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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Malaysia and China look to boost two-way trade

A diplomatic approach towards regional issues has strengthened Malaysia’s efforts to boost trade and investment ties with China, setting the scene for the two countries to roll out an ambitious programme of increased financial cooperation.

Last October, China and Malaysia agreed to raise bilateral ties to a “comprehensive strategic partnership”, with a focus on boosting military cooperation and increasing two-way trade almost three-fold to $160bn by 2017.

Deputy Minister of International Trade and Industry, Datuk Lee Chee Leong, announced in July that Malaysia’s exports to China for the year had already reached $106bn (RM341bn). He added that Malaysian exports currently accounted for 23.9% of China’s total trade with Asean countries.

Although Malaysia is China’s largest Asean trading partner, more can still be done to help the dynamic reach its full potential say Malaysian business groups in particular.

Building ties

The strengthening of bilateral ties comes against a backdrop of growing tension between Beijing and key Southeast Asian nations over maritime disputes in the South China Sea.

While the sovereignty issues simmer, however, diplomatic relations between China and Malaysia remain positive, as US state department envoy John Finkbeiner pointed out in a 2013 study. “Malaysia appears to pursue a non-confrontational approach in the sovereignty dispute, which differs markedly compared to Vietnam and the Philippines,” he wrote. “The first pillar regards Malaysia’s firm commitment to increase its trade and investment ties with the world’s most dynamic economy [China] in order to hedge its other strong economic ties, with the US in particular.”

However Malaysia’s approach has contributed to a growing imbalance in bilateral cross flows between the two countries. Malaysia has channelled almost $7bn of investment into China, but received just $1bn from the Asian giant in return.

Last year, the National Chamber of Commerce and Industry Malaysia (NCCIM) called on the government to intervene by adopting a more pro-active stance in correcting the current investment imbalance, which falls in China’s favour.

The Chinese ambassador to Malaysia, Huang Huikang, has given a reassurance that efforts to address the imbalance are making headway. Chinese interest in Kuantan Industrial Park is expected to help take the country’s investment in Malaysia past the $2bn (RM6.42bn) mark this year, he said. The ambassador added that Beijing aimed to encourage more of its companies to increase their investments in Malaysia.

While Malaysian exports to China remain dominated by agricultural products, such as palm oil, Chinese firms are strengthening their presence in the technological sector as well as in cultural initiatives such as the $91.47m Impression Melaka venture, a live theatre project, which is being rolled out jointly by Malaysia’s PTS Impression Sdn Bhd and China Impression Wonders Art Development Co. Ltd in Malacca.

A readiness to do business in the Chinese currency renminbi (RMB) is giving Malaysia’s exporters an added advantage, according to a HSBC Commercial Banking survey released in July.

“The settlement of goods and services in RMB will remove the foreign exchange risk exposure from the Chinese companies and hence allow them to reduce their cost,” HSBC Bank Malaysia Bhd head of global trade and receivable finance, Vincent Sugianto, said in a statement. “Ability to trade in RMB also allows Malaysian companies to tap into a wider customer base in China which currently does not have access to foreign currency trades.”

Containing shocks

Despite Malaysia’s healthy trade relations with China, however, external factors risk weighing on bilateral ties.

The disappearance of Malaysia Airlines’ Flight MH370 in March put a strain on the relationship between the two countries, sparking a 19% drop in visitors from China for the month of April year-on-year (y-o-y), although these figures have since rallied. The casualties included 153 passengers who were Chinese nationals.

“That the Chinese press has begun to soften its tone towards Malaysia’s government [over the MH370 search] reflects the view that China is better off swallowing a tough pill than taking any action that could provide the US with a major strategic advantage at Beijing’s expense,” the South China Morning Post said.

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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 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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Malaysian markets to gain from pension planning

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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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Mixed reaction to Malaysia’s debt levels

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