Malaysia looks to EEVs for car manufacturing boost

Efforts to position Malaysia as a regional centre for energy efficient vehicle (EEV) production took a key step forward in January, with news that the government intends to hand out its first green car manufacturing licence in the coming weeks.

Malaysia’s plans to develop the EEV industry feature strongly in its newly introduced National Automotive Policy 2014 (NAP 2014), the latest iteration of the government’s strategic roadmap for the sector. However, competition from other South-east Asian countries, which are also targeting vehicle assembly growth, could hinder Kuala Lumpur’s ambitions.

International Trade and Industry Minister Mustapa Mohamed told reporters on February 6 the government expected to issue its first EEV manufacturing licence in April. There has already been strong interest from overseas car makers, with production likely to start on EEV lines within three years, he said. According to the minister, Malaysia is looking to license 3-4 manufacturers of EEVs by 2018.

Launched on January 20, the NAP 2014 is the government’s blueprint for the automotive industry for the next decade and beyond. At its core is a vision that Malaysia will be one of the world’s leading manufacturers of EEVs, with up to 85% of vehicles rolling off the production lines by 2020 to be energy efficient. Goals include annual exports of 200,000 EEVs by the end of the decade, as well as car component sales of $3bn each year.

Incentives and exemptions

Under the NAP 2014, manufacturers will be encouraged to bring out a range of EEVs, powered by various energy sources, such as compressed natural gas, liquefied petroleum gas, biodiesel, ethanol, hydrogen and fuel cells.

The policy offers a number of new incentives aimed at attracting EEV manufacturers to Malaysia, including an easing of rules governing production for international players, which will now be able to manufacture smaller-sized-engine vehicles without having to partner with local companies. Foreign firms operating alone were previously restricted to producing cars with 1.8-litre engines or above.

Grants and soft loans of $600m are also being made available. Other incentives include pioneer status, investment tax allowance, grants for research and development infrastructure facilitation and reduced tax rates.

The immediate beneficiaries of the policy are expected to be foreign automakers already active in the country, including Honda, which has a hybrid car production facility in Malaysia, as well as Nissan, which manufactures conventional cars there.

Other brands have indicated interest, including Toyota, which assembles and distributes conventional vehicles in Malaysia. In January, the president of the Japanese automaker’s local unit said the company had submitted to the government a plan for building a hybrid production facility.

However, some industry leaders have expressed doubts about the NAP 2014. While praising the government’s efforts to broaden its definition of EEV, Gerhard Pils, CEO of BMW Group Malaysia, said additional details on incentives would be required.

Further discussions between industry representatives and the government are necessary to “clarify what the actual exemptions to EEVs assembled in Malaysia will be, as only from there will firm business decisions regarding the market be made,” the CEO said.

Regional competition

As it looks to expand its EEV production, Malaysia will face challenges from established South-east Asian car manufacturing centres such as Thailand and Indonesia, which have more liberal policies when it comes to foreign investment in the auto industry, as well as better-developed networks of local components suppliers.

Malaysia’s small domestic market may also deter some investors. In January, the head of Toyota’s Thai unit told Reuters that Thailand was “still in a better position given the size of the market”. The Japanese automaker sold 445,000 units in Thailand in 2013, compared to 100,000 in Malaysia. Around 650,000 cars were sold last year in Malaysia, more than half of which were manufactured by domestic producers Proton and Perodua.

This suggests that Malaysia may have a tough row to hoe as it looks to build up its local automobile manufacturing sector, but a good first step would be offering additional guidance on the types of incentives that it will provide, as well as encouraging locals to buy energy efficient cars.

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Malaysia moves to maintain halal edge

The halal industry in Malaysia is fast becoming a magnet for international investment, as major players move to acquire a share of a growing global market.

Malaysia is carving a niche as a key producer and exporter of halal products. However, with regional competition growing, its domestic players have been urged to seek out new opportunities beyond their borders, in line with a national drive to boost growth and transform the industry into a pillar of the local economy.

New facilities to open

US food manufacturer, Kelloggs, announced plans in January to build a $130m halal facility in Malaysia which will create 300 jobs when the first phase is completed in the middle of next year.

The news comes after international dairy giant Nestle said it planned to expand its operations in Malaysia by opening a plant in Shah Alam in mid 2014. US confectionery firm Hershey also outlined plans in 2013 to construct a $250m plant next year in Johor.

The emergence of new players is a welcome boost for the Halal Industry Development Corporation (HDC), which is looking to position the country as an international player in the market.

The Department of Islamic Development Malaysia (Jakim), the industry regulator, hopes that a bid to have Malaysia’s M1500: 2009 Halal standard adopted as a global benchmark will raise the country’s profile across the industry.

A total of 73 organisations, comprising 57 NGOs and 16 government bodies, have been granted permission to carry the Jakim certification, which verifies the traceability of ingredients and raw materials. Muslims are required to eat, drink and take medicinal halal products in accordance with religious requirements.

“Globally Jakim is the leader in promoting halal and its standards. Its counterparts in Dubai and Indonesia are also establishing their own standards,” Mohamed Hazli Mohamed Hussain, group CEO of DagangHalal, told OBG.

DagangHalal is a digital marketplace for halal products as well as a repository of halal certificates that works closely with Jakim and international certification bodies, matching Malaysian small and medium-sized businesses with buyers around the world. The company also provides a platform for halal applicants to find alternative suppliers and download the corresponding halal certificates.

Competition on the rise

According to government figures, Malaysia exported RM32.84bn ($9.86bn) worth of halal products in 2013, making it one of the largest suppliers in the Organisation of Islamic Cooperation, an international group with 57 members.

However, regional competitors are also ramping up their activities in the sector. Indonesia, which has the world’s largest Muslim population, revealed plans last October to establish a centre for the halal industry by 2015. The market is also expanding in Thailand, where more than a quarter of food factories are now participating in halal production.

Speaking in January, HDC managing director, Jamil Bidin, suggested that local manufacturers would need to look beyond Malaysia’s borders if the country is to retain its competitive edge.

Companies based in Malaysia should invest in overseas operations to take advantage of the procurement of raw materials and the proximity of markets to catapult the export industry onto the global stage, he told the local media.

Bidin said countries such as China, India, Bangladesh and Indonesia not only offered huge potential as markets for Malaysia’s halal products, but could also provide raw materials.

However, critics believe domestic producers will need to increase their focus on developing marketing strategies if they are to compete globally.

A 2013 report published in the Malaysia Journal of Society and Space concluded that some halal food suppliers were insufficiently informed about the legal, social and cultural environment of importing countries. “They are not able to identify consumer needs accurately in terms of taste and preferences,” it said. “They enjoy little strategic and long term alliances with importers or distributors or private market agents to promote their products.”

Any marketing weaknesses are likely to be exposed further as Malaysia steps up its efforts to expand the halal industry.

Plans include a push to attract non-Muslim consumers to halal foods as healthier and higher-quality options. The strategy is already proving successful in Asia, where food scares have sparked major fears.

“Halal is no longer about religion, but rather about safety, hygiene and quality,” Hussain told OBG.

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Malaysia braced for austerity challenge

While rising domestic demand in Malaysia helped reassure investors after last summer’s regional downturn, concerns remain that the country is displaying an over-reliance on high domestic consumption levels to prop up growth.

According to the World Bank’s latest projections, Malaysia is expected to achieve 4.3% GDP growth in 2013, despite substantial capital outflows and a nearly 10% depreciation in the ringgit during the second half of the year.

Domestic demand’s key role

The significant contribution that strong domestic demand has made to Malaysia’s economic resilience is widely acknowledged, with officials, including Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the central bank, highlighting its impact.

“The domestic sector has been solid and the anchor to drive our growth during this more challenging period,” Zeti told Bloomberg in November. “Global trade slowed down very significantly [in 2013], and of course, that affected us because of the openness of our economy. But had we not rebalanced our economy, we would have had 1-2% growth.”

In the same month, Bank Negara Malaysia announced domestic demand grew 8.3% year-on-year in the third quarter of 2013.

High household debt

In December ratings agency Standard & Poor’s, said increasing levels of household debt in Malaysia, which now exceed 80% of GDP, would be “problematic” if the country’s growth rate slowed. The agency had cut its credit outlook for four Malaysian lenders in the preceding weeks over concerns stemming from a rise in home prices and consumer leverage.

Just two weeks earlier, Nancy Shukri, the minister in the prime minister’s department, said that 16,306 people, or an average of 60 Malaysians daily, had been declared bankrupt in the first nine months of 2013.

Malaysia has one of the highest ratios of household debt to disposable income in the world, with its current level of 140% outstripping even that of the US (123%).

In a move to slow consumer credit growth, in July the central bank introduced certain restrictions on lending, including a ten-year ceiling on personal loans, a maximum tenure of 35 years on property mortgages and a ban on pre-approved personal finance products.

However, conditions may not be as dire as some have made them out to be. As Zeti pointed out in September, less than 2% of household loans were non-performing as of that time.

Effect of new budget

While national efforts to rein in spending are taking shape, they follow a wave of populist interventions, including wage hikes for civil servants introduced ahead of last May’s elections, which almost certainly boosted domestic consumption.

However, Malaysia has been more generally moving to tighten its fiscal position. Under the 2014 budget introduced in October, the government will reduce certain subsidies this year and introduce a new goods and services tax (GST) in 2015. Everyday goods and services will be subjected to a 6% levy, although basic food items and some methods of transport are to be exempt.

International critics have urged Malaysia to break the cyclical nature of spending patterns, suggesting that a new strategy would improve investor sentiment in the long term.

“The new government elected in May must consolidate its credibility by meeting its commitments to reduce the public debt without reneging on its electoral promises,” wrote BNP Paribas in an October analysis. “The prime minister also said the 2014 budget would be marked by austerity … [But] these measures … will only stabilise the public debt ratio at best, without reducing it.”

Public debt stands at around 54% of GDP. According to Douglas McWilliams, economic advisor to the Institute of Chartered Accountants in England and Wales, keeping this figure under 60% is important in terms of maintaining investor confidence and, with reforms in place, is an attainable goal.

“The fast growth is helping taxation revenues and government’s budgetary consolidation, particularly on subsidies but also GST, which means Malaysia’s debt ratio will be below 60%,” he told the local media in December.

The national drive to slow lending to consumers and keep government spending in check has been given a largely positive reception. However, accelerating initiatives and increasing their impact may well help the country in its efforts to attract investors and allay their concerns.

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Malaysia braced for austerity challenge

While rising domestic demand in Malaysia helped reassure investors after last summer’s regional downturn, concerns remain that the country is displaying an over-reliance on high domestic consumption levels to prop up growth.

According to the World Bank’s latest projections, Malaysia is expected to achieve 4.3% GDP growth in 2013, despite substantial capital outflows and a nearly 10% depreciation in the ringgit during the second half of the year.

Domestic demand’s key role

The significant contribution that strong domestic demand has made to Malaysia’s economic resilience is widely acknowledged, with officials, including Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the central bank, highlighting its impact.

“The domestic sector has been solid and the anchor to drive our growth during this more challenging period,” Zeti told Bloomberg in November. “Global trade slowed down very significantly [in 2013], and of course, that affected us because of the openness of our economy. But had we not rebalanced our economy, we would have had 1-2% growth.”

In the same month, Bank Negara Malaysia announced domestic demand grew 8.3% year-on-year in the third quarter of 2013.

High household debt

In December ratings agency Standard & Poor’s, said increasing levels of household debt in Malaysia, which now exceed 80% of GDP, would be “problematic” if the country’s growth rate slowed. The agency had cut its credit outlook for four Malaysian lenders in the preceding weeks over concerns stemming from a rise in home prices and consumer leverage.

Just two weeks earlier, Nancy Shukri, the minister in the prime minister’s department, said that 16,306 people, or an average of 60 Malaysians daily, had been declared bankrupt in the first nine months of 2013.

Malaysia has one of the highest ratios of household debt to disposable income in the world, with its current level of 140% outstripping even that of the US (123%).

In a move to slow consumer credit growth, in July the central bank introduced certain restrictions on lending, including a ten-year ceiling on personal loans, a maximum tenure of 35 years on property mortgages and a ban on pre-approved personal finance products.

However, conditions may not be as dire as some have made them out to be. As Zeti pointed out in September, less than 2% of household loans were non-performing as of that time.

Effect of new budget

While national efforts to rein in spending are taking shape, they follow a wave of populist interventions, including wage hikes for civil servants introduced ahead of last May’s elections, which almost certainly boosted domestic consumption.

However, Malaysia has been more generally moving to tighten its fiscal position. Under the 2014 budget introduced in October, the government will reduce certain subsidies this year and introduce a new goods and services tax (GST) in 2015. Everyday goods and services will be subjected to a 6% levy, although basic food items and some methods of transport are to be exempt.

International critics have urged Malaysia to break the cyclical nature of spending patterns, suggesting that a new strategy would improve investor sentiment in the long term.

“The new government elected in May must consolidate its credibility by meeting its commitments to reduce the public debt without reneging on its electoral promises,” wrote BNP Paribas in an October analysis. “The prime minister also said the 2014 budget would be marked by austerity … [But] these measures … will only stabilise the public debt ratio at best, without reducing it.”

Public debt stands at around 54% of GDP. According to Douglas McWilliams, economic advisor to the Institute of Chartered Accountants in England and Wales, keeping this figure under 60% is important in terms of maintaining investor confidence and, with reforms in place, is an attainable goal.

“The fast growth is helping taxation revenues and government’s budgetary consolidation, particularly on subsidies but also GST, which means Malaysia’s debt ratio will be below 60%,” he told the local media in December.

The national drive to slow lending to consumers and keep government spending in check has been given a largely positive reception. However, accelerating initiatives and increasing their impact may well help the country in its efforts to attract investors and allay their concerns.

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Malaysia moves to target broadband speeds

A drive to bring Malaysia’s internet services up to speed is gathering pace, with ICT infrastructure earmarked for an investment boost next year and longer-term solutions, which could include a fibre optic network roll-out, under discussion.

Malaysia currently lags behind several of its peers when it comes to download speeds, while demand for faster broadband is set to rise significantly in the coming years.

Increasing ICT’s contribution to growth forms a key part of the government’s master plan for the economy. Under its Malaysia Digital Economy initiative, the administration expects the industry to contribute 17% to GDP by 2020. The leadership is also targeting a compound annual growth rate of 9.8% in five key sub-sectors – ICT services, e-commerce, ICT manufacturing, ICT trade, and content and media – over the next seven years.

Boosting broadband

Communications and Multimedia Minister Ahmad Shabery Cheek told reporters in late November that the government was looking at undertaking an in-depth study into ways of boosting broadband speeds to between 40 and 50 Mbps by the year 2020.

According to the minister, there is a rising demand for faster data transfer speeds, with one study showing that Malaysians will want a service operating at 49 mbps by 2018. To achieve this, Ahmad Shabery said, would require significant investment and a shift away from wireless technology. “It requires the installation of fibre optics which is not cheap and cannot be carried out within a short time,” he said.

At present, Malaysia offers a limited fibre optic internet service, with operations restricted to key urban areas, mainly in the capital.

Proposals to construct a fibre optic network, providing a backbone service across the country, have already been submitted by the private sector. However, the project would have limitations and require feeder-link connections to be put in place for wide-ranging access to be made available.

A fibre optic roll-out would produce extensive opportunities for ICT service providers, while the faster rates offered by a new grid should also open doors for firms to market more advanced technology suited to higher speeds. However, the cost of achieving near-total connectivity through fibre optics would make any project a long-term initiative.

Strengthening existing services

In the meantime, Malaysia is focusing on strengthening its existing information and communications backbone.

The recent national budget, handed down at the end of October, allocated funds for several projects aimed at widening the reach of the net and boosting operating speeds.

Among the new initiatives is a $566m joint public-private project, which will expand high-speed broadband coverage. The budget also set aside $571.6m to construct 1000 telecommunication transmission towers over the next three years, which will help increase internet coverage in rural areas, while access in Sabah and Sarawak is set to be improved through the laying of undersea cables.

Peer pressure

National broadband penetration currently stands at 70%, up from 30% in 2006, according to data from the Malaysian Communications and Multimedia Commission.

However, research shows that Malaysia lags behind several of its South-east Asian peers when it comes to broadband speeds.

Data compiled by web analytics firm Net Index put Malaysia’s average broadband download speed at 4.56 Mbps when tested over a 30-day period. While marginally higher than the Philippines (4.55 Mbps), Malaysia’s average broadband speed was lower than that of Brunei (4.69 Mbps), Vietnam (11.70 Mbps), Thailand (12.47 Mbps) and Singapore (39.90 Mbps).

Malaysia placed 112th globally for broadband speed on the index, which was compiled using data from the broadband connection analysis website Speedtest.net. The Philippines ranked 114th, while Thailand placed 54th.

The country gave a stronger performance, however, in the second edition of the World Wide Web Foundation’s comparative study of international web penetration, empowerment and socio-economic impact, which was released in late November.

In its first appearance on the index, Malaysia placed 37th out of the 81 countries assessed, leading the emerging nations, and clinching second position among ASEAN members, behind Singapore.

However, the survey also identified areas where Malaysia could improve, including freedom and openness. In addition, the index highlighted issues around safety, online privacy and information protection.

The foundation’s results confirm that Malaysia would benefit from faster, cheaper and easier access to the web. The government will be hoping that a combination of investment during the coming years, supported by longer-term solutions, will help the country meet demand through faster internet speeds, closing the gap on its peers.

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Malaysia plans for new taxes

Preparations in Malaysia are well under way for the rolling out of a new goods and services tax (GST) in April 2015, but opinions differ on how effective the levy will be in boosting revenue and critics have voiced concern that the tax could feed inflation.

Under the new plans, which were mapped out by Prime Minister Najib Razak on October 25 in his 2014 budget speech, a 6% tax will be levied on most purchases or transactions.

The GST forms a key part of a national drive to boost state income and reduce the fiscal deficit, which stands at 4% of GDP this year.

The government hopes that the new, broad-based consumption tax, which is set to replace a number of other tariffs, including the sales and services tax (SST), will streamline revenue gathering.

The state currently earns between $5bn and $5.3bn from the SST, which is applied to only some transactions. The Malaysian Customs Department said on November 21 that it expected to garner an additional $1.5bn in revenue each year as a minimum, once the GST replaces other tariffs, bringing the new tax’s expected total earnings annually to around $6.5bn.

Targets and exemptions

With GST exemptions not yet finalised, questions remain unanswered about which items and services will be taxed.

In mid-November, Deputy Finance Minister Ahmad Maslan told local media that exports would remain outside of the GST umbrella, in a move seen as offering support to Malaysia’s manufacturing industries. The Customs Department later issued a clarification, saying exporters would be able to recover GST paid on raw materials and components used in final export products.

The government has also said that health services will be exempt from the GST, although it remains unclear whether this will include all associated costs. In early November, the Ministry of Health said talks with the Ministry of Finance were ongoing to “minimise the effects of GST in increasing healthcare cost”, suggesting there could be ripple effects from the tax.

The final drafting of GST legislation will be completed by early 2014 at the latest, according to officials, while the infrastructure required for implementation, such as computer networks, is almost complete.

Persuading the public

This is not the first time that the government has tried to introduce a broad-based consumption tax. An initial plan, floated back in 2005, had targeted a 2007 GST roll-out, which failed to materialise. While the tax was put back on the agenda in 2009, strong opposition in parliament, which was mirrored across a significant part of the population, led to the government eventually shelving the draft legislation in 2010, a year before its planned launch.

Winning broad public support remains a challenge today, with widespread scepticism. Opponents are concerned the new tax could trigger price hikes, although the senior assistant director for GST at the Malaysian Customs Department, Mohd Sabri Saad, moved to allay such concerns at a media briefing on the tax.

“The implementation should not burden the people as it is not a new tax but a replacement of SST,” he said. “Only those goods and services which were not taxed before will have a one-off impact in terms of prices.”

Some analysts have suggested that the GST could spark a rise of up to 10% in real estate costs. The government has proposed an exemption for residential properties, but Jerry Chan, the chairman of the Penang Real Estate and Housing Developers Association, warned contractors will likely fail to set up systems to recover taxes paid on inputs, and instead pass the cost on to developers and customers.

Keen to soften the implementation of the tax, the government said the GST would be offset by a reduction in income tax of 1-3%, which will run alongside other support measures planned for low-income families. However, critics counter that only 1.34m of Malaysia’s 14m-strong workforce earn enough to be liable for income tax.

The government has given itself almost 18 months to work out the fine details of the GST and to sell its plan to the public. While the new levy could streamline tax procedures, too many exemptions and concessions risk limiting the GST’s effectiveness. The final drafting of the legislation for the GST will indicate the depth of the new tax regime and how committed the government is to standing firm against opposition to its policy and reducing the fiscal deficit.

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Malaysia’s oil and gas services looking farther afield

Companies servicing Malaysia’s oil and gas sector are using the experience and expertise gained during collaborative ventures with foreign firms as a launchpad for overseas expansion.

Four decades of developing solutions for Malaysia’s operational environment, under the state-owned hydrocarbons producer, Petronas, have put local outfits on a solid footing to enter the rapidly expanding global oil services industry.

However, the fast pace of growth has also produced challenges for firms embarking on international expansion, including project delays and equipment shortages, which are taking their toll on margins.

Production on the rise

At home, Malaysia’s oil sector services providers have benefited from Petronas’s efforts to galvanise production in recent years, spearheaded by a $30bn investment aimed at ramping up output, developing new offshore reserves and extending the production life of existing fields.

The country is looking to return oil and condensate production to more than 600,000 barrels per day (bpd) equivalent, having reversed a decline which saw output fall to a 20-year low in 2011 of 569,000 bpd.

Malaysia is also aggressively developing its natural gas resources. The country is now the world’s second-largest liquid natural gas (LNG) exporter behind Qatar. Like most of its oil fields, the majority of Malaysia’s gas reserves are located offshore, offering many growth opportunities for service providers.

With their overseas expansion well on track, key Malaysian firms now rank among the largest serving the international oil and gas sector. SapuraKencana has evolved to become a major provider of support platforms for drilling rigs after expanding its fleet to 24.

Firms eye new ventures

At the end of August, meanwhile, the Malaysian offshore oilfield services company, Bumi Armada, announced it had signed a joint venture agreement with Dutch geo-science specialist, Fugro, to provide well services.

Bumi Armada’s CEO, Hassan Basma, told the press that the initiative marked a new direction for the company, which has, to date, focused on floating production storage and offloading (FPSO), transport and installation, and offshore supply.

“This investment will represent our first foray into the lucrative and expanding subsea market where Bumi Armada intends to make its presence felt. These additional services will contribute to our footprint on a global scale with focus on our core markets,” he said. Bumi Armada will have a 51% stake in the new firm.

State-backed services provider UMW Oil &Gas Corporation is also eyeing expansion, with its plans to launch an initial public offering (IPO), tentatively valued at $850m, already generating considerable interest. The provider is expected to begin taking orders for its offering in October, while a scheduled listing is set to come in the following weeks. The Wall Street Journal reported in mid-September that both J P Morgan and US financial group Fidelity Investments have agreed to be two of eight key institutional investors in the IPO.

Funds raised will likely be used to pay down existing debt and boost capital expenditure for future expansion. A total of 39% of the company’s shares will be offered through the listing.

Offshore drilling fuels demand

Malaysia-based Scomi Group has already extended its reach into Africa, the Caucasus region and Asia, with the firm’s oil services unit underpinning a 13.3% increase in revenue in the quarter ending June 30 and posting profits of $7.3m.
“Strong demand for drilling fluids and drilling waste-management solutions in Malaysia, Thailand, Turkmenistan and West Africa contributed significantly to the group’s financial performance,” the company said in a statement filed with Bursa Malaysia in late August.

The firm’s expansion reflects the heightened activity taking place in the global offshore oil and gas industry. However, the rapid pace of expansion has also put several regional players under pressure, leading to cost overruns and increasing competition for both equipment and manpower, resulting in a squeeze on margins.

Reuters reported that despite winning work, Singapore’s Ezra Holdings posted a 68% fall in profits for the three months ended May 31, due to project delays and cost overruns incurred by its subsea division. SapuraKencana said it faced similar risks, Reuters added.

Operators will be aware of the pitfalls that rapid expansion can produce. However, with exploration and exploitation activities set to increase in the coming years, particularly across the offshore segment, Malaysia’s firms will be well placed to tap into the services that the global oil and gas sector requires.

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Malaysia 2020 targets elusive at current trajectory

Despite a low inflation rate and relatively stable sovereign and corporate balance sheets, Malaysia is set to miss the targets set out in its Vision 2020. As part of a long-term analysis of the South-east Asian country, Oxford Business Group recently contributed an article entitled ‘The Malaysian Quandary’ to local media website FMT, looking at the basis for this assessment and calling into question the private sector’s reliance on the government.

We invite you to read the full article and join a vibrant discussion about the Oxford Business Group view on Malaysia . We encourage you to share the link with others who might be interested.

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Malaysia: New regulations to boost market for takaful

An overhaul of Malaysia’s Islamic finance regulations is expected to increase take-up of sharia-compliant insurance (takaful) products, although the new rules could encourage smaller operators to join forces with more established rivals.

New legislation came into effect on June 30, along with parallel laws revamping the operations and regulation of the conventional financial sector. The new Islamic Financial Services Act (IFSA) replaces previous legislation enacted over the past 30 years, strengthening regulatory oversight and boosting industry transparency.

According to a statement from Bank Negara, the central bank, the new rules will provide “a comprehensive legal framework that is fully consistent with sharia in all aspects of regulation and supervision”.

Under the new act, religious advisers will be held legally accountable for financial products. They will also be subject to monetary penalties and could face imprisonment if found to be in breach of the laws.

In the takaful sector, the IFSA will require insurers to separate their life and non-life business lines. Firms that hold composite licences will need to divide their operations within five years.

The new rules are expected to help ensure the rights of takaful consumers, setting out disclosure requirements and mandating that insurers provide a minimum level of information to customers at each stage of the contract process.

“The IFSA will lead to greater consumer protection and subsequently greater confidence in takaful,” Mohamed Rafick, CEO of Munich RE Retakaful, told OBG in an interview in mid-July. “It will also hold takaful companies accountable for their pricing strategies by ensuring that risk funds are sustainable.”

The stringent pricing accountability could put pressure on smaller operators in the industry, Rafick added. They could also face challenges in meeting the new higher capital requirements that are specified by the IFSA.

While there are around a dozen takaful operators in the market, the sector is dominated by a few firms that, between them, account for about 90% of the estimated combined $6bn worth of assets held.

Some of the larger players have expressed interest in acquiring smaller outfits in the wake of the new regulations.

In July, Hassan Kamil, group managing director of Syarikat Takaful Malaysia, the second-largest Islamic insurer, told Reuters his company might be in the market to absorb smaller rivals. “If their portfolio is attractive, we could be buying up business,” he said.

However, analysts are confident that the new regulations will help the sector to expand.

Ahmad Rizlan Azman, CEO of Etiqa Takaful, said the improved regulatory environment, alongside growing public understanding of takaful products, would help the sector to develop into 2015 and beyond.

“Recent reports indicate that the Malaysian takaful industry is expected to grow by 20% per annum for the next two years as consumer acceptance grows and regulatory changes provide a stronger and more stable infrastructure for the shariah-compliant insurance industry,” he told a conference in Kuala Lumpur in late June.

However, the takaful sector still lacks the level of consumer acceptance required to underpin strong growth. Many products in the takaful range, as yet, have limited exposure in the Malaysian market. The penetration rate for life takaful stands at 13%, considerably lower than that of conventional life insurance, at 55%.

According to a recent survey commissioned by Swiss Re, about 30% of Muslims in Malaysia have a good understanding of takaful, while 16.5% hold policies. Though this is a far higher rate than in Indonesia, where only 5% of the population were found to be familiar with takaful and 1% choosing to hold the sharia-compliant product, the survey indicates that more work needs to be undertaken to boost penetration rates.

By tightening up the regulatory structure of its takaful segment, Malaysia will further bolster confidence in both the product and the broader Islamic financial sector and may well set the benchmark for other countries seeking to boost accountability and transparency in their own sharia-compliant markets.

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Malaysia: Keeping the economy running

The central bank in Malaysia is keeping an eye on macroeconomic stability at a time when a cooling external environment is putting pressure on growth. While international factors are starting to affect overall economic performance, domestic demand remains relatively robust, supported by consumer spending and public investments.

On July 11, the Bank Negara Malaysia (BNM), the central bank, announced it would be maintaining its key policy rate on hold for the 13th consecutive month. The bank kept its benchmark overnight rate at 3%, as analysts surveyed by Bloomberg had expected.

The BNM decision balanced concerns of both a slowdown in the economy and rising personal debt. Malaysia’s year-on-year GDP growth has dropped below 5% for the first time in seven quarters, while household borrowing has been increasing at an annual average 12% for five years.

In a statement, the bank noted that slow global growth had begun to act as a drag on the Malaysian economy, as in other emerging markets, despite healthy domestic demand. Domestic consumption has helped Malaysia and many of its neighbours weather the economic turbulence of recent years, with the rebalancing of the economy helping reduce dependence on exports, which have proved susceptible to slowdowns in Europe and the US.

“For the Malaysian economy, domestic demand has continued to support growth amid the continued moderation in external demand,” the bank said. “The sustained weakness in the external sector may, however, affect the overall growth momentum.”

Even so, the bank retains a positive outlook. It expects private consumption to stay steady, led by income growth and a stable labour market, and capital investment both from domestic-oriented industries and government infrastructure projects to help maintain economic momentum. Malaysia is in the process of rolling out the government’s Economic Transformation Programme (ETP), a wide-ranging package of projects, including infrastructure schemes, designed to boost productivity and increase the private sector’s ability to drive growth.

The BNM is also comfortable with Malaysia’s inflation outlook. Inflation averaged 1.6% in the first five months of the year –low given the rate of economic growth. And while the central bank expects the rate to pick up in the second half of the year, it does not foresee inflation becoming a serious risk factor.

Despite low inflation and slowing growth, the BNM avoided cutting rates, keeping a wary eye on rising debt in an economic climate that has become more volatile in recent months. Malaysia’s experience in the 1997 Asian financial crisis makes policy-makers particularly aware of the need for financial and macroeconomic stability.

In early July, the BNM tightened regulations on lending, cutting the maximum repayment terms on personal loans to 10 years and property loans to 35 years, down from 25 year and 45 years, respectively. Some analysts quoted in the international press suggest that the bank may become more hawkish on interest rates as well towards the end of the year, if growth remains resilient.

Following a period of strong capital flows to emerging markets, there has been a cooling off recently in the wake of signs from the US Federal Reserve that it would not push forward its quantitative easing (QE) policy. QE, a strategy of stimulating the economy through expansion of the monetary base, had boosted inflows to emerging markets as investors sought higher returns than those available in developed economies. Malaysia, with its macroeconomic and political stability and stable growth rate, proved particularly attractive: by February, foreigners held almost half the country’s outstanding sovereign debt.

With QE now likely to be phased out and signs of a slowdown in major emerging markets such as China (a key export market for Malaysia), investor appetite for Malaysian assets are expected to abate. However compared to advanced economies Malaysia along with the rest of South East Asia will continue to enjoy a higher rate of growth thanks to relatively stable domestic demand and investment.

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Malaysia: Keeping the economy running

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