Malaysia’s Eventual Fall From Grace

STRATFOR Global Intelligence

Analysis

OCTOBER 22, 2015

Forecast

In the near-term, Malaysian Prime Minister Najib Razak will survive efforts to oust him over mounting corruption allegations.

Whether or not Najib holds onto power longer, the years leading up to the next general elections will be turbulent ones.

Political stability, crucial to Malaysia’s economic rise, will be challenged by demographic changes that stress the country’s delicate ethnic balance.

Analysis

A deepening political crisis in Malaysia is highlighting the country’s longstanding ethnic divides and its uncertain road ahead. Since early this year, Prime Minister Najib Razak has been caught in a scandal surrounding the heavily indebted 1Malaysia Development Berhad (1MDB) sovereign wealth fund. Among other points of controversy, Najib is struggling to explain the source of nearly $700 million deposited in his personal account.

This week, with Malaysia’s parliament back in session, the opposition is renewing its efforts to oust the prime minister through a no-confidence vote — a measure that will succeed only in the unlikely event that Najib’s tightly consolidated party apparatus comes apart. Indeed, Najib is likely to remain entrenched in power for the foreseeable future. In the process, however, the political crisis in Kuala Lumpur will both expose and exacerbate broader challenges confronting Malaysia, particularly regarding divisions between the politically influential “Bumiputera” (the umbrella term for ethnic Malays and indigenous groups) and the economically powerful ethnic Chinese and Indian populations. At risk is the carefully balanced status quo that has enabled the Malaysian economy to flourish without communal disruptions.

A Well-Entrenched Man

On the surface, at least, the hits keep piling up for Najib: A steady drip of leaked documents has magnified scrutiny on the prime minister and spawned official investigations both in Malaysia and in countries where 1MDB has been active, including Switzerland and the United States. Najib, who also serves as finance minister, has come under fire from the country’s central bank chief, powerful figures from within his own ruling United Malays National Organisation (UMNO), and Malaysia’s nine state sultans — whose power is largely ceremonial but who are perceived as guardians of Malay heritage and religion. Most notably, longtime Prime Minister and UMNO boss Mahathir Mohammad, Najib’s former mentor, has gone on the warpath. Since publicly withdrawing support for Najib in mid-2014, Mahathir, who governed for 22 years, has called for more intensive probes, joined a major opposition rally in August, and urged his former adversaries in Malaysia’s long-beleaguered opposition to table a no-confidence vote. (Najib’s predecessor, Abdullah Badawi, resigned in 2009 at Mahathir’s behest.)

But the opposition, with just 87 of the parliament’s 221 seats, does not have the numbers to muster the two-thirds majority needed to remove Najib, even if it peels off disaffected lawmakers from the ruling Barisan Nasional coalition’s ethnic Chinese and Indian parties. Moreover, the opposition alliance collapsed this summer, and certain factions are noncommittal at most about ousting Najib — particularly the conservative, Malay Muslim-dominated Pan-Malaysian Islamic Party, which sat out the anti-Najib rally in August.

UMNO is similarly divided. Several powerful party leaders who have publicly criticized Najib’s role in the 1MDB scandal and expressed concern about damage to the party’s credibility still oppose the no-confidence vote. Even with the opposition at odds with itself and its charismatic leader, Anwar Ibrahim, behind bars, UMNO does not want to chance a snap election with the 1MDB affair still unresolved. It narrowly held onto power after losing the popular vote in 2013, after all. Whatever the prime minister’s sins, UMNO lawmakers naturally do not want to see the party fall as a result. The leaked documents have implicated essentially Najib and his wife alone, largely sparing other major UMNO figures. This suggests an orchestrated effort designed to oust the prime minister without sinking the entire party.

An internal putsch against Najib is more likely sometime after the parliamentary session ends. But even this is unlikely. Earlier this year, Najib postponed the next party elections to 2018 and purged some of his most powerful detractors. An emergency vote would take two-thirds of UMNO’s Supreme Council or a majority of the party’s 191 divisional chiefs, and Najib reportedly maintains strong support in both of these blocs. Nearly all UMNO lawmakers and leaders have benefitted from his largesse, and the fact that Najib’s political machine has proved resilient testifies to the power of his patronage network. Party dissent will need to reach a much higher pitch to oust him. Despite Mahathir’s best efforts, this has not happened — yet.

Economic Complications

The crisis in the capital comes at a particularly bad time for Malaysia. With or without Najib at the helm (but particularly if he holds on), the years leading up to next elections, currently expected to take place in 2018, will be turbulent. In particular, an array of challenges is threatening Malaysia’s economic dynamism and the delicate ethnic balance that has undergirded the country’s remarkable rise. The political uncertainty is likely to exacerbate both issues, and vice versa.

A leading concern is that the scandal is diminishing Malaysia’s credibility with investors and driving down the value of its currency, the ringgit, which hit a 17-year low this month. Investors reportedly pulled around more than $4.5 billion from Malaysian stocks and bonds in the third quarter of 2015, while approved foreign direct investment declined by more than 40 percent through the first half of the year. Currencies have been racing downward across Southeast Asia, but the ringgit has performed worse than its regional counterparts — despite Malaysia having generally more favorable economic fundamentals and substantial foreign exchange reserves available to buoy it.

The country’s economic woes cannot be blamed solely on the political uncertainty. Even without the political crisis, Malaysia is facing economic headwinds because of low commodity prices and a looming interest rate hike by the U.S. Federal Reserve. But the scandal is certainly playing a role. Malaysia’s once globally esteemed financial institutions are now in question, and 1MDB is involved in nearly every key sector of the Malaysian economy, including energy, agriculture, tourism and real estate. Meanwhile, Najib’s influence over those purportedly investigating the sovereign wealth fund (in July, for example, he fired the Attorney-General) has raised questions about regulatory transparency and rule of law in the country.

Moreover, Malaysia’s reliance on semi-conductors and commodities such as oil, natural gas and palm oil leave it fairly vulnerable to global shifts. State investment funds like 1MDB and Khazanah Nasional Berhad (which Najib also chairs) were designed, in part, to give Malaysia additional economic buffer and allow it to use capital in a manner similar to neighboring Singapore. The success of such investment vehicles will become particularly important as China begins to focus on higher-value exports such as semi-conductors. Inversely, the economic woes have magnified the scandal. The commodities collapse, for example, has inflated 1MDB’s debts and shrunk the revenues available for UMNO to dole out to keep the coalition more firmly intact.

There is reason for optimism. Malaysia has relatively low debt and inflation, as well as a healthy resource base on which it can continue to build. Its membership in the Trans-Pacific Partnership would, at minimum, help the country diversify, gain an edge over rising regional competition, and position it at the center of global trade flows. So Malaysia’s economic slump alone may not be prolonged enough to sink the ruling party — UMNO survived even the 1997 Asian financial crisis. Nonetheless, Malaysia’s underlying strengths have given traction to the opposition’s assertion that graft and mismanagement must then be playing a singular role in dragging down the economy. This argument will gain strength if the slide continues.

UMNO’s Ethnic Gamble

More problematic over the long-term is the ongoing shift in Malaysia’s ethnic demographics. As in Singapore, Malaysia’s favorable investment climate has long relied on the country maintaining at least superficial political harmony. This is an innate challenge for a geographically fragmented country where the Bumiputera, or “Sons of the Soil,” have stood in contrast to the ethnic Chinese and South Asians, who wield economic influence disproportionate to their numbers.

Malaysia’s political stability has revolved largely around the dominance of the UMNO-led coalitions that have ruled every year since independence in 1957. These coalitions have ensured high-level representation from all major ethnic groups and the farther-flung regions of Sarawak and Sabah on the island of Borneo, facilitating flows of patronage to all corners of society and preventing a repeat of the 1969 communal riots or revival of pre-independence racial strife. The effective one-party rule has generally enabled policy continuity and targeted infrastructure and industrial development, minimizing uncertainty for investors and giving Malaysia a leg up over regional rivals. This environment, combined with Malaysia’s resource abundance and fortuitous position as a trade hub in a high-growth region, fueled a steady economic rise and the growth of a robust middle class.

But the prospect of ethnic strife and resentment fueled by Malaysia’s affirmative action policies has continued to pose a risk to the country’s economic success. Mahathir, when still in power, tried unsuccessfully to peel back these policies, and it is unlikely that others will be able to do so. And throughout Southeast Asia, economic turmoil tends to lead to a push back against the ethnic Chinese populations. In Indonesia, for example, this has often led to violence. This issue is part of why Singapore is not still a part of the Malay Federation.

The ethnic balance underpinning Malaysia’s stability began to noticeably unravel in the 2008 general elections. Ethnic Chinese and Indian voters began to defect from the ruling coalition, upset with ossifying policies meant to cement the pre-eminence of Malays in political and economic life, as well as anti-minority rhetoric and occasional violence. Barisan Nasional lost 58 seats and its seemingly perpetual two-thirds majority. The shift became more pronounced in 2013, when a multi-ethnic opposition coalition won the popular vote. Today, the main Chinese party in the ruling coalition, the Malaysian Chinese Association, holds just seven seats (down from 31 in 2008) and no Cabinet posts. The main Indian party holds four.

Najib has increasingly sought to frame the 1MDB affair in ethnic terms. In this he has taken a cue from Mahathir, whose own rise was fueled by exploiting Malay and indigenous fears of, for example, “the Chinese tsunami.” UMNO has funded and helped organize the Malay nationalist “Red Shirt” movement, whose mass rally in September was narrowly prevented by police from storming a prominent ethnic Chinese business district in Kuala Lumpur. As political strategies go, this may appear exceedingly base, but it also reflects a recognition that Malaysia’s fundamental demographic makeup is changing, most notably among the Chinese. Since 1983, their share of Malaysia’s total population has dropped more than 8 percent, and birthrates among ethnic Chinese are by far the lowest of Malaysia’s main ethnic groups. For political purposes then, rather than wooing back minority voters, UMNO will increasingly work to secure its base and keep the opposition divided along ethnic lines.

This heralds a widening of ethnic divisions — punctuated by growing public unrest more common to Malaysia’s northern neighbors Myanmar and Thailand — that will challenge the core integrity of what is a particularly manufactured form of the modern nation-state. Lacking geographical or ethnic coherence, Malaysia’s solidarity has long stemmed from shrewd, inclusive policymaking, with plentiful resource wealth available to grease away any frictions. A broad remaking of this political system — if it fails to preserve the ties binding Malaysia’s far-flung and disparate parts to the state — would thus prove unsustainable. To a degree, this risk will limit how far Najib and UMNO will be willing to push their ethnic advantage. But with the 1MDB scandal and the economic stresses drawing the ruling party into a protracted fight for survival, Malaysia is likely to slip further into an environment of new uncertainties.

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Mahathir probably the next victim of the 1MDB Monster stalking the land devouring critics

I said in Parliament yesterday that I was the latest victim of the 1MDB “Monster” stalking the land devouring critics.

Parliamentary conventions, practice and procedures have been shoved aside to achieve the objective to suspend me from Parliament for six months, although the proper parliamentary procedure and practice would be to refer me to the Committee of Privileges to ascertain whether what I said in Parliament when seeking clarification from the AMANAH MP for Sepang, Mohamed Hanipa bin Maidin was a “contempt” of the Speaker and Parliament, or whether the Speaker was misguided when he alleged that I had  accused him of “deliberately” abusing his powers and sabotaging the Public Accounts Committee investigations into the 1MDB scandal.

On Wednesday, I had submitted to Parliament the following motion under Standing Order 43 to review the Speaker’s decision in August to stop the PAC from continuing its 1MDB investigations:

“Under Standing Orders 43 and 99, this House resolves that the ruling of the Speaker in August 2015 prohibiting the Public Accounts Committee under its Deputy Chairman, MP for Kepong,  from continuing its proceedings to investigate the 1MDB scandal until the Chairman of the PAC has been appointed is wrong,  an abuse of power and  incompatible  with the objective in having  a Public Accounts Committee which enjoys credibility and  respect of Malaysians for its commitment and  conscientiousness to ensure that  all government and public  finances uphold the highest standards of  integrity.”

Although my notice of this motion has become academic with my suspension from Parliament yesterday, had I also committed contempt of Speaker and Parliament in submitting such a motion to the Speaker on Wednesday, in total contravention of parliamentary convention, and practice and procedure?

As I said in my speech in Parliament yesterday, I was only the latest victim of the 1MDB “Monster” which had already claimed many highly-placed casualties, including former Deputy Prime Minister, Tan Sri Muhyiddin Yassin, Rural and Regional Development Minister Datuk Seri Shafie Apdal, the Attorney-General Tan Sri Gani Patail, the multi-agency Special Task Force into the two mega-scandals of 1MDB and the RM2.6 billion “donation” in Prime Minister Datuk Seri Najib Razak’s personal accounts, and the Public Accounts Committee (PAC) investigations into 1MDB  by the simple expedient of promoting the PAC Chairman and three PAC Members as Minister and Deputy Ministers.

In Parliament yesterday, I spoke of the “disease stalking the land – the 1MDB Monster”, and  one manifestation was the appearance of a website on the day Najib sacked Muhyiddin, Shafie and Gani Patail, which indicated its association with powerful quarters, naming 21 persons as “conspirators against parliamentary democracy” who were to be hunted down under Section 124 of the Penal Code (which with SOSMA would be playing the role of the new ISA) with the appointment of the new Attorney-General Tan Sri Mohamad Apandi Ali and new Special Branch director Datuk Seri Mohamad Fuzi Harun.

As I listed in Parliament yesterday, these 21 alleged “conspirators against the democratically elected government”, or to be more exact, against Prime Minister Datuk Seri Najib Razak, who are to be hunted down under Section 124 of the Penal Code which carries a penalty of up to 20 years in prison are:

1) Datuk Nor Shamsiah Mohd Yunus

– Deputy Governor, Bank Negara Malaysia (BNM)

2) Shamsuddin bin Mohd Mahayidin (BNM)

– Foreign Exchange Administration

3) Abdul Rahman bin Abu Bakar (BNM)

– Financial Intelligence and Enforcement

4) Dato ‘ Sri Mohd Shukri Bin Abdul (MACC)

– Deputy Chief Commissioner (Operation)

5) Datuk Tan Kang Sai

– MACC Special Operation Division Deputy Director

6) YBhg Tan Sri Datuk Rashpal Singh a/l Jeswant Singh

-A Member of the Advisory Board of the Anti-Corruption (ACAB)

7) Jessica Gurmeet Kaur D/O Nashattar Singh

– Heads the Special Task Force Secretariat, Administration and Finance department

8) Dr.Tong Kooi Ong

– Executive Chairman, The Edge Communications Sdn Bhd.

9) Ho Kay Tat

– Group Chief Executive Officer and Publisher, The Edge Communications Sdn. Bhd.

10) Clare Rewcastle Brown

– British investigative journalist Editor-in-chief of Sarawak Report

11) Sufi Yusof

– Mahathir Mohamad’s Press Secretary

12) Tony Pua

– Member of Parliament for Petaling Jaya Utara – National Publicity Secretary for Democratic Action Party (DAP)

13) Tan Sri Zeti Akhtar Aziz

– Governor Bank Negara Malaysia

The above list shows how far-reaching are the tentacles of the 1MDB “Monster”.

I am only the latest victim of the 1MDB Monster and more victims, including former Prime Minister Tun Mahathir, would be the casualties unless the 1MDB Monster could be stopped in its tracks.

All Malaysians are concerned about the inordinate delay in 1MDB investigations.

Even the Malay Rulers have expressed their concern in their unprecedented statement of Oct. 6 that  the government should complete 1MDB investigations “as soon as possible” and to take “appropriate stern action” against all found to be implicated – a clear  disapproval of the delays and procrastinations in 1MDB investigations, including the three-month delay of the PAC into 1MDB investigations.

Will Najib in his 2016 Budget presentation in Parliament this evening be able to tell Malaysians and the waiting world that there is light at the end of the tunnel to stop the 1MDB Monster in its tracks from destroying not only the Najib premiership, but plunging Malaysia headlong in the direction of a rogue and failed state?

                This entry was posted on Friday, 23 October 2015, 8:45 am and is filed under
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Malaysian PM Najib used state funds for ‘bribery’, says former leader Mahathir

Oliver Holmes and David Munk in Kuala Lumpur

Guardian

23 October 2015

Mahathir Mohamad launches fresh attack on scandal-hit former ally in interview with the Guardian

Malaysia’s former prime minister Mahathir Mohamad has accused his protégé and current premier Najib Razak of driving a debt-ridden state fund into the ground by using it for bribery.

In an interview with the Guardian at his office in the administrative capital Putrajaya, Mahathir said Najib had confided to him months ago that “cash is king”, during a terse meeting in which Mahathir told the man he once groomed for the country’s top post that he had lost his support.

“What he is telling me is that bribery is OK. If you bribe with a few dollars, I suppose it doesn’t work, but if you give [money] to a person who has never seen a million ringgit he will turn around,” he said, referring to the local currency.

Najib is battling for his political life after media reports said investigators had found that nearly $700m (£456m) linked to the troubled 1Malaysia Development Bhd (1MDB) state fund was transferred into the prime minister’s private bank accounts.

Mahathir, who ruled Malaysia for 22 years from 1981 to 2003, said in a one-hour interview that Najib had been struggling to fund cash handouts for support, in patronage to politicians as well as an overt programme of cash payments to low-income homes.

“That is not the way to win support, that is bribery. When you need money, you have to find money. You don’t have all that kind of money.

“So how do you raise money? That is the beginning of corruption. 1MBD was created so they can borrow huge sums of money,” he said.

“He needs a lot of money because he doles out money by the millions according to his own supporters. That is corruption. If you want to be popular, do a good job, you will be popular. But to buy people, it’s something morally degrading.”

Mahathir, 90, won five consecutive elections during a period in which the country saw rapid economic growth under the dominance of a single party, the United Malays National Organisation (UMNO).

He left a mixed legacy, accused by rights groups of becoming more authoritarian when he closed newspapers and arrested opposition activists and political opponents during his time in office.

Retiring in 2003, Mahathir remains one the most influential people in Malaysian politics.

“We find that the money that was borrowed for 1MBD is not traceable. There are officers of 1MBD who resigned because the money was not properly used, but they cannot talk because they are still government servants,” Mahathir told the Guardian.

“I told [Najib] that when you borrow the money, it is not sovereign wealth, it is borrowed money. You can’t do it like this.”

The former leader was seen to have handpicked his successors, Abdullah Badawi and Najib, both of whom he later turned on.

While Badawi was accused of poor economic management, Najib has received more personal vitriol from Mahathir.

“The only thing that we can do is to have the prime minister resign or step down or be removed. Because he is the principal person who has brought about this bad image for the country,” he said.

On his popular blog, Mahathir has alleged that politicians close to Najib who have “documentary evidence” of misconduct “now gladly support him”. During the interview with the Guardian, he said that some Malaysian bloggers are also being paid or persuaded to toe the line.

“Those bloggers who somehow suddenly switched over to supporting him, people who used to complain, to complain a lot … What he says is quite true, ‘cash is king’.

“He has a group of young people who seem to be advising him. Some of them are good but some think they can use his authority to enrich themselves.”

Mahathir has led calls for a vote of no confidence in Najib, although opposition politicians say a successful vote is unlikely while the leader enjoys a majority in parliament.

Malaysian police are currently investigating Mahathir on potential defamation charges, but is is not clear who filed the reports or to what they relate.

The fight among Malaysia’s political elite has stunned the country of 30 million, one of the most developed economies in south-east Asia but struggling with a devalued currency.

While Najib has consistently dismissed allegations of corruption and denied buying political support, he has also cracked down on his foes. He has sacked four ministers, his attorney general and deputy prime minister. Two newspapers were closed down this summer and rights activists warn of a growing culture of fear.

The Malaysian Anti-Corruption Commission (MACC) said the money deposited in Najib’s account was not from 1MBD but came from unidentified “donors who originated from the Middle East”.

The “donation has no connection at all to 1MDB”, the anti-graft commission said in the statement.

The prime minister’s office did not immediately respond to Guardian requests for comment.

Mahathir has called for the money to be traced, saying he doubted the cash was a donation as he had never been able to acquire funds from Arab donors during his tenure.

“He said he got the money from the Arabs. Well, show. If it is legitimate, why are you hiding it? Bring the Arab, we’ll find out how rich is he, what is his business before we can believe that he was given 2.6bn ringgit, US$700m, by a donor. How can you believe that?” he said.

“I’ve asked money from the Arabs for some university. I got nothing. I was prime minister.”

                This entry was posted on Friday, 23 October 2015, 9:39 pm and is filed under
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Malaysia’s 1MDB Scandal: Political Intrigue, Billions Missing and International Scrutiny

By TOM WRIGHT And  KEN BROWN

Wall Street Journal

Oct. 23, 2015

Investment fund is under investigation in five countries

HONG KONG — A scandal involving a government investment fund in Malaysia is drawing world-wide attention and has led to calls at home for the ouster of the country’s prime minister. It is also affecting U.S. diplomacy in a strategically important part of Asia. The fund, 1Malaysia Development Bhd., or 1MDB, is under investigation in five countries.

It is a story of political intrigue, backroom politics and billions of dollars in missing money. At the center of it all is Prime Minister Najib Razak, who founded 1MDB. A Malaysian government probe found that nearly $700 million moved through banks, agencies and companies linked to 1MDB before being deposited into Mr. Najib’s alleged private bank accounts ahead of a close election. The source of the money is unclear, though in August, Malaysia’s anticorruption body said the funds were a donation from the Middle East. The donor wasn’t specified.

Here’s a primer on Malaysia, 1MDB and the scandal that has drawn the interest of investigators from around the world.

The Scandal

Mr. Najib set up 1MDB in 2009 and almost immediately, the fund caused controversy. It was supposed to borrow money so it could attract investment and stimulate Malaysia’s economy. Instead, it amassed $11 billion in debt, invested in overseas energy ventures, bought power plants and laid plans for big real-estate projects that didn’t get off the ground.

The fund faces accusations about billions of dollars in missing money and that it was indirectly used to boost the ruling party’s campaign during a tight election in the spring of 2013. Mr. Najib’s office didn’t respond to specific questions about the fund’s activities and a senior official from the ruling party didn’t reply to a request for comment. 1MDB didn’t respond to a request for comment.

Wall Street bank Goldman Sachs Group Inc. reaped hundreds of millions in fees for its work with 1MDB, according to fund documents and people familiar with the matter, leading critics to say the fund overpaid for the bank’s services.

The Gulf emirate of Abu Dhabi has been deeply involved with 1MDB. It guaranteed 1MDB-issued bonds in 2012 and more recently, it helped to shore up the fund’s finances. Abu Dhabi officials recently said they haven’t received roughly $2.4 billion in payments that 1MDB said it sent to them. 1MDB didn’t respond to requests for comment.

No one has been charged by investigators looking into the scandal. Mr. Najib has denied wrongdoing or taking money for personal gain. He says the accusations are an attempt by political opponents to unseat him. The original source of the funds that allegedly went into Mr. Najib’s accounts was unclear, and the government investigation didn’t detail what happened to the money.

1MDB has said its investments were all proper, its finances are in good shape and it would cooperate with any investigations. Goldman has said its fees were higher than usual to compensate for the risks it took to execute the deal quickly and sell three bonds totaling $6.5 billion.

Now, 1MDB is trying to dig itself out of debt by selling off assets.

The Country

Malaysia is located just north of the equator and sits adjacent to the Strait of Malacca, the main shipping channel between the Indian and Pacific oceans. The former British colony has a population of 30 million, which is divided among an ethnic Malay majority and significant Chinese and Indian minorities.

Malaysia has been dominated by a single party since independence, though it lost the popular vote in the last national election in 2013. The party, however, managed to cobble together a majority in parliament.

The country is a major producer of natural resources and it exports oil, natural gas, palm oil and rubber. Malaysia is also a major exporter of electronics, with global companies such as Intel Corp. and Texas Instruments Inc. manufacturing in the country. Economic growth has averaged nearly 6% a year for the past five years.

But a recent world-wide fall in commodity prices and rise in debt levels in the country have hit the economy. Malaysia’s currency, the ringgit, has fallen more than 20% this year, making it the worst performer in Asia. The uncertainty around the 1MDB scandal has contributed to the decline, which has put additional pressure on Mr. Najib.

Malaysia is now stuck in what economists call the “middle income trap.” Its wages are higher than in neighboring countries like Vietnam, making it hard to attract investment in lower-end electronics. It has failed to grow higher-end industries and service businesses. Gross domestic product per capita, a typical measure of wealth, stands at $10,000.

The Prime Minister

Mr. Najib, 62, became prime minister in 2009 and started 1MDB to fuel new industries like information technology, renewable energy and high-value services. It was also designed to wind down a system where ethnic Malays got preferential treatment over Chinese and Indians. The name 1Malaysia was meant to bring the country’s ethnic groups together by creating jobs and raising living standards.

Mr. Najib’s family played an outsize role in the days after Malaysia gained independence in 1957. His father became Malaysia’s second prime minister and an uncle was its third. When his father died in 1976, Mr. Najib took his seat in parliament.

By the time Mr. Najib came to power, minority communities of Chinese and Indians, complaining of discrimination, had started to gravitate to the opposition. Critics say the ethnic-preferences system—which was established to help ethnic Malays catch up with ethnic Chinese and Indians in areas such as wealth and education—had become a font of corruption. The ruling party’s coalition had scored its worst-ever showing at elections in 2008.

Why Does This Matter?

Malaysia plays an important role in Asia as a moderate Muslim country with strong economic, diplomatic and cultural ties to the broader region and the Middle East. When U.S. President Barack Obama made a pitch early in his administration to “pivot” the U.S. toward Asia, he focused on Malaysia as a counterbalance to China’s rise in the region.

At the same time, Mr. Najib talked of building a more inclusive country and made efforts to reach out to the West. Mr. Obama responded and in 2014, he became the first U.S. president since the 1960s to visit Malaysia. Last Christmas, the two leaders played golf in Hawaii. Mr. Obama will visit Malaysia again in November during a meeting of Southeast Asian nations.

One risk is that the 1MDB scandal destabilizes the Malaysian government, leading to a revival of the ethnic strife that plagued the country in its early years. Another is if the government fails to deal with the economic challenges facing the country, including low commodity prices, high debt levels and slowing economic growth.

                This entry was posted on Friday, 23 October 2015, 9:06 pm and is filed under
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Malaysia’s Mahathir: strongman turns activist to unseat former protégé

Oliver Holmes and David Munk in Kuala Lumpur

Guardian

23 October 2015

‘Father of modern Malaysia’ brought down two former allies groomed to succeed him. Can he topple prime minister Najib Razak, his most stubborn heir?

He makes a most unlikely blogger. And, for many, an even more unlikely full-throated advocate of freedom of speech.

But that is the role Mahathir Mohamad has carved out for himself in Malaysia, the nation he is credited with transforming into a regional economic powerhouse.

As he enters his 91st year, he has become the country’s most prominent and undoubtedly most effective activist.

He has come out of retirement to throw allegations of arbitrary arrest, throttling of the press and corruption against current prime minister Najib Razak – similar to accusations that were lobbed against him during his own premiership from 1981 to 2003.

Sitting in his cavernous office and surrounded by gifts from world leaders, the man whose two decades in power are described by rights groups as autocratic has slipped seemingly with ease into his new role.

“People are very angry but they have no way of voicing their feelings,” he said during an interview with the Guardian.

He said he felt compelled to speak out on his blog against Najib.

“It’s not something I enjoy,” he said. “I find I need to do something because lots of people came to see me, complaining about the government and asking me to do something.”

Mahathir has become the ringleader for one side of a political battle against Najib, his own handpicked heir who entered office six years ago.

The embattled premier is facing allegations of corruption linked to a heavily-indebted state fund, 1Malaysia Development Bhd (1MDB).

Najib has vigorously denied that a sum of nearly $700m that was moved into his personal bank accounts is linked to 1MDB, while Malaysia’s anti-corruption agency says the cash was a donation from the Middle East.

But Mahathir, speaking in the country’s administrative capital Putrajaya, says the allegations convinced him that Najib has to step down, and he has created a coalition of politicians to denounce the man he sarcastically calls “the king”.

This month, Mahathir held a press conference with members of the ruling party who have been sidelined by Najib, including sacked deputy prime minister Muhyiddin Yassin. He condemned “a climate of fear among the people” and abuses of power after two men investigating Najib were arrested.

Dressed in his trademark khaki suit, Mahathir talked of Najib’s ills, painting a picture of a man obsessed with holding on to power.

“Previous prime ministers – we have had five prime ministers – have never been so condemned for corruption as this one and everybody says so,” he said. “[Najib] controls the mainstream media. They dare not say anything, they sort of censor themselves voluntarily,” he added.

“They may be be transferred, they may be sacked, their paper may be stopped from publication. There are all kinds of things that he can do. He can call up the editors for questioning, which is always quite unpleasant, so people try to avoid that.”

Taking occasional breaks to cough, the 90-year-old has lost his youth but kept his direct gaze. Dwarfed by piles of books, documents and newspapers, he remains a central part of Malaysian political life and is visited at his riverside office by the country’s elite, who keep him informed.

“The only avenue is for a vote of non-confidence,” Mahathir said of his desire to oust Najib. “Or some demonstration to the ruler that he has lost the confidence and support of the majority of members of parliament.”

His relationship broke down gradually with Najib, he says: “I tried at first to talk to the prime minister. He doesn’t do anything at all to take that advice. Then I had to tell him privately that I no longer supported him. That also didn’t have any effect. Then I went public and told the public I am not supporting him.

“That had to go through the alternative media because he has literally blocked out anything that I say from the mainstream papers. Lots of people read my blog and they have commented on it,” he said.

Many Malaysians feel his attack on Najib is somewhat incongruous from a man accused of using repressive laws to silence or imprison his own critics.

“What a lot of us feel is that he started that. And we are reaping what he sowed,” said Shamini Darshni, Amnesty International Malaysia executive director. While Darshni says the current human rights climate is worse, she adds that detention without trial started with Mahathir.

While in office, he was condemned for his regular use of the Internal Security Act to detain individuals indefinitely and for curtailing the power of the judiciary through rewriting laws and intimidating of judges.

In 1999, 2000 and 2001, the Committee to Protect Journalists put Mahathir on its list of the 10 worst enemies of the press for his stranglehold on the mainstream media. Some of the Malaysian publications that are being intimidated by the current administration were also harassed by Mahathir.

When pressed on the point that Najib is using executive powers that come from Mahathir’s time in office, the former prime minister claimed he used them only to quell sometimes violent racial divides. Muslim Malays make up around 60% of the 30 million population, with ethnic Chinese at about a quarter and ethnic Indians less than 10%.

“During my time, yes, there were things that I did that were maybe not considered democratic and all that, but my job was to ensure that the race relations in this country remained healthy,” he said.

“To that extent, I never used [the powers] for my personal gain, for trying to acquire funds in an illegitimate way. That is an abuse of power.”

Mahathir has never contented himself with his successors, three times turning on men he handpicked to continue his work at the helm of the United Malays National Organisation (Umno) party.

He first contrived to give the reins to his former deputy Anwar Ibrahim, who is now in prison for sodomy, a crime in Malaysia.

“Sodomy is not a crime in many countries. Even [foreign] ministers now come with their boyfriends. That is very acceptable. These people think I am not giving enough freedom. Well, this country is very conservative. We don’t want that kind of behaviour to be connected with our prime minister,” Mahathir said.

“I wanted him to succeed me, I brought him up. But with his faulty moral character, I don’t think he was suitable to become prime minister.

“I think he should have succeeded me. In fact, I was ready to step down after the Commonwealth games in 1998. I thought, ‘I’ve had 18 years of prime ministership, it’s time I go and give it to him.’ But it was exactly at that time that these things were exposed. I felt that he no longer deserved to become prime minister.”

Next to go was his once-loyal deputy Abdullah Badawi, whom Mahathir cultivated for years before Abdullah rose to become prime minister from 2003 to 2009. Mahathir came out of retirement to say he had lost confidence in Abdullah.

Najib, who headed several posts in Mahathir’s cabinet, was sworn in a day after Abdullah resigned. But now Najib too has fallen out of favour, Mahathir is considering whether any Malaysian can hold the office and the power he had in his grip for so long.

“I think if [Najib] steps down, whoever takes over will not be given the kind of authority he had, especially over the police,” he said.

“I think the people have learnt our lesson. They cannot give too much power to the prime minister.”

                This entry was posted on Friday, 23 October 2015, 9:54 pm and is filed under
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Reality check on Malaysia’s lofty S&T achievement, goals

Natalie Heng

SciDev.Net

23/10/15

        If one were to take the press release issued by the Malaysian Industry-Government Group for High Technology (MIGHT) on 28 September at face value, one could be forgiven for assuming its lead announcement about Malaysia’s GDP per capita exceeding for the first time the average of all nations was somehow connected to developments in the country’s science, technology and innovation scene.

The press release notes down the role of the Global Science and Innovation Advisory Council (GSIAC), run jointly by MIGHT and the New York Academy of Sciences, in advising how science and innovation should be incorporated into Malaysia’s ambitious goal of upping its GDP per capita to reach the threshold of developed country status by 2020.

The press release alludes to a variety of collaborations and initiatives to reach this goal, featuring selective quotations from the Global Innovation Index (GII) report crediting Malaysia as an innovation achiever in the last four years.

Despite all this talk, there are long-standing challenges that form a bottleneck to Malaysia’s success when it comes to fulfilling our S&T potential.

Some challenges are mentioned in GSIAC’s own assessment conducted by independent reviewers who raise the lack of coordinated or dedicated funding to ensure implementation of projects as well as obtaining buy-ins to scale up programmes nationwide.

And if one took the time to conduct a closer inspection of the GII report, one would find out that Malaysia’s innovation efficiency rank fell from 52 in 2013 to 77 in 2014, an indication of the need to review government policies concerning the implementation of government-sponsored R&D funds.

Arguably, the media have a role to play in introducing critical discussions that go beyond PR-generated news bites that make it into local headlines.

To do this, we need to engage relevant institutions and agencies — and the GSIAC would be a good place to start. However, Malaysia’s notoriously poor response rate to public media inquiries remains a major barrier to meaningful discussion. Malaysia may aspire to achieve developed nation status by 2020 but it is still struggling to have an open conversation with itself.

So, what’s being done to remove the bottlenecks in science and technology so Malaysia can fulfill its national potential? If you’re keen on knowing GSIAC’s thoughts, don’t hold your breath. After three calls and several emails, I’m still waiting for their response.

                This entry was posted on Friday, 23 October 2015, 9:19 pm and is filed under
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Aussie authorities looking into businesses associated with 1MDB, says report

The Malaysian Insider

24 October 2015

Australian authorities are investigating key players connected to controversial state-owned investment firm 1Malaysia Development Berhad (1MDB), The Australian reported today.

The daily said the Australian Securities & Investments Commission (Asic) had in December launched investigations into Avestra Asset Management, located at 2 Miami Key, Icon Corporate Park, which has become the centre of a full-scale probe.

Avestra, along with another company known as Bridge Global Securities, was linked to a Cayman Islands entity called Bridge Global Absolute Return SPC Fund (BGARF), which according to the report was used to cover up a US$2.23 billion hole in debt-ridden 1MDB.

 In May, The Edge had examined BGARF, a segregated portfolio company (SPC) managed by Bridge Partners Investment Manager (Cayman) Ltd.

It said the SPC was a high-risk portfolio and that investors were warned they could lose everything, cautioning that 1MDB had put billions of ringgit borrowed at very high cost into high-risk funds managed by companies without a decent track record.

Under a 2009 joint venture with Petrosaudi Holdings, 1MBD had tipped in US$1 billion in cash from which US$970 million was allegedly channelled to a company controlled by businessman Low Taek Jho, better known as Jho Loq.

According to The Edge Financial Daily, PetroSaudi was supposed to put in non-cash assets of US$1.5 billion to make it a US$2.5 billion joint venture.

However, the newspaper said PetroSaudi had never owned the main asset it was to put in farming rights to oil fields in Turkmenistan.

The joint venture was eventually called off but 1MDB never got back its cash, instead ending up with murabaha and promissory notes.

The Edge said 1MDB was now trying to cover the hole caused by the venture with PetroSaudi by paying termination fees of around US$2.22 billion to Aabar Investments to retire options issued to the latter.

Around the same time, The Wall Street Journal reported that some RM2.6 billion had been credited into Prime Minister Datuk Seri Najib Razak’s personal accounts ahead of the 2013 general election.

Najib initially denied the allegations, insisting that he had never taken money for personal gain, but later said the money had been given by a Middle East donor for Malaysia’s effort in combating terror group Isis.

Najib, who is finance minister and chairman of 1MDB’s advisory board, has long been criticised over the fund’s RM42 billion debts and opaque dealings.

Key figures including former prime minister Tun Dr Mahathir Mohamad have been calling for Najib’s resignation while opposition leader Datuk Seri Dr Wan Azizah Wan Ismail on Thursday submitted a motion of no confidence against the embattled leader.

In The Australian report, Bridge Global said it had not managed any Avestra funds since April 2013, adding that it was not aware that any shareholder funds invested in Bridge Global were associated with funds from 1MDB.

However, Bridge Global chairman Simon Lill was quoted as telling the daily that he “can’t rule out” an association between Bridge Global Absolute Return and 1MDB. – October 24, 2015.

                This entry was posted on Saturday, 24 October 2015, 10:54 am and is filed under
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Budget 2016: Subsidy cuts and other things Najib didn’t tell you

Nigel Aw

Malaysiakini

Oct. 24, 2015

Prime Minister Najib Abdul Razak offered a list of good news under Budget 2016 which included a hike in civil servants’ pay, increase in BR1M cash handouts, and Goods and Services Tax rebate for mobile phone purchase.

But where is all the money coming from when the country is facing falling revenue from a slump in commodity prices?

Malaysiakini uncovers the ‘bad news’, by breaking down Budget 2016 for you based on ministries which have suffered the worst cuts.

What the premier failed to mention in his budget speech include the likelihood of pricier cooking oil, more expensive train and flight tickets on ‘uneconomical’ routes, the poor having to pay for their electricity bills, and other subsidy cuts.

1) Finance Ministry – General subsidies almost halved

At first glance, it would appear the Finance Ministry had suffered the worst from an austerity budget, with its allocation being slashed by RM7 billion or 17.8 percent, from RM39.247 billion to RM32.247 billion.

However, closer scrutiny showed the heavy cut was made possible through a reduction in subsidies which is expected to go down by a whopping 45 percent, or RM8.707 billion to RM10.633 billion.

Other notable cuts in the ministry include a 95 percent reduction in allocation to the Poor Students’ Trust Fund (Kumpulan Wang Amanah Pelajar Miskin) from RM200 million to a mere RM10 million.

These cuts allowed for increased spending in other areas, including an allocation of RM1.073 billion to deal with the new increase in minimum wage.

The government has already embarked on an aggressive subsidy rationalisation exercise since the beginning of this year and it is unclear where the further subsidy reduction will come from.

2) High Education Ministry – Less money for universities

The second largest cut was targeted at the Higher Education Ministry which saw its budget reduced by RM2.4 billion to RM13.378 billion.

To make up for the shortfall, public universities will suffer the brunt of the cut as they will see their funding reduced by RM1.442 billion.

The worst hit universities are Universiti Malaya, followed by Universiti Malaysia Terengganu and Universiti Teknologi Mara, which budget were slashed b 27.3 percent, 23.76 percent and 23.72 percent respectively.

Some MPs, including Bayan Baru MP Sim Tze Tzin, have raised concerns if this will mean higher tuition fees next year.

3) Commodities Ministry – Pricier cooking oil

Plantation Industries and Commodities Ministry saw a 60.76 percent reduction to its budget from RM1.659 billion to a mere RM651 million.

While the ministry’s programmes saw an across the board reduction in allocation, it will be the consumers who will feel the burden the most.

This is because the single largest cut came from the RM950 million cooking oil price stabilisation scheme which was completely defunded under Budget 2016.

Under the scheme which was introduced in 2007, it ensured a ceiling price on cooking oil, as well as sufficient supply in the market by compensating producers.

With the scheme effectively abolished next year, consumers are likely to pay more for cooking oil.

4) Transport Ministry – Train, flight subsidies reduced

The Transport Ministry will see a budget reduction of 14.1 percent, or RM648 million, to RM3.955 billion, the fourth largest cut among the ministries.

Areas that will see cuts include subsidies for KTM trains and flights from rural regions.

Specifically, the subsidy on “uneconomical” KTM routes will be slashed by more than half, from RM52.9 million to RM25 million.

Subsidy for rural flights, as well as on aircraft rental, will also be reduced by RM5 million from RM160 million.

Other reductions will come primarily from the ministries’ operations.

5) Energy Ministry – No more electricity subsidy

The Energy, Green Technology, and Water Ministry comes in at fifth place for the largest allocation cut under Budget 2016, with a reduction of RM605 million to RM2.262 million.

Likewise, it will be consumers who will suffer the most as the single largest slash is the electricity bill subsidy of RM150 million which will be completely defunded.

Presently, households which use less than RM20 in electricity have their bill fully subsidised by the government to help poor families.

6) Defence Ministry – Downsized national service

The Defence Ministry will see a budget reduction of RM459 million, the sixth largest cut to a ministry.

The amount is relatively small compared to the Defence Ministry’s huge budget of 17.304 billion for next year.

The cut came largely from the downsizing of the national service programme which allocation will be reduced from RM614 million to RM276 million.

However, other areas have also seen cuts, including a reduction of RM100 million to RM2.701 billion for air defence, even as the government plans to acquire new assets in difficult economic times.

Under Budget 2016, the Defence Ministry will acquire six Littoral Combatant Ships, Very Short Range Air Defence weapons system, armoured vehicles, and the A-400M Airbus.

7) Urban Ministry – Solid waste management

The Urban Wellbeing, Housing and Local Government Ministry is the only other ministry to have experienced a cut of more than RM300 million.

Under Budget 2016, the ministry will be allocated RM4.173 billion – compared to RM4.572 billion this year – a reduction of RM399 million.

The single largest cut will come from solid waste management; its funding will see a reduction of 17.3 percent from RM1.036 billion to RM857.1 million.

It remains unclear how the ministry is going to handle solid waste management while still saving RM178.9 million.

However, it should be noted the ministry’s budget provided for RM15 million for the operation of a new landfill next year, which is a more economical method of waste disposal.

                This entry was posted on Saturday, 24 October 2015, 10:40 pm and is filed under
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Malaysia’s 1MDB scandal: Australian connection in Malaysia scandal

Ben Butler

The Australian

October 24, 2015

Sitting on the canals behind the glitzy towers that line Broadbeach, on Queensland’s Gold Coast, the low-rise Icon Corporate Park doesn’t look much like the kind of place you’d find a funds management company looking after billions of dollars caught up in a financial scandal that is rocking Malaysia.

But this modest address, at a modern low-rise located at 2 Miami Key, has emerged as host to Australian key players, some with colourful histories, caught up in the controversy engulfing Malaysia’s debt-ridden sovereign wealth fund, 1MDB.

In Malaysia, the scandal involving hundreds of millions of dollars allegedly paid into the bank account of the country’s Prime Minister, Najib Razak, has left behind a trail of arrests, accusations and alleged murder.

In August, police arrested three senior officials at the Malaysian Anti Corruption Commission, which has been investigating 1MDB, over alleged leaks to London-based website Sarawak Report.

The controversy has also touched Australia’s ANZ Bank: it owns a quarter of Malaysia’s AmBank, which loaned 2 billion ringgit ($660 million) to 1MDB and where Mr Najib kept the account in question.

AmBank’s founder, Hussain Ahmad Najadi, was shot dead in a Kuala Lumpur street in 2013. Before his death he hadn’t been involved with AmBank for years, but his family insists the murder is linked to his discovery of corruption at the bank. Police say he hadn’t made a report about the alleged graft before he was shot and the case has been solved, with a tow-truck driver sentenced to death by the High Court last year. ANZ, thousands of kilometres away in Melbourne, is more than just a passive shareholder in AmBank — incoming CEO Shayne Elliott, who takes up his post in January, was until last week one of three representatives on its board. Several ANZ executives also occupy key roles within the Malaysian bank.

Mr Elliott quit the Malaysian bank board earlier this month, citing the increased workload when he takes over from Mike Smith as head of ANZ in the new year.

While Mr Najib has denied any wrongdoing, the 1MDB scandal has sparked investigations in Malaysia, Switzerland and the US. It is believed corporate watchdog the Australian Securities & Investments Commission is aware of media coverage linking the Miami Key offices and 1MDB. But neither it or federal police are investigating whether there is an Australian connection to the scandal.

But in December last year ASIC launched a full-scale probe of an array of other goings-on at one of the companies doing business at 2 Miami Key. Avestra Asset Management, including alleged insider trading connected to a takeover bid for Harvest Court Industries, a company where Mr Najib’s son once sat on the board.

A 200-page affidavit sworn by senior ASIC investigator Glenn Childs, filed in the Federal Court last month and obtained by The Weekend Australian, reveals a complex web of transactions involving Avestra and other companies connected to 2 Miami Key.

The probe follows ASIC’s successful prosecution of Avestra in December for breaching takeover law by failing to tell the ASX it had acquired more than half of listed AG Financial — yet another company giving its address as 2 Miami Key. Avestra was fined $45,000. AG Financial owned AG Stockbroking, which despite going into administration last year still faces as many as a dozen Financial Ombudsman Service claims from customers, some dating back to when company was called Freeman Fox and controlled by “wealth educator” Peter Spann. Another company giving Miami Key as its address is Bridge Global Securities. It’s a subsidiary of Bridge Global Capital Management, which backdoor-listed on the ASX in June following a tussle with ASIC.

Reports in Singapore and Malaysia allege a Cayman Islands entity called Bridge Global Absolute Return SPC Fund (BGARF), which is linked to Bridge Global and Avestra, was used to cover up a $US2.23bn hole in 1MDB.

The money was supposed to be the capital plus profit from 1MDB’s joint venture with a Middle Eastern company called Petrosaudi Holdings.

Under the 2009 deal, 1MBD tipped in $US1bn in cash while Petrosaudi contributed assets in Turkmenistan and Argentina, valued at $US2.7bn. It is alleged about $US970m eventually flowed to a company controlled by Najib associate Jho Low.

While it’s not clear where the money came from, the Wall Street Journal and other outlets have reported some $US700m also ended up in Mr Najib’s account at AmBank, most of it coming from the account of a BVI company at Abu Dhabi-owned Falcon Bank.

Malaysian reports allege that in 2012 1MDB converted its investment in the joint venture into a half share in a Petrosaudi company, Petrosaudi Oil Services.

This was then sold to a company called Bridge Partners International, which despite its similar name doesn’t appear in any documentation issued by the Australian Bridge Global group.

Bridge Partners didn’t pay in cash but in promissory notes — IOUs — which 1MDB then invested in Bridge Global Absolute Return. According to Bridge Global’s prospectus, Bridge Global Absolute Return is managed by Hanhong, a Hong Kong securities company in which it planned to buy a half stake.

Bridge Global Absolute Return owns almost 10 per cent of Bridge Global, making it the company’s second-biggest shareholder behind another mysterious offshore entity, Merrill Capital, which owns 10.2 per cent.

Despite its name, Merrill Capital appears not to be linked to Merrill Lynch, according to Mr Childs’ affidavit. It is instead a UAE company associated with Mr Goh that owns some 8.5 per cent of Avestra.

To cover the Petrosaudi hole, it’s alleged that in 2012 1MDB signed a deal with Abu Dhabi’s International Petroleum Investment Corporation under which IPIC guaranteed $US3.5bn of bonds issued by 1MDB. In return, IPIC got an option over 50 per cent of 1MDB’s power assets in the event they listed on an exchange.

To unwind this deal, 1MDB paid out $US2.22bn between May and November last year. It’s alleged this money was then passed to Bridge Global Absolute Return, enabling 1MDB to redeem its investment in cash and covering the hole.

On October 13, Bridge Global told the ASX it had abandoned plans to buy out the manager Hanhong after “several key Hanhong personnel departed jeopardising the ongoing future of the business”. It also said it was aware of “unconfirmed offshore press reports as to Avestra’s management of funds from” 1MDB.

Bridge Global admitted key Avestra executive Paul Rowles, who’s a target of ASIC’s investigation, was involved in the management of some of its “proprietary trading and investments, and was a key part of the company’s capital raising activities”.

Until last month, the two companies also had a director in common, Jason Dixon. He quit Bridge Global on September 16 “to pursue his own business interests” and was replaced by Nathan Carbone, formerly an executive with the CBA in Hong Kong.

Bridge Global said it had not managed any Avestra funds since April 2013 and insisted Mr Rowles had “resigned from all aspects of the day to day business of the company”.

It said it “is not managing any funds on behalf of Avestra or 1MDB, nor is it aware that any shareholder funds invested in (Bridge Global) are associated with any funds from 1MDB”.

Bridge Global chairman Simon Lill told The Weekend Australian he “can’t rule out” an association between Bridge Global Absolute Return and 1MDB.

Bridge Global Absolute Return is “not a company I or the board of Bridge Global, ASX-listed, is responsible for the operations of,” he said. Mr Lill said he also did not know who was behind Hanhong’s owner, Bahamas-based M&A Ventures. Mr Lill said he was “not on the day-to-day operations”.

The Weekend Australian approached Bridge Global’s executive director, Neil Sheather. He referred inquiries to Mr Lill.

Avestra’s responsible managers, Paul Rowles and Clayton Dempsey could not be reached.

                This entry was posted on Saturday, 24 October 2015, 7:29 pm and is filed under
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Malaysia’s Broken Biotech Dreams

By Wan Izzuddin Sulaiman

Asia Sentinel

October 22, 2015

Aspirations to make the country a major biotech player are mostly a failure

A decade ago, then-Prime Minister Abdullah Badawi ushered Malaysia into the biotech era with the opening of the BioMalaysia 2005 conference, aimed at making the country a global player by  building a conducive environment for R&D through leveraging existing strengths, particularly in biodiversity and bio-resources.

But that policy lies in a shambles, having eaten up huge amounts of money and having produced almost nothing of value. The 15-year master plan (2005-2020) crafted by the late  Jamaluddin Jarjis, then the Minister of Science, Technology and Innovation (MOSTI), who unfortunately was killed on April 4, 2015 in a helicopter crash, has almost been abandoned.

Among the main biological processes that catapulted the biotechnology revolution worldwide are the genetic manipulation of microorganisms for the production of new drugs, the cloning and manipulation of selected genes in animals and crops to introduce improved varieties, the sequencing of the entire genome including the human one to better understand diseases, and the use of stem-cells in curing chronic diseases. These technologies were mainly originated in laboratories operated by leading universities and research institutions, mostly in the developed countries.

Universities and laboratories are the fertile grounds where the seeds of biotechnology are grown, and scientists are the workhorses that plough these fields. Without the hard work and ingenuity of these scientists, there is no biotechnology. But these scientists do not work in silos. They work very closely with entrepreneurs. The biotech industry is fundamentally built brick-by-brick through tightly knitted collaborations between academia (education & research) and the private sector.

Malaysia wanted to be part of this biotech revolution and wanted to do it quickly even it was already a latecomer. Thus the government launched a biotechnology development agency, Malaysian Biotechnology Corporation Sdn Bhd., under the purview of the Ministry of Science, Technology and Innovation with a strong mandate to steer and expedite the growth of the industry.

In the Ninth and Tenth Malaysia Plans, Biotech Corp was allocated a total of RM300 million to boost the industry through its Bionexus commercialization grants, technology acquisition programs and other industry facilitation apparatus. Two biotech institutes, one in pharmaceutical and another in agriculture were completed in the 11th Malaysia Plan. A biotech industry park was established in Nusajaya, Johor, ostensibly to rival Singapore’s Biopolis.

After hundreds of millions of dollars in public funding were poured into securing Malaysia’s place as an advanced country in biotechnology,  where are we today?  In order to gauge our ability to build biotech businesses, let’s take a look into three government-owned enterprises that were supposed to pave the way. They preluded the National Biotech Policy as both were incorporated before 2005.

The first is NineBio Sdn Bhd, a company established in 2003 under the purview of the Ministry of Health to spearhead the development of local pharmaceuticals particularly in halal, or Muslim dietary rules, vaccines. A budget of RM350 million was initially allocated to the company and a piece of land in Enstek Park in the university town of Nilai southeast of Kuala Lumpur was purchased for the vaccine project. The Auditor General’s Report in 2008 highlighted gross mismanagement of the company and the Ministry of Finance tried to revive the project in 2010, but to no avail. The company is now as good as defunct and the halal vaccine project suffered a premature death.

The second is Inno-Biologics Sdn Bhd, a company wholly owned by the Ministry of Finance, incorporated in 2002 with a paid-up capital of RM93 million. The company was targeted to be the national center for the commercialization and skill development in bio-manufacturing. Inno-Biologics was  supposed to lead the country into the field of bio-pharmaceuticals  – block-buster billion dollar drugs — such as erythropoietin and human insulin.

After 10 years of operation, Inno-Biologics hasn’t broken even and has  continued to register huge losses. The Auditor General’s Report for 2014 pointed out that the company had losses of RM 78 million in three consecutive years between 2010 and-2012. Now the company is justifying its existence by reframing its business model and plotting new business ventures into an entirely different field of regenerative medicines such as stem-cell therapies.

The third company is TPM Biotech Sdn Bhd, owned by Technology Park Malaysia, an agency under the science and technology ministry, with paid-up capital of RM10 million to spearhead the country’s commercialization of herbal products through biotechnology. The company operates two manufacturing sites, one in Raub in the state of Pahang and the other in Kangar in Perlis. Both facilities were built using funds provided by the central government totaling more than RM 60 million.

Without taking into consideration the capital expenditures, the Auditor General’s Report for 2014 pointed out that TPM Biotech registered an operational loss of RM 580,000 over two consecutive years 2012-2013. And yet the company is now entering into new ventures into the fields of halal validation services. The government is investing another RM20 million in the same applications.

What went wrong with these three ventures? All three claimed they had invested in or entered into collaborations with partners with “state of the art” technologies in their respective fields. An all three companies were reliant on the government as sole and benevolent funder.

In the case of Inno-Biologics the government undertook very risky investment into a very specialized manufacturing platform, mammalian cell cultures. The technology can quickly turn out of date. To minimize risks, Inno-Biologics should have in the first place entered into long term binding strategic partnerships and equitable risk-sharing with established players internationally, both technically  and commercially.

The field of biopharmaceuticals is full of proprietary technologies belonging to third parties which are costly and are well protected. The regulatory barriers are numerous and not easily maneuvered. The markets are well monopolized and covertly guarded. It was a huge undertaking, and so far we have not produced any success story.

The case of TPM Biotech the company has invested in herbal extraction, processing, and analytical facilities that are supposed to uplift the status of our herbal products from mere traditional preparations into scientifically validated health supplements. Scientific validations are the necessary steps needed to place our local products into the multi billion global health supplement markets. Analytical tools of biotechnology are useful to validate our products’ safety and efficacy.

These three cases demonstrated the following salient points:

*State-of-the-art technology does not by itself guarantee success. The technology can quickly become irrelevant and its usefulness dissipates over time. It is only useful insofar as it continues to create products that disrupt markets and generate profits. Acquiring technology is a relatively simple exercise provided that you have the money. The real challenge is how to use the technology.

*We should have given higher priority to developing human capital rather than giving more priority into purchasing equipment, constructing buildings and acquiring technologies. It is the people that drive technologies, not machines. Strong and independent teams of scientists that create innovation are the main drivers of biotechnology, not just a team of administrators.

*Government-owned companies should not just rely on continuous government funding in their financial planning model. Having a benevolent funder at your side throughout the entire commercialization process will only breed contentment and do not encourage innovation. Government investment should only facilitate and match private sector investments.

The proponents of the industry may argue that a high technology and knowledge-based industry like biotechnology is capital intensive and would take a long gestation period to mature. They are right. But that does not mean that we can justifiably continue to bleed public’s money into costly mistakes, one after another, without learning from them. So far we have a few broken dreams of biotechnology, experienced by none other than three of government’s own enterprises. Let’s not turn these broken dreams into another public nightmare.

                This entry was posted on Saturday, 24 October 2015, 10:24 am and is filed under
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Najib had turned Parliament into a circus with a 90-minute 2016 budget without a single  reference to the two mega-scandals  in the  country’s history – the RM50 billion 1MDB and RM2.6 billion “donation” in Najib’s personal banking accounts

Communications and Multimedia Minister Senator Salleh Said Keruak hit the nail on the head when he said yesterday that Parliament should not be turned into a circus.

However, Salleh would not have the guts and gumption to tell it to the Prime Minister, Datuk Seri Najib Razak who is most guilty of turning Parliament into a circus when he delivered a 90-minute 2016 budget without a single reference to the two mega-scandals in the country’s history – the RM50 billion 1MDB and RM2.6 billion “donation” in Najib personal banking accounts in March 2013.

Salleh would not have the guts and gumption to tell Najib not to turn Parliament into a circus or he would have lost  his passport of backdoor entry into Parliament!

The placard “Mana RM2.6 billion” (Where is the RM2.6 billion) which opposition MPs displayed in Dewan Rakyat after Najib’s budget speech resonates in the hearts and minds of 30 million Malaysians, even the three million UMNO members, and a few UMNO/BN Members of Parliament as this the topmost question they want answer from Najib’s 2016 Budget speech.

This was the huge elephant in the Dewan Rakyat Chamber which the Prime Minister, the Deputy Prime Minister, his Cabinet and  most of the UMNO/Barisan Nasional MPs refused to see or acknowledge, although the Opposition MPs, the 30 million Malaysians (including the three million UMNO members), and a few UMNO/BN  MPs  could see clearly before their eyes.

In fact, for the first week, the UMNO/BN Government had been treating Parliament like a circus, firstly, in blackballing all questions about the twin mega-scandals of RM50 billion 1MDB (according to Tan Sri Muhyiddin Yassin in his last speech as Deputy Prime Minister to the UMNO Cheras Division on July 26) and the RM2.6 billion “donation” in Najib’s personal banking accounts.

Malaysiakini reported on Monday that the parliament secretariat had rejected in chambers at least seven questions related to controversies surrounding Najib and 1MDB, three from PKR MP for Alor Setar Gooi Hsiao-Leung, two from PKR MP for Batu Tian Chua, one from PKR MP for Kelana Jaya Wong Chen and one from AMANAH MP for Kuala Terengganu, Raja Kamarul Bahrin Shah.

I believe many more questions on 1MDB and the RM2.6 billion “donation” scandal had been rejected in chambers.

I have one question rejected by the Parliament Secretary, asking Najib “whether Malaysia has a kleptocrat as Prime Minister and whether there is satisfactory explanation by US Government on investigation by US Department of Justice under its Kleptocracy Assets Recovery Initiative involving the Prime Minister”.

The seven questions cited by Malaysiakini were three questions from Gooi Hsiao-Leung, on the US Justice Department’s reported corruption probe on 1MDB, on whether he had received RM42 million from a company linked to SRC international in his private accounts as reported by the Wall Street Journal and on whether Najib’s lawyers Hafarizam Wan and Aisha Mubarak were being paid by the government for representing him in his pending lawsuit against the WSJ.

The two questions from Tian Chua were  whether 1MDB accounts had been frozen in Switzerland and Hong Kong, and if the government would be cooperating with the probe there; and secondly, on the US Justice Department’s reported corruption probe on 1MDB.

Wong Chen  asked  the finance ministry for a copy of Yayasan Rakyat 1Malaysia’s (YR1M) accounts particularly with regard to what the RM190 million donation from the Genting Group was spent on while Raja Kamarul Bahrin Shah’s question was   on whether the federal government, through the Terengganu Investment Authority, had wanted to use Terengganu’s oil as collateral.

In fact, the government has been spending the whole of the first week of Parliament avoiding and evading questions about the two mega-scandals.

This was vividly highlighted in  a written reply of the Minister in the Prime Minister’s Department, Azalina Othman  to the Penang Chief Minister and MP for Bagan, Lim Guan Eng, who  had asked Najib on the source of the RM2.6 billion donation, how was it spent,  how much balance is left;  as well as who the money was spent on, if taxes were paid and if there was a formal declaration.

Azalina parried the question by saying that the  government will answer questions about the RM2.6 billion donation received by Prime Minister Najib Abdul Razak and other related queries during the current sitting of Parliament but exact date for this would be determined later.

A question from Lim Lip Eng (DAP-Segambut) regarding the donation and the missing US$1 billion payment to IPIC also received the same reply.

Azalina was appointed Minister in the Prime Minister’s Department to answer parliamentary questions, and not to perform parliamentary acrobatics like  circus juggling.

What Azalina had done was completely unprecedented, whether in Malaysian Parliament or in Commonwealth Parliaments, as this must be the first time in world parliamentary history that a Minister in the Prime Minister’s Department has been appointed to “juggle” answers!

Azalina has in fact shown supreme contempt of the Speaker and Parliament in her “juggling” of answers when she said that the  government will answer questions about the RM2.6 billion donation received by Najib  and other related queries during the current sitting of Parliament but exact date for this would be determined later.

Is Azalina trying to say that the government has no real answers to these questions and has not decided what is the best and most convincing way to “bluff” its way in Parliament?

Who is reducing Parliament to a circus?

I do not really want to mention the rigmarole of a parliamentary proceeding over my suspension from Parliament for six months.

The Speaker does not understand that two wrongs do not make a right.

One reason which the Speaker, Tan Sri Pandikar Amin Mulia advanced why disciplinary action must be taken against me was that the Speaker would lose all credibility if he is seen to be taken action against young MPs  like the MP for Puchong, Gobind Singh Deo but dare not take disciplinary action against “veteran” MPs like me.

Firstly, it was wrong for the Speaker to suspend Gobind from Parliament for making an innocuous statement that the Speaker “has to be honest and has to be clear dalam apa-apa keputusan yang dibuat” – which would not cause any disciplinary action in more robust Parliaments or less touchy Speakers.

Having committed a first wrong, the  commission of a second wrong with my six-month suspension in Parliament does not make the whole situation right.

As I said in Parliament,  I  was only the latest victim of the 1MBD “Monster” which is stalking the land devouring critics, which had reduced Parliament into a circus again highlighted by  Najib’s 2016 Budget without any reference whatsoever to the two mega scandals.

Najib has disappointed 30 million Malaysians including the three million UMNO members, as well as the Malay Rulers who,  in their unprecedented statement of Oct. 6. had called for  investigations into the 1MDB scandal to be completed as soon as possible and to take “appropriate stern action” against all found to be implicated, when there was no reference whatsoever to these two mega scandals.

Instead, Najib has  performed the  Disappearing Rabbit Magic Trick for the 1MDB and RM2.6 billion “donation” scandals in his 2016 Budget.

But Najib is not the latest David Copperfield in Malaysia – but the country’s sixth Prime Minister and Finance Minister who is expected to account fully for the two mega-scandals undermining the national economy by being the chief cause for the confidence deficit of Malaysians well as foreign investors.

Najib must stand up in Parliament to answer  questions from MPs and the nation on the twin mega scandals of 1MDB and RM2.6 billion “donation” in his personal banking accounts, or he should step down as Prime Minister and Finance Minister!

                This entry was posted on Saturday, 24 October 2015, 9:18 am and is filed under
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The Speaker, the Deputy Speaker, the BN MPs – are they fools?

P. Ramakrishnan

Aliran

23rd Oct 2015

The Speaker, the Deputy Speaker and the BN MPs took exception to Lim Kit Siang’s remarks which rightly criticised the lack of seriousness shown in the investigation of the 1MDB scandal.

Consequently, Kit Siang was unfairly suspended without the benefit of defending himself – which went against natural justice.

In all fairness, he should have been referred to the Rights and Privileges Committee under Standing Order 80 for it to probe and establish whether Kit Siang had indeed insulted the Speaker and Parliament. The manner that he was suspended reminded one of Shakespeare’s play, The Merchant of Venice, where a pound of flesh was insisted upon, come what may!

On 22 October 2015, Parliament was, as it were, baying for blood and it succeeded in its effort. As a result, Parliament has lost a voice that had always spoken with conviction and conscience, without fear or favour, to raise issues that reflect the concerns of the people. Much input into the budget debate has been denied – which is a pity.

The outcome of the motion that suspended Kit Siang from Parliament has been described, as we are made to understand, as the work of fools!

Gerakan Youth chief Tan Keng Liang tweeted: “You fools just gave Lim six months of holiday plus gaji buta.”

Who are these fools that he was referring to? There is no doubt about it – all those who played a role in suspending Kit Siang have been labelled as fools.

And who played this role? It was the Speaker, the Deputy Speaker and the BN MPs – 107 of them. All of them were the ones responsible for Kit Siang’s suspension. All of them have been called fools. What are they going to do about this scandalous reference to them?

Does Tan Keng Liang realise he also called his party president, Mah Siew Keong – if he had been present in Parliament and voted for the motion – a fool for supporting the motion? Malaysians are wondering whether he hit the nail on the head!

As for Kit Siang, it will not be “six months of holiday”, knowing him. He is never known to slow down or take things easy. That man is always on the move, always addressing issues that affect the nation, always commenting on the stupidity of policies and the senseless remarks of politicians that don’t benefit the ordinary rakyat. That voice will not be silenced.

Is he getting “gaji buta”? For heaven’s sake, “No.” That “gaji” was his legitimate due and well deserved. Does Keng Liang remember when Gobind Singh was suspended from Parliament without his allowance, it was the late great Karpal Singh who challenged this ruling and took this unjust matter to court and won the case. The court, in its wisdom, ruled that Gobind Singh was entitled to his allowance and he was paid, back-dated.

It wasn’t only Kit Siang but the people at large are also angry that so much effort had been put in ad nauseam to delay and obstruct the investigation into the 1MDB scandal. They are wondering why there is so much hindrance to keep this matter under wraps.

Like the Altantuya case, will the truth ever be known with regard to the 1MDB scandal?

                This entry was posted on Saturday, 24 October 2015, 3:36 pm and is filed under
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What happened to high-income agenda, economists ask of Budget 2016

by Anisah Shukry

The Malaysian Insider

24 October 2015

Economists said they had expected far more from Budget 2016 that is supposed to propel Malaysia towards high-income nation status in five years’ time.

Economic analyst Dr Muhammad Abdul Khalid said Prime Minister Datuk Seri Najib Razak had inadvertently revealed in his speech yesterday that the country was not entirely on track to becoming a high-income nation in five years.

“According to the Performance Management Delivery Unit (Pemandu), the country’s gross domestic product (GDP) should grow by 6% each year for Malaysia to achieve high-income status yet Najib said GDP will only grow between 4% and 5% in 2016.

 “Even this year, GDP is expected to expand between 4.5% and 5.5% only, not 6%,” Muhammad told The Malaysian Insider.

He said Najib, who is also finance minister, had also not addressed the fact that the ringgit’s depreciation against the US dollar would make it more difficult for the country to achieve high-income status.

He explained that a high income nation requires the country to have USD$15,000 GDP per capita, but with the weakened ringgit, Malaysia was off target by 17% “just by doing nothing”.

Low wages and foreign labour

Institut Rakyat executive director Yin Shao Loong said that Najib’s “big picture plan” was to drive economic growth through private sector spending and domestic consumption, yet little was being done to increase wages and thereby, encourage spending.

The growth of wages from the manufacturing sector has been sluggish, said Yin, adding that it was tied to the wages of the service sector and was a good indicator of wage growth in general.

“So when people’s wages are not outpacing inflation then people will not be economically at ease to spend more. So, where are they going to get the money to spend?

“I predict there will be more people taking loans and getting into debt to finance their consumption,” he told The Malaysian Insider.

Yin said Najib was not putting much effort in developing the manufacturing sector so that it can move up the value chain, make better products, increase exports and increase wages.

Even the Federation of Malaysian Manufacturers (FMM) responded to the budget, saying more could have been done to spur the sector towards “high value and high-tech manufacturing incentives”.

The last time the sector benefited from a major incentive was in 2008, FMM said in a statement yesterday.

Economist Dr Yeah Kim Leng said that he had wanted the government to address the country’s high dependency on foreign labour, which he said was “retarding Malaysia’s structural transformation”.

“What has been desired is how to reduce dependency on foreign workers. The negative implications of cheap foreign labour is in a way retarding our structural transformation,” he told The Malaysian Insider.

Muhammad echoed Yeah’s concern on foreign workers, and added that the government should have placed the entire matter under the purview of the Human Resources Ministry, instead of the Home Ministry as is the case now.

“At least the Human Resources Ministry knows which industry needs foreign workers, and how many,” he said.

Missed opportunities

Muhammad touched on other missed opportunities for improvement, such as ensuring the private sector provided unemployment insurance for workers, which he said would not have cost the government a sen.

He also noted that while the government had increased the 1Malaysia People’s Aid (BR1M) amounts, it had failed to improve on the programme.

For instance, he said that the government could have stipulated that the BR1M recipient for every household was the mother, rather than “heads of households”, which usually ends up being the father.

“Mothers have a higher propensity to spend cash aid on education, groceries and other practical matters. Studies have shown that this intervention has worked in other countries.

“The government could have also made BR1M conditional, like making sure recipients’ kids go for classes or health check-ups. Ultimately, you want people to stop receiving BR1M.”

The economists praised Najib’s move to increase the number of zero-rated food items and medicine under the goods and services tax (GST), but Muhammad added that the government should have included all medicines and healthcare services in the list.

“In the end, there is nothing unexpected from this budget. It is all a realisation of the 11th Malaysian Plan,” Muhammad said.

But Yeah said that the budget indicated government spending remains on track, as indicated by the higher-than-expected revenue from GST and its commitment to reduce its fiscal deficit.

He noted that the budget had also lived up to Najib’s pledge for transformation, and pointed to the high allocation for research and development, as well  as vocational and education training.

“Those are in line with longer term aspirations,” said Yeah. – October 24, 2015.

                This entry was posted on Saturday, 24 October 2015, 10:41 am and is filed under
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Battle between Najib’s 300 UMNO chieftains and the three million UMNO members will be a major factor to determine the fate of Malaysia

The reservations and opposition by UMNO leaders, like the UMNO Deputy President Tan Sri Muhyiddin Yassin, Vice President Datuk Shafie Apdal and former UMNO Deputy President Tun Dr. Mahathir Mohamad about the Prime Minister Datuk Seri Najib Razak’s role in the two mega scandals in the country – the RM50 billion 1MDB and the RM2.6 billion ‘donation’ in Najib’s personal banking accounts – and by the 14 UMNO Branches in Telok Kemang calling for Najib’s resignation must be given serious consideration.

In fact, the battle between Najib’s 300 UMNO chieftains and the three million UMNO members will be a major factor to determine the fate of Malaysia, whether Malaysia will hurtle headlong to become a rogue and failed state because of breakdown of rule of law, rampant corruption and abuses of power, and the collapse of good governance or whether Malaysia can pick herself up, re-strategise and reunite to strike forward to fulfill our national potential when we were on verge of becoming one of the Asian tigers before the 1997 financial crisis.

I agree with former International Trade Minister Tan Sri Rafidah Aziz that Malaysia can rise from its current state again as the country has all the factors for success.

The issue before the country is not whether to save UMNO, the Barisan Nasional or any of the Opposition Parties, but whether to save Malaysia.

The recent Merdeka Centre poll in August showed that Najib’s government has for the first time lost the approval of the majority of Malay voters – with only 31 per cent of Malay voters satisfied with the government from the 52 per cent polled in January this year.

The government’s overall approval rating also plummeted to 23 percent, the worst since the polls started in 2012.

As for Chinese voters, only five percent approved of the government compared to 11 percent this January.

If opinion polls are conducted now, with so many detrimental developments in the past two months nationally as well as internationally, public support for the government would have plunged further – to less than 25% for Malay voters or only some 15% to 18%  among Malaysians as a whole.

I believe that the placard “Mana RM2.6 billion” (Where is the RM2.6 billion) which opposition MPs displayed in Dewan Rakyat after Najib’s budget speech resonated in the hearts and minds of 30 million Malaysians, even among the three million UMNO members, and a few UMNO/BN Members of Parliament as this the topmost question they want answer from Najib’s 2016 Budget speech.

If the three million UMNO members are given a chance to state their position, I will not be surprised if a majority of the three million UMNO members are highly embarrassed by Najib’s failure to give a full accountability of the two mega scandals afflicting his administration – which had caused the Malay Rulers to issue an unprecedented statement on October 6 calling for an early end to to 1MDB investigations.

The problem is that the three million UMNO members have no voice or rights at all as compared to the 300 UMNO chieftains, as Najib has bought the support of the 300 UMNO chieftains whether at the UMNO Supreme Council or at the UMNO Divisional chief levels.

This is why I say that the battle between Najib’s 300 UMNO chieftains and the three million UMNO members will  be a major factor to determine the fate of Malaysia.

(Speech  at the “Support and Solidarity with Lim Kit Siang” and “Mana RM2.6 billion?” Kopitiam ceramah in Batu Pahat on Sunday, October 25, 2015)

                This entry was posted on Sunday, 25 October 2015, 5:34 pm and is filed under
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Can Malaysia withstand external headwinds?

Penang Institute

Malaysiakini

24 Oct 2015

In the last year or so, the Malaysian economy has been affected by two main external headwinds. Firstly, the fall in commodities prices has dented the country’s finances. Secondly, the possibility of US increasing its interest rate has caused some repatriation of foreign investment funds, thus affecting investment climate and ringgit’s value against major currencies.

Therefore, can the Budget 2016 help the country withstand further external economic headwinds given that the US Federal Reserve has hinted that interest rates are projected to rise? A separate press statement will cover the Budget’s impact on households.

Overall projection from the Budget 2016

The budget deficit is expected to be 3.2 percent of GDP in 2015 and will reduce marginally to 3.1 percent of GDP in 2016. Economic growth is expected to be 4-5 percent in 2016. In 2016, the expected revenue is RM 225.7 billion whilst the expected expenditure is RM 267.2 billion; thus the expected shortfall is RM41.5 billion.

Impact factor 1: Exposure to commodity prices

Crude oil contributes to the government coffers predominantly from petroleum income tax, export duty from petroleum, petroleum royalty and Petronas dividends. Perhaps to alleviate concerns by foreign investors and rating agencies that Malaysia’s government revenue is dependent on crude oil, the Budget 2016 has projected significantly lower contribution from petroleum based revenue.

Crude oil based revenue is expected to fall from RM 64 billion in 2014 to RM 29.4 billion in 2016. This is equivalent to 29 percent of total government revenue in 2014 and 13 percent of total government revenue in 2016. As the figures in petroleum income tax and export duty for 2016 are largely similar to 2015, the Budget 2016 is implying that crude oil prices in 2016 are largely similar to 2015.

However, Petronas dividends are expected to fall RM10 billion to RM16 billion in 2016. This might be due to the reallocation of resources towards the RM18 billion investment in Refinery and Petrochemical Integrated Development Project in Pengerang, Johor.

Petroleum-based revenue estimates are largely conservative since they are based on 2015 crude oil prices. Nevertheless, should crude oil price rebounds strongly and/or ringgit depreciates further in 2016 and Petronas dividends increase, then the projected deficit might be lower.

To buffer the RM11.4 billion fall in petroleum based revenue and the RM4.8 billion and RM2.6 billion loss in Sales and Service Taxes respectively, RM6 billion more revenue will come from Company Income tax and RM12 billion more revenue will come from the Goods and Services Tax (GST). Therefore, GST has firmly become an important tax generator for the federal government.

Nevertheless, the increase in Company Income Tax of 8.9 percent looks optimistic given the economy in 2015 and 2016 is expected to grow by 4-5 percent only. The higher contribution from GST is also optimistic since the 11th Malaysia Plan projects private consumption to grow at 6.4 percent only. Therefore, the 8.9 percent growth in GST revenue (taking into account Sales and Service Tax in 2015) could be due to stricter tax collection.

Impact factor 2: Vulnerability to financing cost due to reliance on foreign debt financing

Over the years, Federal government debt has grown from RM502 billion (51.6 pecent of GDP) in 2012 to RM627 billion (55.6 percent of GDP) in Quarter 2 2015 according Bank Negara. If one includes the debt guaranteed by the federal government, debt would have increased from RM625 billion (64.4 percent of GDP) in 2012 to RM803 billion (71.2 percent of GDP) in Quarter 2 2015.

With the projected deficit of RM41.5 billion in 2016, federal government debt is expected to grow to RM669 billion (56.5 percent of GDP assuming 5 percent GDP growth) by next year.

The interest rate that Malaysia pays on its debt in the past three years has been manageable. However, it has been rising from a financing cost to debt ratio of 3.8 percent in 2013 to 4.0 percent in 2016.

Whilst this is low, it is probably influenced by the low interest rate environment in the developed world as well as no change in Malaysia’s sovereign credit rating. Besides, foreigners have been investing significantly in Malaysian debt. Out of RM627 billion of federal government debt (excluding guaranteed debt) in the second quarter in 2015, RM198 billion of debt is owned by foreigners.

On an international basis, this 31.6 percent foreign ownership is a high proportion.

So, Malaysia is vulnerable to foreign capital repatriation as a result of actual or expected increase in US interest rates or changes in credit rating. Should any of these change, Malaysia might be forced to paying higher interest rates to borrow. This has happened recently in August and September 2015 when the yield on government debt increased.

Moreover, it is unlikely that the guaranteed debts amount from Bank Negara would have included debt from 1MDB. Should the 1MDB debt be included as part of Malaysia’s debt, then the total debt burden and financing cost would be higher plus investors’ confidence would be affected negatively.

Impact factor 3 on Malaysia: Lower foreign exchange reserves pressure

Bank Negara foreign exchange reserves has fallen significantly to US$94.1 billion as of Oct 15, 2015. Therefore, Bank Negara’s provision of ringgit-renminbi credit swap facility for local banks is positive. This will reduce the country’s reliance on US$ denominated trade since China is a major trading partner.

However, given that investors’ confidence in ringgit is driven mainly by political risk as well as the uncertainty surrounding 1MDB, it is unclear whether the use of ringgit-renminbi swap will have big impact in restoring confidence.

Conclusion

The Budget 2016 has tried to allay investors’ and credit agencies’ concern on Malaysia fiscal balances. There is a significant move away from petroleum related revenue towards company income tax and GST. Nevertheless, the growth assumption in these two taxes looks optimistic. Overall debt amount and interest payments remain areas of concern.

This statement is by the Economics Team of Penang Institute, comprising of the following: DR LIM KIM-HWA, chief executive officer and head of economics; TIM NIKLAS SCHOEPP, senior executive officer; DR LIM CHEE HAN, senior analyst; and ONG WOOI LENG, senior analyst.

                This entry was posted on Sunday, 25 October 2015, 5:48 am and is filed under
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