Malaysian Prime Minister Razak is trying to move beyond recent scandals, but that may be easier said than done. A fresh round of criticism is arising from ethnic Malays who are concerned about the sustainability of their annual dividend payments from Lembaga Tabung Haji, the so-called pilgrimage fund. The government cannot just shrug. These account holders represent the political backbone of the ruling party.
The pilgrimage fund is an unusual entity by international standards. It was set-up some 50 years ago to help Malaysians finance their once-in-a-lifetime trip to Mecca. It is not a sovereign wealth fund in a classic sense, but it often acts like one in its capacity as a government-owned investment entity. Funds ostensibly come from depositors. Somewhat casually, we like to call it a sovereign wealth fund with ATMs. Lembaga Tabung Haji has about 9 million account holders. Compare the annual visa allocation by Saudi Arabia for pilgrims travelling from Malaysia at about 20,000. Liability matching may not be a top priority.
Account holders are currently focused on the notion that the prime minister may have advocated on behalf of now-failed investments. There have been protests outside the Kuala Lumpur headquarters building. Lembaga Tabung Haji, after all, is a special-purpose agency under the control of his office. These ethical concerns will play out over time. Our focus is the economic setting and how that impacts savings mobilization.
There is a basic rule of financial markets at work in Malaysia. Robust investment returns cannot be sustained in the absence of outsized economic growth. And with the country sorting through a pervasive middle-income trap, it is hard to see growth surprises on the upside over the years ahead. Oil and China no longer provide policy alternatives.
The drama at Lembaga Tabung Haji is worth watching. For the cross-border investor, the implications for the prime minister may prove to be a sideshow. There is, however, an important case study here in how a developing economy redefines its economic wherewithal, while mitigating social unrest. The volatile nature of Malaysian asset markets over the past two years suggests that the road ahead is long and arduous. The good news in this mix is that solid deal flow is likely to be overlooked by many globetrotting bankers. ■
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