This article first appeared in The Edge Malaysia Weekly, on February 8 - 14, 2016

GURUNG Raj’s first memory of Malaysia is the cold floors of the Kuala Lumpur International Airport, where he was made to sit for hours in a long queue with his countrymen, waiting to be picked up by a local agent. He had not known at the time that his next stop would be a restaurant in the city of Petaling Jaya, where he would work 16-hour days as a cook (with a two-hour lunch break in between) for the next two years.

The 22-year-old claims he gets on well enough with his employer and colleagues but he cannot wait to leave for home this year. The plan is to marry before heading to “the Gulf”. Young Nepalis like him, Gurung says, are giving up the comfort of their homes to have a shot of making some “real money”. By that, he means the US dollars migrants are paid when they work in the Middle East.

The Malaysian government’s new levy rate of RM2,500, up from RM1,850, slapped on those in the service sector, has put him off any thought of renewing his contract. Typically, the sum is the worker’s responsibility and amounts to two months of Gurung’s monthly salary. He says with a sense of missed opportunity, “We don’t pay taxes, they take taxes.”

His employer, a restaurant owner for the last 28 years, tells The Edge that he is fretting over Gurung’s replacement as the Chinese New Year holidays loom. Hiring new workers, migrant or local, he says, is not as easy or affordable as it used to be. That sentiment will strike a familiar chord among Malaysian employers.

Malaysia’s reputation among migrant workers has changed from being somewhere inviting to somewhere best avoided over the years. Lengthy immigration processes, exorbitant fees charged by agents, lack of legal protection for migrant rights, unforgiving work conditions and a string of high-profile cases of abuse of migrant workers play out as gaping ironies to Malaysia’s famous culture of hospitality. Still, they came.

But the number of migrant workers willing to endure life in Malaysia could be dwindling soon. Datuk Shamsuddin Bardan, president of the Malaysian Employers Federation (MEF), says hardship in Malaysia is “not worth it anymore” for migrant workers.

“We have received feedback from our members saying that many of the migrant workers are either asking to be paid in US dollars or to terminate their contracts early to return to their home countries. It is clear that Malaysia is no longer the first-choice destination for them,” he says.

One reason for that is the weak ringgit. The currency has featured regularly in the headlines as one of the worst-performing currencies against the greenback over the last year. Often overlooked, however, is its slide against the currencies of the countries of origin of migrant workers. They found themselves caught in unexpected foreign exchange losses when the ringgit lost 7% and 14.2% against the Indonesian rupiah and Cambodian riel respectively over the last year. Against the Bangladeshi taka and Nepali rupee, the ringgit was 7% and 5.3% lower during the same period. Employers say unfavourable rates make recruiting and retaining migrant workers more difficult.

The government’s sudden announcement that the levy on migrant workers will be raised by as much as 284% sent employers from all sectors reeling with disbelief and pleading for a rethink. Deputy Prime Minister Datuk Seri Ahmad Zahid Hamidi says the move is to help wean the economy off its unhealthy reliance on migrant workers and raise RM2.5 billion in revenue. However, he also hints that the government will look into the new rates again, indicating that a U-turn on the policy is not out of the question. The government has been known to change its mind on immigration-related fees before. Recall that heavy lobbying from employer groups compelled the government to give up imposing a fee of RM38 on the online renewal of migrant workers’ permits.

“Employers will have to wait and see if anything changes. I understand that MEF members have opted to make extensions to a worker’s permit where it is possible to avoid paying the new levy rates,” says Shamsuddin.

That, though, is no comfort to employers. The business environment has not offered employers much cheer. Markit’s manufacturing Purchasing Managers’ Index (PMI) for January shows a general deterioration in manufacturing operating conditions. Output and new orders contracted while new export orders decreased for the first time in a year. Consumers, too, are not willing to spend as the Malaysian Institute of Economic Research Consumer Sentiments Index plunged to a record low of 63.8 in the last quarter of 2015.

Cost pressures have piled up at the same time. The ringgit’s weakness has compressed the margins of many manufacturers that rely heavily on imported input in their products. Markit’s PMI report reveals that input prices rose sharply, with manufacturers citing the exchange rate as the main reason.

Planters are suffering because crude palm oil remains suppressed in the international markets and the commodity faces stiff competition from other edible oils. Besides, under Budget 2016, the government had mandated an increase in the minimum wage to RM1,000 from RM900 for Peninsular Malaysia, and to RM920 from RM800 in Sabah and Sarawak. As they say, it never rains, but it pours.

So, beyond the worry of a contracting supply of “cheap hands” to keep the factories running and plantations growing, employers fear the cost of doing business will escalate to a level beyond their ability to cope after the levy hike. CIMB Research, for example, says the 154% levy increase for plantation workers could crimp their earnings forecasts for Malaysian planters under its coverage by 1% to 8% for FY2016. Meanwhile, the Malaysian Knitting Manufacturers Association (MKMA) expects labour cost to rise as much as 25% post-levy hike.

The situation seems to leave producers with a delicate choice of either passing through additional costs to consumers by raising the prices of goods and services or absorbing the higher cost of production. Yet, MKMA’s president Tang Chin Chong says the decision is not so straightforward.

“How far and how long do you think manufacturers can [sacrifice profit margins]? All profits would be wiped out and the sustainability of the business will become challenging. The international market for exports is very price- sensitive and the local market is very price-resistant. In the current business environment, it is very hard to pass down incremental costs to customers,” he adds.

Smaller establishments with thin profit margins and high migrant labour would be most vulnerable to disruptions in earnings and production with the new levy rates, says Yeah Kim Leng, dean of the School of Business at Malaysia University of Science and Technology.

“The big employers could consider relocating their operations out of Malaysia if they find the cost pressures too intense. We could see Malaysia’s production falling because of this.

“My calculation is that the increase in cost would lead to a 0.1% slowdown in Malaysia’s gross domestic product, or RM12 billion. When you think about it, that could be over RM2 billion in forgone corporate taxes,” Yeah warns.

Julia Goh, economist at United Overseas Bank (M) Bhd, says, “When the rates hit a level that can neither be passed on nor absorbed, that is when businesses take a serious look at whether it makes economic sense to automate.”

“In many cases of small to medium operations, it becomes too costly to put in additional capital if there is no target market. Therefore, in this stage of automation and economic rebalancing, there will be businesses that become less viable and the government has to consider the potential loss of output and jobs as a result,” she adds.

Defenders of the government’s move use the familiar argument that a steep levy hike will force labour-intensive sectors to adapt their business models, mechanise their processes and change recruitment habits to favour locals. Disruptions to Malaysia’s producers are necessary growing pains, they say. Under the 11th Malaysia Plan, the government wants to cap the proportion of migrant labour at 15% of the country’s total workforce. The number of documented migrant workers is already near the ceiling of that quota. So, a levy hike can be seen as timely.

That may be the case but the indiscriminate hike in migrant worker levy this time fails to take into consideration the varying ability of various sectors to substitute labour. The service and construction industries, for instance, require hands and not machines on the job but still saw a huge leap in migrant worker levies. The fact that the weak economic environment means employers will hesitate to expend large sums on capital investment to increase their production or output has also been ignored.

Moreover, there is a high number of undocumented workers, unaffected by higher levy charges, fulfilling Malaysia’s labour market needs. The government estimates that for every documented worker, there is at least another undocumented one. Couple that with the fact that Malaysia boasts a low unemployment rate of 3.1%, and vacancies created from fewer documented migrant workers could still go unnoticed by local workers.

To the government’s credit, there is sound economic reasoning for reducing Malaysia’s reliance on migrant workers. But a steep and indiscriminate increase in migrant worker levy to force a structural change at a time of economic uncertainty will put too many businesses in a vulnerable position.

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