Malaysian economy springs a pleasant surprise

The Malaysian economy beat market expectations with gross domestic product contracting 3.9 per cent in the second quarter, versus a consensus forecast by private economists of minus 5.1 per cent.

The smaller than expected contraction was a major improvement over the country's Q1 shrinkage of 6.2 per cent. With the latest numbers, the central bank said the economy retreated 5.1 per cent in the first half of the year.

Compared with other Asian economies, stimulus packages announced by Prime Minister Datuk Seri Najib Razak showed little sign of kicking in, with public consumption growing just one per cent.

“It's an impressive performance, given that most of us thought it would be worse,” said Manokaran Mottain, an economist with the Arab-Malaysian Banking Group. “But it seems clear that the stimulus money hasn't come in.”

The better than expected performance shows that Malaysia, like the rest of Asia, is exhibiting “green shoots”. But Kuala Lumpur must be worried about the economy's seeming lack of response to Najib's stimulus packages announced as far back as March.

The GDP figures, released by the central bank yesterday, show the economy's better performance was driven largely by services (1.6 per cent) and construction (2.8 per cent).

Manufacturing was hit hardest, shrinking 14.5 per cent in Q2 after a Q1 decline of almost 18 per cent.

This was evident in Malaysia's export performance. Output shrank 17.3 per cent, which the the central bank attributed to “weak external demand”. Imports registered a 19.7 per cent correction.

Surprisingly, the central bank provided no figures for investment — neither public nor private — although it did say total consumption grew 0.6 per cent in Q2, after contracting 0.2 per cent in Q1.

Inflation continued to fall. In July it dipped 2.4 per cent, allowing the central bank to keep interest rates low and conducive to growth. On Monday, the bank maintained its overnight policy rate at a historic low of 2 per cent. And with near-deflation persisting, it is likely to keep rates low until the second half of 2010.

“We expect a gradual recovery,” central bank governor Tan Sri Zeti Akhtar Aziz told a news conference. The economic contraction in 2009 will be smaller than expected, she said without elaborating.

Business and Market Overview on Malaysia

ECONOMY. Malaysia is a middle-income economy and has the third highest GDP per capita (US$4,625) among the Southeast Asian countries after Singapore and Brunei. The country was primarily a producer of raw materials but transformed its economy from the 1970s to the 1990s into a multi-sector economy. Malaysia's economic growth is export driven mainly from exports of electrical and electronic products.

Malaysia's economy is relatively stable with healthy foreign exchange reserves and a GDP of US$118.3 billion in 2004. From 2000 to 2004, Malaysia's real GDP grew by an annual average of 5.7% while inflation remained below 2.0% and unemployment below 4.0%. The Asian economic crisis of 1997 adversely affected Malaysia's economy during the period. It is unlikely that the country will experience an economic crisis similar to 1997 with current healthy foreign exchange reserves, low inflation and small foreign debt.

The manufacturing sector accounted for 48.5% of Malaysia's GDP in 2004, services accounted for 42.4% and the agriculture sector accounted for 9.1%. Major industries include electronic & electrical products, textiles, clothing & footwear, chemicals, petroleum, wood and metal products. Major agriculture industries include palm oil, rubber, cocoa, rice, poultry and timber.

DEMOGRAPHY. Malaysia comprises of Peninsular Malaysia and East Malaysia (located on the northern half of the island of Borneo) with a population of 26 million. Malaysia is a multi-ethnic society comprising of the predominant indigenous Malays (50%) followed by the Chinese (24%) and Indians (7%). Other indigenous groups (11%) include the Ibans, Kadazans, Melanaus and Kelabits. Major religion practiced is Islam followed by Buddhism, Taoism, Hinduism and Christianity. Major languages used are Malay (national language), English (commonly used in business), Chinese (mainly Mandarin, Hokkien and Cantonese) and Tamil.

Malaysia's population is becoming increasingly urban. The country's urban population increased from 54.7% to 62.8% of Malaysia's total population from 1995 to 2004. Main reason is increasing employment opportunities in the major urban areas. Major urban areas include the nation's capital Kuala Lumpur and the surrounding areas (known as the Klang Valley), Penang, Johor Bahru, Ipoh, Kuantan, Kuching and Kota Kinabalu.

Households in the urban areas have an average income that is twice than those in the rural areas. An estimated 5% of Malaysian households live below the poverty level while 50% are low-income households. The proportion of medium income households is 33% while high-income households are 10%.

INFRASTRUCTURE. Malaysia has a well-served international and domestic telecommunication system. Cities and towns are well connected by roads including highways and public transport. Internet broadband services are available in the cities and major towns. Malaysia has an international airport situated near Kuala Lumpur and airports across the country serving mainly domestic travel.

INTERNATIONAL TRADE. Malaysia's major trading partners include the United States, Japan, China, Singapore, Thailand, Taiwan and South Korea. Major exports from the country include electrical and electronic products, machineries, petroleum and liquefied natural gas (LNG), textiles, clothing & footwear, palm oil, furniture and sawn timber. High technology exports (mainly electrical and electronic products) account for more than 50% of Malaysia's exports. Major imports include electrical and electronics, machineries and equipments, petroleum products, plastics, iron and steel products, chemicals and foods.

CONSUMER USAGE OF TECHNOLOGY. Nearly 75% of all homes have fixed line telephones and there are 15 million mobile phone subscribers for a population of nearly 26 million in 2004. Penetration of personal computers in homes was nearly 30% during the period with 3.5 million internet subscribers and 10 million internet users. More than 90% of all Malaysian homes have refrigerators and televisions. Nearly all middle and high-income homes have cars and most have more than one. The estimated penetration of cars in homes is between 75% and 80%. Thus, many low-income homes have cars but tend to be lower-end models or cheaper second hand cars. Furthermore, nearly all lower income homes have motorcycles for their travelling needs.

RETAIL MARKET. Retail sales in Malaysia reached an estimated US$14 billion in 2004 and forecast to grow further to US$20 billion by 2010. The Klang Valley (Kuala Lumpur and the surrounding areas) contributes nearly 30% of the country’s total retail trade. The traditional "mom and pop" establishments dominate Malaysia’s retail industry while shopping at the modern retail establishments such as hypermarkets, supermarkets, departments, mini-markets and convenience stores is gaining popularity. These modern establishments account for nearly 25% of the total retail sales. Shopping at the traditional open-air markets remains popular among Malaysia’s low, medium and even high-income consumers because of their festivity atmosphere.

FOOD CULTURE. Malaysia has three major ethnic food cultures i.e. Malay, Chinese and Indian foods. Rice is the staple food followed by various types of noodles and Indian bread. Malay dishes tend to be hot and spicy, Indian foods are usually curry dishes while Chinese foods are salty. However, the various ethnic communities have adapted foods from other communities. Western baked bread and bakeries and fast foods are popular and affordable even among many in the lower income group.

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Malaysia's economic situation will bode well for luxury car sales

While a gloomy cloud is still expected to hover over the global motor vehicle market for the rest of 2009, BMW Malaysia Sdn Bhd is cautiously optimistic that the situation in Malaysia will be a little bit different, said managing director Geoffrey Briscoe.

He said the Malaysian economy was faring well compared with the rest of the world and this would bode well for the local motor vehicle industry, especially the luxury segment.

Geoffrey Briscoe ... “The Malaysian economy is holding up well.’

“The Malaysian economy is holding up well. People are still spending. We’re not bullish about the rest of 2009 because we still feel that there are still tough times ahead,” he told StarBiz in an interview, adding that the local motor vehicle industry should “pick up” in 2010.

“Our finance rates are low. BMW Malaysia also provides good financial packages through its credit arm, BMW Credit, and our inventories are still high, so there has never been a better time to buy a BMW,” he added.

For the first seven months of 2009, BMW Malaysia sold 2,048 units compared with 2,133 during the same period in 2008.

It sold 3,512 BMW vehicles and 201 Mini cars in total last year.

BMW Malaysia’s share of the luxury segment was north of 40%, Briscoe said, adding that despite the dip in the 2009 year-to-date sales, he was upbeat about the company’s prospects going forward.

“Given the current economic climate, we are just 4% down in terms of sales volume. There are still several months to go for 2009 and we would be delighted if we could sell as many cars as we did last year,” he said.

BMW Malaysia’s bestseller is its 3-series (which averages 150 units a month) and the 5-series models.

“Our 3- and 5-series tend to go neck and neck in terms of volume but it’s usually the 3-series that’s ahead. We provide great financial packages for these models through BMW Credit,” Briscoe said.

BMW Malaysia has a majority of its 3- and 5-series completely-knocked-down models built at its plant in Kulim, Kedah, which is operated in partnership with plantation giant Sime Darby Bhd. Briscoe said the plant’s capacity was virtually “limitless.”

“The capacity of the plant can be extended to where we need it to be. We’d love to build more cars, like the X1 and 7-series and we are working with the Government to build those and other models in Malaysia,” he said.

As part of its strategy to provide “efficient dynamics,” BMW Malaysia plans to launch four diesel-powered vehicles in the last quarter of 2009; three of them sedans. The vehicles are expected to be in the 2.0 to 3.0-litre range.

“The diesel segment in Malaysia comprises either SUVs (sport utility vehicles) or commercial vehicles. There’s no passenger market for diesel and we want to create one,” Briscoe said.

He added that diesel-powered engines provided better torque and were more powerful, more fuel-efficient and produced less carbon dioxide (CO2) emissions compared with their petrol-based counterparts.

Briscoe said about 60% of cars sold in Europe were equipped with diesel engines.

The high sulphur content in Malaysian diesel fuel has hindered performance and deterred many car companies from introducing diesel-powered vehicles.

While diesel-powered BMW vehicles were already capable of handling the substandard diesel quality here, Briscoe said the introduction of the four new models was timely as Petronas was launching its Euro 2M standard diesel nationwide tomorrow.

“The Euro 2M diesel has low sulphur content of less than 500 parts per million (ppm) compared to some 3,000 ppm. To a layman like myself, that sounds like a huge reduction and great for the environment!

“We feel that our timing is spot-on because we are bringing in the right diesel cars at the right time,” he said.

Meanwhile, Briscoe said BMW Malaysia was looking to expand its BMW Premium Selection (BPS) used-car programme to more dealers to combat the local motor vehicle industry’s growing “grey market.”

The grey market refers to the importation of used vehicles from foreign countries to Malaysia by non-franchise car dealerships, which are then sold at a cheaper price. The grey importers do not provide verifiable servicing history or factory-backed warranties.

“There’s nothing worse than having a customer say that they have a bad BMW car, which is why we offer a fully backed BPS car as a viable alternative to the grey imports,” Briscoe said.

Vehicles sold under the BPS programme need to have an approved and documented vehicle history as part of the criteria, pass a strict 72-point check by factory-trained BMW experts, are technically and visually refurbished, less than five years old or have less than 100,000-km mileage.

Two dealers currently run the programme – Auto Bavaria Glenmarie (launched in December 2008) and Ingress Auto (launched in August 2008).

“Sales for (Auto Bavaria) Glenmarie have increased 60%. The used car business currently makes up 40% of their business. It’s been an enormous success,” Briscoe said.

“We’re happy to have Ingress aboard. To be part of the BPS programme, the potential dealer needs to go through a rigorous approval process and sign our BPS agreement that’s three inches thick and we are looking at reaching out to more dealers,” he added.

On another note, Briscoe said he could not agree more with its principal in Germany to pull out of Formula One (F1) next season.

“To be in F1, one needs to make continuous progress and it wasn’t sustainable for BMW to remain in the sport.

“BMW is the greenest luxury car company in the world and spends billions on fuel efficiency and CO2 reduction measures under our ‘efficient dynamics’ programme. It’s only right that its resources are focused on that,” he said.

Malaysia economy outlook for year 2009

2009 will bound to be a very challenging year for Malaysia, although Malaysia’s economy is holding up pretty well this year. The first half of 2009 is expected to be a very tough period for Malaysia. The impact on Malaysia this year has somehow been cushioned but many are beginning to feel the economic downturn towards the year-end.

Unlike Hong Kong, people here do not seemed to be frantically queuing at the banks to withdraw their money. The authorities have been very proactive to address the economic slowdown. Bank Negara has stepped forward to guarantee deposits and the Government introduced the RM7bil stimulus package.

Malaysia has come a long way since the Asian financial crisis in 1997/98. We are different from 10 years ago - economy, corporates and even politically. We learned our lessons during the Asian crisis.

Malaysian banks are deposit-funded and lowly geared. The banks also had sufficient reserves to buffer any credit crunch shocks. Malaysia’s external reserves of US$99.7bil could support 8.1 months of retained imports and 3.7 times short-term external debt. Malaysia had the ability for further pump-priming to stimulate the economy with its current external reserves and account surplus.

It is important that consumers continue to spend. The cycle has to continue to stimulate the economy. Those who can afford it should continue spending as we are facing a serious slowdown next year. However, it is still too early to tell if consumer confidence has been restored.

Inflation would not be a concern in 2009 as soaring inflation is likely to ease next year. Corporate profit forecasts are likely to fall significantly further next year. We should not be too concerned with the 2009 earnings as they are expected to be poor, probably charting low single digit growth. The unemployment rate is expected to remain high as corporate could be downsizing.

On foreign funds inflow, a lot of countries would be competing for the same foreign fund inflows during these times so Malaysia should continue to be competitive and make sure that it had reasons for investors to come in.

Although things are not looking very rosy, there are still opportunities to be tapped during this time of market uncertainty. Investors have to do their homework and understand their risk tolerance level before moving into the market at this time.

Malaysia’s Economy May Shrink 4.2%

Malaysia’s economy may shrink more than previously forecast this year as the global recession reduces exports and household spending, the Malaysian Institute of Economic Research said.

Southeast Asia’s third-largest economy will probably contract 4.2 percent in 2009, the institute said in a report released in Kuala Lumpur today, cutting its forecast from an April prediction for a 2.2 percent decline in gross domestic product. It lowered the 2010 growth forecast to 2.8 percent from 3.3 percent.

The country “takes the hit from the knock-on effects of a flagging global economy,” the institute said. “Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace.”

Prime Minister Najib Razak has unveiled 67 billion ringgit ($19 billion) of stimulus measures and eased foreign investment rules to shore up growth as plunging exports push the nation closer to its first recession in a decade. The government cut its 2009 GDP forecast in May, predicting a contraction of 4 percent to 5 percent.

Exports of goods and services may plunge 21.8 percent this year before growing 7.3 percent in 2010, the partially government-funded research institute predicts. Inflation may average 1.6 percent in 2009 and unemployment may reach 4.8 percent, it said.

Recession Looms

“If exports and foreign direct investment shrink severely, the downturn could be more damaging,” the institute said. “The healing from the current crisis will be difficult compared to previous ones, because of the synchronized nature of the downturn.”

The institute expects Malaysia will fall into a recession after contracting for a second quarter in the three months to June. GDP may contract 6 percent in the second quarter, shrink 4 percent in the third and expand 2 percent in the last three months of 2009, Ariff said.

The $187 billion economy shrank 6.2 percent in the first quarter of 2009, and second-quarter GDP data is due in August.

The ringgit, the worst performer among the 10 most-traded Asian currencies excluding the yen this year, fell 0.1 percent to 3.5663 as at 10:17 a.m. local time today.

The currency has been hurt by declining exports and will remain “volatile” until the global economy recovers, Mohamed Ariff Kareem, the institute’s executive director, told reporters in Kuala Lumpur today. The ringgit may strengthen to 3.4 to 3.5 against the dollar by the end of 2009 and 3 a dollar by 2012, he said, adding that the U.S. currency is “overvalued.”

Interest Rates

Malaysia’s central bank has kept its benchmark interest rate unchanged for two straight meetings after reducing borrowing costs 1.5 percentage points to 2 percent from November to February, saying the economy may improve in the coming months as the government implements stimulus measures.

There’s no urgent need for Bank Negara Malaysia to further reduce interest rates, though there is space to cut, Ariff said. Deflation, while possible, isn’t yet a threat for the country, he said.

An improvement in exports and the government’s measures to boost the economy will help the economy grow in the fourth quarter, he said. The budget deficit may exceed 8 percent of GDP this year and reach as much as 9 percent in 2010, he estimated.

The 2010 shortfall “will probably be bigger because this crisis isn’t going away anytime soon,” Ariff said. “2010 will still be a difficult year” and the government may need to boost spending to support growth.

Confidence Improves

The institute’s consumer sentiment index rose 26.9 points to 105.8 in the second quarter from the previous three months, helped by the government’s stimulus measures. The business confidence index climbed 44.1 points to 105.2.

Private consumption is expected to “moderate” in 2009 “owing to the reduction in income, a dismal labor market, a volatile stock market and lower commodity prices,” the institute said. “There will be some lag before the effects of the fiscal spending are felt, making the speed and efficiency of implementation critical.”

Consumer confidence in Malaysia increases

Optimism on economy helps boost consumer confidence.

Consumer confidence in Malaysia improved in the second quarter of the year compared with the first quarter as individuals began to feel “less negative” about the current state of the economy and more optimistic about its future, according to a recent study.

The local Consumer Confidence Index was up from 83 to 94 alongside increases in the indexes of other Asian countries, namely Singapore, China, Thailand and Indonesia, according to independent market research agency InsightAsia Research group’s latest survey.

“Consumers are substantially more positive in the second quarter than they were in the first,” it said in its latest report on Asian Consumer Confidence.

Even though economic growth was expected to remain negative this year, emergency economic policy measures and recovering equity markets had lent support to confidence, it noted.

The survey covered 2,300 people from urban areas that were asked their assessment of the current economic situation and expectations for the next 12 months. The level 100 is the neutral point in the index, where an index higher than 100 indicates a high confidence level (optimistic) and an index below 100 indicated a low level of confidence (pessimistic).

Of the five countries, Singapore registered the strongest growth, adding 26 points to 88 while Indonesia and Malaysia increased more than 10 points each and were now just below the neutral point, at 97 and 94 respectively, the survey revealed.

Singapore yesterday said its economy rebounded strongly by 20.4% quarter-on-quarter in the second quarter versus the market’s expectation of 13.4%, helped by recovery in its construction and manufacturing sectors.

The Singapore government has raised its 2009 forecast to between -4% and -6% year-on-year, up from a previous forecast of -6% and -9%.

In Malaysia, improvements in the local economy were expected in the second half and should extend into 2010 as the effects of the implementation of the various stimulus packages were felt.

Professor of economics and head of department at the London School of Economics Danny Quah does not think that the renewed confidence is unfounded.

“The severe fall-off in the first place was, in my view, an unwarranted over-reaction in any case,” he told StarBiz via e-mail yesterday.

Quah said the 1997 Asian financial crisis had previously already “cleaned out” a lot of financial weaknesses in the region and while exports to the rest of the world remained important for the region generally, the fundamentals on the supply side had been strong and domestic demand had continued to be supported by both high productivity and healthy balance sheets.

“However, caution and vigilance on the part of policy-makers will always be needed,” he added.

Asian economies needed to be more “profoundly aware” that the world’s centre of gravity had shifted eastwards sharply, and that whatever anaemic growth the West might offer in the next few months, strong performance from China would provide significant growth opportunity for the rest of Asia, he said.

Malaysia’s economy, going to be like US soon?

Economy getting worse. Consumer-related companies are having more sales than ever to promote consumer spendings. People become attracted to the cheap stuff and start to buy. Some buy without considering whether they need it, or if they can afford it. In the end, the amount they need to pay for their credit cards becomes shockingly large. Some will fail to pay. Banks end up in big trouble since many people cannot pay their bills and loans.

At the end of the day, the consumer-related companies earn the most. Those people who cannot pay will have to return their homes/cars to the banks, and some even forced to declare bankrupt. And when people cannot pay, the banks will not gain any benefits. They will start losing money if this continues. True, they can take back those cars and real estates, and resell them but they can only resell them at a much lower price. And reselling does not mean there will surely be a buyer. Those cars and real estates might stay with the banks for quite a while due to the poor economy.

In my opinion, I think all these started from the point when consumers (us) start to spend money like water and buy things which they cannot afford, and even borrow loans which they cannot pay (and the banks approve loans without thinking twice. Few months ago, the banks were competing fiercely with each other to get more people to apply for house and car loans. When competition is that fierce, the banks will become more linear when it comes to approving those loans).

So how serious is this?

Frankly speaking, I have a feeling that our country is actually undergoing such a situation, albeit in an early phase. True, encouraging people to spend more will certainly boost the economy since it improves consumer spending. But it does not take away the fact that people ARE getting poorer with the high inflation rate (and companies ARE doing badly due to the bad economy. Do bear in mind that not all companies are involved in consumer business..that’s why there is a possibility of job cuts).

I think perhaps it’s time for people to start being frugal and be prepared. And I do hope that Malaysia will not end up like US, though my gut feel is telling me our country is indeed heading towards that direction (maybe not as bad).

IS Malaysia ready to become an innovation economy?

IS Malaysia ready to become an innovation economy?

At this stage of the race, the question is not whether this transformation should be made, but how. The days of selling cheap land and labour are long gone and if we are going to make a real great leap forward it will have to be by brains, not brawn, by minds, not muscles.

We can, of course, rely on depleting resources such as oil and gas or on volatile primary commodities. We can continue to depend on screw-driver operations and import cheap labour from neighbouring countries to twist them. But we had better get ready our begging bowls for when these avenues are exhausted.

To become an innovation economy, however, is easier said than done. As a country, we have had many very expensive flights of fancy. Invariably, what elude us are solid execution and even more solid successes. We have thrown money when we should have thrown our best minds.

If we are not to reduce economic transformation into a mere slogan, we must see things as they are and not how we would like them to be. The reality is that many things in this country will have to radically change if we are to have any chance at all of having a go at it.

The way that the country and corporations are governed will need to be reformed. Slow, unwieldy and top-heavy hierarchies will have to be thrown out. How innovation is rewarded and failure penalised will also have to be totally overhauled.

But nowhere is change more needed than in the minds of Malaysians. This then begs the question: What are the qualities our leaders and citizens have to evolve? And how on God’s green earth do we effect these mindset changes in the fastest and most comprehensive manner?

Someone who has thought deeply about mind change is Howard Gardner of Harvard University. Credited as one of the most influential psychologists of his time, he is famous for arguing that an individual has not one but multiple intelligences, and for his work on changing people’s minds.

Gardner, together with another Harvard luminary, Professor Quinn Mills, was in Kuala Lumpur last week for a seminar organised by the Harvard Club of Malaysia and the Charles River Centre. His latest book, Five Minds for the Future, addresses many of the issues before Malaysians.

The first type of mind that Gardner espouses is that which is disciplined. Discipline is used in its two usual senses. One, it is the acquisition of an area of expertise. The disciplined mind is able to differentiate, reflect, develop and apply theories and experience. Two, it is about continual application of time, energy and effort to hone and master this area.

Many Malaysians today are earning higher degrees. Surprisingly few, however, can show anything other than superficial knowledge or even interest in their chosen disciplines. Fewer still can demonstrate a profound understanding of them.

The second type of mind is one which synthesises. Synthesis is a necessary skill today given the enormous amounts of information on virtually any topic. The world’s top political and corporate leaders – Bill Clinton and Bill Gates as examples – have the ability to grasp the “big picture” quickly and accurately so that decisions can be made.

Synthesis, however, is not an easy skill to acquire. It requires the ability to identify, classify and weave together many different threads and perspectives.

Many Malaysians do not have the ability or the interest to make decisions based on synthesis. They prefer using their prejudices.

Creativity is the third type of mind and the one most emphasised these days.

Gardner argues that creativity is not the result of an individual or a group of individuals. It emerges from interactions between individuals who have mastered a discipline, the cultural domain (made up of rules and norms) in which they work, and the social field, comprising experts, peers, users and consumers.

In Malaysia, creativity is focused on either the individual or the domain (in most cases, the university or workplace).

There is insufficient appreciation of those who assist, evaluate, approve, criticise and encourage. We believe in consensus even when that consensus is tantamount to nothing more than group think.

The fourth and fifth minds, which are equally critical, are that which are respectful and ethical. Far from being airy fairy, these are essential complements to the earlier three mindsets.

The respectful mind accepts diversity and the need for change and compromise. The ethnical mind values excellence but is also driven by a responsibility to one’s self, family, peers, community and society at large.

Is Malaysia ready to become an innovation economy? I think that the onus is on the optimists to prove the doubters wrong. There needs to be strong and inalienable proof that our minds are not as archaic, anti-change and illiberal as reports make them out to be. And, more than anything, we need to try. Our economic and social well-being depends on it.

Malaysian Economy Reforms

Prime Minister Malaysia, Datuk Seri Najib Abdul Razak unveiled bold measures to further liberalise the economy, including repealing Foreign Investment Committee (FIC)guidelines that have long hampered efforts to attract foreign investors.

Highlights Of Reform

1. FIC Deregulation

Deregulation of FIC guidelines encompasses:

i) Acquisition of equity stakes, mergers and takeovers;

With immediate effect, FIC guidelines covering the acquisition of equity stakes, mergers and takeovers is repealed.

ii) Treatment of fund raising by listed companies;

>>Currently, companies going for IPO will need to meet both SC’ public spread requirement (25%) and FIC’s bumiputra equity requirement (30%).

>>With deregulation, FIC requirement is removed.

>>SC, as sector regulator will continue to impose public spread requirement.

>>SC will now impose a bumiputra equity requirement as part of public spread requirement (specifically 50% of public spread to be offered bumiputra).

>>There will no longer be any equity condition imposed post-IPO except in the case of RTO and backdoor listing.

iii) Acquisition of properties

>>FIC will only process transactions involving dilution of bumiputra interests (i.e sale of property by bumiputra to non-bumiputra) and government interests in property. Even then, FIC approval is only required for properties above RM20 million, whether bought directly or indirectly.

>>All other transactions will no longer require the approval of FIC.

>>The threshold for purchase of properties by foreigners is increased in general to RM500,000. Above the threshold, foreigners will no longer need to refer to FIC for the purchase of properties. State government however, maintain the right to impose additional conditions.

2. Fund Management Liberalisation

Ownership in the wholesale segment of the fund management industry fully liberalised to allow 100% ownership for qualified and leading fund management companies to establish operations in Malaysia. For the retail segment, the foreign shareholding limits for the unit trust management companies raised to 70% from current level of 49%.

3. Stock Brokering Liberalisation

Foreign ownership shareholding limits in existing stockbroking companies be increased to 70% from its current level of 49%.

4. Visa Application

BNM and SC will review all visa applications for the financial services industry and capital market respectively.

5. Establishing New Institution

>>Ekuiti Nasional Berhad (Ekuinas) to be established with initial capital of RM500 million, eventually to be enlarged to RM10 billion fund.

>>Ekuinas will focus its investments in high growth sectors, in line with supporting the New Economic Model.

>>Ekuinas will jointly invest with private sector, reflecting a genuine partnership and, through a fully commercial approach, will ensure meritocracy of participating bumiputras.

Liberalisation Najib’s New Economic Model and 1Malaysia

Keynote address by Prime Minister Datuk Seri Najib Razak at Invest Malaysia 2009 in Kuala Lumpur on June 30, 2009








Introduction

1. First of all, let me thank the organisers of Invest Malaysian 2009 for their kind invitation for me to speak at the Fifth Invest Malaysia conference. I am delighted to see such a large turnout of investors and would like to extent a warm welcome to our international visitors.

Invest Malaysia has become the most important annual forum for us to meet with international portfolio investors and showcase what we are doing. It also provides an opportunity for Malaysian public limited companies (PLCs) to engage with the investment community. We feel that this reverse road-show of bringing investors to our shores allows investors to see firsthand what we are doing and gauge for themselves the investment climate in Malaysia and complements our promotional and marketing efforts internationally.

2. As you aware, this event is typically held in March to coincide with the Grand Prix. However, recognising the imminent transition of leadership then, the organisers delayed the event by a couple of months to allow me to speak to you as prime minister.

For me, this is an important occasion to share with you my views and aspirations for Malaysia and its capital market. To the Formula One fans among you, rest assured that I have asked the organisers to revert to the original schedule for the next year!


Meeting the challenges of the global economic downturn

3. We meet today in a very challenging environment. The world has experienced unprecedented displacements and distortions to the global financial order. The global financial crisis has had severe ramifications on once revered financial institutions, led to tremendous wealth destruction and questioned the wisdom that has driven conventional thinking in finance. But what’s more damaging has been the economic cost that this financial crisis has had across the world beyond the epicentre of the financial crisis.

4. There are clearly many lessons to be learnt and reforms that will need to be put in place. Markets must be subject to stronger oversight and there must be no hesitation in making difficult policy decisions when we see early signs of excesses and irrationality start appearing on the horizon. Governance arrangements and risk management standards at the level of banks and financial firms must be strengthened. Regulation of Over The Counter (OTC) markets and some loosely regulated firms must be commensurate with the impact and role they have in today’s financial markets. Sales practices and unfettered risk-taking must be subject to adequate oversight.

5. We all now know and have felt how this financial meltdown translated into devastating consequences for the real economy, companies, jobs, people and families all around the world. Malaysia has not been spared. Therefore, my immediate priority has been to provide a decisive response to blunt the impact of the global economic downturn. We have put together two stimulus packages amounting to RM67 billion or roughly nine per cent of gross domestic product to be spent over two years. The financial package comprised comprehensive measures aimed at easing the hardship of affected individuals and businesses, stimulating aggregate demand in the short term and building the long-term capacity of the economy. We have ensured that businesses have sufficient access to financing, implemented various initiatives to provide financing to small- and medium-sized enterprises (SMEs), established mechanisms to provide guarantees to support private-sector financing and reactivated debt resolution mechanisms.

6. As of June 19, projects worth RM9 billion have been awarded under the Stimulus Package 1 and 2, of which RM3 billion has been paid. Given the step-up progressive payments to be made as these projects are rolled out, I am confident that this spending injection into the domestic economy and the related multiplier effects will help cushion the impact of the sharp external downturn and set the stage for economic recovery some time in the second half of this year.


The shift to a new economic model

7. The larger challenge before us lies not in addressing the short-term vulnerabilities and dislocations but over the long-term national competitiveness. In the last three decades, we have made great strides in poverty eradication, enhancing the living standards of Malaysians, developing world-class infrastructure and providing respectable economic growth. We have become a successful middle-income economy. But we cannot and will not be caught in the middle-income country trap. We need to make the shift to a high-income economy or we risk losing growth momentum in our economies and vibrancy in our markets. The challenge of managing such a major transition is not easy and has been made more considerable by the weakness in the global financial architecture and intensifying competitive pressures arising from dramatic changes in the global economy.

8. But let me assure you that making this transition to a high-income economy for the future of our country has become my key priority. My government’s policies and priorities will be driven by this overall objective. The concept of 1Malaysia that I have propagated is meant to get all Malaysians to work as one team in order to achieve one goal, and that is towards a developed nation by 2020. I have set in motion efforts to formulate a new economic model, which will be based on innovation, creativity and high value, to lift us into the ranks of a high-income nation within the decade. Our new economic model is intended to shift our reliance from a manufacturing base dependent on semi-skilled and low-cost labour to one that hinges on a high technology and modern services sector dependent upon skilled and highly paid workers.

9. The implementation of the new economic model will require a major and comprehensive policy overhaul in many areas, but it is pivotal for Malaysia’s future. We need to make fundamental changes in strategies as well as mindset. We will adopt a holistic approach to bring about competition in all sectors of the economy. We will systemically foster innovation as a key driver of value-add, and promote higher value add sources of growth, such as private education, health tourism, Islamic finance, ICT, information and communications technology, creative industries and biotechnology.

10. In this context, it is critical to sustain the momentum through policies that are market-friendly and that create new sources of growth in the services sector. Therefore, we will continue to modify or eliminate policies that inhibit growth. The work has already begun. We have already announced the liberalisation of 27 services sub-sectors and followed through with liberalisation measures to enhance the role of the financial sector as a key enabler and catalyst of economic growth.


The Capital market – making the strategic shift towards a growth agenda

11. Similarly, in the capital market, we have come a long way. Assisted by a structured development agenda through the Capital Market master plan, we have developed one of the most diversified and broad-based capital markets in the region. We have a deep and sizeable bond market that is the third largest in Asia benchmarked by GDP. We have one of the largest exchanges in ASEAN with the highest number of listed companies. The fund management industry is growing rapidly and we have the largest unit trust industry in ASEAN. The Islamic capital market is the largest in the world, with more then 60 per cent of global sukuk issuance out of Malaysia; the largest number of Islamic funds globally and a large number of syariah-compliant equities. Our regulatory framework is internationally benchmarked and has been assessed to be of international standards by expert external assessors. We have attracted leading international firms in broking, fund management and Islamic finance to establish operations in Malaysia.


Internationalising the capital market

12. Moving to the next phase of developing our capital markets will necessitate greater internationalisation. This is inevitable and is an integral aspect of a high-income strategy. Internationalisation of the financial services sector and the capital market will serve to expand the scope of opportunities for our country — as was evident with the resources and manufacturing sector. Liberalising ownership rules will serve to allow foreign players who wish to invest in our country and to use Malaysia as a base for their regional and international operations. Liberalisation is, therefore, inevitable, and we can only choose to manage its pace. It would be to Malaysia’s advantage to liberalise at a faster pace, as this would also allow us the flexibility to tap international opportunities earlier.

13. We also expect the wider participation of foreign players to raise the level of competition and promote innovation to drive growth at a faster pace. This would facilitate the Malaysian capital market industry to attain higher competitiveness by rapidly expanding the range of choice and quality of offerings that is available to customers. Growth will be driven by investment in technology, talent, infrastructure, research and development (R&D) and marketing to maximise long-term revenue growth and enhance market vibrancy. Our domestic players have built strong local operations. Some have even established regional presence. They should now leverage on the flexibilities granted to explore new opportunities and business models by establishing strategic partnerships and alliances to expand their global reach. I have every confidence in their ability to raise the bar and compete effectively. The pie must expand. There is no point in having a larger share of a shrinking pie.

14. This has formed the basis of some of my recent announcements on the liberalisation of the services sector, including recent measures announced for the banking sector. I am pleased, therefore, to announce a set of measures today that will have the same impact on the Malaysian capital market.


Investment Management — Fund management and unit trust segments

15. To further strengthen Malaysia’s position in the fund management and unit trust segment of the capital market value chain and to allow fund managers an additional option to establish their operations in the region, I am pleased to announce the following:

First, ownership in the wholesale segment of the fund management industry will be fully liberalised to allow 100 per cent ownership for qualified and leading fund management companies to establish operations in Malaysia.

Second, for the retail segment, the foreign shareholding limits for the unit trust management companies will be raised to 70 per cent from its current level of 49 per cent.


Stock broking segment

16. Major reforms in the stockbroking industry have already strengthened domestic players and widened the scope of their capital market activities. We have also seen greater foreign participation through the special scheme licences improve competition in the stockbroking industry, as well the global connectivity of Malaysia’s capital market. Some of our domestic stockbroking companies have expanded their operations into other countries. But there are still opportunities for domestic stockbroking companies to form new partnerships and facilitate the expansion of business domestically and internationally, as well as promote more product innovation and expand the range of skill sets and capabilities. To allow this to occur, I wish to announce that the foreign ownership shareholding limits in existing stock broking companies will be increased to 70 per cent from its current level of 49 per cent.


Encouraging more listings and addressing liquidity

17. There must be a lot more effort made to attract leading companies to list on the exchange. The government is committed to contributing its part through listing more of its entities and assets to ensure more significant listings, and to provide domestic and international investors more opportunities to invest in the Malaysian economy. We have revamped the fund-raising framework with more efficient rules, and broadened the ease of financing through the merger of the main and second boards of the exchange and re-positioning MESDAQ as a sponsor-driven market for a wide range of companies. We have also allowed for foreign listings, and I note that there are several already in the pipeline. I urge market players to take advantage of these changes by redoubling your efforts to identify quality local and foreign companies to list in Malaysia.

18. I have also asked that the issue of free-float levels and liquidity in the market be addressed immediately with a holistic review and comprehensive measures. On its part, the government and its associated entities will look for ways to contribute towards reducing some of their shareholdings and having more shares available for investors.


Safeguarding governance through effective enforcement

19. Even as we move towards a more internationalised capital market environment, we must ensure that our regulatory objectives of fair and orderly markets, transparency, financial soundness and investor protection are met. In this regard, it is even more necessary to ensure that there are high standards of ethical conduct and practice of good corporate governance. This requires that we strengthen our regime for effective enforcement against corporate crime and securities offences.

20. We will be tabling in Parliament a set of far-reaching amendments to the Capital Market Services Act (CMSA) to further strengthen the enforcement powers of the Securities Commission (SC) on corporate governance transgressions. It will empower the SC to take action against a director or officer who causes a wrongful loss to a PLC or its subsidiary to the detriment of shareholders of the PLC. It will also allow the SC to prevent the wrongful dissipation of assets of a PLC by those managing the PLC. In addition, a new offence is created to prohibit any person from influencing, coercing or misleading any person engaged in the preparation or audit of financial statements of a PLC. In addition, an independent Auditor Oversight Board will be established through the tabling of amendments to the Securities Commission Act 1993.


Attracting human capital

21. The capital market is a knowledge-intensive industry. Attracting and retaining talent is a critical aspect of the process to capture the necessary skills and social relationships to increase international participation in the Malaysian capital market. We must recognise that there is strong international competition for human capital and we must be in a position to fast-track the recruitment process for international talent. For this purpose, I am pleased to announce that Bank Negara Malaysia (BNM) and SC will review all visa applications for the financial services industry and capital market industries.


Deregulation of the Foreign Investment Committee (FIC) Guidelines

22. Malaysia has undoubtedly been a success story in what we have achieved since independence. Then, Malaysia was but a poor nation reliant on rubber and tin. By choosing a path of diversification and industrialisation, the Malaysian economy was transformed, resulting in a higher growth trajectory than what would have been possible if we remained reliant on those commodities. Over this period, Malaysia sustained rapid economic growth, averaging 6.4 per cent annually. Coupled with distributive policies, this rapid economic growth benefited all segments of the population. Poverty has now fallen to below 4 four per cent from 49 per cent in 1970.

23. This is our approach of growth with equity, the Malaysian Way. There is no issue of expropriation. Equity is achieved through a more equitable distribution of an expanding economic pie. Without strong economic growth, we cannot achieve our objective of a more balanced distribution. The introduction of growth with equity in 1971 also reflected Malaysia’s ability to take pragmatic and courageous decisions, particularly to advance the national interest at times of crisis.

24. Not unlike previous crises, I believe we are yet again at a critical juncture in our nation’s journey… failure or hesitation to act now will have long-term ramifications for the nation. The crux of the problem is that on one hand, we have clear ambitions to pursue growth with equity as we strive to achieve developed nation status. To succeed, we would need to again transform the economy onto a higher growth trajectory. Yet, on the other hand, we face major challenges to realising these ambitions, given external factors and domestic constraints to strong economic growth.

25. Against our ambitions for high growth and greater equity, we are faced with four major challenges:

>>First, what has worked before, in advancing Malaysia into a high-middle-income country, appears to be no longer effective in moving us towards developed-nation status.

Our past experience has given us valuable lessons in what has worked well and what has not, but they don’t necessarily provide us with a clear way forward;

>>Second, the competitive landscape has changed. Unlike before, we now face intense competition, particularly globally for capital, talent, knowledge and resources;

>>Third, the global economic crisis is amplifying the need to be a preferred investment destination, given that corporations are consolidating and moving operations to where it is most competitive;

>>Fourth, the intensity of competition for a smaller pool of investment necessitates removing impediments to investment, whether real or perceived, and to administer distributional policies more effectively but in a more market-friendly manner.

26. In the context of the challenges the nation faces, the guidelines of the Foreign Investment Committee (FIC) appear to have outlived their usefulness. When the FIC was first introduced in 1974, it represented a major component of the strategy for growth with equity. Today, it is no longer an effective instrument to support growth with equity. Back in the 1970s, Bumiputera equity was only 2.4 per cent. Given the very low base, it was perhaps relevant to adopt allocation-type policies to quickly redress the imbalance. Back then, it was still practicable to use such policies, given the relative lack of competition for investments.

27. Today, we face a completely different scenario. Investment policies creating regulatory uncertainty and that are not in line with international practice will only constrain our growth potential; growth that will allow our distributional objectives to be achieved. Further, the dynamism and complexity of today’s economy does not sit well with the blunt “one size fits all” approach of the FIC. With the progress achieved and enhanced capabilities of Bumiputeras today, the pursuit of sustainable equity requires a focus on effective and meaningful economic participation, not just ownership. A 30 per cent minority stake in a given company in fact does not provide an avenue for representative participation. Further, it has been shown that the lack of capital results in the 30 per cent stakes held at company level not being sustainable. Thus, an objective assessment would conclude that the FIC in its current form does not facilitate growth, nor does it effectively promote sustainable equity for the “capital-disadvantaged” Bumiputera.

28. The world is changing quickly and we must be ready to change with it or risk being left behind. If we stand still and attempt to cling on to past glories during these dynamic times, we will be swiftly overtaken by our competition, as we have overtaken others in the past. It is not a time for sentiment or half-measures, but to renew our courage and pragmatism to take the necessary bold measures to advance the national interest for the long-term benefit of all Malaysians. Pragmatism requires a focus on substance, not form. The government continues to be committed to pursue the spirit and substance of growth with equity. We are not hostage to forms or instruments, which, though they have been long associated with growth with equity, are no longer effective in substance.

29. As a major initiative to ease doing business in Malaysia and make Malaysia more attractive as an in vestment destination, I am pleased to announce a comprehensive deregulation of investment guidelines administered by the FIC. The scope and functions of the FIC have been substantially rationalised. FIC’s scope now involves far fewer transactions, far fewer rules and far fewer conditions. This is in line with the government’s focus on establishing a more conducive regulatory environment for the private sector to prosper, by facilitating robust investment activity and a more vibrant capital market.

30. The review of FIC guidelines encompasses:

>>First, acquisition of equity stakes, mergers and takeovers;

>>Second, treatment of fund-raising by listed companies; and

>>Third, acquisition of properties.

31. With immediate effect, the FIC guideline covering the acquisition of equity stakes, mergers and takeovers is repealed, without any new guideline in its place. FIC will no longer process any share transactions, nor impose equity conditions on such transactions. This represents a major rationalisation of FIC regulation. Up till yesterday, processing such transactions were the mainstay of FIC. From today, this function of FIC ends.

32. Notwithstanding this deregulation, the national interest in terms of strategic sectors will continue to be safeguarded through sector regulators. Companies in such sectors will continue to be subject to equity conditions as imposed by their respective sector regulator, such as the Energy Commission, Commercial Vehicles Licensing Board, National Water Services Commission, and Malaysian Communications and Multimedia Commission. Even for such regulated companies, the repeal of the FIC guideline enhances the regulatory environment, given that the oversight will only be by the sector regulators, who are best placed to tailor regulation according to the needs of their respective sectors.

33. The treatment of fund-raising by listed companies has also been significantly enhanced towards raising Malaysia’s attractiveness as a listing destination. Currently, companies seeking listing are required to satisfy the public shareholding spread requirement of 25 per cent based on Bursa Malaysia’s Listing Rules and also the Bumiputera equity condition based on FIC guidelines. Going forward, the public spread requirement remains and in addition, the SC will introduce a new guideline which requires companies seeking listing to offer 50 per cent of the public shareholding spread to Bumiputera investors. The Bumiputera equity condition, therefore, becomes subsumed within the public spread requirement. This reinforces the competitiveness of Bursa Malaysia as a listing destination, as promoters of companies seeking listing will no longer need to divest equity beyond that required to satisfy the public spread requirement.

34. In addition, to further ease raising funds from the capital markets, post-listing fund-raising exercises will no longer be subject to any equity condition. This deregulation will immediately support existing listed companies seeking to raise funds to undertake investments and reduce the friction cost of compliance. This new requirement to offer 50 per cent of public shareholding spread to Bumiputera applies only to Malaysian companies seeking listing on Bursa Malaysia. The current guidelines for foreign companies to seek listing without any need for compliance with any equity conditions remain, and we have seen several foreign companies successfully applying for listing in Malaysia as a result.

35. The scope of FIC with respect to property transactions will also be substantially rationalised with immediate effect. FIC approval for property transactions will now only be required where it involves a dilution of Bumiputera or government interests for properties valued at RM20 million and above. All other property transactions, including those between foreigners and non-Bumiputeras, will no longer require FIC approval. For example, a dilution of Bumiputera interests refers specifically to the instance where a property is currently majority-held by Bumiputera and as a result of a transaction ceases to be owned by a majority Bumiputera entity. Transactions no longer requiring FIC approval fall into two categories; first, any transactions involving sale by non-Bumiputera or foreign majority interests (e.g. for example, non-Bumiputera selling to foreign) and second, any transactions involving purchase by a Bumiputera-controlled entity, and this would include a Bumiputera-owned company acquiring property from another Bumiputera-owned company. This deregulation is expected to facilitate greater property transactions and investments, including acquisitions of commercial properties by foreign interests.

36. The government believes that the above easing of regulations will significantly enhance Malaysia’s value proposition as a place to do business and invest. With the comprehensive easing of FIC guidelines at the firm level, the Economic Planning Unit will re-focus its efforts towards coordinating and monitoring distributional policies at a macro level. In this respect, the government remains committed to enhancing economic participation by Bumiputeras. A new approach shall be undertaken, focused on promoting sustainable, meaningful and effective participation through genuine partnerships and meritocracy. Let me emphasise here that while the government remains fully committed to the goals of equitable growth, our approach will be to implement these goals in a market-friendly manner, given that robust and sustainable growth is a precondition for equitable distribution.

37. In line with this new approach, a new investment institution called Ekuiti Nasional Berhad (Ekuinas) will be established. Ekuinas will be set up as a private equity fund, with an initial capital of RM500 million. It is targeted that Ekuinas will subsequently be enlarged to become a RM10 billion fund. Ekuinas will focus its investments in sectors with high growth potential, in line with supporting the New Economic Model. At the same time, Ekuinas will invest jointly with private-sector funds, in order to promote genuine partnerships and a fully commercial approach. In this way, participation of Bumiputeras through Ekuinas will be premised on merit.

38. Since the 1970s, the capabilities of Bumiputera professionals have been substantially raised. The Bumiputeras of today are keen to contribute and compete to play an active role in employment, management and as vendors. It is hoped that through investment funds such as Ekuinas, the ambitions of the best and brightest Bumiputeras can be supported and nurtured.

39. The comprehensive deregulation of FIC guidelines has been formulated to strengthen Malaysia’s attractiveness as a place to do business and invest, for Malaysians and foreigners alike. A facilitative business and regulatory environment that unleashes the full potential of the private sector is required, together with a new economic model to transform the nation towards a sustainable trajectory of higher growth. Combined with a more effective distributional policy, the government is convinced the measures announced benefit all stakeholders. We are committed to drive strong economic growth, which is equitably enjoyed by all Malaysians, in line with the spirit and substance of promoting growth with equity.


GLCs and Corridor Development: Continuity and Change Anchored on Competitiveness

40. In order for Malaysia to successfully realise its ambition for developed-nation status, there will clearly be key areas in need of major change and at the same time, other areas where we are already in the right direction, which therefore will be reinforced. In this regard, our policies on government-linked companies (GLCs) and corridor development going forward will involve a judicious combination of continuity and change.

41. GLCs continue to constitute a major part of the nation’s economic structure. Thus, it is in the national interest that GLCs play their role, both in supporting the success of other companies that make up Malaysia Inc and at the same time, leading the way as successful corporations in their own right. Both roles require a continued focus on performance and competitiveness, which needs to be benchmarked not only locally but at global standards. In this context, the government is committed to ensure that the GLC Transformation Programme continues to be implemented. If anything, with greater urgency and focus. The continued drive for high performance is critical to ensure that Malaysia is able to unlock its full growth potential.

42. There are clearly key examples of GLCs that must aspire to greater heights, whether in terms of being best-in-class or emerging as future regional if not global champions. These include the likes of Petronas, MISC, Sime Darby, MAS, Axiata, CIMB, and Maybank, to name but a few. These companies must continue to pursue an increasingly international outlook in terms of market penetration and international competitiveness. The success of such Malaysian champions will help define the boundaries and reach of Malaysia Inc. in the years to come.

43. At the same time, GLCs are significant in the Malaysian context, not only in terms of their size but also with respect to the business-critical functions they provide to businesses in Malaysia, particularly services such as electricity, telecommunications, postal, airlines, airports, water and financial services. Hence, greater competitiveness and performance by such GLCs supports the competitiveness of Malaysia Inc.

44. Beyond supporting through competitive services, GLCs must also play a complementary role in the development of the Malaysian private sector, in terms of the space in which it competes. In terms of defining the role of GLCs going forward, three key principles will be applied:

First, GLCs should be focused on core activities, and therefore should proceed to dispose of non-core activities;

Second, GLCs should only operate in sectors in which GLCs as institutionally-owned entities can be competitive, and even in these sectors, GLCs should catalyse and develop the domestic ecosystem, including vendors. GLCs should divest companies operating in sectors or scale of activities best undertaken by entrepreneurs.

Third, in their respective core sectors, GLCs must compete on a level playing field with the private sector. There will be no issue of government providing assistance to GLCs by virtue of its shareholding, to the detriment of private-sector competition.

Through these principles, the government is confident that GLCs will play a complementary role with the private sector towards fully unleashing the dynamism of Malaysia Inc and enhancing the competitiveness of the country.

45. Similarly, the government’s support and drive for corridor development will continue anchored on the competitiveness intrinsic to each corridor and in terms of its activity to help drive immediate-term fiscal stimulus imperatives as well as medium- and longer-term structural change to the economy. In this regard, the development of Iskandar Malaysia, for example, will continue to be anchored on its push towards greater regional integration in a networked economy and its propensity to develop a new template for newer higher value-added service-based sectors, including in healthcare, wellness, education, leisure and tourism and logistics services.


Conclusion

46. In conclusion, if there was one message I wanted to leave with the investment community, it is that there should be no doubt that Malaysia welcomes foreign and local investors and participants. We can only achieve high income by creating more opportunities for growth, rather than protecting our narrow turf. We can only achieve our social equity goals by expanding the pie. A high-income society must be socially inclusive. It must provide incentives for those who “have a lot” and yet be fair to those who “have a little”. It must lead to high returns for companies and entrepreneurs who invest, better and higher incomes for those who are employed, and greater capability for those who require assistance to help themselves or to get help from government. Above all, a high-income society must be one where every Malaysian feels they have a place and a promising future under the Malaysian sun. It is toward this ultimate goal that I dedicate the energies and efforts of this government.

I hope, as investors, you too will continue to play your part, and walk along with us in this great Malaysian journey.

Malaysia strives to boost economy through overhauling growth mode

KUALA LUMPUR, -- Malaysia is striving to take various measures to accelerate economic growth and tide over the current financial crisis by giving high priority to the reform of its economic growth mode.

DECADE-LOW GDP IN Q1

Malaysia's gross domestic product (GDP) shrank by 6.2 percent in the first quarter of 2009 compared with the same period last year, the biggest fall since the fourth quarter of 1998, indicated by statistics from Bank Negara, the central bank. The decline was far beyond market predictions.

Malaysia, an export-driven economy, "suffered on average 20 percent drop from January to April. So, this has triggered the shrinkage of our economy," Second Finance Minister Ahmad Husni Hanadzlah was quoted as saying by Malaysia official news agency Bernama.

To combat recession and revive home economy, the Malaysian authorities have launched two stimulus packages with a total government injection of 67 billion ringgit (about 18.76 billion U.S. dollars), or nearly 9 percent of the country's GDP.

Akhtar Aziz, central bank governor, forecast earlier that despite early signs of recovery, the economic slowdown will remain in the first quarter. Some experts, however, believed that the economy will gradually turn for the better in the second half as the global economy is expected to touch bottom.

Malaysian Prime Minister Datuk Seri Najib Tun Razak predicted earlier the country's economic growth would contract by 4-5 percent this year, worse than a 3.5 percent decline predicted by the International Monetary Fund in early May.

ECONOMIC MODE REFORM UNDER WAY

The Malaysian government is considering restructuring the country's export-dominated economy by adopting a new economic growth mode centered on innovation, creativity and high value additions.

"We need a model which is more relevant to current times. To move to a higher income-based economy, we have to move towards a knowledge- and innovation-based economy where skilled labor is needed," Nor Mohamed, minister in the Prime Minister's Department, was quoted as saying on a brainstorming session with a World Bank experts' team on May 7.

In Prime Minister Najib's words, the new mode will emphasize raising the productivity of workers by innovation and creativity to help them earn higher incomes, Bernama reported, noting that the country's the per capita income has lingered below 10,000 U.S. dollars for long.

This new mode will help Malaysia further improve its economy, elevating the country from its current high-middle income level to high-income level, said Najib.

Nor Mohamed also suggested the new economic model should count on increasing domestic consumption rather than depending on exports.

Azrul Azwar Ahmad Tajudin, an economist at Bank Islam in Kuala Lumpur, also stressed the urgent need for Malaysia to overhaul its economic growth mode by easing dependence on exports and foreign investment.

The new mode, which will be drawn up by an advisory economic council composed of local and foreign experts, is to be issued later this year.

The pending Tenth Malaysia Plan for the period 2011-2015 will be drafted on the basis of the new economic growth mode so as to ensure a smooth and quick economic recovery from the current recession.

REFORM CRUCIAL FOR ECONOMIC RECOVERY

Malaysia's economic growth has fallen short of expectation for a long time. The average GDP growth is expected to reach 6 percent during 2006-2010 but that goal was met only in 2007. The global economic downturn is expected to raise the country's unemployment rate from 3.1 percent last year to 4 percent this year, and dragged down its foreign investment by 50 percent to 26 billion ringgit (some 7.28 billion dollars).

"We will not allow the country to remain as it is but find ways to achieve a quantum leap so that we can be in the high income bracket, " Najib said in an address on May 1.

Yet, Malaysia is trying to take the global economic downturn as an opportunity to revive its sagging economy. The government hopes the economic reform will enable Malaysia to make the most out of the global economic recovery and help it gain the status of a developed nation by 2020.

Once the global demand recovers, Malaysia's exports of electronics, oil and other commodities will pick up. But the country has to overhaul its export-oriented economic mode and give priority to developing service sectors if it wants to reduce dependence on low added value products and ensure long-term stable benefit.

Oil money fuels Malaysia’s economy

IT is black, but it is also gold. Petroleum, or crude oil, is one of nature’s most precious gifts to mankind. Those who strike oil will strike it rich. The commodity is so useful that the world is predominantly powered by it.

Malaysia has been blessed with an abundance of natural resources, all of which have contributed to the country’s development in their own ways.

But it is oil and gas that have, over the years, superseded other resources in becoming the major fuel of economic growth.

A key component of Malaysia’s economy, the oil and gas sector accounts for 30% of the country’s manufacturing income and about 8% of the annual gross domestic product.

Last year, total oil production in the country stood at an estimated 720,000 barrels per day, of which around 550,000 barrels per day were refined for local consumption.

Total production of natural gas last year was around 2.3 trillion cu ft, of which 50% were consumed locally.

And as a net exporter of oil and gas, it is no doubt that Malaysia will benefit from the rising oil prices.

The higher prices will raise the national income, as well as the Government’s revenue.

Crude dependency

The oil and gas sector has been an important contributor to the Government’s coffers since the 1970s. This is evident in the amount of money it has received from Petronas through the years.

According to the national oil company, it has paid the Government a total of RM403.3bil between 1974 and 2008.

Last year alone, Petronas’ payment was RM67.6bil, or 63.1% of its profit for the year.

That amount represented 44% of the Government’s revenues for 2008.

The trend of the Government becoming increasingly dependent on oil revenues can be traced back to the early 2000s, when there was an emergence of a strong and sustained rally of crude oil prices, mainly as a result of the geopolitical tension in the Middle East.

However, economists have pointed out that the growing proportion of oil revenues is worrying.

They believe that high dependency on oil revenues to finance fiscal spending is not a viable long-term option, as it increases the vulnerability of the Government budget, and hence the country’s economy, to fluctuations in the commodity’s prices.

So, fiscal adjustment is needed for the Government to ensure long-term stability of its finances.

There is a need for the Government to seek other sources of revenue through diversification and to focus on increasing its non-resource-based revenues, such as taxes.

Among the potential initiatives are tax reforms and reinvestment of oil money in revenue-generating assets.

Previously, the Government had considered implementing goods and services tax (GST) by 2007, but the plan has since been shelved.

Another issue that the Government has to contend with is the subsidies for fuel and gas. In Malaysia, both oil and gas are subsidised, hence their retail prices are lower than market prices.

While high oil prices are a boon to its kitty, it also means that the Government will have to fork out more to subsidise the public’s consumption of fuel.

The Domestic Trade, Cooperative and Consumerism Ministry has said the Government did not have to pay fuel subsidies as long as crude oil prices were below US$65 per barrel.

But now that the commodity has exceeded that level, it appears that the Government will have to pay subsidies again.

According to the Economic Planning Unit (EPU), the total amount of subsidies borne by the Government between 1997 and 2008 was roughly RM78bil.

The total subsidies last year came to about RM20bil, compared with RM16bil in 2007.

Former deputy director of the Energy Section of the EPU, Dr Pola Singh, who is now an independent energy analyst, says Malaysia is a laggard in removing subsidies.

“An environment where fuel prices are kept artificially low will do more damage than good in the long term,” he explains.

He added that it is necessary for the Government to reduce the level of subsidies gradually for retail prices to reflect market prices and to wean Malaysians off their addiction to cheap fuels even though this will not be a popular move.

“We are generally wasteful when prices are low,” Pola argues.

He cites the example of petrol stations experiencing a significant decline in the demand for fuel when pump prices went up to RM2.70 per litre in July last year.

But following the lowering of pump prices to the current rate of RM1.80 per litre, Malaysian consumers have reverted to their old ways, and their consumption pattern is now back to normal.

Depleting resources

Meanwhile, there is no quick fix to the world’s dependence on oil. As the global economy continues to expand (despite the current hiccups, which it has been suffering over the past one year), demand for oil and natural gas as sources of energy continues to grow.

Reserves are fast depleting, as oil and gas, being non-renewable commodities, are continually being extracted to feed global consumption.

The combination of growing demand and depleting reserves may turn many net oil exporters into oil importers.

In the case of Malaysia, if domestic demand continues to grow at 4% annually and the country’s oil and gas production remains at a flattish 2.7% per year, there is a possibility of the country becoming a net importer within the next 10 years.

Held by Petronas, Malaysia’s total domestic reserves of oil and gas as at Jan 1, 2008, stood at 20.13 billion barrels of oil equivalent, while its total international reserves of oil and gas was at 6.24 billion barrels of oil equivalent.

In 2008, Petronas’ reserve replacement ratio stood at 0.9 times, down from 1.4 times and 1.8 times in 2007 and 2006, respectively.

The ratio is a measurement of new reserves discovered to volume of production. It is an indication of the company’s track record in maintaining a stable reserve of oil and gas.

There are various efforts to find new reserves. It is reported that Petronas spends about RM40bil per year on exploration and development activities, and it has indeed been successful in making discoveries, particularly in the deepwaters of Sabah and Sarawak over the years.

In addition, Petronas has overseas ventures in more than 30 countries now.

This could boost its reserve replacement ratio and provide opportunities for local oil and gas services providers to penetrate international markets via the national oil company, which usually prefers to award contracts to Malaysian companies.

However, the thinking that as long as we continue to invest, we will keep finding new oil reserves and that we may not run out of oil will give rise to a lack of a sense of urgency to devise new strategies for a fallback plan, says Pola.

There are no short cuts to counter the depleting fossil fuel resources, he says, but policymakers and corporations can accelerate initiatives to improve energy conservation and develop renewable energy to reduce consumption of oil and gas.

On the role of consumers, Pola says they can practise voluntary restraint and conservation to reduce pressure on oil demand.

Malaysia Economic Analysis

As per Malaysia economic analysis emerging markets over there have shown to be steady and growth has been fast. Several plans have been implemented to update agrarian economy towards manufacturing industry. Malaysia receives different contribution from various sectors of economy. Contribution of agricultural sector to Malaysia GDP in 2008 was 9.7 percent. There was a contribution of 44.6 percent from industrial sector and 45.7 percent came from service sector in financial year 2008.

Economic analysis in Malaysia reveals that state policy of Malaysia focuses on investment in export industries, which mainly comprise electronics goods, investment in real estate sector, non tradable sectors and capital intensive infrastructure. $15,700 has been estimated as Malaysia GDP per capita in 2008. Malaysia economy, now a developing multi-sector economy was previously a mere raw materials producing one.

Economic analysis at Malaysia states that Malaysia GDP as per purchasing power parity was estimated to be $397.5 billion in 2008. Real growth rate of Malaysia GDP of 2008 was approximately 5.5 percent. GDP as per official exchange for 2008 was $214.7 billion. In financial year 2008, Asian Development Bank (ADB) shows Malaysia GDP to be 5.7 percent.

Economic analysis of Malaysia shows that there is a fiscal expansion in nation that has increased domestic income. Recession in global economy has led to reduction of electronics export. These electronic exports were major revenue earners for Malaysia. Early in 2001, Malaysia had a global growth in economy because of silicon based products.

As per Malaysia economic analysis a good development for their economy has been that value added production for has been taken charge of by Prime Minister Abdullah. Investments were encouraged to be made in high technology industries, medical technology and pharmaceuticals. For financial stability, a number of macroeconomic policies have been implemented.

Economic problem that is faced by this south Asian nation, which is revealed by in depth Malaysia economic analysis, is its dependency entirely on electronic exports. Exports need to be diversified in various other sectors including financial and service sector. Corporate bond market can be established to promote private domestic investments. This way, current account surplus can be curbed because of high foreign investments. Malaysia made huge profits by exporting oil and gas and this has contributed greatly to its economic development.

The global financial crisis

The Bush Administration has announced that a rescue package of almost US$700 billion is required to save some of the prominent banks from following the footsteps of Lehman Brothers two weeks ago. JP Morgan, Merril Lynch and a host of investment banks in New York and other cities are already crying foul.

Some of us already know that the world’s economy is worth US$60.2 trillion and the American economy about US$12.5 trillion. Just imagine about 6.5 percent of the total American economy is now being used to save the ailing investment banks including one of the world’s largest insurers, AIG, which itself needs about US$85 billion to be resuscitated from receivership.

Money has four uses: used as a standard, used as a saving, used as an exchange for buying and selling and used for speculation. Investment is speculation. Almost US$100 billion is traded everyday in the European money market. Some currencies go up and some currencies go down. Some currencies are not even accepted for trading. One of the currencies that is not well traded is our Malaysian ringgit.

Based on an economic strength of about US$124 billion (GNP) and total banking capitalisation of about RM60 million, we are not in the position to even worry about how President Bush would rescue these investment banks.

Malaysia is financially a small and insignificant nation depending very much on the current trading of petrol and tertiary sector incomes. With a population of about 25 million and an average per capita income of RM4,200, we are now walking on a tight rope.

Option 1

President Bush is able to rescue these ailing banks and they go back into business much more aggressively. Now as investors, where would they find more investment? We must realise the investments of Lehman Brothers are now in a quandary. No one knows for sure how will that particular receivership affect the economy of the world in the next five to six months.

What will be the rate of return be from the investments made hereafter? How long will it take for these banks, if managed properly, to return the money to the government because the government will need the money to help other sectors of the economy? What if these banks are not managed properly?

Will they be in the red again? Will they need another rescue mission?

Option 2

President Bush gets only minimal help from the Congress and the Senate controlled by the Democrats. Of course, he cannot bulldoze his rescue plans without their collaboration. Hence some of the banks including AIG will have to wait for time to wind up, or play a far less insignificant role in the years to come.

It simply means, investors, depositors and policyholders will have to accept that they are now much more poorer than they thought they would be.

In the wake of this, interest rates cannot be raised and money in fixed deposit markets may become less valuable and those receiving pensions and indirect incomes will have to suffer heavily.

We were told by economists (based on the Keynesian concept) that if the interest rates go up, the share market would drop or vice versa. Now with no money with the investor, we will find, a low interest rate and less bullish stock exchange.

Hence Malaysians have to be ready for the following:

1. Investors will be pulling back to find more stable markets. This will mean loss of jobs and loss of income for thousands of people in tertiary sectors. People in the financial, banking and insurance sectors will be the worst hit. The insurance industry in Malaysia holds slightly more than 7 percent of the GNP.

2. Our banking industry will tighten its lending and if this happens, business will cool down and will drastically affect the retail industry. The Malaysian retail industry with more than 2 million provisions shops and nearly a 1,000 supermarkets will be hardly hit. The retail industry is worth around RM70 billion and this figure may be drastically reduced to RM40 billion or even less, with reduced prices and lesser purchases. This may be a very difficult problem for us, as a nation to overcome.

3. Our secondary sector hardly exists and most of the production is based on heavy industries such as automobiles and steel and shipyards. However, the vibrant nature of our small and medium industries could give us sustained strength to overcome some of the problems faced by the ailing steel industries and automobile companies. The government must gear up this sector and reduce the role of foreign workers in this sector to generate more opportunities for Malaysian job seekers.

4. The government must now seek a tough stand on foreign migrant workers and also on multiple entry visas and control those who do business away from Malaysia while staying in Malaysia.

Option for Survival

We need a very bold, tough and creative finance minister who can speak for all: the investors, the consumers and the workers. The government must now come up with bold contingency plans and reduce the role played by the non-productive government-linked companies. If need be, some could even be shut down.

Structural changes in the economy must be made and rates on utilities must be controlled. Consumer laws should be enforced very stringently on all sectors of the economy to ensure moderation of production and curbing of inefficient use of resources.

The government must now seriously enforce price checks on all items from a plate of fried rice to a unit of saloon car. Either we survive or we are doomed as a nation. The days are getting worse. Malaysians must get together.

BN and Pakatan Rakyat must find a way to work together.

Malaysia’s Economy Grows at Slowest Pace in 7 Years

Malaysia’s economy expanded at the slowest pace in seven years last quarter as exports fell, adding pressure on the government to boost spending to counter a global slump that’s cost thousands of manufacturing jobs.

Southeast Asia’s third-largest economy grew 0.1 percent in the fourth quarter from a year earlier, down from a 4.7 percent gain in the previous three months, the statistics department said in a statement today. Economists were expecting a 1.5 percent increase.

Malaysia’s central bank cut borrowing costs for a third straight meeting this week, saying the risk that the economy will contract in 2009 has risen. The government plans a second stimulus package in March to prevent the country from following Asian exporters including Singapore and Hong Kong into recession as sales of Intel Corp. chips and IOI Corp. palm oil slide.

“External demand collapsed in the fourth quarter, weighing heavily on Malaysia’s externally oriented economy,” said Nikhilesh Bhattacharyya, an economist at Moody’s Economy.com in Sydney. “I don’t believe any fiscal stimulus package can rescue Malaysia from recession. All that it will do is to limit the damage and severity. In this sense it is hugely important.”

The country’s benchmark stock index fell for a second day today and the ringgit declined for a fourth day to 3.7065 against the dollar, the weakest since March 2006. The economic data were released after markets closed.

Bigger Stimulus

The economy expanded 4.6 percent last year, the slowest pace in seven years. The government, which expects 2009 growth to slow to an eight-year low of 3.5 percent, will revise the forecast next month, Finance Minister Najib Razak said Feb. 17. The last time Malaysia posted an annual contraction was in 1998.

The second stimulus, due to be unveiled on March 10, may be as large as 30 billion ringgit ($8.1 billion), Citigroup Inc. said this week. The extra spending may exceed 10 billion ringgit to 15 billion ringgit, Trade Minister Muhyiddin Yassin said in an interview aired today on CNBC.

Najib, who is also deputy premier, is due to replace Prime Minister Abdullah Ahmad Badawi next month and needs to prevent the economic slowdown from fueling public discontent after the government suffered its worst election result in half a century last year.

The government unveiled a 7 billion ringgit plan in November and the central bank has cut its overnight policy rate to 2 percent, the lowest since the benchmark was introduced in April 2004, to bolster local consumption as companies cut jobs amid faltering demand.

‘Tough’ Environment

“The environment this year is going to be tough,” Bumiputra-Commerce Holdings Bhd. Chief Executive Officer Nazir Razak said Feb. 23. The Malaysian bank, which has had four consecutive quarters of profit declines, expects consumer loans growth to slow, he said.

Malaysian Pacific Industries Bhd., the nation’s biggest semiconductor assembler, plans to cut all its 1,700 temporary workers as it expects losses to widen, RHB Research Institute Sdn. said yesterday after its analyst met company officials. Profit at IOI, Malaysia’s second-biggest palm oil producer, has fallen two straight quarters.

Malaysian exports posted their biggest drop in almost seven years in December. Retrenchments in the country’s manufacturing industry jumped 86 percent to 18,578 last year.

Consumer Confidence

“There is a very real danger that Malaysia may witness the self-reinforcing vicious cycles gripping the developed world, where deteriorating job conditions feed into lower consumer confidence and depressed household spending, forcing employers to sack staff,” said Bhattacharyya at Moody’s Economy.com.

The $181 billion economy has “little chance” of avoiding a recession as exports and commodity prices tumble, he said.

Malaysia’s manufacturing industry shrank 8.8 percent in the fourth quarter, compared with a 1.8 percent gain the previous three months. Exports of goods and services plunged 13.4 percent, after growing 5.1 percent previously.

Investment as measured by gross fixed capital formation declined 10.2 percent last quarter for the first time since mid- 2002, the department said. Private consumption growth weakened to 5.3 percent.

Slowing growth will contain prices increases and lead to a continued easing in inflation this year, the central bank said in a separate statement. Malaysian policy makers will continue to focus on ensuring access to credit, it said.

“While global efforts have been intensified to counter the effects of the slowdown, risks remain on the downside and recovery is likely to be slow and protracted,” Bank Negara Malaysia said. “The timely implementation of the fiscal stimulus and providing the necessary policy support to strengthen the domestic sources of growth will also be vital to supporting the overall growth” in Malaysia.