Transparency, ratings agency warn on Malaysia graft 'crisis'

Malaysia's Prime Minister Najib Razak (centre) and Deputy Prime Minister Ahmad Zahid Hamidi (left) on Aug 31, 2015.
Malaysia's Prime Minister Najib Razak (centre) and Deputy Prime Minister Ahmad Zahid Hamidi (left) on Aug 31, 2015.PHOTO: AFP

KUALA LUMPUR (AFP) - Transparency International warned on Tuesday that Malaysia faces a "corruption crisis" over a financial scandal implicating the prime minister, as major credit ratings agencies cautioned that related turmoil threatens the country's economic outlook.

The stark assessments followed weekend street demonstrations by tens of thousands in Kuala Lumpur and other cities to demand Prime Minister Najib Razak's removal.

"Malaysia is facing a major corruption crisis," graft watchdog Transparency International said in a statement following its annual global meeting on Tuesday.

The meeting, along with a world anti-corruption conference that opens Wednesday, are both coincidentally being held in Malaysia.

Najib has faced growing pressure since The Wall Street Journal last month revealed that Malaysian investigators had found nearly US$700 million (S$988 million) was deposited into his personal bank accounts.

Najib initially rejected the report as false, but his government has since admitted the transfers, calling them "political donations" from unidentified Middle Eastern sources.

The government has refused to give further details.

The subsequent outrage has been exacerbated by a flurry of government personnel moves by Najib - including sacking his attorney general - that appear to have left investigations stalled.

Transparency International is a key organiser of the three-day anti-graft conference. Najib, 62, is officially listed as a speaker but it remains unclear whether he will attend.

Transparency International called for "a strong and clear commitment from the government of Malaysia to ensure" independent investigations of all allegations and impartial punishment for those found guilty.

The scandal comes just as Malaysia's economic growth outlook has weakened due to falling prices for the oil and other commodities it exports.

Its ringgit currency has plummeted around 30 percent over the past year.

Economists blame the ringgit's woes on the economic outlook and China's recent currency devaluation, but also cite political concerns stemming from the unresolved corruption suspicions.

"Large political protests in Malaysia over the weekend reflect ongoing political uncertainty that could further undermine market sentiment and capital inflows," ratings agency Moody's said in a statement on Tuesday.

It said the uncertainty would "chip away" at Malaysia's growth outlook and its still sizeable foreign exchange reserves, as the government is forced to buy ringgit to support the currency.

In a separate statement, Fitch Ratings voiced growing investor concern that the scandal would distract the government from managing the economy.

"It would be credit negative for Malaysia should the political volatility result in the government back-tracking on (economic) reforms," Fitch said.

Neither agency said a credit rating downgrade - which would harm the government's ability to raise capital - was imminent, citing Malaysia's still relatively solid fundamentals.

The economy grew 4.9 per cent in the second quarter, its slowest pace in nearly two years.

Even before the Najib funds revelation, he had faced months of scrutiny over allegations that huge sums had gone missing from deals involving a state-owned company he launched.

Najib denies any wrongdoing, alleging a "political conspiracy", and vowed Sunday he would not let the economy fail.