I had submitted a question to the Finance Minister, Dato’ Seri Najib Razak to ask about the status and performance of 1Malaysia Development Berhad’s (1MDB) mysterious investment of US$2.32 billion (RM7.6 billion) in Cayman Islands.  I had also requested that the Minister inform the Parliament the name and address of the investment fund, the fund manager and its owner.

 

The Finance Minister provided me with a written reply on Thursday, 13th March 2014 which was alarming and worse, an attempt to hide vital information.

 

 

The reply by Dato’ Seri Najib Razak confirmed the earlier 1MDB press statement that the fund received a return of only 5.76% in 2013.  The performance of the fund is woeful relative to the 20% increase in the global stock markets for the year.  The United States stock markets indices – Dow Jones Industrial Average, S&P and NASDAQ – rose 26.5%, 30.0% and 38.3% respectively last year.  The Japan Nikkei 225 index shot up by a massive 57%.  Even the KL Composite Index increased by 10.5% for the year.

 

As stated in the Minister’s reply, the US$2.32 billion investment in the mysterious fund in Cayman Islands is a result of exiting the “Murabaha Notes” investment to Petrosaudi International.  The Murabaha Notes had a guaranteed a 8.67% annual return to 1MDB until 2021.  The Finance Minister did not clarify as to why 1MDB see it financially profitable to exit an investment which provided a guaranteed 8.67% return to switch to a fund-which-cannot-be-named that gave only 5.67%.

 

Worse, Dato’ Seri Najib Razak failed to highlight the fact that 1MDB took a loan to make the above investments.

 

The bulk of 1MDB’s borrowings for the above investments were raised in 2009 via an Islamic loan facility “sukuk” where 1MDB had to pay 5.75% interest (“coupon rate”).  In lay man’s terms, this means that 1MDB is borrowing money at 5.75% interest to invest in an anonymous Cayman Islands fund which gave a return of 5.76%!

 

What the Finance Minister, who also happens to be the Prime Minister did not add was the fact that 1MDB had offered the above sukuk at a massive 12% discount – meaning it only received RM87.92 in loan funds, for every RM100 it borrowed.  But 1MDB has to pay 5.75% interest on the full RM100.  Hence the effective interest rate payable by 1MDB for the sukuk is 6.71%.

 

In lay man’s terms, this means that 1MDB is borrowing money at an effective interest of 6.71% to invest in an anonymous Cayman Islands fund which gave a return of only 5.76%.  Hence 1MDB suffers a loss of 0.95% annually or as much as US$22 million (RM70 million) per annum as a result of the Cayman Islands investment.

 

Therefore to avoid further painful losses for the rakyat, 1MDB must withdraw the funds from this unknown Cayman Island fund, and pay-off its sukuk debt which is guaranteed by the Federal Government, costing 6.71% per annum.

 

Finally, what makes the entire Cayman Island investment most dubious is the stubborn refusal by the Dato’ Seri Najib Razak to name the fund, its manager and owner.  By mere stating that the fund is “licensed to operate in Cayman Islands” gives scant comfort to the Malaysian tax-payers who see RM7.6 billion of their monies stuck out of the country. What exactly is so secretive about this particular fund manager that the name must remain a top secret and cannot be revealed to the public?

 

Given the utter lack of transparency, it is hence unsurprising that 1MDB’s external auditor, KPMG has decided to cease its role while the new auditor, Deloitte Malaysia was appointed.  We hope that Deloitte in the much delayed 1MDB March 2013 accounts will be able to shed light into this highly suspicious “investment” parked in Cayman Island, infamous for being the destination for money launderers and tax-evaders.
 
Tony Pua