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Danantara and the specter of Malaysia’s 1MDB Scandal
If not managed properly, Danantara could follow the same disastrous path as 1MDB, which turned from a great hope into a national financial catastrophe.
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A construction worker talks on the phone on Feb. 3, 2016, in front of a 1Malaysia Development Berhad (1MDB) billboard at the Tun Razak Exchange development in Kuala Lumpur. (Reuters/Olivia Harris)
T
he Indonesian government is currently designing Danantara, a super holding company for state-owned enterprises (SOEs) that is expected to become a new locomotive in managing national assets. This model aims to consolidate various state-owned companies to be more efficient, competitive and capable of funding strategic investments without relying entirely on the state budget.
However, behind this grand ambition, there is an important lesson to be learned from: the 1Malaysia Development Berhad (1MDB) scandal in Malaysia.
If not managed properly, Danantara could follow the same disastrous path as 1MDB, which turned from a great hope into a national financial catastrophe.
1MDB was established in 2009 as a sovereign wealth fund (SWF) aimed at attracting foreign investment and funding infrastructure and energy sector projects in Malaysia. Initially, this model appeared promising. 1MDB had access to loans from global financial institutions and supported the development of major projects such as Tun Razak Exchange and Bandar Malaysia.
However, behind the scenes, poor financial management and corrupt practices turned it into one of the world's biggest financial scandals.
One of the strategies used by 1MDB was foreign debt through a business-to-business (B2B) mechanism. Instead of taking out loans directly under the country’s name, the Malaysian government used 1MDB as a vehicle to borrow through the issuance of international bonds and loans from foreign banks, often facilitated by Goldman Sachs.
This structure allowed Malaysia to obtain off-balance-sheet financing, keeping these debts initially off the official public debt records. However, since many of these loans were implicitly guaranteed by the government, Malaysia ultimately had to assume responsibility when 1MDB failed to meet its obligations.
