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.

Malaysia’s economy seen contracting in first quarter

Malaysia’s economy may have contracted above 3.5% year-on-year in the first quarter based on figures released in January and February that showed year-on-year drops in external trade and industrial output.

According to a poll of six economists by StarBiz, gross domestic product (GDP) is expected to contract due to a drastic drop in external demand since late last year, which became worse in the first two months of 2009 and also caused industrial output to fall.

Malaysian Institute of Economic Research (MIER) executive director Professor Datuk Mohamed Ariff Abdul Kareem said the first half of the year would be challenging for the economy.

He forecasts the economy to contract 2.2% this year. MIER does not give out quarterly forecasts.


“As for external trade, we’ve seen signs that it is moderating but (it) will still see a contraction in the teens,” Ariff said. The Statistics Department is scheduled to release external trade figures tomorrow.

“There will be significant contraction based on the economic figures already released in the first two months of the year,” CIMB Investment Bank Bhd economic research head Lee Heng Guie said.

For January and February, external trade contracted 27.8% and 15.9% respectively year-on-year while industrial output fell 20.2% in January and declined 14.7% in February.

Lee forecasts first quarter GDP to contract by between 5.5% and 6% while for this year as a whole, it could contract 3%. He said this would be in tandem with regional economic performance.

“Singapore’s economy in the first quarter contracted 11.5% year-on-year while South Korea’s shrank 4.3%,” Lee said.

He said the first quarter contraction would look bad when compared with the high base of the same quarter last year, when the economy grew 7.1%.

The economists pointed to the manufacturing sector as the biggest drag on the economy, with export-reliant segments of the sector being the most affected.

“The construction sector will not see much of an impact from the pump-priming activities that the Government has instituted until at least the end of the second quarter,” Lee said.

RHB Research Institute Sdn Bhd economist Peck Boon Soon said the manufacturing sector could contract 17% year-on-year based on the figures for industrial output released in January and February.

He expects the economy to contract 5.3% year-on-year in the first quarter and 3.5% for the full year.

“We believe the services sector may only see a 0.5% growth as private consumption falls due to rising unemployment in manufacturing,” Peck said.

For the construction sector, he said the drop in property development activity would likely drag the sector down to minus 2%.

Meanwhile, Citigroup Inc Asia Pacific economics and market analysis vice-president Kit Wei Zheng said there were some signs of stabilisation in the February statistics for external trade and industrial output.

“While year-on-year there is a contraction, quarter-on-quarter there is a moderation in the slowdown,” he said.

Kit forecasts the economy to contract between 2.5% and 3% in the first quarter and 1.5% this year.

On the services sector, he said it could probably manage a slight increase although trade-related services would take a hit.

“My own sense of it is that we’re approaching an inflection point as we see a stabilisation in exports,” Kit said.

Kenanga Investment Bank Bhd economist Wan Suhaimi Saidi said consumer demand in the United States would have to pick up significantly before there was any improvement in growth numbers.

The United States was Malaysia’s third-largest trading partner in February, according to the Statistics Department.

Wan Suhaimi forecasts the economy to contract 2.6% in the first quarter and to grow 0.6% full-year, premised on a recovery in the second-half.

United Overseas Bank Ltd economist Ho Woei Chen said although recent economic indicators had shown a moderation in the pace of declines, it was still too early to tell whether the numbers would hold up.

She expects the economy to contract 2.5% in the first quarter and 2.5% for the full-year.

Malaysia Economy

At present, Malaysia's industrial and service sectors are the 2 major pillars of the national economy. However, agriculture and mining were the 2 dominant sectors during its early history. Britain had slowly but steadily advanced into the region in the 18th and 19th centuries, establishing control over the territory of what would become present-day Malaysia. The British were attracted by the rich natural resources of this region and its convenient location along the Strait of Malacca, which was the main sea route connecting the Far East with British India and Europe. The British established large-scale plantations and introduced new commercial crops (rubber in 1876, palm oil in 1917, and cocoa in the 1950s). They also developed a large mining sector and encouraged migration of Chinese and Indian workers to these plantations and mines.

In August 1957, the Federation of Malaya was granted independence within the Commonwealth of Nations. In 1963, the Malaysian Federation was founded, comprising the Federation of Malaya, Sabah, Sarawak, and the State of Singapore. Singapore, however, left in 1965.

Since achieving independence, the Federation of Malaysia faced a need to develop and to diversify its economy, having a rapidly growing population. The country abandoned reliance on the export of primary natural resources and agricultural products and established itself as a rapidly industrializing country with a diversified export base. By the beginning of the 21st century Malaysia had become one of the fastest growing economies in Southeast Asia and third-richest state (after Brunei and Singapore) in the regional grouping known as the Association of South East Asian Nations (ASEAN).

The Malaysian government promoted the free market with limited state intervention and export-oriented industrialization. Its exports to the international market were used to promote efficient use of the country's resources and generate hard currency, which was necessary for catching up and further developing into areas of technological and industrial innovation. In the mid-1960s, Malaysia established 5-year planning, targeting certain areas of economic growth and social changes, and allocating public resources for priority sectors of the economy and for infrastructure development. Despite these efforts, the government was reluctant to institute centralized control over the state's economy. The 5-year plans became a basis for official development strategies. For example, the recently completed "Seventh Plan" (1996-2000) targeted productivity growth and moved the country towards capital-intensive, high-technology industries. The political and inter-communal violence that had undermined the country's stability and security in the 1960s and 1970s gave way to a period of remarkable stability. This has attracted international investors and greatly contributed to the rapid economic growth of the 1980s and 1990s, especially in the manufacturing and service sectors of the Malaysian economy. Unlike the government of neighboring Indonesia, the Malaysian government has managed to keep its external debt at a relatively moderate level. In 1998, external debt stood at US$42 billion, or 59 percent of GDP with debt service payments of about US$6.0 billion. Estimates for the year 2000 estimated that Malaysian official reserves stood at US$29.6 billion. However, the repatriation of the profits by foreign investors may cause a problem for the Malaysian economy in the future.

The structure of the Malaysian economy has changed during the last 2 decades. According to the World Bank, the proportion of manufactured production grew from roughly 20 percent of GDP in the early 1980s to 31.5 percent of GDP in the late 1990s. Manufactured products accounted for around 85 percent of gross export earnings in 1999, with electronic goods becoming one of the most important products. The role of mining has steadily declined during the last few decades (Malaysia was one of the world's largest exporters of tin in the 1970s), now contributing just 7 percent of GDP. Malaysia continues, however, to export tin, gold, bauxite, ilmenite (a titanium ore), oil, and gas. Meanwhile, the role of agriculture in the country's economy has also been declining, although it provides employment to large numbers of Malaysians. Nevertheless, Malaysia remains one of the world's leading exporters of rubber and timber and produces almost half the world's palm oil. Tourism is another important and rapidly growing sector of the economy, with about 7.5 million tourists visiting the country in 1999 and contributing RM10 billion to the national economy.

Malaysia has a very diverse economy. The manufacturing sector is dominated by large multinational corporations, with a heavy Japanese presence among the largest companies. Meanwhile, the agricultural sector is dominated by medium and small firms. In East Malaysia, Sabah, and Sarawak, and in some northern states, many farmers are still engaged in subsistence agriculture. In the service sector, especially in retail trade, large international superstores such as Marks and Spencer, SOGO, and Yaohan are complemented by a number of medium and small enterprises.

Rapid economic growth and stability brought economic prosperity to a large proportion of the population, especially in urban areas. It also helped to keep unemployment at a very low 3 percent (for comparison, unemployment in the United States was 4.2 percent in 1999). In some sectors, Malaysia has begun to experience a shortage of labor. In the late 1990s, there was an inflow of large numbers of foreign workers through legal and illegal channels from neighboring Indonesia, with whom Malaysia shares some linguistic and cultural similarities, and from Bangladesh, the Philippines, and Burma (Myanmar). This inflow is sometimes blamed for existing criminal activities and black market operations.

Drugs are another important issue; Malaysia is situated very close to the so-called "Golden Triangle" (an area between Burma, Laos, and Thailand) that is the world's largest producer of illicit drugs such as opium. Malaysia is among the few countries in the world to have adopted the death penalty for possession and sale of drugs. However, neither organized crime nor the black market have had a significant impact on the national economy.

Due to the tremendous economic growth and its ability to preserve stability and promote its multicultural environment, Malaysia has become an increasingly popular destination for tourists from Europe, Japan, and North America. Malaysian tropical forests and beaches, colorful festivals in major cities, and luxurious hotels provide a vibrant environment for the development of hospitality businesses.