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 focusing on qualitative growth rather than quantitative easing

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

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

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

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

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

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as pension funds and insurance companies to step up and play an increasing role in the markets as overseas funds are withdrawn.

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

Growth set to outweigh tapering downside

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

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

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

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

Some impact inevitable

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

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

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

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

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

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

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

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

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

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

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

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

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

Foreigners eased out of the low end of the market

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

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

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

Boost for low-cost residential segment

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

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

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

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Malaysia’s EU trade negotiations in spotlight

With the end of an agreement granting Malaysia preferential access to the EU market looming, all eyes are on ongoing negotiations between Kuala Lumpur and Brussels aimed at securing a replacement free trade pact.

Malaysia currently benefits from the EU’s generalised system of preferences (GSP) scheme, which provides developing countries with generous tariff reductions on exports. However, the World Bank’s decision to award the South-east Asian state upper-middle-income-nation status will end its eligibility for the lower levies from January 2014.

While EU representatives are confident that a new free trade agreement (FTA) will deepen economic integration between its member states and Malaysia, local business representatives have questioned whether they can remain competitive once the lower tariffs are withdrawn.

Strong bilateral trade

The EU is a major importer of Malaysia’s goods. Figures show its members purchased 13%, or 2.22m tonnes, of the country’s palm oil exports in 2012, and spend more than $1.3bn each year on Malaysian timber. On October 22, the Malaysia External Trade Development Corporation (MATRADE) said it expected total bilateral trade to reach RM120bn ($38.2bn) in 2013. Results so far this year suggest this is an attainable goal, with exports to the EU for the first eight months amounting to RM41bn ($13bn), while imports stood at RM45bn ($14bn).

Susila Devi, the senior director of MATRADE’s Strategic Planning Division, told reporters that Europe offered Malaysia a broad range of business and investment opportunities across the industries. “It also includes information communication technology, chemicals, automotives, renewable energy, logistics, agro food processing, pharmaceuticals and financial services,” she commented.

FTA negotiations

Business leaders, however, have highlighted the significant impact that the end of GSP status is set to have on trade and investment.

The GSP scheme provides duty reductions of up to 66% on sales to the EU. Malaysia’s exports to Europe under the initiative were valued at RM13.5bn ($4.3bn) in 2011, or 17% of its overseas shipments, according to a report published by the EdgeMalaysia in April.

Tan Sri Lee Oi Hian, CEO of Kuala Lumpur Kepong, a Malaysia conglomerate with interests in the palm oil industry, warned in March that without the GSP, the tax rate on some Malaysian oleochemicals heading for the EU would be between 4% and 6%. “We will just not be competitive,” he said at a Global Malaysia Series workshop.

Lee, together with other business leaders, said the impending withdrawal of the GSP scheme heightened the need for the government to secure an FTA with Europe. The loss of the GSP could be “another nail in the coffin” for the local palm oil industry, he said.

The EU and Malaysia first entered into discussions on a FTA in late 2010, with the next round of negotiations scheduled for the fourth quarter of this year. The ambassador and head of the EU delegation to Malaysia, Luc Vandebon, told Bernama in June that if the next round of talks is held before the end of 2013, then “it should be possible to conclude negotiations in late 2014/early 2015”.

The EU delegation’s former ambassador to Malaysia, Vincent Piket, said last year that an FTA would boost the country’s GDP by 8% by 2020.

“The conclusion of the FTA would be a landmark step in the fostering of bilateral trade between the two partners and deepen economic integration,” he said.

Looking long term

FTA supporters say a deal will, over time, increase market access for goods and services, facilitate trade and investment flows, enable mutual recognition of standards and qualifications, and increase joint capacity-building programmes.

However, not all Malaysians feel that an EU trade pact, at least in its current proposed form, is the best path for securing long-term economic growth.

In a report published in late 2012 by the IFRI Centre for Asian Studies, part of a French think tank, author Tham Siew Yean noted that the proposed FTA was in conflict with key interests of Malaysia. Tham raised particular concerns about the impact of intellectual property rules on the pharmaceutical sector.

“A small trading economy such as Malaysia’s is keen to lock in its market access to other countries. … [But] Malaysia’s focus has always been in the ASEAN as well as the wider East Asian market. In this scenario, ASEAN agreements, including Malaysia’s commitments in extra-ASEAN-wide agreements, will hold more weight than an agreement with the EU,” he wrote.

Concerns have been raised that with regional competitors also vying for the EU market, Malaysia could be tempted to negotiate a deal with the union from a position of weakness or sign an agreement lacking transparency. Many Malaysians, it would seem, are keen to avoid landing an unbalanced deal that fails to dovetail with the country’s broader vision for growth.

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Malaysia’s EU trade negotiations in spotlight

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Malaysia’s palm oil industry faces tough market

The palm oil industry in Malaysia appears set for an uncertain few months, with a number of factors coming into play over the last quarter of the year that could push already low prices down even further, just at the time when production is about to peak.

As of the end of September, Malaysian palm oil prices were down 6% on the beginning of the year. Moving into October, the commodity was trading at $716 a tonne, with predictions it could fall further in the lead-up to the new year.

Malaysia has seen output rise monthly through to August, and while September’s figures have yet to be released, it is expected that volume will again be up. Some estimates put September’s production at close to 2m tonnes, a sharp jump from the 1.74m tonnes of the month before, which itself represented a 3.6% rise over July. This continued increase in output, which is likely to be maintained for the rest of the year – the high season – could further force down global prices as supply overtakes demand.

Also bearing on palm oil prices is the rising tide of soy oil flowing into the market, with the US soy crop set for a better-than-expected harvest and soybean stocks at higher levels than normal for this time of year. This has pushed soybean prices down to near two-year lows as of early October, a trend that will undercut demand for Malaysian palm oil.

Falling oil prices also set to weigh on sales

Another factor weighing down palm oil sales and pressuring prices is the drop in the cost of conventional crude oil. With oil prices falling, there is less appeal for biofuels in the market, and rising output from Libya combined with concerns over demand in the US as part of the fall-out from the shutdown of government, have pushed oil prices down. Benchmark Brent crude was trading at less than $108 a barrel in early October; WTI crude was lower still, dipping below $102, with analysts predicting a further decline in the weeks ahead as price instability posed by a potential US military strike against Syria recedes.

According to Dorab Mistry, head of vegetable oil trading with Indian conglomerate Godrej Industries, palm oil could fall to a four-year low of $617 a tonne in 2014 if crude oil prices go below the $100-a-barrel mark. This would represent a 13% fall on present prices, Mistry told an industry conference in late September.

“The fundamentals of the oilseed and vegetable oils complex are clearly bearish,” he said.

One factor that could boost sales is the drop in the value of the ringgit, which has retreated almost 9% since May. This has made exports more appealing, at least in some markets, though not in those that, like Malaysia, have been hit by the outflow of funds from developing economies. While the weaker ringgit may boost overseas sales, an easing of local currencies against the dollar has taken place in many of Malaysia’s key markets, such as India where the rupee has fallen by 12% since the beginning of the year. This means that any advantage accrued from the devaluation of the ringgit is offset by similar downward moves elsewhere.

Government plans could drain off excess

While palm oil producers may face difficulties in boosting sales abroad, help may be at hand at home. The government has said it is considering lifting the levels of palm oil added to diesel fuel as a way of boosting domestic demand. Malaysia requires a 5% palm oil additive to diesel; the resulting biofuel accounts for a significant portion of palm oil consumption, with nearly 250,000 tonnes of palm oil/diesel blend consumed in 2012, a figure the state aims to double by 2014. Indonesia recently announced it would be raising its palm oil input to biodiesel from 7.5% to 10% next year. Any similar move by Malaysia would help soak up excess production, though the government has yet to set any timeframe for an increase or how far above the current levels the rise would be.

Further state support came in mid-September, when the government decided to keep taxes on palm oil exports unchanged in October, maintaining the 4.5% tariff that has been in place since March. The decision is expected to help boost overseas sales during the peak harvest season and reduce the risk of a large build-up in stockpiles.

It may not be until well into the new year, when local production tapers off, that prices may start to move upwards to any significant degree, though crop losses due to adverse weather or a sudden jump in crude oil prices could give a boost to Malaysia’s palm oil sales. For the present, it seems the best producers can hope for are steady sales and for prices to remain at current levels.

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Malaysia’s palm oil industry faces tough market

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