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Malaysia: Religious tourism boost

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Having been ranked the friendliest country for Muslim holidaymakers for the third year running, Malaysia has confirmed its position as a premier halal tourism destination. However, its position – and the revenue that comes with it – could be challenged by regional rivals seeking to cash in on the lucrative market.

The tourism sector is already a major contributor to the Malaysian economy, directly generating $21.4bn in 2012, the equivalent of 7% GDP, according to the latest report on the global industry’s economic impact, issued by the World Travel & Tourism Council (WTTC). The council’s report for 2013, released at the end of February, said tourism provided direct employment to more than 800,000 Malaysians, some 6.5% of the active workforce.

However, when indirect factors – such as state spending on tourism-related infrastructure and support, the supply and purchase of goods and services, transport, information technology and utilities – are taken into consideration, tourism’s total contribution to the economy came to $48bn, or 15.6% of GDP, and accounted for 1.7m jobs, 13.6% of the total.

The WTTC has also forecast Malaysia will continue to build on its achievements, with total tourism revenues expected to reach $81.5bn by 2023 on the back of a sharp increase in arrival numbers over the coming decade, as the number of visitors is projected to rise from 27m in 2013 to 45m in 10 years.

According to Jamil Bidin, CEO of local firm Halal Industry Development Corporation (HDC), Malaysia has made itself into a leading destination for visitors from the Middle East by making its halal brand what he called, “a seal of guarantee for consumers”. “If you want to encourage Muslim tourists to come to your country, halal-certified products and services are required,” Bidin told reporters at a halal trade fair in Kuala Lumpur in early April.

The international halal tourism trade is estimated to be worth more than $125bn per year, some 12.3% of the global outbound tourism market. This figure is set to rise by an estimated 4.8% annually through to 2020 – well above the forecast 3.8% global average – as disposable incomes in many Asian and Middle Eastern countries increase. Malaysia has already positioned itself to take a significant slice of the existing and future trade, being ranked first for the past three years in an international survey for being halal tourism friendly.

The annual market assessment, based on a number of factors, including the availability of halal food, prayer facilities, and halal-friendly accommodation, was carried out by Singapore-based consultancy and research firm Crescentrating. According to Fazal Bahardeen, CEO of the firm, the survey was conducted from the point of view of the traveller, meaning that it measured the ease of access by Muslim tourists rather than locals to halal food and services, with Malaysia scoring well across the board.

Malaysia’s continued strong showing was largely due to the fact that authorities have been focusing on the market for a number of years, he said. “Malaysia remains the top destination for Muslim holidaymakers,” said Fazal. “It is still the best place to enjoy your holiday and at the same time be completely worry-free when it comes to finding halal food and prayer places almost everywhere.”

Malaysia also benefits from being within a single flight of much of the world’s 1.7bn Muslims, as it has direct links to the Middle East, the Indian subcontinent and Asia.

While Malaysia may head the Crescentrating rankings, it is likely to face increasing competition from regional rivals in the years to come. The survey found that Indonesia was lagging when it came to catering for halal tourism, though Jakarta has announced it will launch a multi-faceted programme in June that aims to better Indonesia’s tourism sector to perform in the sharia-compliant segment of the global market. Singapore and Thailand also have strong market potential and hope to begin competing with Malaysia.

Under the government’s Tourism Transformation Plan 2020, launched in 2010, Malaysia is aiming to attract 36m overseas visitors by the end of the decade, a target it seems to be well on track to achieving, having seen arrivals hit a record 25m in 2012, some 40% up on the 2005 total. Similar progress over the next seven years will put Kuala Lumpur’s goal well within reach and on the road to the 45m the WTTC has forecast for 2023.

The Ministry of Tourism estimates that almost one-quarter of inbound visitors come from Muslim countries, which makes the need to maintain the flow of new services and facilities for this market essential to further growth and development of the sector, as well as to ensure it stays ahead of regional and international rivals.

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Malaysia: CPO Power

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After a slow year in 2012, Malaysian officials expect exports of crude palm oil (CPO) to expand in 2013. Prices that have fallen due to oversupply and slower demand are now on the rise again, and though they may moderate in the second half of the year, an average steady climb over the next two years seems likely.

CPO is a major export earner for the country, which is the world’s second-largest producer of the product. In 2012 Malaysia exported RM71.5bn ($23.03bn) worth of palm oil, down from RM80.4bn ($25.9bn) in 2011 – an all-time high. The 11% drop was largely attributed to a fall in CPO prices caused by a number of factors, including the uncertain international economic environment, a production glut and controls on the CPO trade. The average CPO price fell 27% year-on-year (y-o-y) and 24% quarter-on-quarter in the last quarter of 2012.

Despite this, officials believe the long-term outlook for CPO exports looks sound. In February Hamzah Zainuddin, deputy minister of plantation industries and commodities, said he expected CPO exports to exceed the 2011 record within three to five years. Even given ongoing issues of inventory surplus, the ministry forecasts growth in 2013, partly thanks to an export tax cut.

From January, the government brought the levy down from 23% to a sliding scale between 4.5% and 8.5%; if the CPO price falls below RM2250 ($725), the tax will be cancelled. Meanwhile, Indonesia, the world’s largest CPO exporter, raised its export tax from 7.5% to 9% in January.

Mohammad Jaaffar Ahmad, CEO of the Palm Oil Refiners Association of Malaysia (PORAM), said his members were already “seeing better margins as they ramp up production”. Jaaffar said rising exports would help lower Malaysia’s inventory, which was in substantial surplus at 2.53m tonnes at the end of January 2013, to a “manageable level” of 2m tonnes.

In the first half of February, Malaysian palm oil shipments rose 18%, to 673,555 tonnes, following a 10% decline in output and 1.6% fall in exports in January, the former partly attributable to a run-down of existing stocks and seasonal factors. Rabobank, a Dutch agricultural bank, said it expected Malaysia’s palm oil production to fall 2% y-o-y in the first six months of 2013 as the inventory is fed into exports. However, Malaysia-based Kenanga Research said that it did not expect stocks to fall below 2m tonnes in the first quarter of 2013 due to lower export demand.

Jaafaar said he expected the price of CPO to rise as inventories ran down. In early February, it climbed to around the RM2250 ($725) tax threshold, and by the end of the month, it stood at RM2330 ($751). Meanwhile, futures for delivery in April topped RM2500 ($805) in mid-February. Officials take the view that prices have now bottomed out, as the surplus falls and a number of demand factors kick in, but also due to a seasonal drop in production.

Local press reported that analysts expect prices to rise to RM2600-2700 ($838-870) by the middle of 2013. Kuala Lumpur-based RHB Research Institute, part of bank RHB, has said it has a price assumption of RM2800 ($902) per tonne for 2013, rising to RM3000 ($966) in 2014. It expects prices to fall again in the second half of this year due to the seasonal rise in output.

Meanwhile, Kenanga expects an average price of RM2500-2700 ($805-870) this year and next, and takes a more bearish view on planters’ stocks than some of its counterparts. PublicInvest Research has a neutral recommendation, expecting an average price of RM2750 ($886) this year and RM2850 ($918) in 2013.

As ever, CPO prices will be strongly influenced by the global economic situation, particularly by major importers, such as China and India. India’s proposal to levy a tax on CPO imports concerns Malaysian planters, for whom the country is the second-largest market. With the worldwide economy expected to grow only moderately in 2013 and 2014, it is little surprise that CPO prices are unlikely to reach the peaks seen five years ago. However, as oversupply moderates, a steady rise should boost the sector.

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Malaysia: CPO Power

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Malaysia: Banks shift lending patterns

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With an election looming and uncertainty over the state of the global economy, Malaysia’s banks may have to work hard to maintain earning levels amid predictions of lower rates of household borrowing growth.

Many analysts are tipping a slowing of loan growth in 2013. The results of a study by Alliance Research, a division of Alliance Investment Bank, points to loan growth of between 7% and 9% in 2013, down from the 11% for 2012 and 13.6% in 2011, respectively, in part due to net interest margin compression and higher provisions for non-performing loans.

The report, released at the beginning of January, also said even the lower levels of growth could be optimistic – at least in the first part of the year – if consumers became more cautious in their spending patterns ahead of the general election, scheduled for the end of April at the latest. Consumer activity, and subsequently bank lending, could also be negatively affected by the possible introduction of new taxes and higher utilities tariffs following the election, the report noted.

While individual lending could slow, this may not apply to the business sector, at least according to an investors’ note issued by HwangDBS Vickers Research, a division of a local investment bank by the same name, in early January. The report says there should be increased demand for finance from firms looking to benefit from the Economic Transformation Programme (ETP), a government initiative to develop the country into a high-income economy by the end of the decade.

With the ETP aiming to more than double per capita income by 2020 and create 3.3m new jobs, the government is encouraging private sector investment in key areas. The private sector in turn is looking to the banks to help finance the retooling, infrastructure and expansion needed to take part in the state-backed projects. These borrowing requirements could boost bank-lending activity during the year, HwangDBS said.

Wong Yin Ching, co-head of financial institution ratings at RAM Ratings, a domestic credit ratings agency, told local media in early January, “We anticipate stronger financing demand from corporations as well as small and medium-sized enterprises (SMEs), underscored by the rollout of projects under the ETP and the 10th Malaysia Plan”.

These views were backed by a report prepared by the research unit of MIDF Amanah Investment Bank in early January, which noted the ETP projects would drive demand for corporate loans debt-capital fundraising, again with strong calls for funding from SMEs.

While the elections and unsteady global markets could impact the Malaysian economy, an investor note issued at the end of December by RHB Research Institute said it was maintaining its overweight outlook for the banking sector, which it described as robust and “safe”.

“We think the sector’s ‘defensive’ qualities will help tide investors through the volatile first half on even keel,” RHB said. “As macro conditions improve after that, we see the banks as one of the major beneficiaries.”

While the reduced rate of growth for banks’ loan portfolios could see a lower level of earnings across the sector, there was potential for revenue-generating expansion elsewhere. According to Asian Development Bank economist Jayant Menon, the opening up of the Myanmar economy to outside investment, along with the development of the economies in Cambodia, Laos and Vietnam, held out the promise of growth for Malaysian banks.

“There is also a lot of potential for banks to increase their sales and revenues in these new frontier markets,” he said in an interview with state news agency Bernama in late December.

RHB Bank board member Tan Sri Azlan Zainol said recently RHB would explore opportunities in Myanmar. This, along with a move into the Indonesian market, was part of RHB’s strategy to expand its overseas earnings from 5% of revenue to 30% by 2020, he said in mid-January.

Though loan activity may slow this year, the economy is predicted to expand by around 4.8% in 2013. With a rebound in Asia in 2014 forecast, the country’s lenders should be well placed to boost revenue in the medium term.

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Malaysia: Year in Review 2012

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It has been another year of good growth for Malaysia, even as the international economic climate has been uncertain. Strong domestic demand, government investment, greater diversification and regional resilience have all played their part.

GDP growth is expected to hit 5% this year or possibly exceed it, according to several analyses. The economy has been supported by higher incomes and accommodative monetary policy, as well as by government spending. Malaysia has been pushing ahead with its Economic Transformation Programme (ETP), which seeks to lift the country to its long-term target of achieving middle-income status by 2020.

To this end, the ETP entails large-scale investments in infrastructure, health and education, as well as interlinked efforts to push key sectors further up the value chain, in order to reduce Malaysia’s reliance on raw material exports and increase skill and income levels.

After talks between Malaysia and Singapore in January, the two countries agreed to strengthen transportation links to benefit bilateral trade and the construction sector. Progress has been made on a $9.7bn mass-transit railway system linking Malaysia’s southern Johor state and Singapore, which is part of a new line that will cut travel times from Kuala Lumpur to Singapore from six hours to 90 minutes.

In May, the international business press reported that AECOM Technology had been awarded the $42m contract for the design and engineering study for the Malaysia-Singapore Rapid Transit System (RTS) link by the relevant Singaporean and Malaysian authorities.

Infrastructure development also entails the expansion, upgrading and diversification of Malaysia’s power-generation capacity. In May, Peter Chin Fah Kui, the minister of energy, green technology and water, announced that Malaysia would increase the proportion of electricity it generated from coal to 44%, up from 30%, and lower the share derived from gas to 46% from 60%.

The government’s desire to lower dependency on gas supply was informed by rising gas prices, and a desire not to pass them on to customers, as well as by a connected gas supply shock in 2011. In May, the government confirmed plans to invest $3bn through state power firm Tenaga Nasional to construct two new hydropower plants and two new coal-fired stations, with a total of more than 2500 MW of installed capacity.

Meanwhile, further generation capacity is needed to support the demands of Malaysia’s manufacturing sector, which has performed well in 2012. Industrial production rose by 4.9% in the first nine months of 2012, according to official data. Manufacturing output rose by 5.2% year-on-year, while the other segments included in industrial production – mining and electricity – grew by 5.9%.

Growth came despite the uncertain global economic climate, which was affected by the eurozone crisis, the US’s debt problems and slowdowns in major emerging markets. However, strong domestic demand has helped manufacturers offset slower exports.

Together, manufacturing and mining contribute 35% of GDP, so the expansion of industry has been key to the economy’s good performance in 2012. Next year seems likely to see similarly healthy levels of GDP growth, as both upside and downside risks from 2012 are likely to continue into 2013. On one hand, the Malaysian economy should continue to benefit from its realignment towards domestic demand, supported by an expected maintenance of low-interest rate policy and the further roll-out of the ETP. The development of value-added industries, as well as service sectors such as tourism, should also help the economy.

On the other hand, Malaysia cannot be immune from international events. A significant worsening in the eurozone, the US, or a “hard landing” slowdown in China would undoubtedly have an impact. The Malaysian general election, due by June 2013, may also create an element of political uncertainty, though it is also spurring government spending. The economy, particularly government finances, remains sensitive to fluctuations in commodity prices, including that of oil.

Observers are split on whether there will be a slowdown, or if the economy can accelerate further. The UK’s Institute of Chartered Accountants in England and Wales sees a drop to 3.8%, and international investment bank Nomura expects a fall to 4.3% from 5.3% in 2012. Manokaran Mottain, the chief economist at Kuala Lumpur-based Alliance Investment Bank, forecasts a slight fall to 5% from the 5.2% he expects this year. The independent Malaysian Institute of Economic Research, however, forecasts a pick-up from 5.1% to 5.6%.

Policy-makers will be keeping a keen eye on the international environment, as Malaysia cannot go it alone. However, next year should see the developed and diversified future economy envisaged by the ETP move closer.

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Malaysia: Year in Review 2012

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Malaysia: Gas imports to strengthen growth

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Rising domestic demand for energy, fuelled by industrialisation and a growing population, has prompted Malaysia to take on a new role of major gas importer as it looks to augment its own extensive reserves.

The government’s decision to boost gas imports forms part of a shift in energy-related economic policy that will see Malaysia’s long-standing power subsidies phased out by 2016.

While the new pricing structure for energy has been in the pipeline for some time, it is almost sure to prove unpopular, as consumers may well bear the brunt of sharp increases passed on by producers.

Malaysia has long been finalising its plans to begin using imported gas as a driver of economic growth. In 2009, Petroliam Nasional, the state-owned oil and gas company more commonly known as Petronas, signed an agreement with Gladstone LNG of Australia to buy 2m metric tonnes of liquid natural gas (LNG) annually for a 20-year term, from 2014 onwards.

The agreement, which included an option to purchase an additional 1m tonnes, was part of Petronas’s plans to secure adequate supplies for the domestic market. Since then, Malaysia has struck similar deals with other producers, including Statoil of Norway, France’s GDF Suez and Qatargas.

Petronas is currently developing a receiving and regasification plant at the Sungai Udang Port, Melaka, which will process imported LNG. In a statement issued to Bursa Malaysia in late November, the company said that although the project is behind schedule, the facility was expected to be commissioned by the second quarter of 2013. Once fully operational, the plant will have the capacity to process 3.8m tonnes of gas annually.

On November 26, Malaysia LNG, a production subsidiary of Petronas, announced that the German engineering firm Linde Group had won a tender to design, build and deliver a new boil-off gas re-liquefaction facility that will be constructed at the Bintulu LNG complex in Sarawak, East Malaysia. The plant will have a daily capacity of processing 670,000 tonnes of gas annually and should be up and running by the end of 2014.

The shift to imported gas will signal the end of an era for Malaysian consumers who have long benefitted from the subsidies policy, which the government was able to maintain thanks to ample quantities of cheap, locally-produced stock.

The government is believed to have subsidised gas prices by approximately $6.6bn in 2011, half of which was channelled into the electricity segment. The subsidies, which formed part of a government drive to keep down electricity costs and promote industrial growth, are expected to be phased out by 2016, when gas prices should be fully deregulated.

While Malaysia is laying the foundations for gas imports, it continues to work on maximising output from its existing fields, exploring how it can use extraction enhancement technology to extend production life.

Malaysia’s gas reserves remain extensive, with its proven deposits of around 2.4tr cubic metres earning it a 13th -place global ranking for untapped holdings. Existing reserves should allow Malaysia to maintain production at its present rate of around 63bn cubic metres for years to come, although projected increases in domestic usage are likely to speed up a reduction in the life expectancy of its fields. Much of the increased demand will come from industries dependent on gas for feedstock, such as manufacturers of plastics, chemical fertilisers and other petrochemical products.

Efforts are also being channelled into identifying and developing new reserves. In November, Petronas and its partners announced a number of new finds in offshore fields, although the full extent of reserves and their quality have yet to be determined.

While new fields will help prolong the lifespan of gas production, Malaysia’s rising demand for gas is set to grow at a rate easily outstripping domestic output. Despite concerns that higher energy bills will irk consumers and could push up inflation, foreign gas looks set to play a growing role in powering Malaysia’s economy.

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Malaysia: Steady and growing

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Despite global uncertainty, Malaysia looks set to achieve its GDP growth target this year, thanks to a benign domestic climate, rising investment and fiscal stimulus.

According to Ahmad Husni Hanadzlah, the second minister of finance, Malaysia is on track to achieve its target of 4.5-5% economic growth for 2012. Husni, who was speaking to reporters on the side lines of a conference on October 16, said that he expected growth to be on the upper side of the target range, despite an expected slowdown in the third quarter.

Growth picked up to 5.4% in the second quarter from 4.7% in the first, but the third-quarter figure is expected to be lower, particularly after disappointing results in August, when exports fell by 4.5% year-on-year – the sharpest drop in three years – and industrial production shrank by 0.7%. The minister attributed the dip to the effects of the global economic environment.

However, Zeti Akhtar Aziz, the governor of the central bank, said that both the third and fourth quarters should show “good growth”, and indeed, the markets seem to agree, with the ringgit lifting in the first two weeks of October. The Malaysian currency has been trending broadly upwards against the dollar since June.

In an interview with the international press in October, Zeti said that she expected growth in 2013 to be “much the same” as this year, barring a deterioration of the world economic climate.

Thus far, Malaysia has performed remarkably well, despite the international uncertainties caused by the eurozone crisis, the US debt crunch and a slowdown in China. According to Zeti, domestic demand and consumption are both growing at 7%, while investment is running at 10%. The stock market hit all-time highs in October.

There are a number of reasons for Malaysia’s strong performance, including relatively high prices for some of the commodities it produces, including crude oil. Low inflation (1.4%) in the year to August has allowed the central bank to keep interest rates on hold for eight successive meetings. Meanwhile, the banking system is stable and well capitalised. Investors looking to shift portfolios towards emerging markets and away from the troubled economies of the EU and the US have alighted on Malaysia, helping to sustain growth. Further quantitative easing in developed economies, including the US, is expected to increase the flow of capital to emerging markets such as Malaysia.

Malaysia is also starting to benefit from the government’s Economic Transformation Programme (ETP), a wide-ranging series of reforms intended to release the economy’s latent potential in the quest to achieve “developed nation status” by 2020. A central aim of the ETP is to strengthen value-added industries and services, raise incomes and reduce the historic reliance on volatile commodity earnings.

While the ETP’s raft of schemes is feeding through into the economy over the long term, there has also been a significant fillip from the 2013 budget, which is already buoying consumer confidence and should help support domestic demand. The budget lays out RM251.6bn ($81.73bn) in spending, including more generous benefits for the poor, bonuses for public sector workers, as well as tax cuts. The largesse is partly linked to next year’s election, in which the ruling Barisan Nasional will face a strong challenge from the opposition.

After the election, however, the government may need to tighten its belt. While the 2013 budget foresees the deficit being reduced from 4.5% to 4% of GDP, this is still quite a high ratio, particularly as it adds to Malaysia’s debt pile, which currently stands at 52.6% of GDP – the highest in Asia after India and Pakistan, according to the international press. Malaysia is being urged to ponder long-term tax reforms to increase income and reduce its dependence on revenues from state oil and gas giant Petronas, which currently provides around 40% of government funds.

Should the global economic situation worsen, Malaysia will have limited scope for further fiscal stimulus without running the risk of undermining stability. Domestic demand has been an important factor in maintaining growth of late, which is a positive development both for the country and its international partners. But as a globalised economy, and an exporter, Malaysia cannot be isolated from the effects of international crises.

Nonetheless, Malaysia’s baseline scenario is continued impressive growth for the remainder of this year and 2013. The country is thus in a fortunate situation compared to much of the world, and it is now in a position to implement the investments and reforms that can keep it on course for its 2020 target.

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Malaysia: Steady and growing

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Malaysia: Push for liquefied natural gas

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As gas consumption levels reach record highs in Malaysia and across the continent, the country is positioning itself as a regional trade centre for liquefied natural gas (LNG). With a series of capital-intensive LNG investments, Malaysia will likely see a strong increase in LNG import-export volumes for some time to come. However, muted economic growth in China and India, and with it slowing demand, could limit the country’s ability to export its new LNG production.

Heavy gas subsidies and increasing LNG demand, which has increased from 315bn cu feet in 1990 to more than 1260 cu feet in 2010, a compounded annual growth rate of 7.2% — is expected to result in Malaysia’s consumption rate outstripping production between 2011 and 2016. This trend may lead to a potential gas shortage beginning in 2014, signalling the need for Malaysia to expand its LNG import infrastructure.

To this end, Malaysia has invested in a number of infrastructure projects, including an LNG re-gasification terminal (RGT), located offshore near the Sungai Udang port in Malacca. The RGT was developed by the gas-processing subsidiary of Petroliam Nasional (Petronas), Petronas Gas, and work was completed in mid-2012.

The RGT includes an island jetty with a re-gasification unit, two floating storage units and a new 3-km, sub-sea pipeline that connects to the onshore gas pipeline network. According to the Prime Minister’s office, the facility is expected to commence operations this month. Once it is operational, the RGT will have the capacity to process and store up to 3.8m tonnes per annum (tpa) of LNG, Petronas Gas said in a statement.

Current supply contracts with the new facility include a deal with Norway-based Statoil to supply 1bn cu metres of LNG over three and a half years, a deal with France-based GDF Suez to supply 2.5m tpa also over three and a half years, and a 20-year deal with Qatargas for 1.5m tpa. Petronas is also looking to import gas from the Santos-Petronas Gladstone LNG project in Australia, with the first shipments of LNG to arrive in 2014, once the deal is completed.

To further enhance LNG import capacity, a second re-gasification plant and import terminal is being planned at the Pengerang Integrated Petroleum Complex (PIPC) in Johor. The $56bn project will include oil refineries, petrochemical plants and a $1.3bn investment allocated specifically for the LNG terminal and the re-gasification plant.

The investment will be a joint venture among local engineering firm Dialog Group, Netherlands-based oil and gas storage company Royal Vopak, and the Johor state government, with the first phase of construction expected to be complete by 2014. Storage capacity at the terminal is expected to be around 5m cu metres and will enable international users to store and trade LNG.

According to Mohd Yazid Jaafar, the CEO of the Johor Petroleum Development Corporation, studies by oil companies and the Performance Management Delivery Unit (the state body responsible for overseeing the implementation of the country’s economic transformation programme, PEMANDU) show that the PIPC will contribute RM17.7bn ($5.73bn) to gross national income by 2020, with the PEMANDU study also showing it will provide 8500 high-skilled job opportunities by 2020.

In addition to the onshore LNG developments, Petronas has recently awarded the Technip-Daewoo Consortium with a contract to develop Malaysia’s first floating LNG (FLNG) facility, which is expected to be operational by 2015. The FLNG facility is expected to produce 1.2m tpa and increase Malaysia’s overall production capacity from 25.7m tpa to 26.9m tpa.

The Sabah-Sarawak Gas Pipeline (SSGP) in Borneo, meanwhile, has reached 85% completion and is now entering the final phase of development. According to Shaiful Bahrin Hashim, the senior project manager at SSGP, “We estimate the gas to start flowing by April 2013, if everything goes as planned.” The pipeline is approximately 521 km in length and will deliver natural gas from a terminal in Kimanis to an LNG facility in Bintulu.

With high population growth rates across Asia and increasing demand for power, Malaysia’s ongoing natural gas investments may be a highly strategic asset entering the second half of the decade, particularly if it can secure its position as a major supplier now. If, however, demand slows considerably in China, for which the IMF recently downgraded its 2012 GDP growth prediction of 8% to 7.8%, and India, which also just saw the IMF’s GDP growth estimate for the year fall from 6.9% to 6%, Malaysia could be faced with more capacity than it can use.

Still, the new projects should provide Malaysia with substantial manoeuvrability in the LNG market, both in terms of expanding export capacity, as well as developing a more sustainable import mechanism to meet domestic consumption trends.

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Malaysia: Speculation over real estate levies

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With the aim of maintaining real estate prices at a reasonable level and to rein in any property speculation, the government is considering the use of tighter fiscal policies that have met with a mixed response from industry players.

Speaking on the sidelines of the 15th National Housing and Property Summit, held in Petaling Jaya on August 28, Chor Chee Heung, the minister of housing and local government, said there was a strong need for better government policies to maintain reasonable and affordable property prices, and to ensure sustainability in the real estate sector as Malaysian property prices steadily increase.

“The government has to mitigate excessive investment and speculative activity in the property market so as to prevent a property bubble,” said Chor. “To ensure sustainable housing development, all parties – including the state government, developers and government-linked companies – must keep abreast of real demand and the affordability level of locals for housing, especially in the Klang Valley.”

One of the tools the government has at its disposal to cool the real estate market is the Real Property Gain Tax (RPGT). As of January 1, charges under the RPGT were set at 10% on profits for real estate owned for two years or less and 2% for those owned between two and five years, with no tax on gains for properties sold after that term. Previously, a 5% tax was imposed if a property was sold within five years, with no tax levied on the capital gains if the sale was made following five years of ownership.

The tax on capital gains from property sales has undergone several adjustments in recent years. Prior to 2007, when the tax rate was cut to 5%, it reached as high as 30% for sales conducted within the first two years of ownership.

Jeffrey Cheah, the chairman of Sunway, a local property developer, said it was important for the government and the real estate industry to work together, adding that it was vital the government did not implement drastic measures that could slow down the property market.

“The government should not increase the RPGT. I also hope it will not further restrict lending to the property sector or introduce new measures that will make it more difficult for home buyers to purchase properties,” Cheah said at the end of August.

Unlike some in the industry, who are concerned that Malaysia’s real estate sector is overheating, Cheah said he was confident that no bubble was emerging. “Our property prices are still affordable compared with neighbouring cities in the region,” he said.

Another organisation to urge caution is the Real Estate and Housing Developers Association (REHDA), which said that the capital gains tax on property should either be left untouched or be lowered to its former level.

“Under the current market conditions, such as the softening market, early signs of better growth of the economy, and the uncertainties of the US and eurozone economies, we urge the government not to interfere with the existing policies, which are business friendly,” REHDA said in a statement in The Malaysian Star on August 21.

The Malaysian Developers’ Association (MDC) also spoke out against any increase in the RPGT or in stamp duty – another policy option available for use by the government – stating that much of the rise in property prices could be attributed to higher materials costs, rather than speculation.

“Increases in basic building materials, which are major components of construction, land and compliance costs, will ultimately lead to higher selling prices of homes,” the MDC said in a statement issued in early August.

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Malaysia: Islamic finance pensions

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Moves to liberalise Malaysia’s pensions market are expected to galvanise the Islamic finance market, already a key segment of the country’s economy, though greater regulatory oversight will be needed to bolster investor confidence in the sector.

On July 23, the international press reported that Malaysia was introducing “sweeping reforms” to its pension system. The changes introduce a new, voluntary Private Retirement Scheme (PRS) to run alongside the existing Employees Provident Fund (EPF). The PRS will allow Malaysians to purchase a wide variety of products from private fund management firms, making it easier for them to focus on Islamic investment. Currently, the EPF collects pension contributions and invests the cash; contributors can place up to 20% in a single mutual fund.

By facilitating investment in private products by individuals, the reforms are expected to kick-start the growth of Malaysia’s small private pensions sector, which the government now expects to be worth RM73bn ($22.92bn) by 2020. Though some think the prediction is rather optimistic, most agree that there is a lot of potential for growth given the regulatory changes, growing disposable incomes and a rising culture of saving for the future.

Officials – and the structure of the new regulations – make it clear that increasing investment in Islamic products is one of the aims of the changes. “The PRS will contribute to the growth of Islamic fund products,” Zakie Ahmad Shariff, a board member of the Private Pension Administrator (newly founded to oversee the PRS funds) and CEO of the Federation of Investment Managers Malaysia, told international press. Analysts agreed that those investing in the new system would gain from sharia-compliant offerings in particular.

Of the first 30 products offered through the PRS, only six will be Islamic, with the expectation that there will be more to come. The eight existing PRS providers ¬– all of which have sharia-compliant arms – can offer between three and seven conventional products through the system, but can provide up to 10 products if they offer Islamic schemes as well.

As the domestic market grows in new segments, Malaysia continues to cement its position as one of the world’s leading sharia-compliant sectors. It is particularly strong in sukuk (Islamic bonds), which accounted for 68.7% of the $84.4bn issued globally last year and 71% of the $43.5bn launched in the first quarter of 2012 (a 55% increase on 2011’s first quarter).

In July, Axiata, Malaysia’s leading mobile telephone operator, announced it was looking to raise up to $1.5bn in sukuk issues to tap low-cost long-term funds and increase its capital efficiency. It will be the first Asian telecoms firm to issue multiple currency sukuk, according to the company. The launch was “strategic” and targeted at investors in the region, as well as the Middle East and Europe, and officials said the move would help strengthen Malaysia’s position as a global sukuk leader.

The private sector and government bodies are likely to provide further issuances in the near future as Malaysia rolls out its ambitious Economic Transformation Programme, which envisages large investments in infrastructure and services and aims to develop the economy to boost value added and strengthen value chains.

While Malaysia’s Islamic finance sector continues to be a world leader, the industry’s rise to global prominence is relatively new. As elsewhere in the world, growth has brought on regulatory challenges, and some parts of the industry lag behind others.

“Sharia-compliant trustee management needs to move forward,” Abdul Jalil Rasheed, the CEO of Aberdeen Asset Management, which moved into Islamic finance in Malaysia in 2009 and counts the EPF as its biggest customer, told OBG. “Asset management is still a very locally driven business in Malaysia. There are currently 16 licences in the market for Islamic asset management, not all of which are doing well.”

Rasheed suggests that “innovation needs to slow” so that Islamic finance can put down deeper regulatory roots and to prevent firms from over-extending themselves, adding that the market may still not be mature enough for sharia-compliant hedge funds to flourish.

As Deputy Finance Minister Datuk Awang Adek Hussin noted last year, greater cooperation among Islamic finance experts, religious scholars, government bodies and the private sector is needed to support and consolidate the industry. “Although Malaysia’s Islamic financial performance has shown encouraging development, we should not be complacent with our achievements thus far,” he said.

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Malaysia: Islamic finance pensions

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Malaysia: Confronting the energy dilemma

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Committed to reducing its carbon intensity by 40% by 2020, Malaysia is currently facing some tough decisions on whether natural gas or coal will be the best energy source to meet its rapidly growing consumption needs and looming environmental targets.

While some officials say coal will dominate the future energy mix due to its cost benefits, others believe gas will lead the way, largely based on international trends and the overall environmental benefits. At present, some 60% of the country’s power is generated by gas, 30% by coal and 10% by hydropower plants. As of January 2011, the country is estimated to have 85trn cu feet of gas reserves and proven oil reserves of 4bn barrels.

In May of this year, Peter Chin Fah Kui, the minister of energy, green technology and water (KeTTHA), said the government was moving towards more coal-driven power plants in order to ensure the cost of electricity will not burden the public.

“We are planning to make the shift to 44% coal and 46% gas. We do not want to be too dependent on coal either. The price of gas has gone up and we do not want to burden the public,” Chin said, while speaking with The Malay Mail in June, adding that coal prices are less prone to market variations.

In the same month, the government confirmed it plans to invest $3bn through state-owned energy provider Tenaga Nasional Berhad (TNB) for the construction of four new power plants over the next five years, including two hydropower plants and two coal-fired facilities.

Construction of the Hulu Terengganu (250 MW) and Ulu Jelai (378 MW) hydropower plants, and a 1000-MW coal-fired plant in Manjung, is expected to be complete by 2015. Meanwhile, the fourth, a 1000-MW coal-fired plant in Tanjung Bin, is scheduled to be operational by July 2016.

Discussing the plans, Che Khalib Mohamad Noh, the outgoing president and CEO of TNB, said that when the four plants are operational, national capacity will increase to 2630 MW from the current 2050 MW.

However, Khalid told local media that gas-fired plants will be the focus of future projects, as they have a more minimal impact on the environment. “Gas accounts for 40% of the world’s power generation and this is expected to grow to 60% by 2030,” he said.

On the other side of the debate, KeTTHA’s desire to shift to coal is likely explained in part by a gas supply shock in 2011 that saw daily supply fall from the normal 1050m standard cu feet per day (cfd) to as low as 850m cfd.

To prevent this from happening again, a new liquefied natural gas (LNG) regasification terminal in Melaka, which will be operated by Petronas is due for completion in August. In June, plans were also approved for the firm to build an offshore, floating LNG plant by 2015.

While the Melaka terminal has the capacity to produce 530m cfd of gas, the offshore plant ? set to be the world’s first ? will allow Petronas to drill and ship gas from fields that were either too small or too remote to be profitable previously.

As both LNG and coal will require almost 100% imports in the future due to the depletion of national reserves, another option being considered is nuclear power. Chin confirmed in March that Malaysia was looking to build two 1000-MW nuclear power plants by 2022 to counter an “imbalance” in its energy supplies, despite ongoing environmental concern regarding the safety of nuclear power.

Renewable energy is seen as a greener and safer alternative to the nuclear, gas and coal options, and Kuala Lumpur is committed to a 5.5% contribution from renewables by 2015. However, renewable energy has yet to take off in the country, with investors often seeing it as a risk, due to unproven technologies and potentially high tariffs.

While in late 2011 the country adopted a sophisticated quota system on feed-in tariffs ? a policy mechanism designed to accelerate investment in renewable energy ? critics say its solar segment has been oversubscribed and that the country should focus more on biomass, given the huge amount of municipal waste and biomass generated by palm oil plantations.

Malaysia is also planning to adopt a number of energy efficiency measures. In June Chin said a draft law to mandate energy efficiency would be tabled in 2013, with provisions to include the banning of incandescent light bulbs and the mandatory import of energy-efficient refrigerators. In June, Tan Sri Shamsul Azhar Abbas, the CEO of Petronas, the state-owned oil and gas company, said at the World Gas Conference that heavy subsidies on natural gas may promote economic growth but also lead to energy inefficiency. Indeed, Malaysia began reviewing gas prices last year and aims to achieve market parity by December 2015.

The government insists coal-fired energy will reduce electricity costs and help meet rising demand, however, even with the introduction of new technologies, the burning of fossil fuels will impact environmental goals. Global signs that the coal market is more susceptible to “resource nationalism” than gas suggest the latter will dominate future world energy trends.

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Malaysia: Confronting the energy dilemma

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