Malaysia plans to reform its government-linked investment companies (GLICs) in favour of a better balance between profits and social and economic benefits for the country. While market observers believe the changes could improve the firms’ governance, they say they could also put pressure on returns if the GLICs are forced to invest more domestically.

Gary Smith, managing director of consultancy Sovereign Focus, explained that the firms’ role in the economy has sometimes been unclear. “What you want is improved clarity on what each GLIC is supposed to do,” he said. “Without that, you end up with a bit of a copycat culture, with the GLICs almost competing against each other.”

He believes greater transparency around their purpose could help to improve their governance and shield them from political influence. Experts familiar with Malaysia’s asset owners previously told AsianInvestor that politics are often behind decisions taken by the GLICs.

The new initiative, known as Perkukuh, could spur investments in new areas like renewable energy, where Smith believes the state needs to lead. In line with the initiative, Malaysia’s $31 billion sovereign wealth fund/GLIC Khazanah Nasional announced it would invest in high impact sectors that would help build Malaysia’s competitiveness and resilience through a RM6 billion ($1.4 billion) fund over the next five years.

A spokesperson for the $20.6 billion pilgrim fund Tabung Haji, which invests the savings of Malaysian Muslims intending to perform Hajj, told AsianInvestor that the reforms provided an opportunity for the fund to strengthen its governance and financial position.

“Ultimately, GLICs can look forward to better resilience and growth prospects through improved governance and eventually leading to sustainable returns for depositors, unitholders and pensioners,” he added.

DOMESTIC PUSH

However, the new reforms may push firms into investing more at home, something which could put pressure on returns in light of Malaysia’s Covid-hit economy, said a former GLIC executive.

“With these reforms, the government is trying to spur the economy and pour money back into the country,” he said. “While this sounds great from a macro perspective, from the individual GLIC perspective, it’s going to be very tough.”

This focus on the domestic market contrasts with the GLICs’ recent efforts to ramp up their overseas investments in search of yield. Permodalan Nasional (PNB) last year said it aimed to increase its offshore allocation to 30% by 2022 from 8.5% in 2019. Meanwhile, Employees Provident Fund (EPF)’s 2020 annual results show foreign assets returned 8.64%, while domestic assets yielded 5.02%.

“GLICs are now going to be under immense pressure to maintain profits and dividends. It also remains to be seen whether it will force them to liquidate some of their [foreign] assets. I hope the government will view this holistically in making their policy direction.”

The reforms announced by then-prime minister Muhyiddin Yassin on August 12, re-classify several GLICs as sovereign wealth funds (SWFs). “For the SWFs, there will be a re-balancing of focus between financial returns and socio-economic deliverables,” Yassin said.

Khazanah, Kumpulan Wang Persaraan (Kwap), Kumpulan Wang Amanah Negara (Kwan) and the Ministry of Finance are those now classified as SWFs, while EPF, PNB, Tabung Haji and Lembaga Tabung Angkatan Tentera (LTAT) will be known as institutional investors. “Institutional investors will retain their mandate of maximising returns of contributors,” the former premier said.

While Smith believes the overall intention of the reforms is positive, he questions the apparent arbitrariness of the classification.

Global SWF managing director Diego Lopez could not explain the distinctions: “I can see why Khazanah and Kwan were classified as SWFs and separated from the rest, which are public pension funds (PPFs) and other state-owned enterprises (SOEs), but I cannot see the logic of having Kwap as a SWF, when it manages the contributions of civil servants and is supervised by the Finance Minister, just like EPF.”

LEADERSHIP CHANGE

Though Yassin has lost his job as prime minister since his announcement about the GLICs, market observers believe the reforms are likely to go through because many ministers have kept their positions in the new cabinet. “Zafrul [Aziz] is still the minister of finance so there should be continuity in the reforms,” said a Malaysian-based asset manager who preferred to remain anonymous.

“If there is a continued enthusiasm for the reforms, yes [they will be carried out]. If not, they will quietly disappear, but it’s less likely that the initiative will be publicly reversed,” said Smith.