This article first appeared in The Edge Malaysia Weekly on August 12, 2024 - August 18, 2024

EIGHT months into the job as the Minister of Finance II, Datuk Seri Amir Hamzah Azizan can finally speak even more confidently on Malaysia, with the economy growing much stronger than expected so far this year, and on the ringgit, which is at its strongest against the greenback in more than a year.

“It is important that the ringgit got stronger because it is now [manifesting] what we have been saying all along: that the ringgit is undervalued but has been dragged down by [external factors],” Amir Hamzah tells The Edge.

“[With] the recognition of Malaysia’s becoming a turnaround country, investments are coming in, money is coming back … It is helping to lift the ringgit … That should help with some of the cost-of-living issues and reduce costs for those who have children studying overseas … But more importantly for us, a stronger ringgit presents an opportunity for Malaysian entities to look at expanding. It gives an opportunity for us to do a lot more, [including] how to energise the economy.”

In order for some of this confidence to rub off on others, Amir Hamzah has disclosed plans to harness about RM1.8 trillion in liquidity to invigorate growth and bolster structural reforms outlined in the Ekonomi Madani framework. “Malaysia is a country with a wealth of liquidity. The biggest holders of liquidity are government-linked investment companies (GLICs) — the Employees Provident Fund (EPF), Khazanah Nasional Bhd, Kumpulan Wang Persaraan (Diperbadankan) (KWAP), Permodalan Nasional Bhd (PNB), Lembaga Tabung Haji (LTH) and Lembaga Tabung Angkatan Tentera (LTAT). They have [a combined assets under management (AUM)] of RM1.8 trillion.

“If [they are better able] to deploy that liquidity, they [can] become another engine of domestic direct investment (DDI) growth for Malaysia. So, the Ministry of Finance is trying to orchestrate a mechanism where we work with the GLICs to explore opportunities for them to revitalise the economy,” says Amir Hamzah, who was CEO of EPF before being sworn in as senator in December 2023 to assume his current role.

Managing RM1.14 trillion of its members’ statutory retirement savings as at end-2023, EPF makes up 63% of that RM1.8 trillion liquidity at GLICs (see pie chart). As at end-2023, at least 62%, or just over RM700 billion, of EPF’s RM1.14 trillion assets were invested in Malaysia, and local investments contributed 47% of total investment income earned that year.

That RM1.8 trillion in liquidity was also highlighted by Prime Minister Datuk Seri Anwar Ibrahim, who is also finance minister, on Aug 7 during a briefing on the Government-linked Enterprises Activation and Reform Programme (GEAR-uP) at the Ministry of Finance (MoF).

“With a combined AUM valued at over RM1.8 trillion, roughly the size of Malaysia’s nominal gross domestic product (GDP), the GLICs have the financial capacity to effect the nation’s ascent in the economic value chain and transform Malaysians’ lives for the better,” Anwar was quoted as saying in an Aug 8 statement by MoF.

“Achieving the ambitious targets of the Ekonomi Madani framework demands a unified effort from the entire nation — including the corporate sector. By getting the GLICs to heighten their focus on domestic investments, this deployed capital can benefit Malaysians equitably and birth new economic ecosystems.”

According to the statement, the first phase of GEAR-uP sees the six leading GLICs collectively pledging to invest RM120 billion in DDI over the next five years, aimed mainly at catalysing high-growth, high-value industries such as the energy transition sector and advanced manufacturing (especially semiconductor) as well as supporting start-ups and promising mid-tier companies.

The RM120 billion investment pledge, which works out to about 6% of GDP in total over five years, is on top of the RM440 billion that the GLICs have already invested in public markets under their own individual investment programmes and mandates.

Elaborating on GEAR-uP, Amir Hamzah admits that GLICs managing members’ funds such as EPF and PNB will have a risk appetite that is different from that of KWAP and Khazanah, which either manage government funds or utilise debt-financing.

“The key here is to explore opportunities” that will generate good income or catalyse economic growth, or both, he says.

“If you do things that are not profitable, then you fail the test, because the rigour of making sure that only good profitable investments are made must be the first test that you do. [Being a] strategic fund does not justify … investing for the sake of investing. It must always be things that actually create economic growth.

“MoF will not instruct the GLICs and say ‘you must do this’ because the GLICs must earn fair returns. Some of them have members; we cannot jeopardise the members’ money. So, they [the GLICs] must believe the returns are there. But the government can orchestrate, whereby we bring people together, whether it is foreign investors coming in to work with the GLICs or whether it’s looking at certain methodologies of how things are being done in the country, whereby we can create opportunities for businesses … and [all that] gives us a new engine [to power economic growth],” says Amir Hamzah, allaying concerns of investment returns being compromised.

This is true even when government funds are being invested. “KWAP is not like EPF. EPF collects and grows members’ money. KWAP, to a certain extent, is government funds. It does not collect funds from pensioners but it helps the government by creating [another source of] income that improves the government’s [ability] to pay pensions. Sometimes, the government uses the funds, but that is fine because it is the government’s money, not pensioners’ money per se but it is in the government’s interest to strengthen KWAP,” says Amir Hamzah.

He notes that KWAP is run like a proper investment fund but can afford to take different kinds of risk, unlike EPF, which invests statutory savings from members but also needs to prepare for retirement withdrawals.

An example of “orchestrated” deals in which GLICs can see potential financial returns is the joint investment by EPF, KWAP and PNB in a 10-year sale-and-leaseback agreement for a manufacturing plant in Kulim Hi-Tech Park, Kedah, valued at RM2 billion. It was signed with OSRAM Opto Semiconductors Sdn Bhd, a unit of Austrian-German leading intelligent sensors and emitters-maker ams OSRAM, in October 2023. While OSRAM halted expansion plans in Kulim after a key customer cancelled orders for its micro-LEDs, the company will need to honour its financial obligations to EPF, KWAP and PNB until it finds a new party to take over the 10-year lease.

“This was an arrangement in which PNB, KWAP and EPF took over the OSRAM expansion plant, but it was underpinned by secured guarantees coming in from OSRAM. Yes, business changed and OSRAM didn’t think they were going to be using the expansion, but the obligation to pay continues. So, the GLICs are protected in that form. Again, there’s nothing wrong with exploring [opportunities], but you have built a business model that is sustainable, that is risk-balanced. So, it didn’t jeopardise [the GLICs].

“The more the GLICs can identify opportunities and co-invest with foreign investors or catalyse a local business or investment, that can really stimulate local economy,” says Amir Hamzah, noting that the GLICs would also be supporting the execution of the New Industrial Master Plan 2030 (NIMP) and New Energy Transition Roadmap (NETR) and broader goals under the Ekonomi Madani framework, which the prime minister introduced a year ago.

Rather than speak on the right timing to implement the goods and services tax (GST) to broaden the revenue base or further rollback of blanket subsidies to create more fiscal space for the government, Amir Hamzah casts the spotlight on a third path of least resistance: efforts by the Madani administration to “raise the ceiling” by making the economic pie bigger and “raise the floor” by improving incomes and the quality of life for the people (see “The balancing game between raising revenue and managing knock-on effects” on Page 63).

“[Catalysing growth through GEAR-uP] is another big element we’re pushing on to develop. If you look at the growth of the country … we cannot look at just taxing more to collect more revenue, but we have to grow the economy to get more tax. It is a very valuable mechanism, where it lifts the quality of jobs, reduces the dependency on foreign labour and rewards Malaysians better, and it will also generate better tax return because they move into [a higher] tax-paying bracket,” says Amir Hamzah.

Under GEAR-uP, the GLICs also pledge to support reskilling and upskilling programmes and ensure that permanent Malaysian employees earn at least a living wage of RM3,100 a month, with future wage benchmarks aligned with EPF’s annual Belanjawanku report.

Each of the six GLICs has been assigned focus areas, with EPF centred on investing in commercially viable sustainable healthcare solutions, in partnership with the government, including building private wings in public hospitals. PNB is to focus on modernising industries, with a specific focus on smart industrial parks and energy transition assets.

With its recent acquisition of Malaysia Venture Capital Management Bhd (Mavcap) and Penjana Kapital, Khazanah has been tasked with establishing a national fund of funds to enhance capital access for start-ups to drive innovation and economic growth. Khazanah will also work at enhancing the country’s competitiveness and connectivity.

Through Dana Perintis and Dana Pemacu, the private equity and venture capital space is a focus area for KWAP, which can afford to have a longer investment return horizon because it does not have annual payout obligations like EPF does, as the public pension obligation is borne by the government.

LTAT, which owns 60% of Pharmaniaga Bhd (KL:PHARMA) through Boustead Holdings Bhd, is tasked with elevating the country’s pharmaceutical value by strengthening the capacity to produce biopharmaceutical products. For its part, LTH will aid Islamic banks by, for example, strengthening sustainable social impact through Islamic finance instruments.

Apart from the six GLICs, Amir Hamzah says, the government is committed to ensuring that Kumpulan Wang Amanah Negara (National Trust Fund [KWAN]), which has a fund size of about RM20 billion, is strengthened as an “intergenerational wealth fund” so that wealth is sustained and retained for posterity.

He says: “The KWAN Act is very strong, which makes it very difficult to raid KWAN — that is important. But we need to recognise that there will be instances in which we ask at which point intergenerational transfer actually occurs. So, there needs to be some clarity — for example, on how much can be used currently and the rest is banked. We are still thinking this through. First is how to grow KWAN, which is important because we must provide for intergenerational wealth transfer and crystallise an amount [so that] the generations that were supposed to enjoy it [get] to enjoy it, [with] protection clauses.”

While national oil company Petroliam Nasional Bhd (Petronas) has been the only contributor to KWAN since its inception in 1988, Amir Hamzah says it is “key for us to [identify] other sources of returns that can go into KWAN. That is one thing that we are looking at”.

He adds: “It is important to recognise why Petronas put the money there in the first place. When you are in a depleting resource, the current generation takes away what could have been the future generation’s wealth. So, there must be some give-back, which is why KWAN was set up: to make sure there is no premature lifting of the country’s wealth.”

MoF’s Aug 8 statement also mentions that KWAN will have “new sources of contributions, revised utilisation guidelines and strengthened investment mandates”, but does not say when further details will be available.

Early on in his tenure as finance minister II, Amir Hamzah said 2024 would be about executing the Ekonomi Madani framework, which involves sustainability, prosperity, innovation, respect, trust and compassion. He says it is “on track”, having delivered more than RM10 billion in savings from subsidy reforms, including estimated annual savings of RM1 billion for water, RM4 billion from retargeting diesel subsidies and RM6 billion from a clawback in electricity subsidies.

“Nobody thought we could address water [subsidies] … but we adjusted it because practicality came into play. And the more important thing was the alignment with the state governments, because the model was not sustainable and there would be consequences to the rakyat, such as [water disruptions]. So, we had to begin to close the gap. Some states have not had a water tariff increase for 42 years. Ideally, we do it little by little, but the number will look big after 42 years. I know people were angry at the beginning but, at the end of the day, they understand. If we do not have enough [investments going into water], we may have to live with consistent water cuts, which is not an ideal outcome for everybody. So, the reality was established, and people embraced it and moved on … Opposition states, government states, everyone was aligned. Nobody took a political position against what was nationally an important federal [position].

“The [lesson] for us is that, effectively, what is good for the country, we can do. Don’t draw along political lines; make the hard decisions … Not many people picked up on that nuance, but it was a huge difference to be able to get the support to do the right thing. Have we solved the problem? No, but we have taken the right step and obtained [federal-state] alignment,” says Amir Hamzah, noting that a similar logic applied to diesel, where the decision to move in the right direction was approved and the people who deserve subsidies continue to receive them.

“To pull it off, it wasn’t MoF. It was a whole government approach, where various ministries had to get together and say that we have to align — you do your part here, we do our part here; we work together and we’ll get it managed … So, I think [the diesel subsidy rationalisation in Peninsular Malaysia] has been a success,” he says, adding that not only has cross-border smuggling of diesel been reduced dramatically, but the government is also receiving fewer claims for Budi Individu diesel subsidies than it had expected (see “Pacing reforms to ensure meaningful and lasting change” on Page 60).

“There are some interesting hypotheses as to why people don’t want to claim. In the budget, we expected 300,000 individuals to claim and we have provided for that. But, up to today, maybe 125,000 have actually claimed. Where’s the missing 175,000? I think it relates back to potentially the shadow economy of people … It is revealing interesting things for us to look at.”

Amir Hamzah declines to say whether the retargeting of the RON95 fuel subsidy can happen this year or only after diesel rationalisation is sorted out in Sabah and Sarawak, where vehicle use and logistical issues such as the availability of petrol stations and petrol pumps are very different from the situation in Peninsular Malaysia. The use of boats for daily transport is also more widespread in Sabah and Sarawak than in the peninsula, he says, adding that mechanisms used in the peninsula, such as fleet cards, might not work for Sabah and Sarawak.

“We’re thinking through how to get it sorted out, but we should do Sabah/Sarawak when we figure out how to manage. The big lesson is, if we do it, do it well. If we don’t do it well, it dials back. We have seen that happen to Malaysia before. So, we don’t want to push the button if we cannot control the effect [because it creates a lot of distortions in the whole economy].”

What he can promise is that the government is committed to the reforms outlined in the Ekonomi Madani framework. “Yes, [there will be tangible evidence to show that things are being done]. That’s the way to do it, right?”

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