In his speech unveiling a RM7 billion economic stimulus in the Parliament, the Finance Minister Najib Razak touched on the earlier injection of RM5 billion into ValueCap (translated):
In stimulating the capital market, I announced an additional RM5 billion fund for ValueCap for the purpose of purchasing equities of companies which are priced lowly due to uncertainty in the global equity market but yet exhibit strong fundamentals. The fund will be secured through a loan from the government-guaranteed Employees’ Provident Funds (EPF). Therefore, the loan not only guarantees higher returns vis-a-vis deposit rate offered by banks but it also poses the least risk to the EPF.[1]
Firstly, in the current climate it is hard to believe that the secondary equity market is able to provide better returns in the short run compared to even the dull fixed deposit account. In the long run, maybe but with the stated goal of stimulating the local capital market, surely the investment horizon is short.
Secondly, the equity market is not the least risky options available. In fact, it is probably one of the riskiest there are out there due to its inherent uncertainty. It is hard to imagine why the stock market with erratic prices would be less risky than a fixed deposit which offers stable income stream. Furthermore, if the EPF is interested in investing the least risky field with local context, it should consider investing in risk-free government bonds.
The second point on riskiness as said by the Finance Minister could either be an outright lie or a very, very ill-advised statement.
In any case, the intention behind the injection is suspect, especially, as reported by The Malaysian Insider, ValueCap is due to repay its RM5 billion loan to its three shareholders, Khazanah, the EPF and PNB.[2] Information at hand at the moment suggests that the RM5 billion would be used to pay back those lenders; it appears that the EPF would be the one financing the repayment.
[1] — Untuk merangsang aktiviti pasaran modal, saya telah mengumumkan penambahan dana Valuecap sebanyak 5 bilion ringgit untuk pembelian ekuiti syarikat-syarikat yang mempunyai asas yang kukuh tetapi nilai pasaran mereka kini terjejas berikutan kesan pergolakan pasaran ekuiti global. Dana tambahan ini akan diperolehi melalui pinjaman daripada Kumpulan Wang Simpanan Pekerja (KWSP) yang dijamin oleh Kerajaan. Oleh itu, pinjaman ini bukan sahaja menjamin pulangan yang lebih tinggi daripada kadar deposit institusi perbankan, tetapi juga merupakan pelaburan yang mempunyai risiko yang paling minimum kepada KWSP. [Economic package unveiled (Updated with full text). The Star. November 4 2008]
[2] — KUALA LUMPUR, Nov 3 — State investment company Valuecap Sdn Bhd owes its three shareholders RM5.1 billion, which is due to be repaid in February 2009.
This debt, in the form of interest-bearing unsecured bonds, raises questions over plans for the Employees Provident Fund to lend RM5 billion to Valuecap to invest in the stock market.
In March 2003, Valuecap borrowed RM5.1 billion from shareholders Khazanah, Kumpulan Wang Amanah Pencen and Permodalan Nasional Bhd to invest in the stock market. At the time, world stock markets were bracing for a looming war in Iraq which followed on the September 2001 attacks on the US.
Valuecap’s bonds were due to be repaid in February 2006, but the company was given another three years to this coming February. At the end of 2006, the three shareholders each held RM1.7 billion in these bonds, according to documents obtained by The Malaysian Insider. [Question marks over Valuecap debt . The Malaysian Insider. November 3 2008]