Positive outlook for Malaysian construction

High levels of state and private sector investment will drive double-digit growth in Malaysia’s construction industry this year with momentum likely to be maintained into 2015 as more infrastructure projects roll off the drawing board.

The Master Builders Association Malaysia (MBAM) and the Construction Industry Development Board (CIDB) Malaysia forecast growth of at least 10%, the third consecutive year of double-digit expansion. Growth will be sustained in part by transport and infrastructure mega-projects such as Tun Razak Exchange – a financial center – line two of the Klang Valley Mass Rapid Transit (MRT) and West Coast Expressway, according to MBAM president Matthew Tee. “These projects are yet to start … so I don’t think the number of construction projects will drop in the next few years. There should be a consistent growth in the industry moving forward,” Tee told local media.

The chairman of CIDB Malaysia, Tan Sri Dr Ahmad Tajuddin Ali, reiterated that the industry would benefit from increased investments in infrastructure development. “Currently, we have mega projects, particularly the light rail transit (LRT) and MRT, which involve local and foreign companies and they provide jobs to the people, directly or indirectly,” he told a media briefing in September.

Spurred on by massive capital expenditure projects, growth in the construction sector has been outpacing GDP expansion in recent years. The government’s Economic Transformation Programme (ETP) and public-private partnership (PPP) projects have spearheaded much of this growth. This led to a multiplier effect across the industry, which expanded by 11.4%, 4.7%, 18.1% and 10.1% from 2010 to 2013, respectively, according to data from Bank Negara Malaysia (BNM), the central bank.

Leading growth

In an August report, local financial services firm RAM Ratings said the construction sector would likely be the best performer in terms of expansion for the rest of the year after revising its economic forecasts and GDP growth projection to 5.6% for 2014, compared to the initially estimated 5.1%. “Construction, manufacturing and services are expected to perform better than initially expected, underscored by the continued strengthening of domestic and external demand drivers,” the report said. “In particular, construction activities are expected to lead this growth, which is projected to come in at 11.6% this year.”

Another factor that could boost construction activity in the last quarter of this year and the first of 2015 is the impending introduction of the goods and services tax (GST), set to come into force next April. Some sectors of the economy could see an uptick in activity due to “front loading”, pushing up the schedule of projects in order to beat any cost increases resulting from the GST. Fears of a rise in materials and labour costs, driving up the budgets of projects, may prompt firms to bring forward investments on plants and equipment.

In late August, Maybank Investment Bank recommended that investors move into a number of leading construction stocks, forecasting good returns on the back of projects linked to transport infrastructure. Malaysian infrastructure group Gamuda is noted, thanks to its successful bid for the Penang integrated transportation project worth RM5.5bn ($1.7bn). “The Klang Valley MRT’s construction also provides earnings visibility to the group,” said Maybank’s Lee Cheng Hooi, quoted by local media.

It is not just building firms themselves that will gain value over the coming six months; materials suppliers and construction equipment and machinery companies are also likely to benefit from the ongoing boom, with the continued flow of investments being channelled all along the industrial chain.

Cooling phase

According to data issued by BNM in mid-August, the economy grew 6.4% in the second quarter year on year (y-o-y) while the construction industry climbed 9.9%. Despite the growth, the rate of expansion was down compared to the first three months of 2014, when it recorded an 18.9% surge y-o-y thanks to a sharp rise in new real estate developments.

According to the Malaysian Institute of Economic Research (Mier), the residential segment appears to have entered “a cooling phase” in the first two quarters, with sales expected to stay “moderate” for the coming third quarter. Its Residential Property Index fell for the second quarter to 109.9 points, slipping 1.3 points from the first quarter, and 28.3 points from a year ago.

The survey also showed that total unsold new residential properties have accumulated faster than sales in recent months. However, BNM officials told local media that further measures to cool activity in the property sector were not necessary given some moderation in household debt.

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Domestic demand and exports fuel Malaysian growth

The economy defied expectations in Malaysia by maintaining a high level of growth in the first half of 2014 at 6.3%, according to new figures released in mid-August, though any weakening in exports could see the rate of expansion ease marginally towards the end of the year and into 2015.

GDP in the second quarter surged by 6.4%, the strongest growth since the fourth quarter of 2012, and ahead of analyst expectations. “The very strong export performance was better than expected,” the governor of Bank Negara, Zeti Akhtar Aziz, told journalists at a press conference. “It’s very likely that the overall growth for the year will exceed growth projections made earlier,” the head of the central bank added.

Growth in the first half was fuelled by continuing strong domestic demand, despite Bank Negara pushing up interest rates in July by 25 basis points to 3.25% with further interest rate hikes likely. The intervention is aimed at reining in household spending and keeping a lid on inflation, which was running at 3.3% as of June.

Possible headwinds blowing from abroad

Growing demand at home was matched by a rise in exports, with shipments up 8.8% in value for the second quarter, led by strong sales of electronics and manufactured products, and outpacing the 7.9% increase in the first three months of the year. However, it is possible the contribution of overseas sales to GDP could weaken.

The Malaysian economy is built around international trade, with export revenues in 2013 equal to 83% of GDP, according to the Department of Statistics (DoS), making it more sensitive to fluctuations in the global economy.

With a number of leading economies, including Germany, France and Japan, either seeing their GDP retreat or stagnate in the second quarter, global recovery may be further off than predicted, while the threat of a hard landing in China is still seen as a near-term risk to the Malaysian economy.

“Moving forward, we hold our view that the strength of exports would likely soften in the second half of 2014, on account of uncertainties in the advanced economies due to heightened geopolitical concerns,” said Manokaran Mottain, economist at AllianceDBS Research quoted by local press from a research note.

Budget boost

However, any potential scaling back of exports could be offset by increased state spending next year. On August 12, Prime Minister Najib Razak said the 2015 budget, to be tabled in October, would contain a number of initiatives to further promote economic growth, including increased spending on infrastructure development, fiscal support for low-income earners and low-cost housing developments.

Among the main objectives of the 2015 budget, the prime minister said, were to keep inflation in check while maintaining living standards and balancing state finances.

To achieve the last goal, the government is to launch its biggest tax reform in many years, with the introduction of a goods and services tax (GST) in April 2015. The broad-based tax will see a 6% charge added to two-thirds of the 944 items covered by Malaysia’s consumer price index basket, though the list of exempted items will be expanded, Deputy Finance Minister Ahmad Maslan said on August 12. Basic foods like rice, flour and oil, as well as essential services like household water supply and public transportation are likely to be tax-free.

The government stressed that the GST is not an additional charge, but one that will replace the existing service and sales tax (SST), which is levied on a narrower basis, though at a much higher rate of 16%. Officials also believe the GST will push the state budget into surplus by 2020, allowing for increased funding for social welfare programmes in the future.

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Merger plans set to transform Malaysian banking sector

Plans by three of Malaysia’s biggest lenders to merge into the country’s largest bank conglomerate have thrown a spotlight on the health of the industry.

CIMB Group last week revealed plans to buy smaller rivals RHB Capital and the Malaysia Building Society, a plan that would create a group with total assets of RM 614bn ($192.8bn) and a 23% market share of domestic loans. This would eclipse the current market leader Maybank’s worth of about RM 578bn ($181.49bn) and market share of 18%.

The three confirmed on July 2 that they had obtained approval from Malaysia’s Central Bank or Bank Negara Malaysia for the deal and have since entered into a 90-day exclusivity agreement to negotiate and finalise pricing, structure, and other relevant terms and conditions. The banks say part of the aim is to create a ‘mega Islamic bank’ by tapping in to the country’s status as one of the world’s leading Islamic finance centres.

“Bank Negara has long been talking about creating regional [banking] champions. Given that the Malaysian banking industry has reached a challenging level in terms of organic growth, size does matter,” Sue Lin Lim, an analyst at AllianceDBS, told London’s Financial Times.

Slow start

The deal may also give the domestic banking sector a boost amid criticism that growth has been stale this year. Bank Negara this month revealed that loan growth had slowed to 9.7% year-on-year (y-o-y) in May from 10% y-o-y in April, due mainly to a slowdown in business loan growth.

“Suddenly an industry faced with dull growth prospects amid growing competition is abuzz again,” wrote the Edge magazine in an editorial. “This will be the largest banking merger in a very long time and which could potentially change the current landscape.”

Although mainly related to business growth loan, the decline in May follows central bank measures last July that saw the maximum tenure for personal loans reduced to 10 years, home loans restricted to no more than 35 years, and prohibiting offers for pre-approved personal loans.

An RHB Research survey in July saw the agency downgrade its rating on Malaysian banks to “neutral” from “overweight”.

“A consistent message that came out of our recent meetings with banks was that business lending has been subdued, while capital markets remain quiet,” RHB Research analyst David Chong noted in his report.

The loan decline contrasts with rosy predictions made by the World Bank last December. Touting Malaysia as a success story in terms of financial inclusion and quality of banking regulations and supervision, the bank said the sector was poised for further growth this year.

Regional aspirations

Despite global fluctuations in the economy caused by higher US interest rates, Malaysia’s banks recorded 17% profit growth overall in 2013. The World Bank forecast opportunities for the expansion of banks, both in the domestic and regional marketplaces.

It is the latter market that the new group is expected to target, with some considering the deal a statement of intent as ASEAN deepens its financial integration. A table of top 10 banks’ pretax profits in ASEAN compiled by The Banker shows Maybank in fourth place behind Singapore’s OCBC, DBS and United Overseas Bank.

“The next big thing for Malaysian banks is to venture abroad, and with this merger, it could be a game changer for CIMB in the ASEAN region,” an analyst who wished to remain anonymous told Malay Mail.

However those in the market had expected the push towards Islamic banking to come from BIMB Holdings, a holding company for various sharia-compliant businesses in Islamic banking, insurance and stockbroking. The combined assets of the three banks will still rank second after Maybank in terms of Islamic banking assets, Lim pointed out.

Integration hurdles

But before the new conglomerate can start targeting Southeast Asia, it will first need to navigate the complex three-way merger process and address challenging integration issues.

For instance, critics have noted overlap between CIMB and RHB in investment banking services and retail services. A similar deal touted in 2011 was likely scrapped because it was felt the companies offerings would blur. Because the prospective merger’s branch total would equal 550, compared to Maybank’s 399, it seems likely that the new grouping would face a potentially painful period of consolidation.

“The ability to extract these cost synergies may be a hurdle in the near term as it would largely depend on rationalising branches and staff, which could be politically unpalatable,” said ratings agency Fitch in an analysis of the proposed merger.

Although analysts differ on the logic behind the merger, most agree that it signifies a new dawn for the banking sector where size will matter more than before as lenders look to compete on a regional level.

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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

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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 plans for new taxes

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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’s oil and gas services looking farther afield

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