Investors have voiced doubts over potential conflicts of interest posed by Malaysia’s plan for an equity fund to buy “undervalued” shares, reflecting their growing unease as a scandal over an indebted state fund engulfs Prime Minister Najib Razak.
Last week, Najib announced a series of measures to support the economy. Chief amongst them was a plan to infuse 20 billion ringgit ($4.6 billion) into defunct equity fund called ValueCap so that it can buy underperforming shares.
Analysts and investors have raised questions of propriety over the idea of a state-directed fund picking stocks to support.
“Why is the government intervening into the private sector?” said Tricia Yeoh, chief operating office of Malaysian think-tank IDEAS. “How is the government planning to identify which companies are under-valued versus those that are sufficiently-valued?”
Malaysians are still awaiting answers to questions thrown up by multiple investigations into allegations of financial mismanagement and graft at state fund 1Malaysia Development Bhd (1MDB), whose advisory board is chaired by Najib.
On Tuesday, the government’s newly formed special economic committee sought to dispel some of the scepticism over ValueCap.
“ValueCap has a board of directors and investment committee that are separate to monitor its investment operations,” it said in a statement reported by state run news agency Bernama.
“This fund is not prepared by the government. It will be invested in stages based on current shares value and the right time,” it said.
The 20 billion ringgit will not be provided by the government and ValueCap was given the mandate to raise the amount from its shareholders and through other funds, Bernama reported.
The statement said ValueCap will pick its stocks after “an organised and objective evaluation, not sentiment and speculation”.
The other big concern for investors is the impact this spending will have on an economy that already has one of Asia’s highest budget deficits at 3.5 percent of the economy, and in particular on the column for contingent liabilities such as 1MDB’s 42 billion ringgit debt.
Opposition politicians have seized on the risks.
“The deficit will increase; it will have to be funded by increased borrowing; this in turn will lead to the self-imposed debt ceiling of about 55 percent being breached,” said Lim Kit Siang, leader of the Democratic Action Party (DAP).
Set up in 2002 to revive a flagging stock market, ValueCap’s shareholders include state investment fund Permodalan Nasional Berhad, the state-owned Employees Pension Fund and Malaysia’s sovereign wealth fund Khazanah Nasional Berhad.
Ang Kok Heng, chief investment officer of Phillip Capital in Kuala Lumpur, said these state-owned firms would need to issue bonds to fund ValueCap’s investments.
“If they borrow, they would have to find a way to pay back too. This just means that ValueCap would have to invest prudently instead of listening to the government on where it should put its money,” Heng said.
The stock market hit three year lows last month and is down 8.4 percent this year, while the ringgit currency is near its weakest levels in 18 years, reflecting concerns over a deterioration in Malaysia’s trade position due to weak prices for its liquefied natural gas exports and nervousness over the scandals raging round Najib.
“The money could be better spent,” said Alicia Garcia Herrero, Chief Economist Asia Pacific Natixis, adding that it could put a drag on the fiscal deficit.
“Together with the external debt and falling reserves, the situation could hit a nerve with rating agencies,” she said.
Rating agencies are for now going with the assumption that the government will not be using its budgeted funds to revive the stock market.
“Our focus remains what the recent developments mean for the policy environment,” said Standard & Poor’s analyst Kim Eng Tan.
“And, if big spending increases are implemented, we would have to assess the fiscal position vis-a-vis rating support.”