Dividends by EPF, Khazanah, and GLICs may be hit by ‘involuntary repatriation’ of their foreign earnings, say economists.
BNM wants more consistent repatriation and conversion of foreign investment income by government-linked entities to strengthen the ringgit.
PETALING JAYA: Bank Negara Malaysia’s (BNM) move to “encourage” government-linked corporations (GLCs) and government-linked investment corporations (GLICs) to repatriate their foreign investment income in order to strengthen the ringgit may backfire, say economists.
In particular, government-linked funds like the Employees Provident Fund (EPF) and Khazanah Nasional Bhd may underperform if they have to exit their foreign investments and repatriate the proceeds, which are in foreign currencies, back into ringgit.
In a bid to arrest the weakening of the ringgit, BNM announced late last month it had stepped up its engagements with GLCs and GLICs, as well as investors and exporters, to encourage more consistent repatriation and conversion of their foreign investment income.
The central bank made the announcement after the local currency touched the RM4.80 level against the US dollar last month, its weakest level since January 1998 during the height of the Asian financial crisis.
Monash University Malaysia economics professor Niaz Asadullah said a potential unintended consequence of BNM’s move is underperformance by these funds, translating into lower dividends for contributors and investors.
“This risk can’t be ruled out given that GLICs have delivered higher dividends because of a diverse asset portfolio which included a variety of foreign asset classes,” he said.
However, he noted that much depends on whether the move is temporary or the GLCs and GLICs are asked to continue repatriation of their foreign funds until the end of 2024.
“If it is the latter, an unintended consequence of such involuntary repatriation would be the adverse impact on the performance of GLICs particularly EPF and Khazanah.
“They have enjoyed higher returns compared to GLICs such as Amanah Saham Nasional Bhd (ASN) that relied on local investments and asset classes (e.g. mostly Bursa Malaysia listed GLCs),” he added.
Malaysians who receive yearly dividends from EPF for their contributions should be aware that they enjoy returns higher than conventional banks primarily because the fund invests in foreign assets. For FY2023, 53% of EPF’s total investment income of RM67 billion came from foreign assets while only 47% was from domestic assets.
In the case of Khazanah, 59.1% of its investment portfolio derives from Malaysia while a significant 40.9% is invested in foreign markets, according to its website.
In other words, any underperformance by EPF, Khazanah and a host of government-linked funds as a result of cutting back on foreign investments will have a direct impact on the financial well-being of millions of Malaysians.
Pat on the back
BNM and the ministry of finance (MoF) are apparently pleased with their joint initiative to get the GLCs and GLICs to do “national service” by converting their foreign earnings back into ringgit, pointing to the currency’s strengthening in recent weeks.
Second finance minister Amir Hamzah Azizan said the move appears to have succeeded in encouraging continuous inflows into the foreign exchange market.
“We have seen the joint efforts of BNM, GLCs, and GLICs bearing fruit, and the ringgit has already strengthened over the last one-and-a-half weeks,” he said on March 11. The ringgit is currently trading at 4.71 to the dollar.
BNM governor Abdul Rasheed Ghaffour previously said the ringgit’s recent sharp drop does not reflect the “positive prospects” of the Malaysian economy, attributing it to “external factors” including the significant differential between the overnight policy rate (OPR) and US interest rates.
Another issue of concern for Niaz is that this repatriation policy may crimp the independence of GLCs and GLICs when it comes to making investment decisions.
Though BNM and MoF say the repatriation of foreign funds is a “request”, Niaz has a different perspective on this.
“I am reading it as ‘involuntary’ because when the central bank makes requests of GLCs or GLICs, there is little room for ignoring that request.
“GLCs and GLICs must be assured of independence when it comes to decisions such as repatriation of foreign income. Anticipation of future moves of similar nature by BNM and the risks of involuntary repatriation may distort their investment choices,” he added.
Not making the right decisions
However, Malaysian Institute of Economic Research senior research fellow Shankaran Nambiar expects this policy to be a short-term one. “It’s something to boost confidence in the ringgit. Basically, it’s to increase demand for the ringgit.
“If these GLCs and GLICs have excess non-ringgit denominated assets, they could convert them to ringgit, provided they have no alternative uses for them. And if their earnings are in non-ringgit currencies, they could convert them to ringgit.”
However, the problem arises if after converting their earnings back to ringgit, the local currency falls in value subsequently, he said.
“So, in essence, the GLCs run the risk of allocating their funds or assets in ways that they otherwise wouldn’t. There is, therefore, a likelihood of making sub-optimal decisions,” Nambiar warned.