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Potential Impact on the U.S. Dollar (USD): 

The demand for strategically located data centres with ever greater computing power has grown exponentially with the proliferation of artificial intelligence and the digital economy. Malaysia is a major beneficiary of this emerging trend in the Asean region. Substantial investments have been made, particularly in Johor and Cyberjaya, Selangor, over the last 18 months by reputable global data centre operators, and others are expected to jump onto the band­wagon too. This has been a boon for the local construction industry, with several big names having been engaged to deliver this specialised infrastructure.

The government, being cognisant of the potential economic multiplier benefits, is keen to position Malaysia as the regional data centre hub. However, it is also encouraging that it continues to reinforce Malaysia’s commitment to net zero emissions as early as 2050. Multi-agency collaboration at the federal and state levels is ongoing to draw guidelines on data centre power and water usage effectiveness given the significant energy and water requirements needed to power data centres.

Tax incentives were announced under Budget 2022, most notably the Digital Ecosystem Acceleration (DESAC) scheme, to catalyse digital investments that would strengthen the country’s digital ecosystem and attract high-quality digital projects that can generate significant spillover benefits domestically.

To recap, the DESAC focuses on two categories. The first category comprises Digital Technology Providers that provide digital services based on Industrial Revolution 4.0 (IR4.0) and digitalisation technology related to manufacturing and manufacturing-related services. Data centre players would fall under the second category: Digital Infrastructure Providers.

DESAC-qualified data centre operators are eligible for an investment tax allowance of 100% on capital expenditure incurred for qualifying data centre activities that can be offset against up to 100% of statutory income for a period of up to 10 years. In layman’s terms, this is essentially a 200% tax depreciation of eligible capital costs, which effectively reduces the tax payable once the data centre becomes profitable.

However, the guidelines setting out the DESAC framework have not been released yet and it would be good if these could be expedited with Budget 2025 approaching. It is hoped that these guidelines will contain business-friendly elements such as:

Flexibility for various investment structures: It is not uncommon for a data centre operator with several campuses in Malaysia to own them via separate legal entities for myriad commercial reasons such as ring-fencing of risks and separate financing requirements. A lingering question is whether there will be a cap on the number of companies under the same corporate umbrella that can be eligible for the DESAC tax incentive as there have been similar practices for other industries. This should not be the case here, ideally, because tax incentives should ultimately be evaluated by the merits of the proposed investment. A sound business case should not be precluded from tax incentives simply because other related companies have already been incentivised.

Environmental, social and governance (ESG) considerations: It would also be relevant to include ESG-linked conditions in the DESAC guidelines as the government strives towards balancing the economic growth that could be contributed by these data centres against the broader impact on surrounding communities and the environment. The incorporation of industry best practices around power and water usage, for instance, would certainly be welcomed by the public.

Outcome-based approach: The government has progressed towards a policy whereby an incentive awarded can only be enjoyed once the outcomes that were proposed have been achieved by the investor. While such an approach is laudable, as it aligns the interests of all stakeholders, it is pertinent that the outcomes or conditions, despite how stringent they may eventually be, are clear and unambiguous. A lack of certainty generally does not augur well with businesses, especially in the realm of taxes. Due consultation with the relevant stakeholders prior to the finalisation of the guidelines would certainly be appreciated by the industry.

Practicality: Operational issues such as the process and time frame for certifying the achievement of outcomes must be clearly spelt out. An incidental question is also whether past tax returns have to be amended to effectively claim the tax incentive once outcomes have been achieved. The importance of these practical considerations cannot be underestimated as businesses should not have additional administrative tasks unnecessarily imposed upon them simply to enjoy the tax incentive.

As data centres are a rapidly evolving space with new technologies emerging, particularly around energy conservation, it is therefore understandable if the government is potentially still working behind the scenes to harmonise the DESAC guidelines with the strategic direction that Malaysia intends to take. This must be balanced with investors’ need for clarity since the devil is in the details when it comes to taxes, but more critically, a sign of our country’s commitment in championing this burgeoning industry.

Source: Theedgemarkets

Source:Yoshiaki Nohara

Japan's largest labour union group said on Friday it will seek wage hikes of at least 5% in 2025, similar to this year's hefty increase, but economists doubt that another such bump is realistic.

The announcement by Rengo means debate about pay rises for next year will begin in earnest. Prime Minister Shigeru Ishiba, who only took office this month, has made wage hikes a top priority, seeking to help support a still fragile economic recovery.

The Bank of Japan will also scrutinise annual wage negotiations. It's keen to see solid wage growth underpin the economy as it moves to normalise its ultra-easy monetary policy.

Japanese companies agreed to an average 5.1% wage hike earlier this year, the biggest increase in three decades, following a 3.5% rise last year, according to Rengo. The union group has about seven million members.

Many economists are sceptical.

"We expect the level will be around 4% to 4.5%, because inflation has stabilised and doesn't need to be reflected so much in wages," said Keiji Kanda, a senior economist at the Daiwa Institute of Research.

Inflation-adjusted wages in Japan turned up in June for the first time in more than two years, but slipped again in August.

Rengo said in a statement it will focus on achieving wage hikes at smaller firms, setting a target of at least 6% to narrow the income gap with workers at large firms.

Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, said, however, that some smaller firms have little financial leeway after lifting wages to cope with labour shortages.

The BOJ also warned in a recent report that some small- and medium-sized firms were struggling to earn enough profits to hike wages, a development that "required vigilance".

Maeda expects the wage growth next year to be at least 4.5% but short of 5%. That would be substantial enough to keep alive expectations of further rate hikes, he said.

Rengo will finalise its position on next year's wage negotiations in December. Around March, the management of major firms meet with unions for wage talks.

Japanese wages were stagnant for decades until 2022, when rising raw material costs pushed up inflation and piled pressure on firms to compensate employees with higher pay.

Source: The edge markets

After a decade at the heart of power, Luhut Panjaitan, the 77-year-old fixer who championed so many of outgoing President Joko Widodo’s key industrial policies, says he is ready to step aside. His departure from the political frontline, after serious illness last year, is not unexpected. But with no clear heir in view, it leaves a tricky gap for the incoming administration, as it tackles the next stages of key existing policies, including efforts to limit raw material exports in favour of higher value goods or the energy transition — areas which cut perilously across fiefdoms.

A retired four-star general turned diplomat and businessman, Panjaitan, widely known as Luhut, has a low profile outside his home country. Inside, however, he’s been for years the go-to man who can woo investors and shuttle between ministries to cut through the bureaucracy that so often tangles Indonesia’s unwieldy cabinets. He’s pushed through everything from coronavirus controls to a landmark climate finance deal in 2022.

His most significant policy accomplishment has been what is known in Jakarta as “downstreaming”, or the idea of leveraging Indonesia’s mineral wealth to secure investment in industrial development. The concept was not new when Jokowi, as the president is known, came in — it simply had never been put into action. And not without good reason, given the limited evidence of success elsewhere, with other mineral-rich nations also struggling to push investors towards processing and even manufacturing.

Panjaitan’s move to ban raw nickel ore exports in 2020 did infuriate trading partners. But it also proved a radical step that ultimately brought billions of dollars of mostly Chinese funds into Indonesian processing, and helped turn the country into a dominant force in the market. Restrictions on unrefined copper and bauxite have followed.

The economic impact of the nickel move has been rapid and visible. Indonesia has built a multi-billion industry, created jobs and boosted exports — even if that has also come at a steep environmental and human cost, especially for islands like Sulawesi.

“It’s really difficult to find a close personality who can replace Luhut,” said Siwage Negara, a research fellow at the ISEAS-Yusof Ishak Institute, pointing to Panjaitan, whose most recent title is Coordinating Minister for Maritime Affairs and Investment, as a critical actor.

“The new government needs to find someone who can play Luhut’s role, if they are serious about downstreaming.”

The moment is a delicate one for the downstreaming campaign. Indonesia’s new government has said it will continue to pull the economy away from its dependence on raw materials and encourage the development of a manufacturing sector. Incoming President Prabowo Subianto wants to include other commodities, such as sugar and palm oil, according to people familiar with the matter. 

But he also wants to ensure existing bans are contributing financially, and his team has already commissioned McKinsey & Co to provide a downstreaming review. (McKinsey did not reply to a request for comment.)

The ban on exports of bauxite, the ore used to make aluminum, may be first to be challenged. Shipments were stopped last year, before enough refineries had been built, hitting local miners, curbing earnings from exports and prompting lawmaker protests. Jokowi and Panjaitan held firm. 

Without the dominance Indonesia enjoys in nickel, however, it is not clear that other export restrictions will ever generate a similar boost. In the first nine months of this year, the metal accounted for more than 40% of downstreaming investment, according to official figures. While nickel processing has boomed, a full-scale electric-vehicle and battery sector remains a distant prospect.

“Prabowo is inheriting a very constrained budget,” said Eve Warburton at the Australian National University’s Indonesia Institute. “He may pivot if the policy is more difficult to implement in other sectors, and the government needs fast revenue.”

Panjaitan declined to be interviewed for this story.

Military clout

As a former army man, including with the elite special forces, Panjaitan’s pedigree resonated with the one-time officers who still hold sway in Indonesian politics and business. Prabowo himself was once under his command.

He is also wealthy, thanks to a coal and energy business set up after he left the forces and listed on the Jakarta Stock Exchange as PT TBS Energi Utama. Panjaitan has said he now owns approximately 9% of the firm, having divested most of his shares before coming into government. Still, a 2023 disclosure to Indonesia’s Corruption Eradication Commission put his personal net worth at 1.04 trillion rupiah (US$65 million, or RM279.91 million).

Key to his ascent has been his closeness to Jokowi, which dates back to a furniture-making venture they formed in 2009, while the outgoing president was mayor of a city in central Java. The two remained close, with Panjaitan stepping in to become Jokowi’s chief of staff after his election in 2014.

“Luhut has a lot of history working with Jokowi; he kind of represents the president,” said Putra Adhiguna, managing director at the Energy Shift Institute, adding that Jokowi “delegated much of his decision-making to him”.

That relationship was leveraged to provide foreign investors with the confidence they needed to invest in nickel downstreaming and other ventures, according to those who met him. They knew Panjaitan had the president’s ear, and so spoke with authority. In a country where abrupt policy u-turns are not uncommon, his reassurance and straight-talking approach went far.

The exit also raises uncomfortable questions for another high-profile success, the Just Energy Transition Partnership, which is still the most significant climate finance deal signed to date and probably also the most ambitious, seeking to move Indonesia away from coal dependence. The agreement’s existence was itself a victory, but as Panjaitan departs, it remains largely on paper.

The new administration — assuming that climate deal remains a priority — will have to navigate institutional hold-ups, cut red tape and protectionist measures, and campaign for continued disclosure. It will also have to continue to demand from wealthy partner nations more grants, concessional loans and straight-up investments into green energy generation and infrastructure, to clean up a system still heavily dependent on the dirtiest fossil fuel.

That may not be the direction of travel.

Of course, much depends on whether any replacement can be found for Panjaitan. Speculation has swirled around Prabowo’s brother and close adviser, Hashim Djojohadikusumo, who could step into a similar, perhaps backstage, position.

But even then, the role is a daunting one. The downstreaming campaign in particular only becomes tougher, as Indonesia tries to leverage more commodities where it is nowhere near as dominant as it is in nickel — while still hoping to go beyond processing to the next stage of development, into manufacturing and on to become a major player in electric vehicles (EVs).

“We have only reached the first leg of downstreaming,” said Adhiguna. “The question is whether Indonesia can reach the second.”

Source: The edge markets