The current scandals surrounding controversial debt-ridden sovereign investment fund 1Malaysia Development Berhad (1MDB) are proving difficult to shake off for Prime Minister Najib Razak, who set up the fund and chairs its advisory committee. In the latest development, the Wall Street Journal on March 30 cited Malaysian investigation documents which show that some $15 million of a larger sum of money in Najib’s bank accounts was allegedly used to purchase luxury goods across several countries. Global investigators believe that most of the money in Najib’s accounts originated from 1MDB via several foreign entities.

Taking center stage among the scandals is the alleged movement of over $1 billion through 1MDB-linked entities into Najib’s personal bank accounts from 2011 to 2015, which the Wall Street Journal has exposed so far. Najib denies that he took state funds through 1MDB, and claims that the money was a ‘political donation’ from a Saudi royal. However, the government’s reluctance to fully disclose the donor’s identity and motive has hurt Najib’s efforts to counter domestic skepticism towards 1MDB. The scandal has prompted more grassroots leaders, albeit still a small minority, from the ruling United Malays National Organisation (UMNO) to brave disciplinary action to call for Najib’s dismissal – an unthinkable prospect before the 1MDB scandal started to unravel in 2014-15.

A key barometer of Najib’s shelf-life is UMNO’s ongoing grassroots meetings that run until May; a critical number of branch leaders calling for his resignation will significantly raise the likelihood of his ousting by year-end. At the time of writing, however, early indicators point to Najib’s survival this year. Party warlords continue to back Najib, suggesting that dissenters remain a distinct minority that can be bought over, intimidated, ignored, or deposed. Najib has maneuvered himself into a stronger position today than at the height of the scandals last year because he has shed his non-confrontational manner for strongman tactics reminiscent of those exercised by Mahathir in his heyday. To Najib’s benefit, there are few indications that UMNO is actively considering an alternative leader for the next elections due to be called by 2018.

The price of survival

Najib’s extended rule is likely to exact a significant price on the business climate. The 1MDB scandal is likely to be the tip of the corruption iceberg, and its roots may reach deep and wide within the public sector. Significant reputational risks lie in wait for businesses dealing with state-owned companies and local partners closely linked to Najib’s administration. Swiss investigations into 1MDB have so far implicated two major Malaysian conglomerates in alleged ‘criminal activity’, even as details have been scarce. Investments in 1MDB made by at least two government-linked agencies have come under opposition scrutiny, and could yet be included into ongoing foreign probes as investigators dig deeper. Other government sectors also pose substantial corruption risks, with defense being highly vulnerable.

With Najib preoccupied with political survival, state institutions and top decision-making bodies on fiscal and economic policies are likely to be increasingly politicized, with Najib’s loyalists replacing independent figures and technocrats who would otherwise help steer Malaysia more capably through a period of global economic uncertainty. The result is likely to be erratic policymaking at times, with larger foreign investment projects at risk of being ensnared in the politicking. The unexpected decisions in January and March to hike foreign worker levies and to indefinitely freeze all foreign worker recruitment may be nascent signs of a new normal to come.

Of particular concern for foreign investors is the respected Bank Negara (central bank) governor Zeti Akhtar Aziz, whose steady hand has helped Malaysia tide through turbulent times such as the 1997-98 Asian economic crisis. Zeti has come under fire from Najib’s cabinet allies since she stepped up criticisms of 1MDB last year. Her impending retirement in April has sparked concerns over possible political interference in Bank Negara’s succession plan, which could jeopardize its independence and policy continuity.

While Malaysia under Najib will continue to actively court foreign investment for much-needed capital – given lower foreign reserves and capital flight concerns – the lack of transparency in public tenders will be a growing risk. Najib’s government will remain parochially focused on retaining domestic support, which poses greater risks that a larger share of public contracts will be reserved for ethnic Malay-owned businesses – particularly amid declining Malay support – and business tycoons who are funding Najib and his wife’s patronage networks.

The administration will have little bandwidth to devise holistic policies to resolve economic problems and structural obstacles to long-term development. The shortage of skilled labor and the dominant role of government-linked companies in the economy will continue to deter private investment. Businesses remain exposed to potentially higher operating costs arising from stop-gap reforms – the foreign worker levy hike, for instance – designed to raise government revenues amid Malaysia’s tight fiscal conditions.

A serious economic recession will escalate the currently low potential for mass unrest, particularly in the capital Kuala Lumpur. Societal discontent with the rising cost of living is growing amid fiscal consolidation policies, including among the majority Malay community. Communal protests by hard-line Malay groups over alleged economic exploitation by non-Malays are likely to be supported by UMNO elements as a distraction from the government’s struggles to manage economic grievances. Boycotts against products from Western countries that are perceived to have acted disrespectfully toward Islam are also possible.

The growing polarization of Malaysian society along ethnic and religious fault-lines will make it more conducive for ideological appeals by radical Islamist groups, such as the Islamic State (IS), to gain traction. Malaysia is facing a growing and rapidly evolving terrorism threat, with a marked increase in the number of arrests and alleged terrorist plots, particularly over the past year. While authorities are generally effective in disrupting plots, and counter-terrorism legislation continues to be periodically strengthened, the growing number of individuals with the intent to carry out attacks in Malaysia means that planned attacks are increasingly likely to slip past surveillance.

Given the ruthless fashion with which Najib has fended off challenges to his leadership, he will do whatever it takes to be the one to lead the ruling coalition in the next general elections. Yet the 1MDB scandal seems likely to drag on, and – more worryingly for investors – the fallout on Malaysia’s operating environment and the integrity of state institutions will only grow with time.