Purinex, Inc

THE EPF AND GOVERNANCE ISSUES

Petronas (the national oil corporation) with an unprecedented widening in their credit spreads over USTs. There was little or no change in the perception of the domestic credit standing of these borrowers. Therefore, there was a big divergence in the credit spreads of Petronas. This should have led to an arbitrage activity – i.e. domestic investors who are happy with the credit of Petronas would have been better off buying its USD bonds, and then swapping them into a ringgit exposure, thereby enabling the domestic investor to earn onshore and in ringgit the spread that is available on Petronas papers in the offshore market. For this arbitrage activity to take place, what is necessary is a CCS market. And there should be no restrictions on the prudential activities of domestic investors such as the EPF to enter into a swap trade. By doing so the EPF is not assuming an foreign exchange exposure. Neither does it have to take a credit risk that it is not happy with. However, in practice, there were restrictions of one form or another, which prevented or reduced the extent of arbitrage activity that can take place. Therefore, the offshore credit spreads remained at a higher level than it need have been if the domestic investors had the opportunity to arbitrage away the wide differential in the credit spreads between the onshore and offshore markets. In this section we examine the issues related to the governance of a provident fund such the EPF, as well as the role that the Fund, as an institutional investor, can play in corporate governance. The goal of a provident fund must be clearly articulated to avoid a conflict between the interests of the contributors and that of the government as the regulator. It is important to note at the outset that a government’s development goals can often constrain the investment choices of a provident fund. These constraints must be minimized by reference to the efficiency and equity criteria. To align the...