PETALING JAYA: Everything comes at a cost and that is set to be the case with the government’s decision to allow flexible withdrawals from the Employees Provident Fund (EPF) and to raise civil servants’ pay since the last raise over more than a decade ago.
Critics have panned the government for introducing the new EPF Account 3, which went live on Saturday, pointing out that it will likely drain old-age savings at a time when about one-third EPF members at age 54 have less than RM10,000 in savings with the retirment fund.
Economist Geoffrey Williams estimated that up to RM57bil could be at risk of being taken out of the EPF this year via Account 3, although based on past withdrawals, the amount is likely to be about RM20bil to RM30bil.
As for the civil service pay hike, a brokerage firm recently called it a “deficit widener”. Hong Leong Investment Bank (HLIB) Research said the pay hike translates to 0.5% of the gross domestic product (GDP).
“This would add on to the fiscal deficit faced by Malaysia, where expenditures have far surpassed revenue for the last 26 consecutive years,” said the reserach house.
It is noteworthy that the Finance Ministry’s fiscal deficit target for 2024 is 4.3% of GDP, and 3% to 3.5% for 2025.
Williams told StarBiz that the federal government’s operational expenditure will rise as a result of the pay hike that is expected to come into effect this December.
“It will squeeze the budget unless revenue rises, which would probably be from higher taxes,” he said.
Williams said the total civil service emoluments in Budget 2024 were RM95.6bil. A hike of 13% would mean an extra of RM12.4bil, he estimated.Earlier this month, on Labour Day, Prime Minister Datuk Seri Anwar Ibrahim announced that civil servants’ salaries will be hiked by more than 13%.
He later explained that the pay rise for those in the lower category could even be higher between 20% and 40%.
The hike will have to be approved in Parliament via Budget 2025.
Just a week before the announcement, the government unveiled the third EPF account that allows members to withdraw at any time, subject to a minimum sum of RM50.
Starting last Saturday, new EPF contributions will be credited in the following manner: 75% to Akaun Persaraan, 15% to Akaun Sejahtera and 10% to Akaun Fleksibel.
Despite the mixed reactions garnered by both announcements, market observers and analysts have said that the initiatives are major consumption boosters.
HLIB Research, for example, said the new EPF account and the proposed civil servants’ pay hike could potentially raise private consumption growth by 1.2 percentage points (ppt) and 0.5 percentage points, respectively.
“The effect on private consumption and fiscal deficit may potentially be neutralised if fuel subsidies are rationalised – though this remains fluid,” HLIB Research said in a note.
Meanwhile, Williams said the new EPF account could provide a multiplier effect of RM45bil to the economy or 2.5% of GDP, based on normal spending patterns.
Interestingly, he said the high-income groups are most likely to benefit from the withdrawals.
“Since it is also a windfall for them, they might spend almost all of it or around 80%, so the impact would be worth perhaps RM150bil or 8% of GDP but this is not so likely to happen.”
On the announced civil servant pay hike, he said it would create about RM19bil in economic impact or around 1% of GDP.
“This is not a windfall, it is a pay increase and will be eaten up by higher living costs,” according to Williams.
Williams was also asked whether the civil service pay hike is a needed precursor to remove civil service pension eventually.
In response to this, he said new hires into the civil service will be on EPF and they will have to pay the 11% employee contribution from their salaries.
“If starting salaries rise by 13%, they are only 2% better off.
“So it is a precursor to that possibility but it also raises the salaries of existing civil servants and perhaps there is an idea that with higher salaries they can pay the 11% extra for EPF without being worse off and so they can all move to EPF. That is a very risky strategy,” he said.
Meanwhile, HLIB Research allayed concerns that the EPF withdrawals post-Account 3 will cause liquidity tightening in the local bourse.
This is considering that net EPF contributions will be quite similar to the pre-pandemic average even after accounting for the estimated “opt-in Account 3 withdrawals”.
“We reckon that the expected RM25bil (mid-point of estimated range) Akaun Fleksibel withdrawals shouldn’t have a significant tightening of liquidity to the local bourse.
“This amount constitutes 2.2% of EPF’s RM1.14 trillion asset under management as at end-2023 – of which 42% is allocated to equities, 46% fixed income, 5% money market and 7% others.”
HLIB Research highlighted that several business segments will be potential beneficiaries of the two income initiatives, namely, automotive, consumer, financing and property.
“The one-off opt-in transfer to Account 3 could aid in the down payment for automobile purchase and the higher civil servants’ wages would raise their car hire purchase eligibility,” it said.
As for the consumer segment, HLIB Research said it is possible that this round of expected EPF withdrawals could see a higher proportion used for discretionary spending as opposed to necessities.
In addition, given the highly liquid nature of Akaun Fleksibel, there is a possibility that consumer spending patterns may turn structurally higher.
On the financing segment, the research house noted that OSK Holdings Bhd
’s capital financing segment stands to benefit from the civil servants pay rise as this increases their loan eligibility, allowing higher borrowings.
OSK’s current penetration in civil servant financing is less than 0.7% of an estimated over 1.7 million civil servants – a large untapped market with few major competitors.
“The rise in civil servants’ salaries should augur well for IOI Properties Group Bhd’s IOI Resort City township in Putrajaya which has a remaining gross development value of RM14.9bil.
“Being the administrative capital of Malaysia, Putrajaya has a population of 120,000 (2021 estimate), mainly comprising civil servants,” said HLIB Research.
