly unusual and raise many ethical questions, even if it might be considered legal.
The Prime Minister needed this money for his election campaign in 2013. He came to office before the 2009 elections and he did quite well. But in 2013 he came under much pressure from the opposition headed by Anwar Ibrahim, a former Deputy Prime Minister and Finance Minister in Malaysia who was ousted from the UMNO party by Mahathir and ultimately charged with sodomy and imprisoned.
Najib needed money in 2013 to both run the elections and also to build support in certain constituencies. Some of the money allegedly was used for economic development projects, in particular in states like Penang that often vote for the opposition. Najib won those elections, although he lost the popular vote. Through gerrymandering by the ruling party coalition, he was able to win a majority in the Parliament and maintain a majority there.
Najib in these elections lost support from Malaysia’s ethnic Chinese and many of the ethnic Indians. Running the country is difficult when only one ethnic group, most of which lives in rural areas, supports you. That was the first time the ruling party ever lost its two-thirds majority in Parliament, viewed as very important in Malaysia, as it allows you to change the constitution if need be. Najib now controls the party apparatus and he has fired all his critics within the party.
However, he faces elections in 2018, and I would suspect unless the 1MDB issue is resolved and the Prime Minister is not exonerated from involvement in 1MDB’s dealings, Najib will have to be removed. The party’s problem is that he is not easily replaceable. There’s been some reluctance to change horses because Najib is very charming, internationally well known and liked, speaks English very well, and is the son of a former prime minister.
Najib has many factors going for him and going against him; and it is not clear that he can survive another round of elections. Nazir Razak, the prime minister’s brother and a prominent banker in Kuala Lumpur, has been critical of the 1MDB issue. He says it has dented the reputation of Malaysia economically and politically, which will make it hard to attract new foreign investors. The issue has also dented Malaysia’s economic institutions.
Will the scandal have an impact on Malaysia’s economy? For example, is foreign investment in Malaysia likely to be affected? If so, what will Malaysian authorities need to do to overcome the effects of this scandal?
Interestingly I’m talking to you from Singapore, where I’ve been in meetings for the last three days. Businessmen, both American and Singaporean, as well as domestic officials here, are saying the scandal is denting Malaysia’s attractiveness as an investment target.
The overall economy is relatively okay but Malaysia’s largest trading partner is China, so it has been damaged by China’s economic slowdown. It is also dependent on hydrocarbons. The state-owned company Petronas is a major global oil and gas company that provides about 25% of the government’s revenue. The drop in oil prices from over $100 a barrel to around $30 has hurt revenue. Foreign investors are affected by both the economic slowdown and the political climate.
Malaysia’s central bank chief, Zeti Akhtar Aziz, has also announced that she is stepping down in April. The regulatory agency Bank Negara, the central bank, has been key in the investigation. Zeti is highly respected internationally and has had the position for at least 15 years. We will have to see how this continues to play out. The Swiss, Abu Dhabi, and the U.S. FBI are conducting investigations. Singapore has frozen at least six bank accounts belonging to 1MDB. For Malaysia to recover from this, it will have to come clean on what happened with 1MDB’s funds and where the money went. Malaysia can be extricated from the political crisis by ousting people who behaved badly in this whole process.
The scandal gained international attention after Swiss authorities made their investigation into 1MDB public. Agencies from the US, Singapore, France, and the UK have also became involved. Given the heightened international attention to Malaysia’s corruption, how will Malaysia’s political relationships with Europe and the United States be affected?
When Malaysia’s top leader is under investigation and has his reputation sullied, it really affects the warmth that leaders of other countries can have with him. U.S. President Barack Obama just hosted Prime Minister Najib in Sunnylands, California for the US-ASEAN summit on February 15 and 16. President Obama also visited Malaysia last November for the ASEAN and East Asia summits. In both the recent summit and the one in November, the president had to relate to Prime Minister Najib, but these meetings were less warm than earlier meetings. The meetings were not bilateral, with the US President just seeing him as part of the group that includes other leaders also unpopular in the United States, such as Cambodian Prime Minister Hun Sen, given his many human rights problems.
The United States, Europe, China, and Malaysia’s other neighbors have very complicated relations now. They want to cooperate with Malaysia economically, so it is still in the twelve-nation Trans Pacific Partnership trade arrangement. There is concern that ISIS fighters from Syria and Iraq could move back to Malaysia and Indonesia, two Muslim-majority countries in Southeast Asia. US intelligence agencies want to keep cooperating with Malaysia to follow these people, and make sure they are not able to do any violence or terrorist acts. The US also wants to rein in their recruiting ability. Malaysia and the U.S. also cooperate on piracy at sea issues.
Globally, Malaysia is the economically most successful Muslim country. Malaysia plays a moderating role in trying to show that Muslim countries can be engaged internationally in the economic sphere and be considered significant players.
Malaysia is really important internationally. Having its leader under a cloud does not mean that international players can afford to cut it off.
China is one of Malaysia’s largest trading partners and has invested heavily in 1MDB. How will the scandal affect economic and diplomatic relationships with China and other countries in the region?
In the last two months, two Chinese state-owned conglomerates purchased an infrastructure project and an energy project for $4 billion. So Chinese companies are trying to be helpful to Malaysia. Although there were other bidders for the companies, the Chinese firms won. There was not an open bid, so we do not know what all was involved in deciding that the Chinese company would get these assets.
The whole region is being affected by China’s slowdown. Within Asia-Pacific generally investment will probably be reduced because of China’s economic slowdown. I have been hearing from U.S. companies operating in Asia that the 1MDB issue has not risen to the economic and political level where current investors are going to pull out. However, current investors may not boost their investments, and new investors will be cautious and may not move into Malaysia in the middle this scandal.
Malaysia is one of twelve members of the recently concluded Trans Pacific Partnership with the United States, Singapore, Vietnam, and Brunei in Southeast Asia. This important trade agreement will knock down tariffs and non-tariff barriers. Malaysia is considered the second-largest beneficiary of this agreement in terms of boosts to its GDP growth, after Vietnam. The World Bank recently did a study suggesting the TPP alone could increase Malaysia’s GDP about 8 percent between now and 2030, which is no joke.
It will probably take the various countries another year or two to complete ratifying the TPP. I do not expect it to kick in until maybe early 2018. If the 1MDB crisis is resolved, Malaysia could be a huge beneficiary from the TPP. That gives politicians and investigators more incentive to try and resolve this issue relatively quickly.
Q: How will political relationships between Malaysia and other countries in the region be affected?
Countries in the region will probably be less bothered by the scandal, except for democratic countries like Japan, Korea, Australia and New Zealand. Many others will just view this as business as usual. The fact that two Chinese conglomerates have spent $4 billion in Malaysia in the last two months indicates that at a time when investors in the West are looking cross-eyed at Malaysia, China will still be a good friend. We have seen this also with Thailand. After a military coup almost two years ago, the U.S. has downgraded some of its ties while China has upgraded relations.
Malaysia will face some international downgrading of warmth. However, I expect the multitude of relations in the economic, security and intelligence sharing spheres will still continue.
There is now rising domestic and international pressure for Malaysia to crack down on corruption and increase transparency in its government. Have authorities made any efforts to do so and do you expect to see any changes?
Addressing corruption was one of Najib’s priorities when he came into office in 2009. There have been various officials investigated for corruption and more attempts at moving toward greater economic transparency, especially in economic dealings, which will be required under the TPP. But really we are talking about minnows when some big fish seem to be up to their eyeballs in shenanigans under 1MDB.
The scandal has also raised awareness of human rights issues in Malaysia, including the government’s efforts to silence public criticism of the scandal with the imprisonment of opposition leader Anwar Ibrahim. Will this spotlight on the scandal have longer-term implications for Malaysian human rights?
When Anwar as Deputy Prime Minister in 1998 tried to challenge then Prime Minister Mahathir Mohamad, he was fired, charged with sodomy, and thrown in jail. Eventually the courts threw out the case, freeing him in 2004. When the opposition did well in the 2013 elections, the case rose again with another sodomy charge against Anwar. Early last year he was convicted and sentenced again to prison. One of the goals was to weaken the opposition, a coalition of three parties that has frayed since, and even before, Anwar’s imprisonment.
Any critics, bloggers, or NGOs, including former Prime Minister Mahathir, are investigated for sedition when they get too critical. The sentences are not terribly long, usually for a year or less. Still this has made people who want to be critical recognize the costs and be cautious.
Human rights have slipped. Najib came in getting rid of the draconian British Internal Security Act from colonial days, making various democratic and liberalizing moves early in his tenure. As he came under criticism and the opposition grew in strength, he and his government used various vehicles to crack down on the opposition and his critics. Whether this is addressed down the road will depend on who replaces him. In Malaysia the scandal can be compared to the Watergate scandal in the U.S. for President Nixon. His successor had to find ways to reunite the country and that is what will be needed in Malaysia. If the ruling party elects someone to maintain business as usual, that might not mean much change in human rights. If a dark horse rises with the goal of uniting and healing, then Malaysia could go back to liberalizing.