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

WHAREVER the reason behind the sudden announcement of telecommunications spectrum optimisation and the foreign labour levy hike, the market found it hard to swallow. That’s going by the over RM20 billion of market value lost by the larger affected companies — led by mobile telecommunications companies and oil palm planters — netting out gainers when some details of the “bad news” post Budget 2016 revision hit the ground.

What’s exasperating is the manner in which details such as the quantum of the foreign worker levy and redistributed spectrum block sizes were being decided and released, industry insiders and market watchers say. Their grouses in summary: “Why was the industry not consulted? Is this final or will there be more surprises in the coming weeks?”

While some of the larger stock market losers the past week include exporters like glove-makers and chip-makers — which benefitted from the weaker ringgit and are now seeing prices coming off on profit-taking after the ringgit firmed against the greenback from 4.2525 on Jan 27 to 4.1452 on Feb 4 — there is real concern over whether companies and businesses affected by policy changes can transform themselves quickly enough to emerge stronger from the policy change.

Felda Global Ventures Holdings Bhd (FGV) president and CEO Datuk Mohd Emir Mavani Abdullah, for instance, issued a public appeal asking the government to reconsider its 154% levy hike for foreign estate workers. “The sudden move would push the company’s costs up drastically,” he said in a Feb 3 statement, pointing out that the palm oil industry as a whole “has been affected” by the slump in CPO price to a six-year low last August and a stronger greenback.

The Real Estate and Housing Developers’ Association Malaysia (Rehda) also said they “are totally caught by surprise” over the sudden announcement. Rehda Malaysia president Datuk Seri FD Iskandar said the 100% hike for construction workers “will definitely have adverse effects on the real estate industry”, which already faces higher costs.

“We are deeply concerned that such a steep increase would not only negatively impact businesses but ultimately, the unattainable cost increase would be passed down to consumers, thereby hampering the affordable housing agenda,” he added in a statement, suggesting that the government raise revenue through “better enforcement” rather than a levy hike.

While Malaysia wants to encourage companies to cut dependency on cheap labour and invest in automation to raise productivity, it is impossible, for instance, to expect labour-dependent sectors such as plantations and construction companies to instantly change, experts say. 

“Can Malaysia stay competitive enough for local and foreign investors to invest and stay invested here?” an observer asks.

Deputy Prime Minister Datuk Seri Ahmad Zahid Hamidi — who announced on Jan 31 that the government expects RM2.5 billion additional income from the 100% to 300% higher restructured levy for foreign workers that came into effect on Feb 1 — on Feb 3 reportedly said the government “will not hesitate to look into the issue though the new rates are enforced effective Feb 1” after planters, manufacturers, builders and service sector business groups made strong statements against the move.

It is not immediately certain whether the RM2.5 billion mentioned was already included in the revised Budget 2016 assumption, where government revenue was projected to fall RM7.8 billion to RM9.4 billion, largely from oil-related sources, while operating and development expenditure will be cut RM8 billion to RM9.5 billion as the government reduces supplies and services and reprioritises projects.

The fees telecoms operators will have to pay the government for their reallocated spectrum blocks are also still unknown at the time of writing, but these have not been included into the revised Budget 2016 assumption.

What’s evident, however, is that Malaysia’s total market capitalisation was down RM22.3 billion over two days post the levy shock (as at Feb 3) — nearly 10 times the RM2.5 billion in extra income the government expects to collect from the revised levy rates — before the government signalled room for negotiation.

The precipitous value lost due to the cost-related shock could have been avoided with proper consultation with local players.

And although Bursa Malaysia’s total market capitalisation was over RM8 billion higher than before the levy shock as at last Thursday (Feb 4), half of those gains were from Axiata Group Bhd and Maxis Bhd, whose collective market capitalisation on Feb 4 was still RM6.5 billion lower compared to before the revision of Budget 2016.

Put another way, total market gains could have been higher had there not been those sudden huge losses for telecoms and plantation stocks. As stock market gains are also seen as a wealth creation factor, a decline implies wealth destruction, an observer says.

Stock prices of real estate companies such as S P Setia Bhd, UEM Sunrise Bhd and IOI Properties Bhd were not as badly affected as planters and telcos, collectively falling only about 1.4% or about RM350 million, Bloomberg data show, possibly because the sector was already experiencing slower growth.

Large planters such as Sime Darby Bhd, IOI Corp Bhd, Kuala Lumpur Kepong Bhd, Genting Plantations Bhd and FGV, on the other hand, lost about RM7.8 billion or about 5.5% of market value over two days post the levy hike shock.

The largest losers were Malaysia’s top three mobile operators, which were hit on infrastructure cost, potentially lower customer spending as well as their ability to keep up good dividend payments.

Maxis, Axiata (which wholly owns Celcom Axiata) and DiGi collectively coughed up a whopping RM12.7 billion or 9% of their collective market value over two days on Jan 29. Some RM9.5 billion in market capitalisation lost on Jan 28 alone when the government’s intent to “optimise revenue from the telecommunications spectrum through a redistribution and bidding process” was first announced by the prime minister during the Budget 2016 revision.

It seems the decline presented a buying opportunity for some investors, possibly one reason for some recovery. 

At the time of writing, stock exchange filings show the Employees Provident Fund, for instance, buying DiGi shares on Jan 29 after selling on Jan 27 and 28. The EPF had 14.247% of DiGi as at Jan 29, above the 14.156% it had on Jan 26. Closing at RM4.98 last Thursday, yield was 4.4% based on the lowest FY2016 dividend forecast of 22 sen apiece.

The EPF was also a net buyer of Maxis shares on Jan 28 and 29, with its stake at 7.7% as at 

Jan 29, compared with 7.57% on Jan 27. For Maxis, implied yield was 3.25% at RM6.15 last Thursday, assuming it pays 20 sen dividend in FY2016.

To be sure, the government and Bursa Malaysia are doing their bit to woo investors abroad. Datuk Seri Abdul Wahid Omar, Minister in the Prime Minister’s Department and head of the Economic Planning Unit, engaged over 80 fund managers with US$15 trillion under management in Hong Kong and Singapore to speak on the growth and competitiveness of Malaysia’s marketplace through the Invest Malaysia 2016 capital market conversations.

Yet last week’s precipitous fall seen at the affected stocks are more likely to have cost local investors and businesses more — something that could have been better communicated.

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