In a 2013 Working Paper, the Asian Development Bank (ADB) examined slumping foreign investment in Malaysia and concluded a potential barrier was the presence of government-linked corporations crowding out private business. These are companies where the government is the controlling shareholder, and they have historically occupied a very substantial role in the Malaysian economy.
In some cases, the government owns companies outright, such as oil and gas giant Petronas in which the state is the only shareholder. In others, state-owned investment funds are the controlling shareholders, sometimes as part of a mix of state and non-state ownership. In 2004, Malaysia began a long-term program to try and consolidate the state-owned sector and improve the efficiency and commercial viability of the major government-linked corporations.
Back in 2013, the ADB was hopeful that Malaysia’s state-owned sector had turned a corner writing that “the government appears to recognize that government-linked corporations could be crowding out private sector investment and standing in the way of realizing private investment targets. The Economic Transformation Program has called for a reduced role of government in business, and a program of divestment is already in place.”
The program, which ended in 2015, did result in some sizable divestments. IHH Healthcare, a state-owned company and one of the region’s largest hospital operators, was publicly listed in 2012 and raised over $2 billion. The controlling shareholder of IHH is no longer the Malaysian state, but Japanese conglomerate Mitsui. This shows the government is willing to pare down its holdings in certain sectors.
However, whatever momentum there was for getting the state out of the economy a decade ago has seemingly stalled. Although some sectors saw divestment, key firms like Petronas were never seriously considered for privatization. And now the government is looking to leverage state-owned investment funds and their vast financial resources to drive economic growth in strategic sectors.
Last year the Ministry of Finance announced the six largest government investment companies had pledged to invest RM 120 billion (around $26 billion) in the domestic economy over a five-year period, with an eye toward high-value manufacturing. Malaysia has plans to become a key link in semiconductor and clean energy supply chains, and is trying to carve out a foothold for itself in specific niches such as the assembly and design of computer chips. Government investment funds are being directed to support these efforts with stepped-up financial commitments, in what appears to be a pivot toward a more assertive industrial policy.
Let’s take a quick look at the key players. The Employee Provident Fund (EPF) is by far the largest public investment fund in Malaysia. It’s a mandatory retirement fund that receives contributions from all employees and employers in Malaysia. As of 2023, the EPF had over $253 billion in assets. Permodalan Nasional Berhad (PNB) is the second largest fund, with around $75 billion in assets under management in 2023.
Other funds include the government employee pension fund (KWAP) and Khazanah Nasional, which is the majority owner of strategic national assets like electric utility Tenaga Nasional Berhad. There is also a pension fund for the military (LTAT) and a fund specifically earmarked for Islamic investing activities called Lembaga Tabung Haji.
Cumulatively, these funds held or managed assets of around $427 billion in 2023. As a point of reference, Malaysia’s GDP in 2023 was $400 billion meaning the assets managed by these six government investment companies were worth more than the cumulative economic output of the entire country that year. And now they are being directed to tap some of those resources to invest in priority areas like semiconductors and clean energy.
Although we might call this the return of Malaysia’s government investment funds, the truth is they never really went anywhere. Despite the reform efforts kicked off in 2004, the Malaysian state has continued to hold substantial ownership in many strategic sectors, including energy, pharmaceuticals, real estate, transportation, agriculture and manufacturing. For instance, even though IHH went public in 2012 and Mitsui became the controlling shareholder, Khazanah Nasional is still the second largest shareholder.
At the end of 2024, I wrote that the rise of economic nationalism was the biggest economic story of last year, and I believe it will continue to shape the region’s trajectory for the foreseeable future. The mobilization of Malaysian state capital in the pursuit of industrial policy is a good example of what I am talking about. It’s not that the Malaysian state ever really exited the domestic economy, but at least in 2012, they were making concessions toward liberal market reforms, giving the impression that they understood the state needed to get out of the way of private market forces.
Nowadays, public officials appear more comfortable openly telegraphing plans to mobilize state-owned and managed financial resources to accelerate the development of strategic sectors, like semiconductors. This is indicative of the wider political and economic shift that is underway in the region, and I think it is very likely we will see similar rhetoric and policies emerge in and outside of Southeast Asia in the months and years ahead.