June 6, 2018 / 11:20 AM / 14 days ago

Malaysia's cenbank chief steps down, latest casualty of 1MDB scandal

KUALA LUMPUR (Reuters) - Malaysian Prime Minister Mahathir Mohamad has accepted the resignation of the central bank governor, the latest in a string of departures as the 92-year-old leader purges top officials seen as close to the scandal-plagued previous government.

Angered over accusations of massive corruption, Malaysians delivered a shock election result last month by voting out a coalition that had led the country for the six decades since independence.

The new government is seeking to unearth suspected graft, in particular in connection with big losses at state fund 1Malaysia Development Berhad (1MDB), during the nearly 10 years that former premier Najib Razak spent in power, casting a cloud over several top officials.

Mahathir, Najib’s mentor-turned-foe, told a news conference after a cabinet meeting on Wednesday that the central bank’s governor, Muhammad Ibrahim, had offered his resignation.

“We have not decided on his successor because we need to have the approval of the Agong before we can announce,” Mahathir said, referring to the king, adding that the new government would meet him as soon as possible to discuss a successor.

Muhammad, a career central bank official, has completed less than half his five-year term, which began in May 2016.

The resignation followed comments by Finance Minister Lim Guan Eng last month that funds from a sale of land by the government to the central bank had gone to pay the liabilities of the beleaguered 1MDB.

Muhammad had defended the decision to buy the land, saying the transaction met government requirements.

Mahathir has reopened investigations into the state development fund 1MBD, which was founded by Najib.

The fund is the subject of a global money-laundering investigation with authorities saying billions of dollars have gone missing.

Jayant Menon, lead economist at Asian Development Bank, said the uncertainty might produce some negative market reaction in the short term, but overall the change at the bank should be positive.

“This type of outcome bodes well for market confidence, if a more accountable and transparent governance system emerges in the longer term,” Menon said.

Former deputy central bank governor Nor Shamsiah Mohd Yunus, who left at the end of her term in November 2016, is among the candidates to replace governor Muhammad, two sources told Reuters.

BANK’S IMAGE

Ratings agency Moody’s said uncertainty over the smooth functioning of monetary policy could increase if a central bank governor was not appointed promptly.

“The governor’s resignation would also be credit negative if it dampens foreign investor sentiment and leads to capital outflows for a protracted period of time,” Moody’s sovereign risk analyst Anushka Shah said in an email statement.

Mahathir, who has promised to reform state institutions and stamp out corruption, this week also replaced the government’s top lawyer, the attorney-general, and the chief of the anti-graft agency.

Malaysia is looking for a new national stock exchange chief, two sources told Reuters.

Media has reported that several top officials at state-linked firms are either stepping down, or being asked to leave.

In a note to employees on Wednesday, Muhammad dismissed as “totally untrue” the perception that the land deal aimed to intentionally aid the misappropriation of funds through 1MDB.

“I am prepared to relinquish my post if I no longer have the strong trust and support of the public,” he said in the message that was leaked online.

“I cannot in good conscience continue if it affects the Bank’s image and reputation.”

A Harvard University graduate, Muhammad joined the bank in 1984 and became the deputy governor in 2010, before taking the top spot upon the retirement of long-serving governor Zeti Akhtar Aziz.

Two months later, Muhammad cut the interest rate in a surprise move, prompted by Brexit, to boost economic growth.

The rate was restored to 3.25 percent in January, as domestic consumption and exports improved.

SUCCESSOR

Nor Shamsiah, who sources say has been approached to replace Muhammad, joined Bank Negara in 1987 after graduating from Australia.

She left the central bank in November 2016 when her term ended, just months after Muhammad’s appointment. She assisted with the 1MDB investigation when Zeti was in charge.

Sukhdave Singh, another former deputy governor, is also being considered, a source said. Sukhdave stepped down in 2017 after 31 years in office.

Bank Negara said in a statement it would “ensure a smooth transition in the handing over of duties to the new governor”.

The announcement did not shake Malaysia’s stock market, which rose 1.25 percent feeding off optimism in U.S. markets. The ringgit only dipped 0.05 percent.

Frances Cheung, head of Asia macro strategy at Westpac, said the equity reaction suggested news of the resignation has been digested.

“It is the uncertainty when the market awaits confirmation of new leadership, rather than the change itself, that affects sentiment,” she said.

Malaysia's Bank Negara Governor Muhammad Ibrahim attends a photo session in Yokohama, south of Tokyo, Japan in this photo taken May 5, 2017. REUTERS/Issei Kato/File Photo

Writing by Praveen Menon; Editing by Clarence Fernandez, Robert Birsel

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