Top banker Nazir Razak says there’s no winner with this tax on independent power producers as credit spread has widened, bond volume has dropped and investors are nervous
THE windfall tax on independent power producers (IPPs) has posed a serious threat to the country’s bond market and will lead to more expensive infrastructure projects in the future, warned a top banker.
CIMB Group chief executive Datuk Seri Nazir Razak yesterday strongly urged the government to review this tax quickly because it is badly affecting both the share and bond markets.
“Some think IPPs earn a lot of money in the past, so it’s okay to tax them a bit more. In reality, the impact of the windfall tax is way beyond that,” he said. CIMB has submitted its view to the government, he said.
About a fifth of the bonds in Malaysia is issued by the IPPs, whose debts were tied to their cashflow. The recently gazetted windfall tax will erode the IPPs’ returns and affect their ability to repay their debts.
The development may also signal increased regulatory risk for all infrastructure projects going forward, including those of toll roads and others. This means future projects will have to raise debt financing at much higher costs.
“For future issuance, this is a huge setback,” Nazir said in Kuala Lumpur. Shareholders of Bumiputra-Commerce Holdings Bhd, the owner of CIMB, yesterday met to approve the plan to merge its Indonesia lender PT Bank Niaga with PT Bank Lippo.
“There’s no winner with this IPP tax. Credit spread has widened, bond volume has dropped and investors are nervous. As a result, borrowing costs in Malaysia will go up,” Nazir said.
Malaysia’s bond market was the most successful local currencies debt market in the emerging world, but the IPP windfall tax has dented it, Nazir said.
“It is like shooting a golden goose. I hope the government will respond quickly to this,” he added.
The government stands to lose also. He said Malaysia probably has about RM100 billion worth of infrastructure to be built in future, but because the risk premium has risen, the government will have to fork out more for upcoming projects. In comparison, the government is estimated to collect RM500 million a year from the windfall tax.
“The impact of incremental borrowing costs to the government far exceeded any proceeds that they hope to raise from the IPPs windfall tax,” he said.