As Putrajaya deploys a market-based mechanism to tackle its fiscal challenges, will its processes be inclusive?
By RADZUAN TAJUDDIN / Pic By ISMAIL CHE RUS
The strain on the government finances is driving Putrajaya to review and broaden its options on how best to meet its current fiscal challenges.
The magnitude of its problems is borne out of the severe damage done onto its finances. As things further unravel, the scale of the financial destruction is unprecedented, to say the least. There has been a total breakdown in public governance.
As the government weighs its alternatives, the market mechanic appears to fit in well. Predictably, Malaysia’s capital market becomes the obvious choice, presenting a lifetime of an opportunity to stimulate some degree of excitement amid the global chaos and turmoil plaguing global markets.
Malaysia’s domestic capital market is often characterised as one of the most developed in Asia. A deeply entrenched market, it commanded both depth and breadth, as evidenced by the sheer size, ie more than RM3 trillion by end-2017 and 2.4 times the country’s GDP.
More importantly, it is capable of mobilising a mass scale of capital into the economy. In 2017, Malaysia’s capital market mobilised about RM147 billion through multitudes of financial instruments in a diverse set of asset classes.
The Islamic capital market is just as deep. Capitalised at RM1.9 trillion in 2017, its significance is symbolised by the strength of its sukuk and the Islamic equity markets’ positioning globally.
This phenomenal growth is attributed much to the role played by country’s main stakeholders, the Securities Commission Malaysia (SC), and the government and its related institutions, by embracing the “Islamic finance first” principle.
This has brought about greater financial inclusion through democratising risk and social capital. It further avails investment and financing opportunities to the broader society, smaller businesses and empowers entrepreneurship. And equally significant is the mainstreaming of the faith-based finance globally.
A New Normal
As Putrajaya meaningfully deploys its vast arsenal of assets, expect to witness an unparalleled level of corporate transactions and exercises leveraging on the various market- driven tools. Expect assets to be either monetised, securitised or floated. Some may be disposed of outright.
This has been a new normal for some time now, not just domestically. Even governments the world over are turning to markets to confront economic and financial woes. A prime case is Dubai. At the hike of Dubai’s property meltdown in 2009, Dubai restructured its investment-linked arm Dubai World’s colossal debt to the tune of US$25 billion (RM104.5 billion). A series of capital market- related exercises were executed ranging from debt-to-equity swap, to outright assets disposal.
Similarly, the UK and US had established state-backed special-purpose vehicles (SPVs) as an asset management platform to clean up and strengthen the balance sheets of its systemically important financial institutions, in addition to giving a fresh injection of capital. But interestingly enough, consideration and the mechanics for a sustainable approach were never a substantive feature even then.
As the Malaysian government consolidates and the pace of reform picks up, most of its institutions and linked corporations are currently in a reform mode. Khazanah Nasional Bhd has recently disposed of 16% of its equity stake in healthcare provider IHH Healthcare Bhd through an outright sale to Mitsui & Co Ltd, raising some RM8.4 billion in the process.
Lembaga Tabung Haji (TH) will soon embark on cleaning up its investment book that will see the fund subscribing some RM19.9 billion in both sukuk and Islamic preference shares as part of its assets swap. This will be done by disposing of its under-and non-performing investments into an SPV, leaving TH with ample room to draw up a more prudent investment philosophy and review its investment strategy.
The Big Question
And in continuation of Putrajaya’s market-driven strategy, the government recently announced the monetisation of Malaysia Airports Holdings Bhd’s (MAHB) core assets to raise some RM4 billion through a real estate investment trust (REIT) initial public offering (IPO).
It could potentially be the largest airport REIT IPO to be listed and should bring about some level of vibrancy to the marketplace. Recent news even suggested for the REIT IPO size to be enlarged, so as to attract wider international participation.
While it sounds well and good, the bigger question lies as to whether the airpot REIT could make it as a Shariah- compliant REIT and attract a wide investor base as envisioned. The complexity lies in MAHB’s shares designated as not Shariah-compliant, most probably on account of its duty-free premises selling tobacco and alcohol — prohibited items under Shariah. Rentals from these prohibited activities may not meet the Shariah screening standards of the SC’s Shariah Advisory Council.
Similarly, the SC’s qualitative criteria. Potential revenue increase from the imposition of departure levy on international passengers may be a way out, but this will only begin on June 1, 2019. The RM20 and RM40 per passenger for Asean-bound and other regions respectively will be imposed. It would be interesting to observe how this will play out in the coming months.
Whether an inclusive Islamic REIT IPO is a possibility is now largely in the hands of the government, though there has been an indication.
Expect the pipeline to build up over due course. But its mechanic requires Putrajaya to embrace sound principles. Here, no one should be left out. Only then the goal of effectively managing its fiscal objectives can be said to have been truly achieved.
- Radzuan Tajuddin runs a consultancy specialising in strategy development of capital markets and sustainable finance. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.