Freeze on foreign worker intake a structural risk, says RAM Ratings

Freeze on foreign worker intake a structural risk, says RAM Ratings

PETALING JAYA, 28 March: The ongoing freeze on hiring new foreign workers, if prolonged, may adversely affect the construction and plantation industries, said RAM Ratings.

The rating agency said in a statement last week that the heavy reliance of both sectors on foreign labour remains a structural risk and makes them susceptible to government policies on foreign workers.

“Although the re-hiring of existing foreign workers may tide the industries over in the shorter term, new supply will be required in the longer run to replace those who have returned home. An extended freeze will, hence, affect both sectors in terms of project delivery and estate productivity,” it said.

However, it does not expect the recent hike in the levy on foreign workers to have any major impact on rated construction and plantation companies within its portfolio.

RAM said the RM600 (or 48%) hike in the levy on each foreign worker employed within the construction sector will push up the industry’s labour cost.

“Applicable in Peninsular Malaysia, this quantum is, nevertheless, substantially lower than that initially proposed by the government in January 2016, which was to have taken effect on Feb 1, but had subsequently been put on hold,” it said.

The Master Builders Association Malaysia (MBAM) estimated in early February a 10% increase in labour cost and 2% rise in overall costs in the sector. Based on MBAM’s previous estimates and in view of the levy hike being half that initially proposed, the construction sector may see labour and overall costs climb about 5% and 1% respectively.

RAM expects the impact of the cost increase on rated construction players to be manageable, as the bulk of work is subcontracted out and the number of foreign workers directly employed is minimal.

The lack of levy hike pass-through clauses in sub-contracts means that margins of ongoing jobs should be largely intact, unless contract terms between the main and sub-contractors are renegotiated.

For future contracts, the additional costs will be factored into the respective bids.

In the plantation sector, the RM50 or 8% increase in foreign worker levy is minimal relative to the earnings generation capacity of planters rated by RAM.

“Despite the large pool of foreigners employed, the hike is estimated to translate into less than 0.2% of the projected pre-tax profit of Batu Kawan Bhd, Kuala Lumpur Kepong Bhd and Genting Plantations Bhd in 2016,” it said.

To recap, the government has restructured the levy on foreign workers. From March 18, 2016, the levy on employers within the Category One sectors of manufacturing and construction is RM1,850 per foreign worker (up from RM1,250), and in Category Two industries of plantations and agriculture RM640 (up from RM590 and RM410, respectively).

The government has also reiterated that the freeze on the intake of new foreign workers will remain.

The initial proposed levies of RM2,500 and RM1,500 on foreign workers within the Category One and Two sectors respectively, from Feb 1, 2016, was held back following outcry from industry players.

— THE SUN

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