KUALA LUMPUR (Feb 26): Younger generations could inherit an economically stagnant Malaysia as a result of the 1Malaysia Development Bhd (1MDB) scandal, even as the troubled state investor begins to repay its RM42 billion debt, lawmakers and analysts say.

They said a potential long-term impact of 1MBD is that it would dampen investor confidence in the country, adding that this would make it harder for Malaysia to attract investment or raise money from financial markets through government bonds.

A slowdown in investment will hamper the country’s ability to move from low-cost, low-value, labour-intensive economy to one that is efficient, high-value and high-income, said PKR's Pandan MP, Rafizi Ramli.

"As oil and commodity revenue go down, we are quickly running out of the fiscal space to make the systemic reforms we need. If we are well managed, we could still go to the market to raise money," Rafizi told The Malaysian Insider.

"But because 1MDB has eroded market sentiment and confidence in the country, no one wants to lend us money. And if they do, it will be at interest rates that are way too high."

The lost opportunity to develop into a high income economy due to lack of funds will mean that Malaysia will remain backward as its neighbours catch up, said Rafizi.

The 1MBD scandal has triggered domestic inquiries as to how the company managed to rack up RM42 billion in debts – a big portion of which is guaranteed by the government – in six years.

The state-owned firm is also at the centre of graft allegations involving Prime Minister Datuk Seri Najib Razak, who has been accused of receiving funds from 1MDB-related firms.

Najib, also the finance minister, chairs 1MDB’s advisory board.

Putrajaya has unveiled plans to restructure 1MDB by selling off its power and property assets to pay off its debts starting this year.

Analyst Dr Lim Teck Ghee said the scandal has hurt the country’s reputation among investors, especially after it spread to nations where Malaysia goes to in search of investors.

Authorities in Switzerland, Singapore, Hong Kong and the United States are conducting their own probes into allegations of money-laundering and embezzlement in 1MBD and its related companies.

This comes as Malaysia’s Attorney General (A-G) Tan Sri Mohamed Apandi Ali said there was no offence committed by Najib following investigations into former 1MDB subsidiary SRC International Sdn Bhd.

"The major problem is not so much the direct financial loss incurred in the 1MDB mess which is a large but not ruinous amount. It is the impact on investor confidence and sentiment.

"When major newspapers such as the Financial Times and The Wall Street Journal play up the issues of abuse and mismanagement by the top leadership of the country repeatedly, that cannot be helpful to the country's reputation and drive for foreign investment," said Lim.

Worries about dampening investor confidence have already started.

On Feb 11, a research firm tied to world financial rating agency Fitch Group said the sheer scale of the scandal could deter investors.

The controversy would hurt Malaysia’s score in the legal environment category of BMI’s trade and investment index, which in turn is used by investors as an indicator of a country's stability.

Putrajaya’s supporters, however, refuted arguments that investors were put off by 1MDB, claiming that agencies such as Fitch and Moody’s have continued to give the country "stable" credit ratings.

But Rafizi said such ratings only gave a snapshot of a country’s financial position at a given time, and not an endorsement that a country is necessarily on the right path.

Echoing this, economist Tan Sri Ramon Navaratnam said that a slide in good governance as illustrated in the 1MDB case would make investors worry about the country’s trajectory.

Malaysia could not afford to lose investors’ confidence at a time when government revenues are falling due to low oil and commodity prices and a slack demand for exports, said Ramon, a former Treasury deputy-secretary general.

"I believe that the 1MDB issue is not a positive development. It has negative and far reaching implications," said Ramon, who heads Public Policy Studies at the Asian Strategy and Leadership Institute (Asli).