EPF Subsidiaries Record Losses?

Nine subsidiaries of the Employees Provident Fund (EPF) have posted losses for three consecutive years since 2021, with total losses reaching RM224.21 million in 2023. This is according to the Auditor-General’s Report 1/2025 (LKAN). 

The report revealed that these subsidiaries recorded losses of RM76.51 million in 2022 and RM49.76 million in 2021. Among them, KWASA Europe S.à r.l suffered the highest loss of RM158.42 million in 2023, followed by Ameen Direct Equity I, L.P (RM25.61 million), KWASA Europe-I S.à r.l (RM14.40 million), Naungan Sentosa Sdn Bhd (RM11.88 million), Kwasa Utama Sdn Bhd (RM8.61 million), YTR Harta Sdn Bhd (RM2.70 million), Kwasa Singapore Duo Pte Ltd (RM1.36 million), PPNK – Harta Sdn Bhd (RM840,000), and Common Icon Sdn Bhd (RM390,000).

 

According to the audit report, the losses in three subsidiaries—KWASA Europe S.à r.l, KWASA Europe-I S.à r.l, and Naungan Sentosa Sdn Bhd—were attributed to their capital structure, which mainly comprised shareholder loans. EPF, as the sole shareholder, generates returns in the form of interest income, which is used to pay dividends to contributors.

 

Ameen Direct Equity I, L.P., on the other hand, is a newly established fund set up in 2021 with a long-term investment focus and has yet to generate sufficient income to cover its operational expenses.

 

The LKAN report recommended that EPF strengthen its revenue generation efforts to ensure continuous operations based on a going concern principle and reduce its reliance on government grants.

 

It also suggested that EPF review the direction and business plans of its loss-making subsidiaries, particularly those that have been unprofitable for three consecutive years and have not yielded appropriate returns. Overall, EPF owns 55 subsidiaries, with 34 recording profits in 2023.

 

So long as EPF pays dividends of above 6%, there are no real concerns by contributors. But if this (dividends) were to drop to say, 3% then alarm bells will be set off.  Even a Royal Commission may be appointed. It is in the interest of EPF to communicate transparently on steps being taken or will be taken to reduce or turnaround those “sick” subsidiaries. And then report to contributors if it has succeeded or otherwise. Waiting for the next AG’s report is too late. Try to be pro-active!

 

Reference:

Nine EPF subsidiaries record losses for three consecutive years, Business World Today, 24 February 2025

 

Trump’s Tariffs: Key Effects!

Tariffs are typically charged as a percentage of the price a buyer pays a foreign seller. In the United States, tariffs are collected by Customs and Border Protection agents at 328 ports of entry across the country. 

U.S. tariff rates vary: They are generally 2.5% on passenger cars, for instance, and 6% on golf shoes. Tariffs can be lower for countries with which the United States has trade agreements. Before the U.S. began imposing 25% tariffs on good from Canada and Mexico, most goods moved between the United States and those countries tariff-free because of President Donald Trump’s U.S.-Mexico-Canada trade agreement.

 

Mainstream economists are generally sceptical about tariffs, considering them an inefficient way for governments to raise revenue.

 

Trump is a proponent of tariffs. He insists that they are paid for by foreign countries. In fact, it is importers — American companies — that pay tariffs, and the money goes to the U.S. Treasury. Those companies typically pass their higher costs on to their customers in the form of higher prices. That’s why economists say consumers usually end up footing the bill for tariffs.

 

Tariffs may hurt foreign countries by making their products pricier and harder to sell abroad. Foreign companies might have to cut prices — and sacrifice profits — to offset the tariffs and try to maintain their market share in the United States. Yang Zhou, an economist at Shanghai’s Fudan University, concluded in a study that Trump’s tariffs on Chinese goods inflicted more than three times as much damage to the Chinese economy as they did to the U.S. economy.

 

By raising the price of imports, tariffs can protect home-grown manufacturers. They may also serve to punish foreign countries for unfair trade practices such as subsidizing their exporters or dumping products at unfairly low prices.

 

Before the federal income tax was established in 1913, tariffs were a major revenue source for the government. From 1790 to 1860, tariffs accounted for 90% of federal revenue, according to Douglas Irwin, a Dartmouth College economist who has studied the history of trade policy. Tariffs fell out of favour as global trade grew after World War II. The government needed vastly bigger revenue streams to finance its operations.

 

In the fiscal year that ended Sept. 30, the government collected around $80 billion in tariffs and fees, a trifle next to the $2.5 trillion that comes from individual income taxes and the $1.7 trillion from Social Security and Medicare taxes. Still, Trump favours a budget policy that resembles what was in place in the 19th century.

 

Tariffs can also be used to pressure other countries on issues that may or may not be related to trade. In 2019, for example, Trump used the threat of tariffs as leverage to persuade Mexico to crack down on waves of Central American migrants crossing Mexican territory on their way to the United States. Trump even sees tariffs as a way to prevent wars.

 

Tariffs raise costs for companies and consumers that rely on imports. They’re also likely to provoke retaliation. The European Union, for example, pushed back against Trump’s tariffs on steel and aluminum by taxing U.S. products, from bourbon to Harley-Davidson motorcycles. Likewise, China has responded to Trump’s trade war by slapping tariffs on American goods, including soybeans and pork in a calculated drive to hurt his supporters in farm country.

 

A study by economists at the Massachusetts Institute of Technology, the University of Zurich, Harvard and the World Bank concluded that Trump’s tariffs failed to restore jobs to the American heartland. The tariffs “neither raised nor lowered U.S. employment’’ where they were supposed to protect jobs, the study found.

 

Despite Trump’s 2018 taxes on imported steel, for example, the number of jobs at U.S. steel plants barely budged: They remained right around 140,000. By comparison, Walmart alone employs 1.6 million people in the United States.

 

The retaliatory taxes imposed by China and other nations on U.S. goods had “negative employment impacts,’’ especially for farmers, the study found. These retaliatory tariffs were only partly offset by billions in government aid that Trump doled out to farmers. The Trump tariffs also damaged companies that relied on targeted imports.

 

U.S. stock markets have also tumbled over concerns that President Trump’s tariffs on Canada, Mexico and China will lead to a wider trade war and hurt the economy. The Dow Jones Industrial Average dropped 1.5%, while the Nasdaq, where many technology companies' shares are listed, fell 0.35%. The S&P 500 closed 1.2% lower. American retailers and carmakers were among the hardest hit, with electronics chain Best Buy's share price closing more than 13% lower.

 

As Prime Minister Trudeau mentioned at a recent press conference, this (tariffs) is a dumb idea from a so-called smart President. Tariffs will impact cost of production, increase inflation, create higher unemployment, cause stocks to spiral downwards and may lead a country into a recession, if not depression.

 

What can we do? Boycott U.S. products like Tesla; seek retaliatory tariffs; report to WTO; and have a “America Last” movement. That’s war!

 

References:

Here’s what tariffs are and how they work, Paul Wiseman, The Associated Press, 4 March 2025

US stock markets fall amid trade war fears, Jennifer Meierhans and Dearbail Jordan, BBC News, 5 March 2025

Semiconductor Industry: Prospects and Challenges

The semiconductor industry is key to the global technology sector, and its prospects are closely tied to advancements in various fields such as artificial intelligence, 5G, the Internet of Things (IoT), and electric vehicles (EVs). As for Malaysia, its role in this industry is significant, and its future may seem promising due to several factors:

1. Strategic Location

Malaysia is geographically well-positioned in Southeast Asia, providing easy access to major markets like China, India, and other ASEAN countries.

2. Established Ecosystem

The country has a well-established semiconductor manufacturing ecosystem, with a strong presence of multinational corporations and local players involved in various stages of the semiconductor supply chain, from wafer fabrication to assembly and testing. 

Source: https://commons.wikimedia.org

3. Skilled Workforce

Malaysia has been investing in education and training to develop a skilled workforce capable of supporting high-tech industries. This includes specialized programs in engineering and technology fields relevant to semiconductor manufacturing.

4. Government Support

The Malaysian government has been supportive of the semiconductor industry through various initiatives, including tax incentives, grants, and the development of specialized industrial parks like the Kulim Hi-Tech Park.

5. Diversification

Malaysia is looking to diversify its semiconductor industry by moving up the value chain. This includes efforts to attract investments in higher-value activities such as integrated circuit design and the manufacture of more sophisticated components.

6. Global Demand

The global demand for semiconductors is expected to continue growing, driven by the proliferation of smart devices, the expansion of IoT, and the transition to greener technologies. This bodes well for Malaysia's semiconductor industry.

7. Trade Agreements

Malaysia is part of various trade agreements that can benefit its semiconductor industry, such as the Regional Comprehensive Economic Partnership (RCEP), which can enhance trade flows and reduce tariffs among member countries.

8. Challenges

Despite the positive outlook, Malaysia faces challenges such as competition from other countries, the need for continuous technological innovation, and the impact of global economic fluctuations on the semiconductor market. 

Malaysia has been one of the largest exporters of semiconductor devices and integrated circuits. The semiconductor industry is one of the largest employers in Malaysia's electrical and electronics (E&E) sector. The global semiconductor industry has seen a CAGR of around 4-6% over the past decade, and Malaysia's growth has been somewhat aligned with global trends.

Looking ahead to 2030, several factors could influence the value, workforce size, and CAGR of Malaysia's semiconductor industry:

1. Industry Value

The value of the semiconductor industry is expected to grow as demand for semiconductors continues to rise with the expansion of 5G, AI, IoT, and EVs. Malaysia's industry value could potentially increase proportionally with global growth, which some estimates suggest could see the global semiconductor market reach over $1 trillion by 2030.

2. Number of Workers

The number of workers may not grow at the same rate as the industry's value due to automation and the adoption of more advanced manufacturing technologies. However, there will still be a need for skilled workers, particularly in high-value areas such as semiconductor design and R&D. 

3. CAGR

The CAGR for Malaysia's semiconductor industry could remain steady or increase if the country successfully moves up the value chain and captures more of the global market share in higher-value semiconductor activities. The CAGR will depend on Malaysia's ability to innovate, attract investment, and navigate global competition.

A lot of work needs to be done between MITI, the Association and various large market players. We have Vietnam, Taiwan, India and Singapore as our competitors, and they don’t have other peripheral issues to contend with!

World Bank: Untaxed Capital Income!

The World Bank has identified untaxed capital income as a major weakness in Malaysia's tax system. This contributes to the country's low revenue collection despite a progressive personal income tax (PIT) structure. Capital income, derived from the ownership of assets or investments, includes dividends, interest, rental income, and capital gains. Malaysia's PIT structure has high chargeable income thresholds; low tax rates for upper-income brackets, and provides multiple tax reliefs given without an overall cap that reduces taxable income, and a narrow tax scope. 

Source:https://en.m.wikipedia.org

Malaysia’s heavy reliance on direct taxation is quite progressive. But capital incomes, which are highly concentrated and still constitute a high share of the national income, are not taxed, and direct taxation through personal income tax is low, at below 3% of GDP (gross domestic product)," World Bank said in their report. 

The PIT is also designed in a manner that places an inherent limit on its revenue capacity, and compromises the progressivity of the tax burden. The Bank suggested that addressing these issues, including the taxation of capital income, would broaden the tax base, primarily affecting higher-income earners, and consequently increase government revenue. 

World Bank had previously said in October 2023 that Malaysia's PIT revenue collection is limited — standing below 3% of GDP over the past decades, and below 2% in recent years — well below most high-income countries. In its latest report, the World Bank, using estimates from its own simulation model, suggested that reducing taxable income thresholds and applying higher rates to upper-income brackets could boost PIT revenue by RM2.5 billion to RM2.8 billion for the 2024 assessment year. Additionally, introducing a cap on overall relief claims could contribute an extra RM1.1 billion. 

The Ministry of Finance has projected that total government revenue would reach RM339.71 billion in 2025, up from a revised estimate of RM322.05 billion in 2024, driven by increased direct and indirect tax collection. While revenue has grown steadily since a near 15% decline in 2020, the revenue-to-GDP share is estimated to be 16.3% in 2025, slightly below 16.5% in 2024. This ratio has been below 18% since 2015, raising concerns about Malaysia’s increasing dependence on debt to fund its fiscal needs.   

An attractive feature of Malaysia’s tax structure is the untaxed capital income. It is better to leave this untouched. Why can’t the World Bank focus on other tax initiatives like a Tobin tax or widening the “excess profit or windfall tax”. I don’t know. My assessment is that the additional revenue from the initiatives suggested (Tobin or windfall) together with a revised PIT (as proposed by the World Bank) will generate sufficient revenue for development expenditure and avoid any new borrowings! 

Reference:

World Bank: Untaxed capital income, low tax rates for the upper income among key weaknesses in Malaysia's tax system, Yu Jien Lim & Syafiqah Salim, theedgemalaysia.com, 5 February 2025

Petronas: Survival in Question?

Since the enactment of the Petroleum Development Act 1974 (PDA), Malaysia's petroleum revenues have been a significant contributor to the country's economy. The PDA established Petronas (Petroliam Nasional Berhad) as the national oil company, granting it exclusive rights to explore, develop, and manage Malaysia's petroleum resources. Over the decades, petroleum revenues have played a crucial role in Malaysia's economic development, funding infrastructure projects, government expenditures, and national savings.

Petronas has been one of the largest contributors to Malaysia's federal revenue. On average, it has contributed 20-30% of total federal revenue annually, though this figure fluctuates depending on global oil prices and production levels. In recent years, Petronas’ contributions have ranged from RM50 billion to RM80 billion per year, depending on oil prices and production volumes. 

Source: https://en.wikipedia.org

Since its establishment in 1974, Petronas has generated trillions of ringgit in revenue from oil and gas production, exports, and related activities. For example, between 2010 and 2020 alone, Petronas contributed over RM800 billion to the federal government in the form of dividends, taxes, and royalties.

Malaysia's petroleum revenues are heavily influenced by global oil prices. For instance, during periods of high oil prices (e.g., the 2000s and early 2010s), revenues surged, while periods of low oil prices (e.g., 2014-2016 and 2020) led to significant declines. The COVID-19 pandemic in 2020 caused a sharp drop in oil prices, reducing Petronas’ revenues and contributions to the federal government.

Under the PDA, oil-producing states like Sarawak, Sabah, and Terengganu receive a 5% royalty on oil and gas production. This has been a point of contention, as states argue that the royalty is insufficient. The federal government retains the majority of petroleum revenues, which are used for national development, subsidies, and other expenditures.

In 2022, Petronas reported a record profit of RM101.3 billion, driven by high global oil prices following the Russia-Ukraine conflict. This resulted in a significant increase in contributions to the federal government. However, the long-term sustainability of petroleum revenues is a concern, as Malaysia's oil reserves are gradually depleting, and the global shift toward renewable energy could reduce demand for fossil fuels.

While exact figures are not publicly available, conservative estimates suggest that Petronas has contributed over RM2 trillion to Malaysia's federal revenue since 1974. This includes:

(i)              Dividends

Petronas has paid substantial dividends to the federal government, often exceeding RM20 billion annually in recent years.

 

(ii)            Taxes and Royalties

The company also pays corporate taxes, petroleum income tax, and royalties to the federal and state governments.

(iii)     Export Earnings

Malaysia is a major exporter of liquefied natural gas (LNG) and crude oil, generating significant foreign exchange earnings.

 

Meanwhile, Petronas intends to right size its workforce in view of an evolving and increasingly challenging global operating environment, according to its president and group CEO Tan Sri Tengku Muhammad Taufik. 

The number of jobs affected is not known yet, as the new structure will only be out in the second half of the year. Once the structure is out, certain employees will be redeployed to new roles while some will be displaced. The exercise is expected to be completed by end 2025. 

The exercise mainly aims to reduce the number of “enablers” — meaning those in administrative roles — whose ratio relative to the group’s workforce is above the industry average. There are currently 15,000 to 16,000 enablers in Petronas, as opposed to its global workforce of 52,000 to 53,000 people. 

Petronas is not the only oil company that is trimming its staff. International oil giants such as Shell and ExxonMobil have also implemented job cuts recently, hit by rising volatility and the long-term decline of oil prices, amid a global push for decarbonisation and green energy. (Petronas is facing the cessation of its gas aggregator role in Sarawak). 

Shell’s job cuts, announced in September 2024, involved 20% of its workforce in two subdivisions responsible for exploration. ExxonMobil expects to reduce nearly 400 jobs by 2026 as part of its operation integration. 

Petronas’ average cost per barrel is about US$50. Brent crude was trading at US$74 per barrel recently. On top of the long-term downward trend in oil price, market uncertainties include the possibility of lower-cost producer Russia supplying hydrocarbon to its allies, including Petronas’ clients, as well as the chance of a drilling bonanza in the US. 

For the six months ended June 30, 2024, Petronas booked a net profit of RM32.38 billion on revenue of RM156.9 bil­lion. Capital expenditure totalled RM25.72 billion. Its cash balance stood at RM217.44 billion as at end-June, against borrowings of RM114.59 billion, giving it a net cash position of RM102.85 billion. 

Unlike Norway, we don’t have a good sovereign wealth fund. Khazanah supposedly acts like one! And 1MDB was a joke! So, unless we save and invest in “safe” assets we will be like the U.K. or Nigeria – wasted opportunities! 

Reference:

Petronas rightsizing workforce to “ensure survival”, says group CEO, Adam Aziz and Kathy Fong, The Edge Malaysia, 18 February 2025

World Inflation at Risk?

As President Donald Trump threatens tariffs on the US’s trading partners, the worry of another inflation wave troubles global economists. Tariff wars are inflationary, that’s not up for debate. 

While China shows little sign of vulnerability to a price shock for now, the same can’t be said for the rest of the world if some spiral of tariffs unfolds. Multiple economies face latent inflation pressures, either domestic or external. 

In the US, a resilient labour market is keeping the Federal Reserve alert. Trump’s policies threaten to drive bond yields higher. Elsewhere, dollar strength is haunting emerging markets such as Indonesia. Eurozone consumer-price growth has been faster than expected. The Bank of England recently said they may be forced to raise its forecast for inflation. 

Trump’s arrival has added to pre-existing worries. Despite an International Monetary Fund official declaring (in October) that the battle against inflation was “almost won,” attendees at the World Economic Forum in Davos in January 2025 harboured open doubts. 

A Bank of America survey of global fund managers in January showed the re-emergence of global consumer-price growth as a key theme for 2025. The World Bank predicted slowing inflation but still warned that it “could prove to be more persistent than expected.” That chimes with markets. 

For the US in particular, analysts are openly starting to reassess inflation prospects. Morgan Stanley recently scrapped its forecast for a Fed interest-rate reduction in March. That followed Chair Jerome Powell’s remarks recently that officials aren’t in a rush to lower borrowing costs as policymakers pause easing to see further progress on inflation. The potential for increased tariffs complicates that outlook.

Across the Atlantic, the extent of any trade response is to be watched closely if Trump unleashes tariffs. For now, policymakers have downplayed them as a price driver in either direction. European Central Bank President Christine Lagarde has argued she isn’t “overly concerned” about imported inflation and BOE Governor Andrew Bailey has said tariff effects aren’t straightforward to predict. Euro-area inflation unexpectedly accelerated in January, while selling-price expectations rose to the highest level in almost a year for services, and the strongest in nearly two years in manufacturing. Consumers and professional forecasters are less sanguine than policymakers, raising their 2025 inflation outlook. And a Bloomberg poll showed a majority of economists is now more concerned about price pressures exceeding 2% in the medium term. 

What about Malaysia? Tariffs will raise headline inflation but we also have other issues like petrol subsidy rationalisation (RON95), electricity tariff hike and salary increases (for civil servants) to help inflation to 3.5% in 2025 (1.8% in 2024). 

What could we do? Raise interest rates? Defer electricity tariff hike? Defer subsidy rationalisation? Produce more food and essential items locally? We may need to set-up a reserve for the most vulnerable?  All of the above and many more! Remember, this time there is no savings left in EPF for contributors to dip into! 

Reference:

World inflation at risk of rekindling with Trump’s trade war, Jana Randow, Katia Dmitrieva and Enda Curran, Bloomberg, 6 February 2025

Trump’s Trade War: Ways Forward for Malaysia?

US President Donald Trump has fired several tariff shots. Currently, the only one in effect is the 10% tax on China imports. ASEAN countries, including Malaysia, are well-positioned to capitalise any trade diversion. Tariffs have become central to Trump’s economic and political strategy which ultimately raise costs for Americans. 

According to the Peterson Institute for International Economics (PIIE), tariffs from the 2018-2019 US-China trade war were passed on to US purchasers, effectively acting as a tax hike on US households. According to the analysis, Trump’s proposed tariffs would offset his tax cuts plans as bottom 60% of households would face financial setbacks due to higher tariff costs outweighing tax relief. 

During Trump’s first term (2017-2021), ASEAN nations, notably Vietnam, benefited from the US-China trade war due to trade diversion; Vietnam’s exports to the US grew at a compound annual growth rate (CAGR) of 15.9%. Malaysia also saw notable gains (CAGR: 4.6%). With Trump’s new 10% tariff on Chinese imports, similar trade shifts could reemerge, creating opportunities for export-driven Asian economies. 

Industries that could benefit further include: toys, sporting goods (66.5% US import dependency on China), and cell phones and appliances (57.3%). As such, ASEAN countries are again well-positioned to capitalise on this shift. 

President Trump has signed a memorandum calling for “fair and reciprocal” tariffs, directing a country-by-country review; this is aimed at addressing perceived trade imbalances. The overall tariff gap between the US and Malaysia is estimated at 2.3%, indicating no substantial imbalances. Although reciprocal tariffs could generate revenue for the US, the impact is limited, contributing just 0.2% of US gross domestic product (GDP) and only 0.002% from Malaysia. (This is HLIB’s analysis and views) 

Given his unpredictable trade stance, the risk of a blanket 10% universal tariff is not entirely off the table.

The US China trade war in 2018-2020 led to a notable decline in Chinese exports, underscoring the role of trade elasticities in shaping trade flows. 

HLIB’s analysis suggests 0.7/2.0 for lower/upper bound elasticity to access the potential impact on GDP. Hypothetically they say, if Trump impose a 10% global tariff and we utilise a lower trade elasticity of 0.7 is used, Malaysia could see a decline of 0.5% of GDP with the impact potentially rising to 1.6% of GDP over time if trade elasticity strengthens.

Countries with even higher exposure to US trade such as Vietnam, Taiwan and Thailand would likely experience a more pronounced impact. While global trade tariff measures pose potential risks to Malaysia’s economic outlook, the country is well-positioned to withstand these challenges. 

As such, HLIB Research maintains 2025 GDP growth at 4.9% (2024: 5.1%) driven by strong domestic demand drivers, particularly resilient household spending and implementation of public and private investments. This is further reinforced by higher civil wage hikes, an increase in the minimum wage, expanded cash transfers (2025:RM13 bil; 2024: RM10 bil), a robust labour market (December 2024: 3.1%) and a steady pipeline of investments benefiting from government’s incentives packages. 

These factors may serve as key buffers against external headwinds, thus ensuring that Malaysia remains on a stable growth trajectory despite the evolving global trade landscape. 

Reference:

The art of emerging winners from Trump’s trade war: Ways forward for Malaysia, Felicia Ling and Nurul Athira Salith, Focus Malaysia, 17 February 2025