CFA Society Singapore
SINGAPORE (May 21): Steven Sim, a member of Malaysia’s Democratic Action Party (DAP), recalls a meeting he organised some time ago in the Malaysian state of Penang for Lim Guan Eng and a group of Singaporean businessmen. “By the end of the chat, the Singaporeans said [Lim] reminded them of Lee Kuan Yew,” Sim tells The Edge Singapore. Lim, 58, is the leader of DAP and served as Chief Minister of Penang from 2008 to 2018, during which time the state’s economy grew steadily while the state government’s financial position improved significantly. The budget surplus recorded from 2008 to 2015 totalled RM574 million, exceeding the RM373 million in surplus amassed by Barisan Nasional (BN) from 1957 to 2007, said Lim’s office.
This past week, following a watershed general election that saw the Pakatan Harapan coalition led by Dr Mahathir Mohamad sweep into power, Lim was picked to be Malaysia’s finance minister, subject to the clearing of corruption charges laid against him. The corruption trial for Lim will continue on May 21.
For investors, this marks a period of great uncertainty, not least because some of the headline campaign promises of the PH coalition — which include abandoning the Goods and Services Tax (GST) and introducing targeted petrol subsidies — are likely to weigh on the Malaysian government’s budget.
Yet, a clean and fair national government could remove the “hidden costs” of doing business in Malaysia and spur stronger growth, according to Sim, who is a director of the Penang Institute and the Member of Parliament for Bukit Mertajam. The Penang Institute is a public policy think tank funded by the Penang state government. The way Sim tells it, much of what was achieved by the DAP state government in Penang over the past decade was the result of little more than a focus on competence, accountability and transparency. “We inherited the same people and system working from the previous government.
The government operations were defined by the federal government, including the hiring of civil servants,” says Sim. But a different approach to governing the state made a huge difference, he adds. For instance, Penang’s fish farming industry grew from just RM100 million in 2007 to about RM1.2 billion by 2016, Sim says. “The reason was the previous government gave licences to middlemen to sublet to others — ‘Ali Baba’ deals. When we took over, we had a checklist to make sure the licence holders were genuine businessmen and they had to run the business themselves.”
Unleashing private enterprise and attracting foreign investment were crucial for Penang to keep its economy growing while reining in the state government’s debts, especially as there was little support from the BN-led federal government.
“Penang was really about survival. At the same time, [the state government had to] provide the notion that Penang was actually succeeding despite federal pressure,” says Ooi Kee Beng, executive director at the Penang Institute. “But when you can project a government that is clean and predictable, investors tend to take a second look at you.”
Now, the PH government faces a similar challenge at the national level. In the past decade, Malaysia’s headline GDP growth averaged a respectable 5%. However, critics of the previous BN government say this was supported by debt and that taxes were pushed up. From 2008 to 2017, federal government debt averaged 53.1% of GDP. By comparison, debt levels averaged 38.7% during the 1998-to-2007 period.
In 2015, Malaysia introduced GST in place of its Sales and Services Tax. Last year, GST revenue totalled RM44 billion ($14.9 billion).
In 2014, SST revenue was RM17.1 billion. The additional tax revenue from GST was useful, as dividends from Petroliam Nasional (Petronas) tumbled from RM29 billion in 2014 to just RM16 billion last year.
“Malaysia’s high debt burden remains its key credit challenge,” says Anushka Shah, a senior analyst at Moody’s Investors Service, in a May 14 report. “We estimate Malaysia’s debt-to- GDP ratio [to be] 50.8% at end-2017, significantly above the 40.1% median for A-rated sovereigns. Although the previous government achieved eight consecutive years of fiscal deficit reductions to 2.8% budgeted for 2018, lower expenditures mainly drove the consolidation, with revenue falling as a share of GDP since 2012.”
On the face of it, abandoning GST and returning to SST would result in Malaysia’s suffering a revenue shortfall of about RM20 billion.
To put that in perspective, the federal government is expected to chalk up a deficit of 3% of GDP for 2017, or RM40.3 billion. Then, there is the apparent looting of 1Malaysia Development Bhd (1MDB), which has collapsed after raising some RM42 billion in debt. While much of the money raised was promptly diverted, its debts still ultimately need to be honoured by the Malaysian government.
“Fiscal discipline is important to instil market confidence, particularly since non-residents held 28% of outstanding government securities at end-2017, and 28.5% of the equity in Bursa Malaysia as at April 2018,” says Shah. She adds that Malaysia faces a relatively high degree of vulnerability to swings in capital flows and investor sentiment compared with other A-rated sovereigns.
Yet, bringing Malaysia’s national budget under control will be far more difficult than anything Lim did while he ran the Penang state government. Apart from the financial numbers being much larger, the politics involved are more complicated. Notably, reducing the number of ministries from the current 27 to 10, which Mahathir has mooted, would probably involve downsizing Malaysia’s bloated civil service. Last year, civil service emoluments and pensions topped RM102.4 billion, which was equivalent to 45% of total federal government revenue. Currently, a total of about 1.6 million people are employed by the government.
Lim himself has openly said he has a challenging task ahead, based on what he recently learnt from looking at the federal government’s books and talking to public officials. “One of the things he would bring is likely to be the [principles of competence, accountability and transparency] to close up the leakages and balance the budget. But running a country would be a different ball game [from] running a state. The reduction of debt… in Penang took us quite a few years. So, this would take time,” says Sim. What exactly is Lim’s track record as a public sector official? What are the priorities of the new government likely to be? And, how should investors position themselves?
Obtaining funding, driving growth
Lim has spent practically all of his political career battling unfavourable odds. He was jailed in 1987 during a political crackdown, and again in 1998 under the Sedition Act. His big break came in 2008, when the Anwar Ibrahim- led opposition coalition Pakatan Rakyat — which consisted of DAP, Parti Keadilan Rakyat (PKR) and Parti Islam Se-Malaysia (PAS) — made signi ficant inroads against BN, including wresting control of the state governments of Penang and Selangor. Lim was appointed chief minister of Penang after the 2008 elections, but faced challenges steering the state government.
“When DAP took over in 2008, they noticed Malaysia had become very centralised. The state government didn’t have a lot of leeway,” says Ooi, adding that everything — from the collection of solid waste and the collection of taxes — was controlled by the federal government. And, once Penang was in opposition hands, getting federal government support for the state became even harder.
For instance, the states of Penang and Melaka succeeded in being listed as Unesco heritage sites in 2008, a major plus in their efforts to draw international tourists. But the federal government did not support the two states equally, Ooi grumbles. “The federal government gave RM50 million for the development for Melaka and Penang when they were listed as Unesco heritage sites — but the RM30 million given to Melaka was given to the state government, [and] the RM20 million for Penang was given to [state sovereign wealth fund] Khazanah Nasional.” Lim turned to local resources to obtain funding for Penang state development projects. “The main one was control over land use — such as the awarding of developmental projects, land reclamation and land rezoning,” says Ooi. According to Lim in past media reports, land sales chalked up RM939.3 million between 2012 and 2016 — of which RM500 million was used to build affordable homes. The opposition Penang United Malays National Organisation (UMNO) chief said the Penang state government collected RM770 million in land premium charges and quit rent in those years, on top of land sales, to cover operating expenses.
The reliance on revenue from real estate drew some criticism, especially when the property market in Penang stalled over the last few years. “Some complained that there was overdevelopment and too many developers were allowed to build,” Ooi acknowledges, though he says the problem might have been due to market forces. “To what extent this is a result of policy is hard to say. You don’t control the global economy.”
At any rate, Lim was also able to leverage Penang’s established reputation as a technology and manufacturing hub. About 3,000 ma nufacturing companies have a presence in Penang, including the likes of Western Digital and Broadcom. As a result, Penang accounts for more than a quarter of Malaysia’s exports. It is also the second-richest state in Malaysia. Building on this, as well as the Unesco heritage listing, Lim was soon frequently travelling abroad to drum up interest in investing in Penang. “The Unesco listing and clean government were clear attractions to foreign investment,” says Ooi. “He set up something called investPenang, whose job was to attract investments into Penang.”
Among the investors that were drawn to Penang was Temasek Holdings. In 2015, the Penang Development Corp and Temasek said they would jointly pursue a $500 million mixed-development project near Penang’s Bayan Baru Free Industrial Zone. In fact, Lim is said to have forged close ties with Singapore, which could now be a factor in his role as Malaysia’s finance minister. “There is a sense of assurance, that someone like Lim Guan Eng is the finance minister,” says Mustafa Izzuddin, a fellow at the ISEAS-Yusof Ishak Institute.
“The expectation is he would continue his approach in Penang and the way he personally ran the administration to how he will run the finance ministry. Penang and Singapore have very good relations and that spells good news for us.”
Indeed, in some ways, Penang’s approach to developing its economy is remarkably similar to Singapore’s. Case in point: the Penang Automation Cluster, which aims to be a onestop metal component supply chain hub for small and medum-sized enterprises serving MNCs. The Penang Automation Cluster is a joint venture between Malaysia’s Vitrox Holdings and Pentamaster Corp. Together with another company called Walta Engineering, they acquired a 2.04ha land parcel from the Penang Development Corp for RM3.5 million. Lim said last year that local companies operating at the Penang Automation Cluster are expected to generate revenues of RM980 million by 2021.
As finance minister, Lim will have to find ways to cap Malaysia’s debt and spur its growth. And, he will need to do this quickly. “I think the next few months will be critical for the government in terms of managing the country’s finances, bringing down the national debt level to a reasonable level,” says Mahendhiran Nair, professor of econometrics and business statistics at Monash University Malaysia. He adds that Lim is just the individual to head the finance ministry at this crucial moment. “The Ministry of Finance will have to play a key role in [getting to the bottom of the] major financial scandals, in particular 1MDB and mega projects. With the proposed plan to scrap GST and implementation of SST, the Ministry of Finance will have to play a key role in working out the implementation and mechanism of how to do this. Part of that is to look carefully at the mega projects — what will contribute to economic growth; [and what can be] postponed or cancelled.”
Given the wide scope of things the new PH government has said it will address, there is now a growing expectation that it will introduce a “supplementary” or “mini” budget shortly. That could help the new government address all its priorities in a comprehensive and holistic manner while maintaining the confidence of financial markets, according to some analysts. Maybank IB Research says in a recent report that Daim Zainuddin and Zeti Akhtar Aziz, who are members of the newly created Council of Eminent Persons, have indicated that the immediate policy objectives and priorities are the well-being of Malaysians, a review of the mega projects and governance issues.
Will Lim and the rest of the new PH government manage to bring an end to GST and review the mega projects without hurting Malaysia’s growth? While financial markets were initially nervous, some analysts are now turning more sanguine. “Based on our early analysis, sticking to the original deficit target of 2.8% of GDP for 2018 is not an impossible task,” says Mohamed Faiz Nagutha, Asean economist at Merrill Lynch (Singapore), in a report dated May 14. “A pledge to cut excesses and higher dividend income from Petronas could also help contain the risk of a fiscal blowout in 2019.”
Mohamed Faiz adds that investors should temper their expectations of what the new government can do, given that it will take time to pass new laws. “Policy bills are only likely to be passed in early July at the latest, meaning the status quo would have been in place for half the year. The pledge to fulfil ‘10 promises in 100 days’ stretches the timeline to mid-August. As such, any impact on the 2018 fiscal position will be diluted, with full effects coming through only in 2019,” he says.
Many analysts agree, however, that if the new government succeeds in pushing through its reform agenda without upsetting the markets, Malaysia could be headed for an exciting new era. “What Malaysia is facing at the present moment is [weak] confidence with respect to governance,” says Nair of Monash University. “If that is sorted out, the drivers of economic growth will move at a faster pace and move the economy up the value chain.”
Gerald Sheah, a vice-president and executive director at Franklin Templeton Emerging Markets Equity, says the medium-term impact of the structural changes being pursued by the PH government could be positive for the ringgit as well as Malaysian asset prices. “Unravelling Malaysia’s patronage system will be difficult, but we think it’s key to unleashing the people’s full potential and productivity. In our view, the level of success on this front will determine the long-term growth potential of this resource-rich nation,” he says.
The way Sheah sees it, better governance at government-linked companies could lead to better competitiveness and profitability. And, an adherence to the rule of law could lead to a generally more conducive environment for business. “While some facets of populism can undermine economic progress, our hope is that sweeping, positive reform will follow in Malaysia, and with it will come improved investor confidence. We are cautiously optimistic that progress will take place under the new government, thereby increasing the chance for Malaysia’s economy to escape the middle-income trap.”
‘Are you afraid of anything?’
Of course, lots of things could go wrong. For one thing, the PH coalition consists of political parties with very different ideologies. And, some of their members still regard one another as competitors, rather than as partners in government. Moreover, Lim has an outstanding graft case against him, which could be an obstacle to his becoming finance minister.
The graft case is related to Lim’s purchase of a house in 2015. Specifically, Lim is accused of purchasing his house from a businesswoman for RM2.8 million versus the property’s market value of RM4.27 million, and using his position to approve an application to convert a parcel of agricultural land for residential purpose that benefited the vendor of his house. Prime Minister Mahathir has said Lim will not be sworn in as finance minister until he is cleared of the graft charges.
On the other hand, relatively firm commodity prices and global growth could help keep Malaysia’s trade-dependent economy steady as the PH government carries out its proposals of abandoning GST and introducing targeted fuel subsidies. And, even if delivering improved economic prospects takes some time, the PH government could still achieve some high-profile successes by properly investigating the 1MDB scandal and reviewing the mega projects with inflated costs. “The low-hanging fruits — the review of contracts and anti-corruption measures — I think that would be felt immediately,” says Sim, the MP for Bukit Mertajam.
Lim also seems to be the right person to spearhead new economic initiatives, such as positioning Malaysia for the fourth industrial revolution, a reference to the era of devices connecting with one another and sharing information via the Internet of Things. “He is very pragmatic, a bit like Mahathir. He is not into airy-fairy big things, which sound nice but have no substance,” says Sim. Rather than pursue big technology projects that could quickly become obsolete, the Penang state government has been encouraging vocational education in fields such as computer coding and robotics, he adds.
Perhaps even more important than this are the decades Lim spent in the opposition, battling an authoritarian government. At the meeting with the Singaporean businessmen in Penang, Sim remembers how Lim impressed his guests with his apparent fearlessness. “They asked him, ‘Are you afraid of anything?’ I was caught by surprise,” says Sim. “Lim Guan Eng said, ‘I am always afraid of the people.’”
This story first appeared in The Edge Singapore (Issue 831, week of May 21) which is on sale now. Get your copy today.