Mahathir Mohamad was never under any illusion about the scale of the task to restore enough order and governance in Malaysia to spur confidence among investors, both at home and abroad.
Yet the extent of the challenges facing the country’s oldest-ever prime minister may have been even more acute than even he could envisage. The 92 year-old and his aides reportedly entered the Malaysian government offices after their early May election victory to find garbage bags filled with shredded documents, loose papers scattered across the floor and computers that blocked access to certain high-ranking officials.
To describe Malaysia’s finances as being in a woeful state is an understatement. Amid the realities facing the new administration is national debt of around $250 billion, equivalent to 80% of the country’s GDP (not the $170 billion purported by the former government). Added to this are various claims of theft from national coffers, including the $4.5 billion hole in sovereign wealth fund 1MDB.
Inevitably, foreign investors have become unsettled. Between January and June 15, for example, the net outflow of foreign funds totalled MYR4.23 billion ($1.05 billion). And in the weeks immediately following the May election, foreign investors pulled even faster out of Malaysian equities. At the same time, ratings agencies expressed concerns over the country’s fiscal strength.
The “Mahathir 2.0” regime has an opportunity to stop the rot and re-establish Malaysia’s investment appeal. AsianInvestor proposes five steps, based on the views of foreign and domestic investors at insurance companies, pension funds, government entities and private banks.
1. Create clarity on the direction of the market
Publicly exposing and targeting a host of alleged and confirmed corruption scandals is a critical first step. However, it doesn’t give investors the comfort they want and need.
“A lot of the reasons for the problems we are seeing [at the moment] is that investors are not coming back into the market, due to the uncertainty about its direction,” according to Shahril Ridza Ridzuan, chief executive officer of the Employees Provident Fund (EPF).
He and other institutional investors are urging the government to set a clear direction for their intentions for the financial markets. This means articulating the growth strategy, not just publicising the decision to cancel existing projects.
More specifically, investors are calling for a new pathway on policy for the next five to 10 years, coupled with all-important plans for how it will be implemented, including key performance indicators and the responsible ministry.
“The faster the government gets around to telling the market what the direction is and which industries it will promote, this will encourage investors to re-enter and take a view,” added Ridza Ridzuan.
2. Foster transparency and promote good governance
The new government must follow through on its array of much-needed, good governance-related promises in its election manifesto.
These range from efforts to ensure no cronyism or threats of corruption within the ruling party, to implementing due process in selecting individuals for key appointments and removing all political appointees at state-owned or state-linked companies. It has also said it would create more layers and checks—such as open tenders—in approving public spending.
“In the short term, it is all about giving [investors] consistency,” said Rohit Nambiar, chief executive officer of AXA Affin Life Insurance. “This is done via transparency, as well as articulating the vision for the country.”
Continuity in the direction and conduct of monetary and other policies is also vital. The appointment in mid-June of Nor Shamsiah Mohd Yunus as the new governor of Bank Negara Malaysia is a step in this direction. She was a former deputy governor who assisted in investigations into the 1MDB scandal, and has most recently held a senior role at the International Monetary Fund.
Another way to potentially give credibility to the push for transparency would be listing state oil company Petronas; this could allow the new government to set the tone by paying down debt and signalling to investors Malaysia’s pro-business stance.
3. Sell the Malaysia story
The new government needs to do more to spread the word about what the country has to offer.
This would build on initial post-election efforts to woo Japanese companies, and on the commitment by Alibaba chief executive Jack Ma that the Chinese technology company will add to its existing $100 million investment in Malaysia via funding, staff training and technology.
Investors say the focus of the new administration should be on areas that highlight points of differentiation and potential competitive advantage for Malaysia. These include, for example, the availability of professional talent, especially within financial services and IT, as well as existing infrastructure.
“With the right policies, Malaysia would then be a more attractive investment destination for local and overseas talent compared with other Asian markets such as Hong Kong and Singapore where costs of living are much higher,” added Nambiar of AXA Affin Life Insurance.
In particular, the government’s goal, said several investors, should be to position Malaysia as a new-economy, digital incubation hub for many larger organisations.
This would require clearer policies within financial services, for instance, on the cloud, explained Nambiar.
4. Allow greater investment diversification
Many of Malaysia’s smaller to medium-sized retail and institutional investors lack the resources and expertise to create the kind of balanced, multi-asset portfolios that are more common among the market’s larger players.
As a result, they say they want to be able to diversify into overseas or alternative investments without having to justify the decision by the need to secure higher returns to compensate for the higher risk charges imposed.
“Alternatives can generate returns at a lower risk or at a return which may not justify the higher risk-adjusted return required,” explained Esther Ong Chen Woon, chief investment officer of Prudential Malaysia.
A broader array of investments is certainly in demand. The longer term, ringgit-denominated characteristics of alternatives appeal to some investors, especially given uncertainty over which industries and infrastructure projects will be prioritised by the government.
At the same time, private equity and robust set of infrastructure assets domestically are on the portfolio wish-list of insurers in Malaysia.
5. Facilitate more private sector investment
Many investors seem to believe Malaysia should bank on private sector investment to spur economic growth.
There is a pressing need for this. Moody’s Investors Service estimated lost revenue from the abolished Goods and Services Tax (GST) would measure around 1.1% of GDP this year. Further, there is a desire to re-introduce fuel subsidies and a marked pull back on infrastructure plans like the high-speed railway to Singapore.
The private sector therefore offers an avenue to diversify the revenue base. Investors suggest the funding gap could be filled by initiatives such as:
• Exempting fund houses from the new sales tax—a step to making Malaysia more competitive in terms of its funds
• Considering reforms to help the Sharia fund industry—for example, easing the MYR10,000 transfer limit on foreigners for a single transaction to increase the flow of funds into local products
• Improving cooperation with offshore managers—facilitating partnerships in private and listed investment solutions
Richard Morrow contributed to this feature.
This feature originally appeared in AsianInvestor's June/July 2018 edition.