by Wan Fadzrul Wan Bahrum. First published in The Malaysian Insider 17 September 2015

I shall be very frank. The prime minister’s (PM) decision to reactivate ValueCap in view of shoring up the equity market is at best a waste, at worse a danger to the principles of a free market, and overall antithetical to the PM’s much lauded plans to liberalise the economy.

As it had been reported, a figure of around RM20 billion will be earmarked to prop up flailing stocks of which is to counter the outflow of hot money since early 2014 – worth purportedly around RM23 billion.

Considering that this plan was brought on by the newly-formed Special Economic Committee, which comprises mostly of bankers and financial bigwigs, I have to say that this solution comes from a very narrow interpretation on what the problem is and where it lies.

In order to understand why the value of the share of a publically-traded company falls you must understand that it consists of the sum of two parts: (1) the net worth of the company, and (2) the expected future earnings of said company.

The first, called “book value” is simply the remaining value of all of its assets after deducting all of its liabilities, marked to market of course. This is quite straight forward and any first-year accounting or finance student can show you how.

Any reduction in the book value is directly due to either the reduction of assets or the increase in liabilities, and is therefore intrinsic, meaning that external factors have little effect on it.

The second is a matter of pure reasoning on why its future earnings may not meet investor expectations, and therefore reasons for them to sell off their shares.

If a former monopoly were to face a new entrant, more competition and earnings fall.

If an industry becomes obsolete due to some new technology, revenues will dwindle and again it would fall.

An economic downturn? Fall again. And what about a festering political crisis that may result in a failed state? Let’s just say that a warzone is not an ideal place to do business.

What currently ails our capital market and currency is obviously systemic, it explains the withstanding trend of investors fleeing trade dependent, emerging markets; and the resulting plunge in their respective currencies, but that only partly explains what Malaysia is facing.

We should take into consideration that our sovereign ratings outrank our emerging market neighbors, with the exception of Singapore.

From this we can rule out inherent fiscal instability, however, not off-the-books, contingent liabilities – the more risk-sensitive investors are not willing to gamble on uncertainties such as 1MDB and Pembinaan PFI.

And nothing raises further red flags than rescue attempts from government-linked investment companies (GLIC), especially when the deals are with sectors unrelated to their core business competencies.

It should also be noted that the sovereign rating does not reflect political outlook.

A direct comparison to our case would be that of Thailand’s, and from that we can easily deduce that a nation’s long term stability is definitely included in an investor’s deciding calculus.

Nations with a stable political structure and a truly private-sector-driven economy, include the United States, Japan or Australia, whereby changes in leadership have negligible effects on investment risks.

What about this suggested Valuecap “cure” then? Would reactivating ValueCap reverse this downward spiral and restore Malaysia’s international standing amongst investors? The short answer is “no”.

As mentioned, the value of shares are intrinsic to the future outlook of the company, the industry and the stability of the political landscape of where it operates. Artificially propping up the FBM KLCI does not, and will not, change the fundamental basis of why it dipped in the first place.

Companies aren’t earning more, there are no new breakthroughs in technology exclusive to Malaysian industries, and the leadership crisis have only gotten worse with the addition of racially-charged politics. In short there’s little for foreign investors to cheer for, similarly with Malaysians who are now scrambling for foreign currencies to avoid the dipping ringgit.

ValueCap’s plan will only divert funds within the country, and neither new wealth will be created nor new capital will be raised. It’s a simple macroeconomic case of taking money from your right pocket and putting it in your left – which are not “investments” by any serious definition.

One may argue that the shares are just depressed and undervalued and ValueCap may make a tidy profit after the market returns to normalcy, which means that the funds will be tied up rather than being used for more urgent needs (e.g. public infrastructure, the national debt, military modernisation) in addition to calling into question the government’s plans for a private-sector-driven economy, no? As we know, investors despise uncertainties.

But there will be winners of course. These will be the shareholders of those listed companies lucky enough to be included in the list of preferred beneficiaries of ValueCap’s ‘investments’.

Bear in mind, retail investors only hold a fraction of the market capitalisation of Bursa Malaysia-listed companies, the lion’s share belongs to individual substantial holders, institutional investors and of course GLICs, such as Khazanah Nasional, Permodalan Nasional Berhad and the EPF.

What should really be done then? First and foremost, we have to admit on the existence of the problems, only then can a lasting solution can be formulated:

(1) China’s economy will not be our savior (if the “Li Keqiang Index” is to be trusted), and the United States and Europe are no longer the bottomless consuming maw they were before; therefore we should greatly expand foreign trade especially with much overlooked large, emerging markets such as the Next Eleven;

(2) The government’s contingent liabilities from 1Malaysia Development Berhad (1MDB) and Pembinaan PFI have to be dealt with, as their very existence casts doubt on the integrity of the Ministry of Finance (MOF) as well as the competence of our regulators to recognise systemic crises in advance; moving forward, some governing mechanism must be placed so that future MOF overtures are transparent and accounted for; and finally,

(3) The political crisis must end, with a new leader who commands respect and confidence from both sides of the Dewan Rakyat, as well as the Malaysian people, taking over. A regime change is not requisite, but in order to restore confidence in our economy we must restore confidence in the competency and independence of our institutions. Investors will not put their money into a country where laws are not respected, due process is flouted, and courts have a reputation for bias.

Again I shall reiterate, ValueCap’s plan will only be a waste of the nation’s much-needed financial resources, it will only be cosmetic in nature, and it will only be a danger to our nation’s reputation for prudent, savvy and enlightened economic policies, that have been painfully, arduously earned over 52 years of nationhood. – September 17, 2015.

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* Wan Fadzrul Wan Bahrum is an associate of the Institution for Democracy and Economic Affairs (Ideas).

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