KUALA LUMPUR (Aug 27): Malaysia’s GEAR-uP initiative will bolster corporate capital spending and support infrastructure development without adding financial strain to the government, said Moody’s Ratings.

The RM120 billion programme by government-linked investment companies (GLICs), equivalent to about 6.5% of Malaysia's gross domestic product (GDP) in 2023, should augment public spending at a time when the government has committed to fiscal consolidation, the rating agency said in a note.

“How much each GLIC will invest and the potential returns on these investments remain unclear at this point,” Moody’s said.

“Nonetheless, the GLICs play an important role in driving socioeconomic development in the country and that includes supporting government initiatives such as GEAR-uP.”

The six GLICs involved in the programme known as GEAR-uP are Khazanah Nasional Bhd, Employees Provident Fund (EPF), Retirement Fund (Incorporated), Permodalan Nasional Bhd, Lembaga Tabung Haji and the Armed Forces Fund Board.

Together, they are pledging to spend RM120 billion over the next five years under the initiative led by the Ministry of Finance to invest in “high growth, high value” industries such as energy transition and advanced manufacturing.

Moody’s also noted that the pledge represents fresh capital from the GLICs that was not previously earmarked for government budgetary spending.

“While a portion of the funds directed to the initiative might have been otherwise allocated by these GLICs to invest in government bonds, the relative size of the GEAR-uP investment spread over five years suggests that the impact on broader financing conditions for the government will be limited,” it said.

Moody’s also highlighted that direct investments from the GLICs will be credit positive for corporate and infrastructure companies as these funds will support capital spending efforts and reduce reliance on debt for growth.

“Importantly, this influx of funds from the GLICs will supplement work done by Malaysia’s government-linked companies in advancing the nation's policy objectives,” it said.

The agency also noted that the total pledge represents only about 3% of the total outstanding bank loans and domestic bonds combined, suggesting that banks possess sufficient liquidity to back the initiative if required.

“We expect the GLICs' pledged investments to have a limited impact on Malaysia's banking system even if fully funded with debt as the borrowings are likely to be spread over five years with low related credit risk,” it said.

So far, Khazanah is the only GLIC that has a credit rating from Moody’s Ratings at A3. 

The credit impact on Khazanah, however, will depend on the amount and funding method of the pledged investment, Moody’s said, noting that an increase in domestic investments would also raise geographic concentration risk for the sovereign wealth fund’s investment portfolio.

The share of domestic investments has fallen to 59% of Khazanah's investment portfolio in 2023 from 74% in 2018.

As for EPF, Moody’s thinks that the pension fund has sufficient capacity to absorb a portion of healthcare capital expenditures. The EPF’s assets under management totalled RM1.21 trillion as of June 2024, which is equivalent to around 66% of Malaysia's GDP in 2023.

“This strategic redirection of funds not only alleviates immediate fiscal pressures but also potentially enhances the overall health infrastructure, benefiting the workforce,” Moody’s added. 

https://www.theedgemarkets.com/node/724400