Ringgit loans for data centres – boon or bane?

A data centre tsunami is apparently hitting the country, but are these centres, many being developed by Silicon Valley juggernauts such as Amazon.com, Google and Microsoft, bringing in the US dollars?

Are they being funded through ringgit borrowings locally?

And if foreign currencies are not entering the country, will the large borrowings of ringgit constitute a drain on Malaysia’s reserves? The results release for the first half of 2024 of local banks last week revealed some interesting findings.

Malayan Banking Bhd (Maybank) president and group chief executive (group CEO) Datuk Khairussaleh Ramli and Novan Amirudin, the new CEO at CIMB Group Holdings Bhd, have both announced that they have secured deals to finance the development of data centres in the country.

According to Khairussaleh, the nation’s largest lender has confirmed deals of up to RM2bil, with another RM1bil in the pipeline, while Novan reported that CIMB Group has extended loan deals of approximately RM500mil so far for the building of data centres, with another RM5bil being lined up.

It can be surmised that Maybank and CIMB Group are not the only banks that are supporting the budding data centre industry through loans.

Notably, Malaysian construction firms that are collaborating with these Silicon Valley names are not saying much in terms of where their partners are obtaining their funding from, which is understandable.

Economists, however, have plenty to talk about in relation to the money flow involved in the construction of data centres, as they take note of the overall implications as well as benefits to the country’s growth and more importantly, its effects on Malaysia’s fiscal position.

Professor of economics at Sunway University and Finance Ministry adviser Dr Yeah Kim Leng believes that given Malaysia’s lower interest rates compared with the United States, it is not surprising that the US-based technology giants have opted for local borrowings to set up data centres here.

Seeing it as just simple business sense, he tells StarBiz 7: “Besides benefitting from cheaper debt compared to equity costs, the ringgit borrowings can be matched to payments for construction and other services procured in Malaysia, thereby avoiding currency and maturity mismatches.”

Yeah agrees that the benefits to Malaysia would be greater if the foreign direct investment (FDI) is funded entirely by foreign capital inflow – which would then boost the country’s foreign reserves and ringgit demand. However, he says local borrowings will nevertheless raise the total bank credit flow in the country.

From the perspective of the banks, he points out that besides adequate lending capacity at the level of individual lenders, the superior financial strength and credit quality of the foreign borrowers will also contribute to the loans asset quality of the banking groups.

“The economic benefits in terms of employment generation, business opportunities for local suppliers and service providers as well as other spillovers from the development of data centres are the longer term advantages,” Yeah predicts.

Chief executive at Centre for Market Education Carmelo Ferlito agrees, saying that borrowing in any foreign currencies to be brought into Malaysia will not make sense. He feels the data centre developers are borrowing ringgit to spend it in the country.

“The loaned ringgit will be reinjected into the economy. Adding foreign currency in the middle of the transaction will only add on costs to the operations,” says Ferlito.

Economist Prof Geoffrey Williams, meanwhile, says that to maximise the economic impact of data centres, investors should channel capital into the country rather than draw on local funds.

Offering a differing view to Yeah and Ferlito, he says that in the first place, if loans are advanced to foreign investors, it could have the effect of reducing funds available for domestic direct investment or making those funds more expensive in a form of crowding out.

“Secondly, the bringing in of foreign currency investments will support demand for the ringgit and reduce the need for intervention as we have seen recently in the repatriation of Malaysian investment returns,” he notes.

Additionally, Williams cautions that if foreign investors do not bring in funds but instead cause an outflow by repatriating their profits to their headquarters on foreign soil, this would mean Malaysia would not fully benefit from the FDI.

“For every US dollar of new FDI, about US$3 of profits are being taken out,” he remarks.

Meanwhile, on the question of how the government could use these foreign investments to beef up its own fiscal position, Yeah explains the reduction to the government’s fiscal deficit is indirect, occurring mainly through the higher collection of taxes stemming from increased economic output linked to the data centres. This point provides a reflection to reports earlier in the year on how Singapore-based Bridge Data Centres (BDC) is expected to invest RM15bil on its data centre presence in Malaysia, which was confirmed by Deputy Communications Minister Teo Nie Ching.

Yeah estimates that a 1% increase in economic output as measured by gross domestic product is associated with a 0.94% increase in government tax revenue.

Ferlito thinks that the most important benefit to be derived from FDIs – data centres or otherwise – is to create job opportunities and economic growth, bringing a general beneficial spillover to the economy.

“Helping government revenue is a consequence, which, while important, is a resultant effect. Looking at FDIs as mainly a source for fiscal benefits would mean embracing too narrow a perspective,” he says.

Williams, for one, is of the view that in terms of creating jobs and value for the economy, there are bigger fish to fry than data centres.

“The investments are from big names but actually the number of jobs created are relatively small compared with the two million people, mostly graduates, who are underemployed,” he comments.

Besides, he says revenues to be generated are also comparatively minor compared with other economic activities, even if BDC or other foreign corporates were to invest sums of up to the reported RM15bil.

“Our research for the Malaysian Digital Economy Corp estimates that the sharing economy, which forms part of the eCommerce and gig-economy, will be worth RM313bil and employ 4.3 million people by 2030.

“So it is significantly more important than data centres,” Williams reveals.

As such, he feels the effects of data centre investments will not be substantial, especially if the investors are given tax breaks or repatriate their profits.

“There are also concerns about electricity and water demand from data centres which will be considerable and may put pressure on supply, causing prices to rise for the general population,” he says.