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Economy

Najib maintains firm grip on power despite 1MDB scandal

SINGAPORE -- Politics in Malaysia is an enigma for many foreign investors.

Foreign capital is fleeing the country as investors are disturbed by a massive corruption scandal involving Prime Minister Najib Razak. But allegations that Najib received a massive amount of cash from a state investment fund have made little dent in his grip on power.

There is clearly a wide gap in perceptions of this 62-year-old, seasoned politician between overseas observers and the Malaysian people.

Standing tall

Najib showed supreme confidence in his political standing during a ceremony to launch a new model of national carmaker Proton Holdings held on June 14 in Putrajaya, the administrative center located 25km south of Kuala Lumpur.

"I am pleased to say, Mahathir's era of political interference has come to an end," Najib said, referring to Mahathir Mohamad, the former prime minister who ruled the nation for more than two decades until 2003 and has maintained major political clout.

Proton, established by Mahathir in 1983, has been struggling to stay afloat amid intensifying competition in the domestic auto market. The company's market share has plunged from 74% in 1993 to around 15%.

Mahathir, who became chairman of the troubled carmaker in 2014, asked for financial support from the government, but it was rejected. The government's snub is said to reflect the bitter political conflict between the two men.

The 90-year-old former premier has been stepping up his campaign for an exhaustive investigation into the money scandal over the ties between Najib and the state fund, 1Malaysia Development Berhad.

Local political pundits have said Najib has been putting pressure on Mahathir by refusing to bail out the automaker.

The battle over Proton ended with a victory for Najib when Mahathir resigned from the post of the company's chairman at the end of March. "I don't want to be the cause of Proton's inability to recover because of my presence," Mahathir said.

In early June, the Malaysian government decided to inject up to 1.25 billion ringgit ($311 million) into Proton Holdings by subscribing to convertible debt issued by the maker. If the government opts to fully convert the debt -- issued in the form of new, redeemable convertible cumulative preference shares -- into shares, it could become Proton's largest shareholder again.

Najib's remark about Mahathir's waning political power sounded like a declaration of victory over the former leader.

Scandal comes to light

Since The Wall Street Journal reported in July last year about a paper trail tracing nearly $700 million from 1MDB-related companies to Najib's personal bank accounts, the scandal has received a barrage of foreign media coverage.

Following the business daily's report, Mahathir started ratcheting up rhetoric criticizing Najib. A rally against the prime minister in Kuala Lumpur attracted tens of thousands of people.

A Reuters article on the scandal published in September last year said, "Najib faces pressure at home to step down from his post over the 1MDB scandal."

The series of revelations about the money scandal at that time caused the ringgit to plunge around 4.4 ringgit against dollar, its lowest level since the 1997 Asian financial crisis.

One year since the scandal came to light, however, there are few signs that Najib is in danger of losing power.

In a Sarawak state assembly election on May 7, the ruling coalition Barisan Nasional, or National Front, led by Najib's United Malays National Organization, won a landslide victory, taking 72 of the 82 seats in the local assembly.

It was the first major election since the scandal came to light, but the results showed no sign that the revelations had any effect on voters' decisions. In a blog post, Salleh Said Keruak, the minister of communication and multimedia, said, "This proved the prime minister's critics wrong regarding his popularity."

The ruling coalition also scored an overwhelming victory in lower house by-elections in two constituencies held on June 18.

Instead of being eroded by negative coverage of the scandal by foreign media, Najib's political power base has actually strengthened. There is currently no vocal critic of the prime minister within the ruling camp.

Strong suits

Three key factors explain why the scandal has not undermined Najib's leadership.

One is strict control over domestic media. While Mahathir and other critics have been campaigning for Najib's resignation, their efforts have received little domestic media coverage. For example, the scandal was not a major campaign topic in the Sarawak election.

Since domestic media organizations must obtain a license from the government to operate, they tend to restrain themselves in reporting on the prime minister's scandal.

A second factor is the concentration of power in Najib's hands. He has tight control over the ruling party's financial and personnel affairs.

In July last year, Najib sacked Deputy Prime Minister Muhyiddin Yassin after he publicly called on the premier to explain the scandal.

In February, Najib also forced Mukhriz Mahathir, the son of the former prime minister, to resign as chief minister of the state of Kedah.

The third factor behind Najib's unshakable political power is vote value disparities between urban and rural constituencies. The ruling coalition, which has been in power since the country's independence in 1957, has allocated more parliamentary and local assembly seats to sparsely populated rural areas.

The ruling alliance suffered a drubbing in major cities in the 2013 lower house election, but managed to remain in power because of its overwhelming victories in farming villages.

Before the Sarawak election in May, the ruling coalition distributed bags of fertilizer among farmers in the state.

The ruling coalition also successfully courted support from rural voters, mostly pious Muslims, by casting criticism against the prime minister as an attack against Muslims.

Overwhelming support for the ruling coalition in rural areas more than offset the effects on the election results of lingering indignation about the scandal in urban districts.

In June, Mahathir, speaking at "The Future of Asia" conference organized by The Nikkei in Tokyo, said the leader of his country should be replaced. But, he lamented, the country had no means to do so.

Concentration of power

Ironically, it was Mahathir himself who established the political regime that is now supporting Najib's firm grip on power.

During the Asian financial crisis, Mahathir, who served as prime minister for 22 years, engineered the downfall of Deputy Prime Minister Anwar Ibrahim, who supported the International Monetary Fund's austerity approach for dealing with the crisis and thereby clashed with Mahathir.

Mahathir also cracked down hard on media critical of his leadership and reapportioned parliamentary seats to boost the ruling camp's political power base.

Malaysia is still governed under a political system that allows the concentration of power in the hands of the leader in order to accelerate the country's economic development.

Najib's political standing, however, could still take a hit from the economic fallout of the scandal. In May, Swiss authorities launched a probe into potential money laundering by a Swiss bank linked to 1MDB.

Alarmed by the growing scandal involving the state investment fund, global investors started pulling their money out of the country again this spring.

Najib has no control over such flows of foreign capital. A political analyst in Malaysia said Najib's only potential undoing is in the economy.

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