Razak paints picture of Malaysia’s future

Institutional Investor, April 2011

In February, the Prime Minister of Malaysia, Dato’ Sri Najib Razak, answered questions from Institutional Investor. Highlights follow below, while in the box, the heads of the Securities Commission and the stock exchange, Bursa Malaysia, share their thoughts.

II: What do you feel is the outlook for Malaysia’s economy in the year ahead?

Prime Minister Najib Razak: Malaysia’s economic outlook in 2011 remains strong, led mainly by domestic demand and in particular private sector investments. Improving global economic performance, led by the emerging economies, coupled with the aggressive Economic Transformation Programme (ETP), are key contributory factors.

In order to sustain the growth momentum, we have embarked on a series of bold initiatives to bolster private investments. So far, the government has announced 37 entry point projects with investments worth about RM80 billion. In addition, various government transformation programs have also been put in place to enhance the public delivery system and facilitate the private sector activities. Significant progress has been made on these programs.

In addition, strong commodity prices such as palm oil, rubber and tin are expected to raise household disposable income, particularly in the rural areas, and hence sustain strong private consumption. We believe these are our main drivers of growth in 2011 and are optimistic that we can achieve the growth target of 5% – 6% in 2011.

II: Like many countries in Asia Malaysia faces the threat of inflation. How big a challenge does it present to Malaysia?

Inflation in Malaysia, as measured by CPI, increased moderately to 1.7% in 2010.  The increase partly reflects the improving economic conditions, the rationalization of fuel and other subsidies, and the surge in global food prices following poor weather and supply disruptions. With close monitoring and appropriate policy responses, inflation is expected to remain benign and stable. Furthermore, the strengthening of the ringgit has helped to mitigate the imported inflationary pressures.

Higher commodity prices will definitely contribute to improved household disposable incomes. This is particularly significant in the rural economy given that crude palm oil and  rubber prices have surged to an average of RM3,640 per tonne (2009: RM2,261 per tonne) and RM10.63 per kg (2009: RM6.40 per kg) in 2010. Hence, private consumption increased by 6.6% in 2010. Higher commodity prices are also expected to encourage investment activities, especially in the oil and gas sector.

II: In recent years you have announced a number of social and economic reform initiatives. What progress do you think has been made and where is there still work to do?

In order to achieve the target of becoming a high-income economy by 2020, Malaysia has embarked on the Government Transformation Programme (GTP), structured on the principles of “1Malaysia, People First, Performance Now.” The 1Malaysia vision encapsulates the concept of inclusiveness and fairness to all. No segment of society will be marginalized as support and opportunities will be given based on need and merit.

The GTP aims to transform the government to be more effective in its delivery of services and to be accountable to the people as well as to move the nation towards an advanced, united and just society with a high standard of living for all. In tandem with this, six National Key Result Areas were identified. These are combating crime, reducing corruption, widening access to quality and affordable education, raising the living standards of low-income households, improving rural basic infrastructure and upgrading urban public transport.

Taking into account the need to move out of the middle-income trap, the government re-examined its growth model and introduced the Economic Transformation Programme (ETP). The ETP will spur private investment, increase labor productivity and boost efficiency, lifting real growth to an average of 6% per annum over the 2011-2020 period, with per capita GNI rising to US$15,000 by 2020.

The government is also focusing on 12 national key economic areas with potential to generate high income: oil and gas, palm oil and related products; financial services; wholesale and retail trade; tourism; information and communications technology; education services; electrical and electronics; business services; private healthcare; agriculture; and Greater Kuala Lumpur. In this context, a special unit will be established to plan and coordinate their development and implementation.

In October last year, nine projects were identified to kick start the ETP.  Among them were the construction of five wafer fabrication plants totaling RM1.9 billion in Kulim by German firm LFoundry, a RM300 million investment by Schlumberger to set up financial hub in Kuala Lumpur, RM1.2 billion from St. Regis to build a six-star hotel, and a project to develop the KL International Financial District at a 34 hectare site in Kuala Lumpur by 1Malaysia Development Berhad. In November 2010, nine more projects with investments worth RM8.3 billion were announced. Nineteen entry point programs worth RM67 billion in investments were announced in January this year, including a mass rapid transit system in Kuala Lumpur which will commence in July.

Malaysia also improved its ranking in the 2010 World Competitiveness Yearbook to 10th place, moving up eight positions, due to improvements in government and business efficiency. Meanwhile, the World Bank’s Ease of Doing Business report in November put Malaysia in 21st position. These underline the fact that Malaysia’s business condition is improving and it is back on the radar of investors following the various social and economic reforms.

We are confident that we can achieve an average investment of RM115 billion per annum.

In particular, you have sought to unwind some of the NEP-era policies around affirmative action as it relates to business and the economy. What progress are you making there?

The government has undertaken major efforts in making Malaysia a more attractive investment destination.  We have reviewed and evaluated various instruments to ensure their effectiveness in sustaining economic growth and ensuring inclusive participation in the socio-economic development.

As such, the government liberalized Foreign Investment Committee (FIC) guidelines, effective June 30 2009, by easing rules and restrictions to investors doing business in Malaysia. A major feature of the FIC revamp was the repeal of the ‘one size fits all’ requirement on the 30% Bumiputera equity ownership at the firm level. Malaysian and foreign investors are no longer required to seek Bumiputera partner. The government has instead taken a new approach of ensuring Bumiputera equity ownership at the macro level, particularly in sectors with existing Bumiputera strengths and advantage.

Malaysia has undertaken an autonomous liberalization in its services sector in parallel with liberalization commitments made under the ASEAN Framework Agreement on Services and its bilateral Free Trade Agreements.  The liberalization of 27 sub-sectors, announced on 22 April 2009, signaled to the world that Malaysia was prepared to open up its services sectors, and provided a feel-good factor particularly when many economies were becoming protective.

Are foreign direct investment numbers showing enthusiasm for your changes?

In terms of FDI inflows, Malaysia recorded impressive growth of 409.7% to US$7 billion in 2010 from US$1.4 billion in 2009, with most of the investments going into the oil and gas, financial and insurance services as well as the manufacturing sector. The number of approved projects rose to 910 in 2010 from 766 projects in 2009. These approved projects are expected to provide a total of 97,319 jobs of which 74.2% will be in the high-income category.

In the manufacturing sector, approved investments amounted to RM47.2 billion in 2010, of which 537 were new investments worth RM23.9 billion. FDI-approved projects rose 31.7% to RM29.1 billion due to greater interest from foreign investors investing in new growth areas as outlined in the ETP. This demonstrates investors’ confidence in Malaysia’s economic transformation and reform program. It is expected that over the medium term, the effective rolling out of 10MP [the 10^th Malaysian plan] and the ETP will further unlock investment opportunities for both domestic and foreign investors.

You have unveiled ambitious infrastructure plans. What do you hope they will achieve?

Undoubtedly, there are many economic benefits in implementing key physical infrastructure initiatives such as the Penang Second Bridge, the double-track railway project from Johor Bahru to Padang Besar, the Kuala Lumpur International Airport 2 (KLIA 2), the Mass Rapid Transit (MRT) in Kuala Lumpur and the implementation of the high-speed broadband projects.

These key infrastructure projects will help expand Malaysia’s economic growth potential. In order to achieve high-income status by 2020, we must ensure that the economy grows by 6% per annum. Apart from expanding the capacity of the economy, the infrastructure projects will also drive domestic demand and hence help to rebalance the economy so that it is less vulnerable to external shocks. They will also allow Malaysians to acquire and upgrade their skills and expertise and raise their income levels.

Under the 10th Malaysia Plan, Public-Private Partnership initiatives worth RM62.7 billion will be implemented. They include the Integrated Transport Terminal (ITT) in Gombak Gombak, seven toll highways, five Universiti Teknologi MARA branch campuses, and the redevelopment of the Angkasapuri Complex in Kuala Lumpur into the Media City. To further enhance the effectiveness of the PPP projects, the government will set up a RM20 billion fund to facilitate private sector investments in projects with high strategic value to the nation and multiplier effects. The fund will bridge the viability gap for private investment in priority areas, such as infrastructure projects.

What can you say to investors wondering if you will call an election in 2011? And, in a new era of greater political vibrance in Malaysia, are you confident of winning a decisive mandate from Malaysia’s people?

They should not be too worried about the elections. I am sure they want to see stability in the country. This, we can assure them. The Barisan Nasional government has a proven track record in ensuring political stability, good governance and a favourable investment climate for investors.

The government will continue to strive hard to ensure not only the political and economic stability but also create the right environment that investors are looking for. We will continue to adopt a business-friendly policy to spur both domestic and foreign investments into the country. We are committed to economic reforms and financial liberalization.

We need a stronger mandate from the people to ensure these programs and initiatives are successfully implemented. It is about building a better and an exciting future for all Malaysians. Of course, there will be some time before we can see the results.

FOREIGNERS IN THE MARKETS

The Malaysian stock market has started the year relatively well, underpinned by a revival in foreign interest in the market. “When foreigners become net buyers in our market, valuations tend to go up, and retail investors tend to get more interested in what’s happening because they see a pick-up in market activity,” says Dato Yusli bin Mohamed Yusoff, CEO of Bursa Malaysia, which runs the stock market. And that’s what’s happened: foreign investors are now accounting for 25 to 30% of daily turnover, driving overall average traded values up as much as 70% over 2010 numbers.

Why are they back? “Several reasons,” says Yusli. “One, they see the Malaysian economy is relatively strong; two, they see the government trying to transform the local economy by identifying sectors and key infrastructure projects to promote for the future; three, relatively good results from our companies; and four, due to these fundamentals, the ringgit has been strengthening relative to other currencies.” IPOs have started the year strongly too: six in January, three in February, and a strong pipeline. “We had 29 in 2010, so we think that is something we can match or do better than,” he says.

TC Kok, managing director of AmInvestment Bank, says that despite recent inflows “the equity market in Malaysia is still relatively low in terms of price to book, and I see value.” This is partly because of the government projects outlined in the main article, and partly by momentum. “To some extent it’s liquidity-drive sentiment, and confidence in some of these mega-projects is leading to stronger corporate profits. Inflationary pressures here are manageable, there is an interest rate differential, and the region offers a strong sense of safe haven,” he says; he feels the index could rally to 1700 points from its current level below 1500.

A similar story of foreign appetite is evident in the debt markets. At the end of December 2010, foreign investments in local currency bonds amounted to RM121 billion, according to the Securities Commission, mainly Malaysian government securities (RM73 billion) and corporate bonds (RM14 billion). “This is in stark contrast to the RM4 billion of foreign investment recorded in early 2004 when we first liberalized the market,” says Tan Sri Zarinah Anwar, chairman of the Securities Commission. “As a result, we are increasingly recognized as an important hub for cross-border investments and issuance in the region.”

“The Malaysian bond market is one of the few markets in the region that has taken early steps to attract participation from foreign investors,” she says. This has included removing withholding tax on foreign investors, liberalizing foreign exchange and making approvals easier. Correspondingly, RM12 billion of bonds and sukuk have been issued by foreigners since 2004. “Today, we see Malaysian institutions reaching a confidence level that has enabled them to progressively pursue the offering of advisory services outside Malaysia,” Zarinah says.

Malaysia’s increasingly international nature raises questions about the role of the country’s offshore centre, Labuan. But David Kinloch, CEO of Labuan IBFC, says: “Malaysia’s aim of becoming an international financial centre is the backbone of Labuan IBFC’s growth over the years. We believe that the government’s stance of recognizing financial services as a key economic driver only strengthens Labuan IBFC’s position both domestically and internationally.” He argues the centre “has played an important part as the catalyst and incubator for products and services which may then be adopted onshore.” A classic example of this is Islamic finance, in which a number of initiatives attempted in Labuan subsequently became mainstays of the Malaysia International Islamic Finance Centre (MIFC). “Both initiatives complement each other and provide for the continual growth of Islamic finance in Malaysia as a whole.”