BUSINESS: Malaysia's provident fund
Far Eastern Economic Review
April 30, 1998
Savings at Risk:
Malaysia is being criticized for using its national pension fund to
funnel cash to companies
* By Salil Tripathi in Kuala Lumpur
Every parent knows the temptation. When there's no loose cash to be
found, the pennies in the children's money box are a tempting target:
Borrow now, put them back later.
In Malaysia, the Employees' Provident Fund is a sort of national
money box. And in these cash-strapped times, the 129 billion ringgit
($34 billion) it holds on behalf of workers looks especially tempting to
a government struggling to steer its economy out of trouble without
recourse to the International Monetary Fund.
Since October, Kuala Lumpur has lent EPF funds to three
state-sponsored companies or projects. The capital's new international
airport got 1 billion ringgit; the government's investment arm, Khazanah
Nasional, 2 billion ringgit; and Perwaja Trengganu, a debt-laden steel
maker, 710 million ringgit. Now it's considering a proposal to buy a 20%
equity stake in trans-Malaysia highway operator Plus.
While opinions differ about these transactions, the latter two
particular have raised eyebrows. Perwaja has twice before gone bankrupt
and been bailed out by the government. And analysts believe Plus' motive
is to ease the debts of its controlling shareholder, UEM. Those debts
were incurred when the company bought shares of its ailing parent,
Renong -- a company with close links to the United Malays National
Organization, the political party led by Prime Minister Mahathir
To some, the transactions represent a worrying trend. Financial
analysts and others fear that national pride, an understandable desire
to find a homegrown solution to Malaysia's troubles, and a shortage of
options could tempt the government to raid the EPF-with possibly
far-reaching implications. It could endanger the level of returns from
the country's largest pension fund, and might provoke an angry response
from labour unions. Bankers add that the fund is so vast that if it
withdraws cash deposits to support ailing companies, the loss of
liquidity would force banks to raise interest rates, thereby hurting
healthy companies. Even then, say critics, the government would succeed
only in delaying some of the pain that is unavoidable if the Malaysian
economy is to pull out of its slump.
"Malaysia has to let bankrupt companies go under and let bad
fail," says Rajeev Malik, senior economist at Jardine Fleming in
Singapore. "Any other measure, like borrowing from EPF, will be stop-gap
and only postpone the inevitable."
Finance Minister Anwar Ibrahim has defended the three EPF loans
since October. As all the projects are government-backed, he implied to
parliament they are as safe as a government-backed security. But others
question the logic. "Why is the EPF throwing good money after bad?"
opposition MP Lim Guan Eng says of the Perwaja deal. "Why does the EPF
make loans to a company that no decent financial institution would
Part of the answer is that although Malaysia's economy has looked
relatively healthy compared with its neighbours' -- it hasn't had to
fall upon the mercies of the IMF, after all -- it is probably sicker
than it seems. At 153%, Malaysia's debt-to-GDP ratio is among the
world's highest. It has managed to stave off an Indonesian-style crisis
only because, unlike much of Asia, the bulk of its debt is in local
currency. That means there are fewer foreign creditors banging at the
door demanding instant repayment of their loans. Nor has there been any
immediate threat of a balance-of-payments crisis.
But the cash that financed years of 8% annual growth has dried
and banks' nonperforming loans continue to expand. Companies struggling
to pay for needed imports -- more expensive since Asia's currency
devaluations -- lack the cash to buy sufficient foreign currency. Their
shrinking business prospects, moreover, are making it difficult to
generate the cash flows needed to service their local debts. Meanwhile,
the country's emaciated stockmarket shows no promise of providing fresh
capital. As a result, financial analysts believe that dozens of large
companies are teetering on the verge of bankruptcy. In such
circumstances, what is more natural than to reach out to the national
pension fund for he?
One EPF board member, at least, thinks pleas for aid should
resisted. Zainal Rampak, president of the Malaysian Trades Union
Congress, declares: "The Plus deal is highly risky and offers no
guaranteed returns, and hence should be rejected. The EPF should not
bail out anybody." Senior officials at other unions have backed his
Several EPF officials contacted by the REVIEW declined to comment
this article. For their part, government officials say the EPF will make
investments only after "careful consideration."
But since investments made by the EPF are done at the government's
discretion, an "investment" can be just a euphemism for a bailout. "It
is a real problem because the pool of funds at the EPF's disposal makes
it a very tempting target, and it has been abused in the past," says
K.S. Jomo, professor of economics at the University of Malaya. Jomo
refers to an episode in the mid-1980s when the EPF funnelled profits to
a state entity in an effort to plug a hole in the government's books --
a hole that resulted from a bungled attempt by the government to corner
the world tin market.
Indeed, there were signs early in the economic crisis that the
government was prepared to dip heavily into the EPF. Last year, after
the stockmarket plunged following a ban on short-selling Kuala Lumpur's
100 key stocks, Mahathir floated a plan to set up a 60-billion-ringgit
fund, financed from the EPF and other sources, to buy shares from
Malaysians at a premium price. The plan was intended to restrain selling
pressure from overseas. It never got off the ground, chiefly because
there wasn't enough money in Malaysia's financial system to meet the
Fears that the government may try again, however, are widespread.
popular act around Kuala Lumpur, Comedy Court, ran a skit recently that
featured a convention of distressed Malaysian tycoons beseeching Premier
Mahathir to he ease their woes. Says one of the tycoons: "And finally,
remember we don't want the IMF. All we need is the EPF."
Set up in 1955, the EPF represents 85% of Malaysia's pension-fund
assets. Around 4.2 million salaried workers make a compulsory
contribution of 11% of their pay cheques, matched by a 12% contribution
from employers. There are currently 8 million members, including those
retired. (Self-employed, government employees and labourers are among
those not included.)
As the fund has increased in size, it has become increasingly
difficult for the EPF to meet its charter recommendation that 70% of all
investments be in government-backed securities, especially since the
government has been posting budget surpluses in recent years and doesn't
need to raise public debt. When the government began to privatize large
parts of the economy in the late-1980s, the amount of securities it
issued began to decline. Consequently, the share of government paper as
a percentage of the EPF's total portfolio fell to 33.6% in 1996 from 74%
in 1991. To compensate, the government broadened the definition of
government-backed securities to include government-backed projects. This
has allowed it to invest in companies without exceeding the fund's
ceiling of 25% equity investment. Since 1991, the fund's equity
investments have risen by two percentage points to nearly 20% in 1997.
Some critics, however, say this is simply semantics and warn
although (or because) the EPF already holds assets representing 55% of
Malaysia's GDP, this is no time for it to become a white knight for
every business in need. In any case, the EPF already has problems that
will not be easily overcome. These range from an anticipated shrinkage
in the amount contributed to the fund to complaints over its recent
rates of return.
Union leaders are already complaining about the fund's profitability.
From a steady 8% a year during the 1980s, its dividends fell in 1996 to
7.7% and last year to 6.7%-the lowest level since 1976. "The economic
crisis is expected to pose increasing challenges to the EPF in
maintaining the real rate of return provided in the past," says Mukul
Asher, professor of economics at the National University of Singapore,
who has written extensively on pension plans in Southeast Asia.
Bankers say that if the fund cashes its more than 32 billion
in deposits, interest rates could double from the current 12%-14%
levels. Of the 430 billion ringgit in Malaysia's banking system, close
to 400 billion ringgit is lent out. That leaves just 30 billion ringgit
of liquidity -- a sum roughly equal to the EPF's money-market holdings.
In addition, the EPF has to worry about its own future cash
Malaysian Trades Union Congress estimates that unemployment will rise
this year to 500,000 from the current 300,000, shrinking the fund's
contributor base by 12%. "My main worry is that the savings rate will
decline as people accept wage cuts and lose jobs," says Mohammed Ariff,
executive director of the Malaysian Institute of Economic Research.
As the EPF's investments shift from safe government securities
markets, analysts say the fund needs to enhance its investment expertise
by allowing professional fund managers to make decisions. For instance,
they say, the EPF should be looking at creating an international
portfolio. Its board does not take investment decisions; an investment
panel, which meets every fortnight, does. The six-member panel includes
three private-sector professionals, two government officials, and the
executive chairman of the board.
Bringing in professional fund managers could also he to allay
suspicions outside Malaysia. "The markets are watching with a microscope
and binoculars," says Ariff. "The government will have to let blood flow
on the floor. The scope to bail out companies is now considerably
But there is a way out for Malaysia. The government could follow
South Korea's lead and raise international loans through sovereign bonds
to bring new liquidity to the market. But that would require greater
transparency and a government that had shown it was prepared to steer
clear, at least for now, from large, debt-financed projects. It would
also mean swallowing a lot of pride and working with international
bankers and markets -- which Mahathir, only months ago, accused of
denying Malaysians human rights by diminishing their standard of living.
Then again, if the EPF's goal is really to protect Malaysians' future,
looking outside Malaysia for solutions would seem to be the least of all