This article first appeared in The Edge Financial Daily, on February 3, 2016.

KUALA LUMPUR: The government’s sudden move to raise foreign workers’ levy sent plantation stocks into a downward spiral yesterday, wiping out RM5.52 billion in market value from Bursa Malaysia.

The rates vary according to the sector they are employed in. For those working in the plantation sector, the levy rate was raised by 154% from RM590 to RM1,500 per worker starting Monday. Analysts estimate the higher levy will shave off 1% to 8% of plantation companies’ earnings in the financial year 2016 (FY16).

Sime Darby Bhd led decliners in plantation stocks, ending the day 50 sen or 6.2% lower at RM7.57, erasing RM3.16 billion in market value to RM47.9 billion from last Friday’s close.

This was followed by Kuala Lumpur Kepong Bhd, which lost RM426 million of its market capitalisation yesterday from last Friday’s close. The stock shed 40 sen or 1.67% to close at RM23.50, with a market capitalisation of RM25.03 billion.

Genting Plantations Bhd lost RM266.15 million in value, while IOI Corp Bhd and Felda Global Ventures Holdings Bhd (FGV) saw RM1.45 billion and RM219 million of their value erased respectively, yesterday.

In a note yesterday, CIMB plantation analyst Ivy Ng said levy hike is a negative for the palm oil sector, which relies heavily on foreign workers.

She sees the higher levy cut plantation companies’ FY16 earnings by 1% to 8%. “The potential earnings cut on FGV and Hap Seng Plantations Holdings Bhd are higher due to their lower earnings base and higher earnings exposure to palm oil.”

PublicInvest Research analyst Chong Hoe Leong expects an increase of 4% to 6% or about RM50 per tonne in their operating production cost for the majority of Malaysian plantation players.

However, Chong is of the view that the higher operating cost could be easily absorbed by the local planters, who have about 80% of foreign labourers in the workforce, as he sees an increase of 20% in crude palm oil price this year.

AllianceDBS Research plantation analyst Marvin Khor also expects the foreign workers’ levy hike to be fully absorbed by plantation firms.

“In the near term, firms with a higher proportion of their estates in Malaysia would see bigger impacts. This hike also adds to the minimum wage hike, which is planned to commence on July 1 this year (11% to 15% increase per worker).

“In our estimation, the earnings impact to Malaysian plantation counters under our coverage would range from 1.5% to 15.4% for FY16 to FY17,” he added.

The levy hike has raised the ire of 55 trade organisations and chambers of commerce, which deemed the move as “short-sighted”. The government has been urged to withdraw its decision immediately.

They also called on the government to conduct comprehensive consultations with all stakeholders to discuss the matter.

According to findings conducted by the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM), the additional cost per year to agriculture (including plantation) stands at RM578.75 million a year, while for plantations alone (involving 375,565 foreign workers) it is about RM338.12 million a year.

For housing development, ACCCIM estimates the cost of construction to increase by 2% to 3%.

“We are totally surprised and disappointed by the abruptness of this announcement, given that the government has been potraying that it is an inclusive and consultative goverment,” ACCCIM deputy secretary-general Tan Sri Teoh Chang Kok told a joint press conference yesterday.

“The foreign worker levy is not part of the goverment’s revenue and should in fact be ploughed back to the respective industries,” said Teoh, who expressed concerns that the sudden hike will have adverse impact on the local economy.

“This is a bad time to raise foreign workers’ levy as the economic slowdown is already putting a strain on the operations of many businesses,” he added.

He said the worst case scenario is that the cost hike could lead to business failures and would ultimately be passed on to consumers and result in price increases.

Due to the economic slowdown, coupled with a weakening ringgit, Teoh said Malaysia is becoming less attractive for foreign workers to work in.

“A shortage of workers, whether local or foreign, will have a significant and adverse impact on the economy of the country,” he added.

“It has to be recognised that the size of our economy needs some six million foreign workers. The key is to have an efficient and transparent system in place for the management of foreign workers,” he said.

The trade bodies are calling for the government to legalise the estimated three to six million illegal foreign workers in the country instead.

“On the basis of a similar levy of RM1,250 per worker for the four million illegal foreign workers, who are converted to legal workers, the levies collected would amount to RM5 billion,” said Teoh.

Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi announced on Sunday that the new levy rate system would boost the country’s income by an additional RM2.5 billion.

“Under the existing economic circumstances, we would suggest that RM2.5 billion of the RM5 billion raised to be assigned to the goverment and the balance to be reserved for the industries,” said Teoh.

The trade bodies are also calling upon the government to improve the foreign worker management system and elimination of illegal and undocumented foreign workers.

“Currently, the application process to recruit foreign workers is so expensive, convoluted, uncertain and [the] enforcement is poor.

“The process must be undertaken by [the] home ministry and not any outsourced parties,” he said.

Teoh pointed out that no employer would prefer to engage undocumented foreign workers if the cost and process to engage legal foreign workers are reasonably priced, efficient and transparent.