This article first appeared in Forum, The Edge Malaysia Weekly on March 25, 2019 - March 31, 2019

There was a stir in the news flow when Khazanah Nasional Bhd’s financial results were released earlier this month. The fund posted its first loss in 15 years — a RM6.27 billion loss before tax in 2018 compared to a RM2.9 billion profit before tax in 2017. The losses were from impairments of some of its investments — a whopping RM7.3 billion. The more appropriate measure of its performance, however, and the more telling one, is the 21.6% drop in the net worth adjusted (NWA) of the portfolio from RM116 billion in 2017 to RM91 billion in 2018.

A more detailed look shows that the value of Khazanah’s holdings in its two telcos alone, Axiata Group Bhd and Telekom Malaysia Bhd (TM), lost RM8.5 billion in market capitalisation, while the drop in the share prices of Tenaga Nasional Bhd (TNB), CIMB Group Holdings Bhd (CIMB) and IHH Healthcare Bhd (IHH) contributed to the contraction of the NWA. Clearly, market sentiment towards these major Khazanah investee companies turned negative, resulting in the drop of their share prices. The share price of TM opened 2018 at above RM6 and closed the year at RM2.65, hitting a low of RM2.15 along the way. The FBM KLCI, by contrast, contracted only 3% in 2018.

The explanation for the contraction of the NWA is a rather straightforward one. While overall market sentiments softened in 2018, the FBM KLCI still outperformed both the MSCI Global and Emerging Market indices. The 21.6% drop in Khazanah’s NWA is, therefore, peculiar to its holdings in selected companies — TM, Axiata, TNB, CIMB, IHH and Malaysia Airports Holdings Bhd (MAHB). There were policy and regulatory changes in 2018 that affected these particular companies and, therefore, market sentiments towards them. Herein lies a larger issue.

These same companies, all of them public companies, have other investors, institutional and retail, domestic and foreign. These investors too suffered the same losses as Khazanah. Major domestic institutional investors such as the Employees Provident Fund (EPF), Permodalan Nasional Bhd (PNB) and Kumpulan Wang Persaraan (Diperbadankan) (KWAP) must have invested in these historically well-performing companies and they, too, will have suffered similar losses in value, which will affect both their portfolio values as well as the dividends they pay out to their respective subscribers.

Beyond these domestic institutional investors, there are also foreign funds that invest in good performing Malaysian companies. They, too, will have invested in these same companies and they would have suffered the same losses. While some domestic institutional investors are constrained from investing in domestic markets, foreign investors are free to move to where the risk-weighted returns are the best. Some of them have exited our market, with net foreign fund outflow for 2018 totalling RM11.6 billion.

What has happened is that policy and regulatory changes adversely affected market sentiments — not just for the specific companies but, more alarmingly, for the Malaysian market more generally. These sporadic bouts of policy changes would have been tolerated by investors if they were part of a broader policy shift that is well communicated and understood, but that is not the case.

In the case of the telcos, policy and regulatory changes — on what should have been commercial decisions such as product design and pricing — seriously affected earnings forecasts and, therefore, investors’ valuations of the companies. The drop in share prices simply reflect that outlook. This is the kind of regulatory risks that investors are fearful of. They are capable of assessing companies’ operational efficiency as well as locating them properly within the industry landscape but it is regulatory risks that present a challenge and thus constitutes the larger bulk of risk.

Changes in regulatory regimes that are seen as reacting to specific impetus without a broader coherence will just increase the risk profile of Malaysia as a whole. The Malaysian economy can ill-afford the increased risk profile. Our current account surplus has dwindled over the years, closing 2018 at barely 3% of gross domestic product, and it is not expected to improve given sluggish trade sentiments, while the need to borrow and refinance debts will continue. Portfolio outflows make things worse. Therefore, maintaining investors’ confidence and managing the country’s risk profile is of utmost importance.

What is still missing at the policy level today is a big picture economic story — phrased positively in terms of what it is rather than what it is not. That will set a direction, a focal point for all other subsidiary stories. It will also identify the lynchpins of the story — the key economic imperatives that drive the whole story, among which, I reckon, is to protect investors’ confidence.

Matters of policy relate to the boundary between the state and markets. What is the role of the government in the economy? From the perspective of the capital market, terms like government-linked companies (GLCs) should be properly used or its usage abandoned altogether. Policy and regulations cannot discriminate between GLCs and non-GLCs if a company, a public company, is deemed a GLC merely because statutory funds whose monies do not belong to the government, such as the EPF, PNB and Social Security Organisation (Socso) have shares in it. Are Sime Darby, Malayan Banking Bhd, CIMB, Axiata and IJM Corp Bhd government-related companies?

In the case of sectors where there used to be natural monopolies, such as utilities and airports, privatised public enterprises such as TNB, TM and Malaysia Airports may still have government holdings in the form of Khazanah shares in them, but these are publicly listed companies with sizeable private and even international investors, and they should neither be favoured nor made victims of policy or regulations.

These are commercial entities and should be treated as such — treated by how they behave in the marketplace rather than according to their lineage or even the composition of their shareholders. Commercial disputes between companies, for example, should be matters resolved by the rule of law without the parentage of companies being taken into consideration, what more direct government intervention.

The whole point of the Putrajaya Committee for GLC High Performance programme launched in 2004 was to improve the performance of the 20 publicly listed companies that had either significant holdings by statutory funds or a governmental legacy so that they are subjected to market discipline and their governance be made equally transparent.

When the 10-year programme ended in 2015, the total shareholder return of these 20 companies grew at 11.1% annually and their aggregate market capitalisation increased from RM133.8 billion to RM386 billion — almost a three times multiple.

Beyond that, the regulatory environment was improved mainly by clearly demarcating policy, which can get enmeshed with the political imperative of the government and regulation, which should be driven by promoting healthy competition to attract investors into industries. Empowering shareholders and the presence of regulators, independent of policymakers, create a rules-based environment, the kind of environment investors prefer.

The problematic part of government’s presence in the economy are the numerous companies established by the various statutory bodies. There has been a proliferation of these companies. These are not government-linked companies, but outright government-owned, effectively state-owned enterprises (SOEs). They should be properly labelled and need some sort of rationalisation, and a major part of public sector reform should be a serious re-examination of the government’s use of non-governmental organisations — companies established under the Companies Act — as policy tools.

The government has been using companies as policy tools in the form of SOEs to achieve bumiputera participation objectives but this approach has not worked. Compare this to the much better performance of funds such as PNB using the capital markets to invest and therefore support performing firms, but the firms they invest in should be treated neutrally by the regulations.

These are not GLCs, certainly not SOEs, but public companies with a wide spectrum of investors whose collective performance defines the health of the country’s economy. Truth be told, PNB operating in the capital market has been more successful in achieving the bumiputera agenda objectives than most other policy tools.

Clarity in these fundamental issues will create the right environment and the right incentives for investors to decide which enterprises to support and what, in their view, are potentially profitable ones. The government should have a facilitative and not a participative role. It should focus on providing policy clarity and regulatory certainty to attract investments. In order to obtain such an outcome, the government must first articulate a big picture story that sets a strategic direction understood by all interested parties.

Nungsari A Radhi is an economist. He was the executive director (Research and Investments Strategy) of Khazanah Nasional between 2007 and 2013. The views expressed here are not related to any of his organisational affiliations.

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