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1MDB sparks political crisis, protests in Malaysia

The Malaysian ringgit is hovering around 17-year lows against the U.S. dollar, battered by a combination of weak commodity prices, a slowdown in China and expectations of a US interest rate hike.

In fact, the ringgit is the worst performing emerging Asian currency this year – having shed nearly 20 percent of its value since January.

Adding to the currency's headwinds is the growing political turmoil on the domestic front.

Hundreds of thousands of protesters are expected to take to the streets this weekend, ahead of Malaysia's Independence Day, calling for the resignation of Prime Minister Najib Razak. This comes as 1MDB, a state fund chaired by Razak, is embroiled in a scandal over allegations it amassed billions of dollars in debt due to mismanagement and graft.

CNBC looks at what the 1MDB scandal means for the outlook for the ringgit, the economy and the country's political landscape.

What is 1MDB?

Short for 1Malaysia Development Berhad, the fund was formed in 2009 to invest in global infrastructure, real estate and power projects. It is wholly owned by the government. The fund has suffered huge losses, resulting in a debt accumulation of close to $12 billion.

What's the scandal?

Rasid Mohd/Pacific Press | LightRocket | Getty Images

Media reports suggest a high profile $2.5 billion joint venture between 1MDB and oil services firm PetroSaudi International was used as a front to syphon billions of dollars from the fund. The reports implicated top PetroSaudi officials along with well-connected Malaysian tycoons.

Separately, Swiss authorities have launched a money-laundering investigation against several individuals linked to 1MDB.

In the latest twist to the saga, Abu Dhabi's International Petroleum Investment Company is reportedly reconsidering its plans to help restructure 1MDB's massive debts. However, the Emirates company has denied this.

How is the Prime Minister involved?

Malaysia's Prime Minister, Najib Razak
Mohd Rasfan | AFP | Getty Images
Malaysia's Prime Minister, Najib Razak

At the center of the scandal are reports that $700 million were transferred from 1MDB into Najib's personal bank accounts ahead of a general election in 2013.

The prime minister has denied any wrongdoing, saying the money was a received as a donation from an undisclosed entity in the Middle East. But his explanation has done little to placate his critics – the harshest of which include former Prime Minister Mahathir Mohamad.

Mohamad has repeatedly called for Najib to step down, criticising Najib for his alleged role the scandal and lavish lifestyle.

The crisis threatens to undermine Najib's party's 58-year grip on power in Malaysia.

This weekend's 34-hour massed protests are scheduled to take place simultaneously in three Malaysian cities, including the capital of Kuala Lumpur.

Ringgit hit

Analysts suggest the ringgit's woes began long before the political crisis and were mainly as a result of external factors.

A major element has been the weakness in global energy prices, which risks hitting the country's revenue. As one of Southeast Asia's major oil producers, Malaysia's oil-related revenue currently stands at around 30 percent.

Against this backdrop, the 1MDB scandal is adding to the currency's troubles and fuelling nervousness among investors.

Impact on the economy

Some analysts say the weakness in the ringgit could be temporary, as the country's growth prospects remain healthy. In the second quarter, Malaysia's economy posted a better-than-expected 4.9 percent year-on-year growth, despite sluggish commodity prices.

"There are some tentative green shoots," Callum Henderson, global head of FX research at Standard Chartered told CNBC.

"We view the Malaysian ringgit's weakness as a positive for non-energy exports and that eventually should help the trade balance overall."