Malaysia braces for impact of solar energy expansion

The future of solar energy in Malaysia received a powerful boost on June 16 with the commissioning of the country’s largest solar power plant to date. The project’s operator, Malaysia-based Amcorp Group, awarded the production of the power plant’s solar panels to Chinese manufacturer Yingli Green Energy Holding Company. The project spans an area of almost 14 ha and will require some 40,000 photovoltaic (PV) units, which are estimated to produce 13.6m KWh of electricity annually.

While Amcorp Group’s decision to commission Yingli Energy is a testament to China’s dominance in the field of solar panel production, Malaysia is quickly gaining a reputation as one of the region’s leaders in renewable energy production.

In January, plans were unveiled for the installation 19 MW of solar energy units at Kuala Lumpur International Airport. Malaysia Airports’ managing director Bashir Ahmad told Renewable Energy News, “Rooftops, parking lots and ‘buffer’ areas at airports are traditionally not multi-purpose facilities, but we’ve turned them into a clean energy generation facility. This initiative also demonstrates our support towards the government’s initiative in introducing renewable energy and also to further reduce our carbon footprint.”

Pro-solar policy

Malaysia’s increasing momentum in the renewables arena is also attributed to a generous feed-in tariff (FIT) policy which requires energy providers such as Tenaga Nasional and Sabah Electricity to purchase power from Feed-In Approval Holders (FIAHs) at a rate that ranges from RM0.85 ($0.02) to RM1.23 ($0.38) per kilowatt produced. The FIT system is part of a larger development initiative set forth by the Malaysian government in June 2010, the 10th Malaysia Plan, which targets 5.5% of energy production to be derived from renewable sources by 2015 and 11% by 2020.

A tariff war currently taking place between solar panel producers in China and the US has further strengthened Malaysia’s growing status in the solar power arena. Chinese producers face US import duties of between 18% and 35% on solar panels, a response to US allegations that Chinese solar panel manufacturers have dumped their products into the US market.

To bypass the tariff, Chinese PV cell producer Comtec Solar Systems has opted to move its manufacturing operations to Malaysia. “We have been considering producing in Malaysia for over a year because we have a major customer there, but now our main consideration for moving there is to avoid trade barriers in our main markets,” John Zhang Yi, CEO of Comtec Solar, told the South China Morning Post.

The question of efficiency

As a nation historically known for an abundance of natural resources including oil, gas, hydropower and coal, the decline in hydrocarbons reserves in recent years has reinforced a national desire to secure renewable energy sources. Solar energy has proven to be chief among the renewables with a market share of 43%, followed by small hydropower (26%), biomass (26%) and biogas (5%).

As with any industry in relative infancy, technological efficiency remains a topic of debate among those for and against solar power production. The amount of energy produced per solar panel, a maximum of about 33.5% efficiency, is still a concern for many looking to invest in the technology. In comparison to conventional energy sources, the cost of solar power is relatively high.

While Malaysia’s FIT system claims to take the high cost of solar panel installations into account when considering what it takes to see a return on investment, the rates received by the FIAHs are dependent on the date of installation. Those that installed PV equipment at earlier times will receive higher rates than those which do so later on. This is based on the assumption that the price of solar technology will decrease as it becomes more efficient and widely available.

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Malaysia’s tourism sector aims to blow past headwinds

A strong showing by Malaysia’s tourism industry in the first three months of the year may be offset by an expected drop-off in arrivals from China. But officials and travel bodies remain confident that any cooling in sentiment from the mainland will ease by the latter part of the year, giving the sector a lift in the final quarter.

The tourism industry posted arrivals up 10% year-on-year for the first quarter of the year, with just over 7m visitors, up from 6.5m for the same period in 2013, according to data issued by the Immigration Department of Malaysia in mid-June.

Fellow ASEAN members continued to provide the bulk of Malaysia’s inbound visitors, contributing 72% of the total – 5.1m arrivals – with Vietnam, Thailand, Cambodia, the Philippines and Singapore all showing double-digit increases for the quarter. Indonesia, the second-largest source of tourists, delivered 676,000 passengers that represented a 7.3% increase.

Malaysia will need to maintain this rate of growth if it is to reach the aim of 36m annual arrivals set by the government for 2020, more than 10m up on the 25.7m arrivals recorded last year. The government is also looking to greatly expand tourism revenue, targeting earnings of $52bn annually by the end of the decade, more than two and a half times the 2013 total of $20.3bn.

Headwinds cooling Chinese interest

Despite the good performance, the real proof of the resilience of the tourism sector will come with the release of the second quarter figures, with a number of factors set to have a negative impact on performance.

The disappearance of Malaysia Airlines Flight 370 on a flight from Kuala Lumpur to Beijing in March, with 239 passengers and crew – many of the former being Chinese nationals – combined with the kidnapping of a number of Chinese nationals in Sabah recently, has hurt Malaysia’s standing as a tourism destination in the eyes of many potential travellers from China. Some estimates put the drop in arrivals from mainland China at around 40% since the incidents, putting at risk the industry’s target of hosting 2m Chinese tourists this year compared with 1.4m arrivals in 2013.

Tourism and Culture Minister Datuk Seri Nazri Aziz told Parliament in June that a total of 76 flights to Kota Kinabalu, the capital of Sabah, from China were cancelled recently in response to three kidnapping cases on the east coast of the Malaysian state in three months.

Another factor that could impact Chinese visitor numbers is the simmering tension between Beijing and a number of countries in the region, including Malaysia, relating to territorial disputes in the South China Sea and elsewhere. These tensions have seen at times violent anti-Chinese protests in Vietnam and while sentiment in Malaysia is not as heated, some Chinese tourists may look further when planning their holidays, away from any states in which their government is at odds.

Promotional push

Malaysia is now moving to shore up its Chinese market, having curtailed promotional activity in the wake of the Flight 370 disaster. Tourism authorities are again starting to increase advertising activities and attend trade fairs.

Speaking in Hong Kong in early June, Azizan Noordin, the deputy director-general of promotions for Tourism Malaysia, said he remained confident Chinese arrivals would hit 2m this year, representing a 15% increase year-on-year. Echoing these comments, the Malaysia-Chinese Tourism Association, a group representing Malaysian Chinese travel agents, predicts that arrivals from China are likely to rebound in the third quarter and into the last three months of the year while officials are confident year-end targets will be met.

But it remains unclear how deeply the loss of Flight 370 and the kidnappings in Sabah impact Chinese sentiment in the second quarter and beyond.

In for the long haul

Visitor numbers from China may well fall short of expectations for 2014, but this gap may be bridged by holidaymakers from other countries seeking an alternative to troubled Thailand.

Malaysia’s tourism appeal is spreading further with visitors from countries such as Australia a target. Though only representing a fraction of the overall total, long-haul visitors from countries in Europe or North America added significantly to Malaysia’s arrival numbers, with 500,000 landing in the first three months of the year, according to the Immigration Department. While only 8% of all arrivals, these long-haul markets represent an area of strong growth potential, one that has been given increased support by improved flight connections to Europe in particular.

Another more distant market that both the government and operators are working to expand is in the Middle East and other predominantly Muslim markets. Muslim visitors to Malaysia were estimated to account for a fifth of the total last year. This amounted to 5.2m according to the Islamic Tourism Center, an almost four-fold increase on the 2000 figure. By building on its credentials as a Muslim-friendly destination, Malaysia should be able to further broaden its tourism base.

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Moving ahead with Malaysia’s trade pacts

Malaysia’s leadership is forging ahead with plans for entry to the US-led Trans-Pacific Partnership (TPP) despite domestic concerns that the multilateral trade agreement will negatively impact some domestic sectors and international concerns over delays in its progress.

Prime Minister Najib Razak said in May the agreement would be ratified by the end of this year, though only on “Malaysia’s terms” with the content being more important than the deadline, he noted.

This has led to some speculation that regional and bilateral trade deals may give Malaysia more tailored and long-term benefits than sweeping global arrangements, even though the changes are taking place on a smaller scale.

Compromises

The free trade agreement (FTA), which involves 12 countries including Australia, Brunei, Canada, the US and Vietnam, would strengthen Malaysia’s ties with the wider world with the aim of expanding trade and market access in terms of economic and investment growth, said Razak.

His remarks came after anti-TPP rallies were held in the region, in response to a visit by US President Barack Obama in April. Opposition leaders in Kuala Lumpur warned that Washington would use pressure tactics to get Kuala Lumpur’s approval for the deal.

“The US might offer security enhancement as a trade-off if Malaysia compromises on its red lines in the TPP. The US regime has always used trade and security hand-in-hand to twist arms of nations to accept its economic hegemony,” Parti Sosialis Malaysia treasurer A Sivarajan said.

Malaysia is reluctant to accept changes to its government procurement policies that could result from the deal, while domestic critics say it will impact on equality initiatives such as pro-ethnic Malay affirmative action introduced after 1969 race riots.

“[Joining the proposed TPP agreement] may mean disruption of our effort to reduce national tension caused by economic disparities,” the former Malaysian Prime Minister and recently-appointed chairman of the automotive manufacturer Proton, Mahathir Mohamad, told the Nikkei Asian Review. He added that retaining some trade barriers was necessary to protect local industries. “To ask us to compete with fully developed countries, that is a task that is almost impossible.”

Proponents of the TPP say it will help dismantle non-tariff barriers and enforce best practice, while obliging countries with closed economies to tackle domestic monopolies. But even its supporters claim its free trade principles are being diluted as divergent economies such as those of Australia and Vietnam demand changes.

Small may be best

Critics have suggested that potential signatories to the TPP, such as Malaysia, would benefit more from focusing on smaller-scale, bilateral or regional free trade agreements rather than joining global initiatives which include economies on the scale of the US and Japan.

The Asian Development Bank (ADB) said in May that the time spent on negotiating “mega” trade deals such as the Trans-Pacific Partnership (TPP) would be better spent consolidating more bilateral trade agreements.

“Whether or not countries wish to pursue mega-regional agreements, in the meantime they should simply pick the lowest tariff among their myriad agreements and adopt this single measure. The solution would also apply to many non-tariff barriers, and would have clear economic benefits, in addition to furthering the cause of global free trade,” Jayant Menon, lead economist for trade and regional co-operation at ADB, told Emerging Markets.

In this vein, the Malaysian and Turkish governments signed an FTA in April that is expected to boost trade to $5bn by 2018 by providing preferential market access for Malaysian goods entering the Turkish market and vice-versa. It also included key bilateral conditions such as reducing the tariff on crude palm oil exports to 20% from 31%.

Under the provisions of the FTA, which took several years to negotiate, Malaysia and Turkey will co-operate in areas encompassing small and medium-sized enterprises, halal-related areas, agriculture and food industry, research development and innovation, health, energy, e-commerce, and automation.

Malaysia already has existing free trade agreements with China, South Korea, Japan, India and Australia and New Zealand.

Export growth

Such preferential agreements have helped Malaysian exports hit a sweet spot this year, accelerating at their fastest pace in four years to nearly 19% year-on-year (y-o-y) growth in April and charging ahead of analysts’ expectations.

This marked the 10th consecutive month of expanding exports, following five successive months of contraction. The institute said this was due to a sharp rise in the shipments of electrical and electronic (E&E) products (32% share of total exports) and commodity (19% share) during the month. At a regional level, observers also point out the advantages of the Regional Comprehensive Economic Partnership (RCEP), which includes Malaysia and the other nine members of the Association of South-east Asian Nations.

“While the TPP aims to be a high-quality preferential trade agreement… the RCEP… sets the bar low and accepts that countries will reduce trade barriers at different rates – especially among less-developed members – and also makes limited demands for regulatory harmonisation,” wrote the Australian Strategic Policy Institute in April 2013.

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High hopes for low-cost air in Malaysia

Malaysia’s transport sector marked a major milestone in early May when a new terminal for the rapidly growing budget air-travel business opened at Kuala Lumpur International Airport (KLIA).

Known as “klia2” and billed as the largest purpose-built low-cost carrier (LCC) terminal in the world, the facility began operations a year behind schedule. Supporters of the project, however, insist that klia2 is nothing short of a game-changer for the country’s ambitions as both regional transport hub and global tourism destination.

A cloud has loomed over those ambitions since March 8, when Malaysia Airlines Flight 370, bound from Kuala Lumpur to Beijing, went missing. The aircraft’s fate remains a mystery, and persistent worldwide media coverage of the tragedy has produced a wave of negative publicity. Both the airline, Malaysia’s flag carrier, and the government have repeatedly stressed that locating the aircraft is their top priority, but having the spotlight shift elsewhere is likely welcome news.

Focus on LLCs

klia2 has the capacity to handle 45m passengers a year, a significant improvement on its predecessor, which topped out at 10m. Even more importantly, it caters specifically to LCCs, already the fastest-growing category in the Asia Pacific air-travel market and widely expected to experience further expansion in the near future. In a market forecast published on its website, Boeing predicts that “[d]uring the next 20 years, nearly half of the world’s air traffic growth will be driven by travel to, from, or within the Asia Pacific region.”

And the LCCs are leading the charge: according to statistics published by CAPA – Centre for Aviation, an industry information consultancy, LCCs went from operating 2% to 15% of the Asia Pacific region’s total fleet numbers in the 10 years to 2013. They take an even larger share – 20% – of seat capacity, and both figures look set to increase. The region had 47 LCCs (including five new ones) active in 2013, most of which added capacity at double-digit rates, and no fewer than 10 additional entrants are expected to begin operations in 2014.

Perhaps most tellingly, according to CAPA, LCCs account for 50% of the region’s orders for new aircraft – not counting orders on behalf of budget airlines that are actually subsidiaries of traditional or full-service carriers. The 1500 units on order will more than double the Asia Pacific LCC fleet to 2500 planes, vastly raising the scope for competition with conventional airlines. In addition, bulk purchases like those of the sector’s two heavyweights, AirAsia and Lion Air, will significantly reduce unit costs, increasing the intensity of that competition.

Home advantage

Malaysia enjoys something of a head start in the race to cash in on the sector’s expansion. First and foremost, while North Asia has significant long-term potential, the focus for the foreseeable future will be on Malaysia’s own backyard of South-east Asia, where LCCs already account for 30% of the commercial fleet. Also, the country enjoys a positive image as a model of development and a bastion of stability, qualities that set it apart from its neighbours.

As with many large and complex airport facilities, however, the launch of klia2 has not been entirely smooth. Total costs, for instance, have risen sharply: while the original 2007 budget was about $500m, the project has thus far absorbed some $1.3bn. Completion and operational readiness were achieved a year late, due in part at least to tensions between the terminal’s operator, Malaysia Airports Holding, and its largest tenant, AirAsia. Allegations that its taxiways and parking bays are vulnerable to undermining by torrential rains may necessitate millions in repair costs and service delays.

Nevertheless, klia2 is designed to serve as a catalyst, compounding the impact of Malaysia’s inherent tourism and air-transport advantages to ensure that Kuala Lumpur’s early lead is never lost. To do this, it has been built with modern infrastructure and technologies aimed at maximising competitiveness, capacity and convenience.

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Malaysian markets to gain from pension planning

State agencies and the private sector are combining to promote private pension schemes, both as a measure to strengthen provisions for Malaysians in retirement and to boost liquidity in the nation’s capital markets. However, longer-term success will depend on convincing the younger segments of society of the need to prepare for life after work.

Malaysia is trying to move away from state-funded pension schemes and a traditional reliance by the elderly on family support in its planning for a society with higher incomes but also an ageing population. At the core of this is the Private Retirement Schemes (PRS) initiative, a range of investment funds intended to offer Malaysians the option of building up a private pension as a supplement to a state pension and the existing mandatory private pension scheme administered by the Employees Provident Fund (EPF).

Launched in mid-2012, there are now eight PRS providers, providing 44 PRS funds among them, with take-up of the scheme starting to gain momentum. As of end-December 2013, PRS providers have some RM280m ($86.87m) worth of assets under management, a figure that is expected to double by the end of this year. According to the Private Pension Administrator (PPA), the central administrator of the PRS industry, the contributor base will grow from 65,000 members as of the end of 2013 to between 140,000 and 150,000 by the end of 2014.

The need for Malaysia to increase retirement coverage for its population is becoming more pressing. While the population base is still young, that situation is changing, with more than 11% of citizens expected to be 60 years of age or older by 2020. According to estimates from the World Bank, some two-thirds of Malaysians are currently not adequately prepared for retirement, meaning that the state will have to carry an increasing burden in the coming decades unless there is a far greater take-up of private pension schemes.

Planning for the future

According to Steve Ong, the chief executive officer of PPA, more Malaysians need to ensure their financial security in the post-employment years.

“Currently, the income replacement ratio of an average Malaysian is at 30%, which falls short of the two-thirds, or around 66%, recommended by the World Bank. The two-thirds replacement ratio is to provide the financial means to continue with the same living standards and lifestyle one has become accustomed to when retired,” Ong told OBG.

“With the PRS, PPA envisages that over time the Malaysian public will have two retirement funds, namely the EPF and PRS, to support their retirement years,” he said.

Younger customers targeted

To deepen the savings pool and to spread out the demands on state-funded pension schemes, the government raised the minimum retirement age from 55 to 60 last year. This move allows workers to make a further five years of EPF contributions and also gives older workers the chance to buy into PRS funds.

In planning for the future, the government and fund managers have been looking at the younger segments of society, those under the age of 30, as being the priority target for the PRS market. At present, only 6% of contributors to private pension schemes are below the age of 30, according to PPA data. The agency hopes this will rise to 20% by the end of 2014 as promotional initiatives, including an incentive scheme launched in this year’s budget offering a one-off top-up contribution of $150 from the state to new subscribers, boost interest.

Capital markets boost

If, as expected, younger Malaysians start to buy into PRS, this will provide a sharp influx of funds under management, which in turn will serve to add long-term liquidity to the country’s capital markets, with pension investors not looking for a payout for 30 years or more.

In mid-March, the chairman of the Securities Commission, Ranjit Ajit Singh, said that the collective investments segment, which will increasingly be driven by pension funds, has a strong potential for growth. The market regulator will take steps to further expand PRS distribution channels and promote the use of employer-sponsored schemes as part of broader measures to encourage a more sustainable retirements savings culture, he said while launching the commission’s 2013 annual report.

If PRS providers are able to maintain the rate of growth foreseen by PPA through to 2020, they will have a massive asset base at their disposal. PPA anticipates funds under management by PRS providers reaching $9.5bn, even with the rising level of payouts expected by the end of the decade. This will make the funds managed by PRS providers a significant factor in Malaysia’s capital markets, one that is expected to see greater demand for long-term bonds and other longer-term asset classes, adding depth to the market and further strengthening its appeal to investors.

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Mixed reaction to Malaysia’s debt levels

Pressure is mounting on Malaysia’s central bank to tighten loan restrictions after its annual report showed household debt levels inching towards 87% of GDP at the end of 2013. With the highest household debt levels in Asia, demand for credit is driven primarily by the desire to buy properties and vehicles.

Keen to allay growing concerns, the central bank recently highlighted Malaysia’s strong fundamentals, while also pointing to measures introduced last year which, it said, had improved lending practices. Senior analysts have given Malaysia’s economy a vote of confidence, although concern is growing that a future talent shortage could weigh on the bank’s financial projections.

Vetting brings improvements

Household debt levels hit 86.8% of GDP at the end of December 2013, marking a record high, but signalling slower growth.

Bank Negara Malaysia governor, Zeti Akhtar Aziz, voiced her confidence that efforts to tighten up lending were producing results. “Household loans from the banking system continued to improve in quality across all loan segments, with delinquencies remaining low and continuing to trend downwards. … This has been supported by sustained improvements in the lending and risk management practices of banks,” she said at a press briefing.

The central bank limited the tenure of personal loans to a maximum of ten years last July, while also banning pre-approved personal financing products. Later in 2013, the government announced plans to bring an end to the practice of developers absorbing interest payments on loans. It also raised capital gains tax to 30% on homes sold within five years in a bid to rein in speculation.

Despite the bank’s efforts, Standard & Poor’s cut its credit outlook for four Malaysian lenders in November, citing concerns that rising home prices and household debt were contributing to economic imbalances.

“The negative outlook recognises the potential for deterioration in the banks’ asset quality and financial profile, if the consumer debt burden proves excessive in an unfavourable economic scenario,” S&P analysts Ivan Tan and Deepali V. Seth wrote in a report.

Conflicting sentiment

Official data from the Malaysia Department of Insolvency issued in the same month showed that 60 people, aged between 35 and 44, were being declared bankrupt each day.

Yet several financial experts remain optimistic about the Malaysian economy’s potential. “If you look at the demographics of the country, we have a young working population and with urbanisation, it is supporting spending,” Alan Tan, chief economist at Affin Investment Bank told The Malay Mail Online in late March.

His sentiments were echoed on the same day by the World Bank senior economist for Malaysia, Frederico Gil Sander. “As long as household income is growing, as long as there is growth in the economy, and people can service their debt, it’s not necessarily… a bad thing,” he commented.

Projections made by market analysis firms support their views. RHB Research said in March that Malaysia’s GDP looked likely to grow at 5.4% in 2014.

Supporting transformation

Kuala Lumpur has set a target of achieving a per capita income of $15,000 by 2020, up from its 2013 level of $10,500, as part of its Economic Transformation Programme. Prime Minister Datuk Seri Najib Raza said in early January that the government was looking to create more than 3m job opportunities by the same year, in line with its target of achieving high-income, developed nation status.

Critics, however, warn that positive income and job creation predictions depend heavily on having the people in place to fill those roles. Malaysian students ranked 52nd out of 65 countries featured in the PISA 2012 survey of world student performance, released in December.

Writing in the FTAdviser on March 24, two professors from the University of Nottingham – Malaysia Campus, Christine Ennew and Nafis Alam, said that the effectiveness of any international financial centre was underpinned by the quality of its people. “Poor scores in international student assessments and declining English-language capabilities do not augur well,” they said. “In short, Malaysia has a people problem.”

While managing risk and improving lending practices will help ease fears about the debt situation, bringing through the next generation of achievers and creating roles for them is likely to be equally important in steering Malaysia towards its longer-term economic targets.

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Malaysia’s universities working to make the grade

Universities in Malaysia have been given a key role in government plans to raise the country to developed-nation status within the decade, but more investments may be necessary if higher education institutions are to meet the targets that have been set by the state.

According to government figures, 25% of all Malaysians between the ages of 18 and 24 are taking part in some form of higher education, a level of participation that Prime Minister Najib Razak says will help the country overcome income inequality and reach its goal of being a high-income nation by 2020.

“The odds of people succeeding in their socioeconomic upward mobility are significantly improved by raising access to education,” he said while attending a ceremony at the Unitar International University in Kelana Jaya on February 27. “Only with equity can we narrow the gap of income inequality and achieve a resilient national unity.”

Working to make the grade

However, it is not just greater access to higher education that is in the government’s sights – Malaysia is aiming to boost the quality of academics as well. The goal is to have at least one local institution ranked among the top 50 global universities by 2020, with a minimum of three in the top 100.

Meeting this target may prove difficult to achieve by the deadline set. In the latest edition of the QS World University Rankings, the preferred benchmark according to the Ministry of Education, the highest-placed Malaysian institution was Universiti Malaya, which came in at 167, followed by Universiti Kebangsaan Malaysia (269), Universiti Sains Malaysia (355) and Universiti Teknologi Malaysia (355).

Malaysia’s universities fared better in the QS World University Rankings by Subject, however, which was released at the end of February. Eight institutions are rated within the top 200 in at least one of the 30 disciplines reviewed, two more than made the grade last year.

Best-performing was Universiti Sains Malaysia, which ranked 28 for environmental sciences, while also joining the top 100 for computer science and information systems, chemical engineering, civil engineering and mechanical engineering. Universiti Malaya reached the top 100 in six categories, including computer science and information systems, chemical engineering, electrical engineering and mechanical engineering.

This year’s results show that Malaysian universities are operating at an increasingly high level within a range of academic disciplines, QS head of research, Ben Sowter, told the local media.

“Overall, the performance of Malaysian institutions has improved compared to last year,” he said. “Through taking a more targeted approach to ranking universities, we have been able to pick up on the particular strengths of Malaysian institutions much more effectively than is possible in overall institutional rankings.”

Academic credence, economic gain

Apart from gaining credibility in the academic world, success in various ratings surveys are of importance to individual universities and the country, and can bring clear financial benefits. Better rankings help universities attract more international students, staff, business investment and research partners.

Another advantage of a stronger higher education system could be a reduction in the flow of Malaysian students overseas, with up to 80,000 studying abroad annually, of whom roughly one third have some form of sponsorship. While a similar number of international students come to Malaysia, the balance of revenue from higher education could be swung more firmly in the country’s favour if it was able to keep more of its students at home while attracting additional fee-paying foreigners from other markets.

One encouraging fact is that many of the disciplines where Malaysian universities scored high in the QS rankings were in technical and scientific fields, indicating strength in areas that have practical applications for economic development. Though Malaysia may find it a challenge to reach the upper tiers of global university rankings, the country appears to be making the grade in terms of moving closer to its national economic targets.

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Malaysia forms ties to the Gulf to develop Islamic financial services

A cooperation agreement between the bourses of Malaysia and Saudi Arabia – the world’s two largest Islamic financial services markets – stands to help the industry grow at a greater clip in both countries.

The deal, signed on February 20, will see the exchanges in Kuala Lumpur and Riyadh share expertise and develop human resources jointly. It covers topics such as equities, mutual funds and sukuk (Islamic bonds), and comes after an agreement between Malaysia’s central bank and the UAE in October on bolstering economic ties, including in the arena of IFS.

Combined, Malaysia and Saudi Arabia hold $682bn in Islamic banking assets, according to Reuters. The Saudi exchange, Tadawul, lists the world’s biggest Islamic banks, while Bursa Malaysia hosts the largest and most liquid market for sukuk.

Expanding its draw

The Malaysian market in particular is set to expand this year thanks to greater international interest, according to ratings agency Standard & Poor’s (S&P). “Malaysia already benefits from a broad sukuk investor base and liquid debt market. So the increased interest from issuers – notably in the Middle East and Asia – in tapping the Malaysian ringgit and dollar market should in our view continue over the next few years as Malaysia cements its leading position in the industry,” S&P wrote on February 4.

Major international investors, too, are extending Malaysia’s clout in IFS. AIG, the US-based insurance company, revealed in early February that by June it plans to start a sharia-compliant reinsurance business in Malaysia – a country that accounted for 11% of the $20bn global takaful (Islamic insurance) market in 2013, according to a February 13 report from the Malaysia International Islamic Financial Centre

Also in February, Libya’s ambassador to Malaysia, Anwar A Y Elfeitori, said his country was seeking more cooperation with Malaysia to assist in the development of its Islamic banking sector.

As a result of such global positioning, the IFS market has the potential to provide a significant boost to the economy, particularly in talent and employment, Adnan Alias, CEO of the Islamic Banking and Finance Institute Malaysia, told the local media recently.

“Malaysia has the right landscape and regulatory framework to further spur the development of talent in Islamic finance,” he said, adding that the IFS workforce was expected to grow from 144,000 to 200,000 in the next eight years. He noted the contribution of IFS to GDP was set to be around 10-12% in 2020, compared with the latest figure of 8.6% in 2010.

Steps toward further growth

While Malaysia has had a significant degree of success in the international IFS market – the Kuala Lumpur-based IFS Board, for example, is one of two global standards-setting bodies – the South-east Asian country faces increasing competition. Potential competitors include Dubai, which in recent months has signalled its intentions to establish the emirate as a centre for IFS.

According to some observers, Malaysia could be doing more to ensure continued growth in the IFS market. Islamic banking and finance could account for 50% of the financial sector if domestic banks like Maybank and CIMB Group give “a big push” to their IFS strategies, Humayon Dar, visiting professor of Islamic Finance at the Academy for Contemporary Islamic Studies, Universiti Teknologi MARA, wrote in an op-ed published by Malaysian Reserve on February 24.

Humayon said this would involve “Islamising” businesses by making more procedures sharia-compliant. “This is perhaps the time for the government to consider converting Cagamas [the Malaysian national mortgage company] into a fully-fledged Islamic financial institution, as almost 50% of its business is already sharia-compliant,” he added.

Others say the local IFS sector could receive a boost if Malaysia were to adopt sharia-compliant laws. Speaking in February at a conference on Islamic banking and finance law in Kuala Lumpur, former chief justice Tun Abdul Hamid Mohamad pointed out that many countries have set up regulatory frameworks to facilitate the development of Islamic finance products such as sukuk, but none has drafted sharia-compliant laws that could be used to settle the disputes that arise from their use. This could provide an edge for Malaysia, which is already viewed as a “model Islamic country”, he said.

As the global market grows – Islamic financial assets are currently valued at $1.3trn and S&P expects the industry to grow 20% annually from 2011 to 2015 – Malaysia is in pole position to capitalise on its early entry into the sector. While linking up with Gulf countries will help spread and develop Malaysian expertise on Islamic finance, new competitors in the sector continue to arise. This means that Kuala Lumpur must strive for the innovation that will keep its IFS sector ahead of developing trends.

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Malaysia forms ties to the Gulf to develop Islamic financial services

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Malaysia focusing on qualitative growth rather than quantitative easing

With the US Federal Reserve set to reduce its bond buying activities as of January 2014, there has been growing speculation as to how great an impact the tapering will have on emerging markets, including Malaysia. While some economies dependent on short-term capital inflows, such as Turkey or Brazil, are likely to face challenges, Malaysia is increasingly seen as more capable of coping with the reversal of the US bond policy.

In mid-December, Bank Negara Malaysia (BNM) governor, Zeti Akhtar Aziz, said that the central bank was well positioned to manage and intermediate any volatility resulting from the tapering of quantitative easing, and had been preparing for the gradual reduction in the US bond buying scheme.

“Progressive liberalisation has resulted in two-way flows that will help towards stabilising the markets, and BNM will be there to ensure orderly market conditions,” Zeti said.

While there will likely be some negative economic effects, there are also potential advantages to be had from the ending of US quantitative easing, the BNM head said.

“We have to take the tapering as an eventuality and it is a sign that the US economy has improved and this would be positive for the rest of the world,” she said. “However, as recipients of funds, we would see more volatility in our financial markets.”

Zeti noted she expects local institutional investors such as pension funds and insurance companies to step up and play an increasing role in the markets as overseas funds are withdrawn.

Another individual to remain confident in the economy’s outlook in the face of quantitative easing is Edward Iskandar Toh, chief investment officer of fixed income for Areca Capital, a Malaysia-based fund management company. In an interview with the local media January 13, Toh explained that the domestic market had been factoring in the advent of tapering for the past six months.

Growth set to outweigh tapering downside

Even with the Federal Reserve’s tapering as a cloud on the horizon, the Malaysian economy is expected to sustain momentum in 2014, with analysts predicting expansion of 5% or more. According to a report issued by Standard Chartered Bank on January 9, improved foreign trade and continued strong domestic demand will underpin growth, suggesting the economy would be able to ride out the impact of the Fed’s tapering.

Indications that Malaysia could likely experience a soft landing when the Fed eases its stimulus programme came in early January, with the release of the latest current account figures. November saw the highest trade surplus in almost two years, rising from October’s $2.51bn to $2.96bn.

Following the release of the trade data on January 8, Rahul Bajoria, an analyst with Barclays, said the ongoing growth in trade “boded well for overall economic performance”. Should the economy continue to expand, it could attract both longer-term foreign direct investment as well as more mobile overseas capital.

A further show of confidence came from ratings agency Moody’s, which in mid-November upgraded its outlook for Malaysia’s government bonds from stable to positive, while reaffirming both bond and issuer ratings at A3. One of the factors influencing Moody’s decision to revise its outlook was what the agency described as Malaysia’s “continued macroeconomic stability in the face of external headwinds”.

Some impact inevitable

Though Zeti and others are confident that the Malaysian economy can successfully weather the ending of quantitative easing, the tapering process is likely to cause ripples, as has already been seen in mid-2013, when speculation first began regarding the Fed’s plans to cut its stimulus programme. Over the course of 2013, the ringgit lost nearly 7% of its value, its worst performance since the Asian economic crisis of 1997, while the cost of government borrowing also edged up as the focus of investor interest shifted towards the US.

However, in comparative terms, Malaysia has fared quite well – the value of Indonesia’s rupiah, for example, fell by around 20% in 2013. The worst of the impact has probably occurred, and a rejuvenated US economy could boost demand for Malaysian exports, part of the upside referenced by BNM governor Zeti. With its own economy set to expand solidly, and some of its main external trading partners on the road to recovery, Malaysia will likely experience ripples, rather than waves, as the Federal Reserve shifts down its bond-buying programme.

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Malaysia focusing on qualitative growth rather than quantitative easing

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Oxford Business Group | Budget shake-up for Malaysian real estate

The Malaysian government has taken steps to cool speculation in the property market by imposing a capital gains levy on real estate sales, tightening up regulations governing developers and raising the price bar for foreign investors, moves that have won mixed reviews from analysts.

On October 25 Prime Minister Najib Tun Razak tabled the draft budget for 2014, which has a strong emphasis on raising state revenue and cutting spending. According to the plan, subsidies will be restructured in the coming years and public debt – currently at 53% of GDP – will be lowered.

Among the revenue-generating proposals are a number of new taxes, including a real property gains tax (RPGT), which is also intended to ease property speculation and reduce inflation in housing. Under the new provisions, set to come into effect on January 1, a tax of 30% is to be imposed on gains from real estate sales on properties owned for three years or less, with the rate sliding to 20% if the property is sold in the fourth year of ownership and 15% in the fifth. Any sales after the fifth year will not be charged a capital gains levy. Previously, the capital gains tax on property sales had been set at 10% when introduced in 2010 and later increased to 15%, and applied to sales within two years of purchase.

For foreign property buyers, a different tax scale will be applied, with non-citizens required to pay a tax of 30% on the capital gains for a property sold at any time over the first five years of ownership, after which the rate falls to 5%.

Another move, one seen as even more likely to cool speculation, was the banning of developer interest bearing schemes (DIBS). As their name suggests, developers that offer DIBS agree to pay any interest on home loans during the construction period, making the purchase more attractive to potential buyers. The new provisions also prevent commercial lenders from involving themselves in DIBS-related projects. This measure will probably result in a slowing of off-plan sales by developers, while also reducing the property lending component of some of Malaysia’s larger banks.

While many in the sector have said banning DIBS was a positive move, one that would directly target speculation, others believed it would make it more difficult for first-home buyers to enter the market. One critic of the reform was Michael KC Yam, the president of the Real Estate and Housing Developers Association. Yam told the local media on October 25 that DIBS had been of benefit to many.

“We think that innovative home financing packages such as the DIBS offered by developers of high premium properties should be encouraged to facilitate financing and promote home ownership,” he said.

The RPGT also had its supporters and opponents, with Foo Gee Jen, managing director at property consultancy CH Williams Talhar and Wong, describing the increased levy as a measure that would boost stability in the market.

“The increase in RPGT is a wake-up call for flippers,” he told the local media on November 6. “Investors will have to go back to investing in property fundamentals, such as location and yield.”

However, some analysts have queried whether speculation is as rife in the sector as has been suggested, saying that the higher tax rate on capital gains will do little to reduce price increases for residential properties, one of the stated aims of the bolstered levy.

Foreigners eased out of the low end of the market

The budget also lifts the minimum value of a property that foreign investors can buy from the current RM500,000 ($161,000) to RM1,000,000 ($322,000), a move that may cool some of the speculation by overseas players.

Given the still relatively low price and solid value of Malaysian property, even the increased threshold may not curb foreign interest, though Chang Kim Loong, the honorary secretary-general of the National House Buyers Association, believed the higher ceiling will ease pricing pressures for Malaysian buyers.

“Foreigners must be prevented from snapping up property meant for the lower- and middle-income and thus artificially inflating property prices and creating a domino effect which can result in higher property prices across the industry,” he said in a statement issued the day after the budget was handed down.

Boost for low-cost residential segment

The budget also lays out a plan to add 223,000 new residential units to the national accommodation stocks in 2014, with both the government and the private sector expected to play a role.

The state will directly provide funding for the construction of low-cost housing, while at the same time offering a subsidy of $6000 per unit to private developers that build homes directed at low- and middle-income buyers.

It will be well into the new year before the full impact of the 2014 budget articles dealing with real estate will become apparent. To some degree at least, the buoyancy of the property market will depend on the strength of the Malaysian economy. The government has predicted growth of 5-5.5% in 2014, though ratings agencies and analysts are predicting GDP expansion may fall somewhat short of this target, at 4-4.5%. It could be that a relatively sluggish economy, rather than any increased tax, could slow activity in the property market.

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Oxford Business Group | Budget shake-up for Malaysian real estate

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