Research Report | DR
FORUM
: Dewan Rakyat
ISSUE
: The Question of Rising Costs and Sovereign Wealth Fund
STUDENT OFFICER
: Adam Aiman Raflee
POSITION
: Tuan Speaker
___________________________________________________________________________
TOPIC: The Question of Rising Costs
Cost of Living in Malaysia
The cost of living in Malaysia might seem low at first glance and especially when compared
to some other countries, but the living costs have been on the rise lately.
Removal of subsidies
The removal of subsidies for oil and higher electricity and gas tariffs will result in higher
costs (shipping, lorry transport, refrigeration etc) incurred in bringing fruit and vegetables to
the public. These charges will invariably be passed on by food vendors and suppliers through
higher prices.
The removal of subsidies followed concerns expressed by international rating agencies,
which downgraded Malaysia’s credit rating from stable to negative. Fitch Ratings cited
concerns over public finance as a key issue.
But instead of cracking down on wasteful spending and rampant corruption, the
government adopted a neoliberal approach by slashing subsidies. While some subsidies like
those on petrol may also benefit the rich, the government has not invested enough in public
transport across the country to ease the burden of the lower-income group who will find
the higher fuel prices a burden. The removal of subsidies has had the effect of reducing
disposable income among the ordinary people, making it more difficult for them to afford
higher food prices.
Monopolies and cartels
When basic food supplies such as rice and sugar are controlled by well-connected
monopolies or cartels then the public is at the mercy of these companies when prices are
set.
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For example, the Padiberas Nasional Berhad (Bernas) group of companies, owned by Syed
Mokhtar Al-Bukhary, is involved in the procurement and processing of paddy along with the
importation, warehousing, distribution and marketing of rice in Malaysia. The firm controls
about 24 per cent of the paddy market and 45 per cent of local rice demand.
With the removal of rice subsidies in Thailand, more Thai rice could reportedly be made
available on the international market and with the increased supply in the regional market,
the price of rice imports into Malaysia could fall. Concern has been expressed that the
benefit of this lower-priced rice could be reaped by Bernas while the public and the 142,000
local rice farmers may not be any better off.
Or take the sugar market, which is controlled by the well-connected Malaysian Sugar
Manufacturing Bhd and Tradewinds Bhd. Opposition politicians have claimed that the
removal of the sugar subsidy at the last Budget would result in higher profits of up to 100
per cent.
Shrinking agriculture land
Increasingly, as agricultural land in urban centres and their fringes is converted to ‘mixed
development’, high-rise condos have sprouted on former farm lands. Elsewhere, priority has
been given to mono-cropping and cash crops, which can damage the overall environment
and reduce biodiversity.
Urban vegetable farms are vanishing as they make way for high-rise super condos.
Unfortunately, we do not have community organic gardens to make up for the loss of local
supply. Where once it was common to see banana trees growing in our neighbourhood, that
is not so anymore. Local bananas, which used to cost RM3.50 per kg, are now sold at RM5.
This means more food has to be transported from a longer distance, usually Cameron
Highlands or even imported. It is not uncommon to see people waiting at a vegetable stall
for the lorry from Cameron Highlands to arrive. As petrol prices inch upwards, the cost of
transporting food follows suit, what more when food has to be transported from farther
away, and this invariably pushes up the price of food.
Food imports and depreciation of the ringgit
If you visit a stall selling vegetables and fruit, chances are half the produce is likely to be
imported from countries such as the United States, China, Australia, New Zealand, India and
South Africa. Imported fruit may even be displayed more prominently than their local
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counterparts in such stalls. Moreover, a significant portion of our rice
requirements is also imported. We may be self-sufficient in poultry, eggs and fisheries – but
we are also importing beef, mutton and milk. This makes us highly dependent on imports
for our food security. No wonder our food trade deficit has soared from RM1bn in 1990 to
RM13bn in 2013.
Along with this external dependency comes vulnerability to fluctuations in the exchange
rate of the ringgit against the US dollar.
Property development and higher business costs
Over time, as interest rates were kept low and as cheap money flooded this region,
speculation in property development intensified as people tried to maximise their returns.
This has driven up property prices and rentals in the country. In turn, the cost of doing
business has risen.
As property prices and rentals go up, two things happen. These higher business costs have
cut into business profits, thus putting downward pressure on workers’ wages, which in turn
reduces the purchasing power of ordinary people. They also translate into higher prices of
foodstuff as fruit and vegetable wholesalers and retailers, who themselves are confronted
with higher property prices and rentals, pass on their costs to customers. Even the price of
food and drinks at hawker stalls and food courts has escalated.
Stagnant real wages
Despite years of economic growth as indicated by positive GDP growth figure, many people
do not feel better off. For one thing, in many households, real wages have not kept pace
with the cost of living and productivity increases. This suggests that many workers are being
underpaid relative to productivity increases while firms and banks post large profits. This
disconnect is being aided by the existing policy of using migrant workers to depress local
wages while workers’ and trade union rights are suppressed.
This unhappy situation is masked by unrealistic official household poverty line income levels
of RM830 in the peninsula, RM1090 in Sabah and RM920 in Sarawak. These figures are
unrealistically low and seriously understate the real poverty rates. As for the official
minimum wage of RM900 (RM800 for Sabah and Sarawak), that is hardly enough for a
household of four or five people to meet food, rental, transport, education, and health care
expenses.
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Goods and Services Tax
Goods and service tax was introduced by the Government of Malaysia under the leadership
of Dato’ Sri Najib Razak on the 1st of April 2015 replacing the older taxation system also
known as the sales and service tax. The sales tax before GST was set at 10% and service tax
set at 6%.
GST however was set at a rate of 6%, which is the lowest in ASEAN with Philippines being
the highest at a rate of 12%. However implementing GST would mean that price of products
in the whole Malaysian Market would increase.
This is because the new taxation system imposes tax every time a particular goods or
services are sold. For example, a miner mine iron ore and sell it to the manufacturer, this
will include a 6% tax. Then the manufacturer turn it into iron and sell it again, this will again
include a 6% tax. Then the buyer who bought the iron and turn it into iron nails and sell
them would again be taxed a 6% tax, until it finally reaches the consumer, who bought the
iron nails and you guessed it, another 6% tax. This therefore increases the price of products
and causes inflation.
However, if the goods and services were exported, the government would give a refund to
the exporter. This is because we would like to make sure that our goods and services
remains competitive in the international market. Besides that due to the implementation of
GST, the government has decided to reduce other taxes to reduce the burden of fellow
Malaysians.
Conclusion
Unfortunately, the current government does not appear to have zeroed in on the real
factors behind these significant price increases. Without accurately identifying the root
causes of the price increases, how is it going to lighten the people’s burden, other than by
the occasional BR1M payments, which are like Band-Aids too small to plaster over festering
gashes?
Meanwhile, Malaysians are being hit by a triple whammy: as household debts soar following
the sharp increase in property prices; as disposable income shrinks following the removal of
subsidies and the suppression of real wage (and with GST looming), the rising food prices
come at the worst possible time. In such a situation, news that GDP is rising and FDI is doing
fine means very little to the person on the street, struggling to put food on the table.
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Subtopics that should be addressed during parliament session:1. Removal of subsidies
2. Monopolies and cartels
3. Shrinking agricultural land
4. Depreciation of Ringgit
5. Property development
6. Higher business cost
7. Stagnant Real Wages
8. Goods and Service Tax
9. Budget 2016
10. Racial and economic dispersion
11. Education policy
12. Tax evasion
13. Toll hike
14. Vision 2020
TOPIC: The Question of Sovereign Wealth Fund (SWF)
In recent months, sovereign wealth funds have received much attention and criticism on the
world stage. This topic analyses these funds from a multidimensional perspective, showing
their relative size, origins, history, strategies, and what regulatory oversight they have. Next,
it examines why countries create sovereign wealth funds, and the criticisms of these funds.
Thirdly, it projects the likely behaviour of sovereign funds in the near term, explaining that
they will create more liquidity and lower costs of capital in emerging equity markets and
raise the demand for the services of existing investment managers. These funds may, on the
other hand, increase the volatility of developed and emerging markets and create greater
demand for openness to foreign direct investment among sovereign wealth fund-holding
countries.
In the last six months, the subject of sovereign wealth funds (SWFs) has created much
discussion in the Malaysian Parliament. With over RM 70 billion in assets, these vehicles
have the possibility of revolutionizing the financial services industry, and having strong
influences on international capital flows. The formation of new funds in Malaysia moreover,
has sparked a heated debate in the country: some see these funds as an opportunity for
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additional foreign direct investment (FDI), capital formation, and ultimately, growth, while
others see sovereign wealth funds as threats, where hostile, authoritarian regimes can
perform “sneak attacks” of corporate espionage or economic turmoil to undermine open,
democratic nations.
A. What are they?
Sovereign wealth funds are defined as “government vehicles funded by foreign exchange
earnings but managed separately from foreign reserves” Along with financing, sovereign
wealth funds also differ from other government vehicles in their objectives, terms, and
holdings: while foreign reserves have historically invested in sovereign fixed income notes
for the purpose of intervention on the foreign exchange market, SWFs typically take a
longer-term approach, where international equities, commodities, and private fixed income
securities are used to achieve the long-run strategic and financial goals of a sovereign.
1 MALAYSIA DEVELOPMENT BERHAD (1MDB)
ONE OF THE MOST CONTROVERSIAL ISSUES confronting Malaysia’s ruling political coalition,
Barisan Nasional, is the 1Malaysia Development Berhad (1MDB). Technically, the 1MDB is a
private corporation wholly-owned by the Ministry of Finance, Malaysia. It was established in
2009 by converting a state sovereign investment fund, the Terengganu Investment
Authority, into a federal entity. The 1MDB was assigned the role of a strategic investment
company with the mission “to drive sustainable economic development by forging strategic
global partnerships and promoting FDI”.
To fulfil its mission, 1MDB has invested in two key sectors, namely power (electricity
generation) and real estate. In the power sector, 1MDB has acquired three power plants at
the cost of about RM12 billion and has won another RM8.1 billion greenfield power project
(Project Track 3B). In the real estate sector, 1MDB has already acquired land at the cost of
around RM2 billion for the building of the Tun Razak Exchange (a RM26 billion financial
hub). It is also investing in Bandar Malaysia (a commercial and housing project) and a
project for affordable housing in Air Itam, Penang.
The 1MDB has become a controversial issue in Malaysia mainly because of its financing
aspects. These include the size and nature of 1MDB’s debt as well as how it has used its
funds. To date, 1MDB has borrowed to the tune of RM 41.9 billion (in the year ending 31
March 2015). Right from the very beginning, there have been allegations of financial
impropriety involving 1MDB’s borrowings of US$700 million in 2009.
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The media has also pointed out the high cost of borrowings and the maturity mismatch
between its assets and liabilities. The latter has affected 1MDB’s debt servicing ability to the
extent that it sought two extensions for loan repayment in November 2013 and December
2013. With the third deadline looming in February 2014, 1MDB had sought the assistance of
a local tycoon, Ananda Krishnan, to settle the RM2 billion loans owed to local banks. This
has not solved 1MDB’s liquidity problems completely as analysts have pointed out that
1MDB’s annual debt servicing continues to exceed its cash flow.
Whilst 1MDB appears to have some liquidity problems, some have gone further by
questioning its solvency. Former Malaysian Prime Minister Mahathir Mohamad has pointed
out that there appears to be a gap of RM27 billion between 1MDB’s total liabilities
(borrowings) and the total value of its assets. Related to this problem is the lack of
transparency and the consistency of information on how the borrowings have been utilized.
One widely discussed topic relates to the placement of US$2.32 billion funds (from
redeemed investments) in the Cayman Islands.
Uncertainty and speculations over 1MDB’s insolvency have also raised the spectre of a
government bailout. Aside from the fact that the Ministry of Finance is the sole owner of
1MDB, the government has also extended letters of support for which it could be liable for
up to US$3 billion. Subsequently, a request for a government loan of RM3 billion was
rejected by the Malaysian Government Cabinet in late February 2015. However, the Cabinet
subsequently approved a RM970 million loan to 1MDB two weeks later. Coinciding with this
was the call by the Prime Minister Najib Razak himself and the Public Accounts Committee
for the Auditor-General to probe into 1MDB’s accounts.
The 1MDB’s strategy forward appears to be one involving the unwinding of its assets by
monetizing some of its landed assets to reduce its financial liabilities (especially short-term
ones). The maturity mismatch between its assets and liabilities clearly caused some liquidity
problems. This has affected its plans to list its energy assets via an initial public offering. The
on-going restructuring of 1MDB assets and liabilities continue to court controversies such as
the recent sale of 1MDB land to Lembaga Tabung Haji (LTH). Critics have pointed out that
the land was originally bought by 1MDB from the government for RM74.20 (psf) and was
sold to LTH for RM2,779 (psf). The prime minister subsequently suggested that LTH sell the
land to other parties for a profit.
The 1MDB has clearly become a political liability for the Najib Administration. Critics have
attempted to link 1MDB’s financial woes to allegations of corruption and fraud. These have
been accompanied by the media’s recent exposé on the lavish lifestyle of ruling-party
politicians and their family members. The negative public reactions and responses to the
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1MDB issue, at least in the urban areas, have been further amplified by the rising cost of
living and dissatisfaction with the implementation of the Goods and Services Tax.
OTHER EXAMPLES OF SWF IN MALAYSIA:
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Employees Provident Fund (EPF),
Retirement Fund Inc (KWAP)
1 Malaysia Development Berhad (1MDB)
Khazanah Nasional Berhad
BIBLIOGRAPHY & REFERENCES
1.
2.
3.
4.
5.
6.
http://www.kwap.gov.my/en
http://www.aseanbriefing.com/news/2014/10/15/malaysia-implement-gst.html
http://www.thestar.com.my/Business/GST/?pgno=4#LatestStories
http://gst.customs.gov.my/en/Pages/default.aspx
http://www.gst.com.my/what-is-gst-goods-and-services-tax.html
http://www.themalaymailonline.com/malaysia/article/rafizi-to-sue-epf-tabung-hajiover-1mdb-deals
7. http://www.themalaysianinsider.com/sideviews/article/is-1mdb-a-sovereignwealth-fund-or-not-puthan-perumal
8. http://www.institutionalinvestor.com/article/3488487/investors-sovereign-wealthfunds/scandal-surrounding-sovereign-fund-1mdb-shakes-malaysiangovernment.html#.Vlvg-VUrLIU
9. https://www.kpmg.com/ES/es/ActualidadyNovedades/ArticulosyPublicaciones/Docu
ments/sovereign-weath-funds-v2.pdf
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