Political Risk and Legal Uncertainty in Southeast Asia: Lessons from Najib Razak's Legal Battle and Its Impact on Foreign Investment

In 2025, Southeast Asia remains a paradox for foreign investors: a region of rapid economic growth and strategic geopolitical importance, yet riddled with political and legal uncertainties that test the resilience of capital. The legal saga of former Malaysian Prime Minister Najib Razak, now in his final years of a 12-year prison sentence for corruption, has become a case study in how governance risks can ripple across markets. Najib's recent judicial review to secure house arrest—backed by a royal addendum to his 2024 pardon—has reignited debates about judicial independence, executive overreach, and the credibility of anti-corruption reforms. For investors, this case is not an isolated incident but a microcosm of broader governance challenges across the region.

Malaysia: A Test of Institutional Integrity

Najib Razak's legal battle underscores Malaysia's struggle to balance political accountability with institutional trust. The Federal Court's decision to allow a judicial review of the royal addendum—a move that could reduce his sentence to six years and enable house arrest—has drawn sharp criticism from Prime Minister Anwar Ibrahim's government, which has positioned itself as a champion of anti-corruption. This tension reflects a deeper issue: the perception that legal outcomes in Malaysia are influenced by political agendas rather than impartial justice.

The implications for foreign investment are clear. Malaysia's Corruption Perceptions Index (CPI) score of 57/100 in 2025 lags behind regional peers like Vietnam (64/100) and Indonesia (49/100), signaling lingering concerns about governance. Foreign direct investment (FDI) inflows dropped by 8-5% between 2023 and 2024, with infrastructure and financial sectors particularly affected. Investors are wary of how political disputes might delay regulatory approvals or disrupt long-term projects.

Broader Regional Trends: Political Risk as a Systemic Challenge

Najib's case is part of a larger pattern of political and legal uncertainty across Southeast Asia. In Vietnam, the consolidation of power under General Secretary Tô Lâm has raised concerns about authoritarianism, even as anti-corruption campaigns have improved transparency. The country's FDI rebound in 2024—driven by tech and manufacturing—hides underlying risks, including bureaucratic delays and geopolitical tensions with the U.S. over trade policies.

Thailand offers a starker example. The 2017 constitution, designed to entrench elite control, has led to frequent court interventions in politics. The 2023 dissolution of the Move Forward Party and the 2025 protests over leaked communications have created a “chilling effect” on FDI. While Thailand's digital sector attracted $7.3 billion in 2024, political instability has caused a 24% drop in the Stock Exchange of Thailand (SET) Index year-to-date.

In Indonesia, President Prabowo Subianto's ambitious spending plans and reliance on legacy economic figures have sparked fears of fiscal mismanagement. Meanwhile, the Philippines remains a hotbed of political rivalry, with the dissolution of the Marcos-Duterte alliance threatening policy continuity. These dynamics highlight how governance risks are not confined to any single country but are systemic across the region.

Investment Implications: Navigating the New Normal

For foreign investors, the lesson is clear: political risk is no longer a peripheral concern but a core factor in capital allocation. The 2024 academic study on Vietnam's political risk environment, which found that governance quality and military involvement had a greater impact on FDI than GDP growth, underscores this shift. Investors must now prioritize:

1. Sectoral Diversification: Shifting toward sectors less exposed to political volatility, such as technology, renewables, and ESG-aligned infrastructure.
2. Geographic Hedging: Balancing exposure across Southeast Asia by favoring markets with stronger institutional frameworks, such as Vietnam and Singapore, while avoiding high-risk areas like Thailand's tourism sector.
3. Legal Due Diligence: Scrutinizing the enforceability of contracts and the independence of judicial systems in host countries.

Conclusion: Governance as a Currency

Najib Razak's legal battle is more than a political drama—it is a barometer of Southeast Asia's evolving investment landscape. As governments grapple with the dual demands of economic growth and political control, foreign investors must adapt to a world where governance integrity is as critical as GDP. The region's future will be shaped not just by its economic potential, but by its ability to build institutions that inspire trust. For now, the message is clear: in Southeast Asia, political risk is not a risk to be ignored—it is a risk to be managed.