Malaysian markets to gain from pension planning

State agencies and the private sector are combining to promote private pension schemes, both as a measure to strengthen provisions for Malaysians in retirement and to boost liquidity in the nation’s capital markets. However, longer-term success will depend on convincing the younger segments of society of the need to prepare for life after work.

Malaysia is trying to move away from state-funded pension schemes and a traditional reliance by the elderly on family support in its planning for a society with higher incomes but also an ageing population. At the core of this is the Private Retirement Schemes (PRS) initiative, a range of investment funds intended to offer Malaysians the option of building up a private pension as a supplement to a state pension and the existing mandatory private pension scheme administered by the Employees Provident Fund (EPF).

Launched in mid-2012, there are now eight PRS providers, providing 44 PRS funds among them, with take-up of the scheme starting to gain momentum. As of end-December 2013, PRS providers have some RM280m ($86.87m) worth of assets under management, a figure that is expected to double by the end of this year. According to the Private Pension Administrator (PPA), the central administrator of the PRS industry, the contributor base will grow from 65,000 members as of the end of 2013 to between 140,000 and 150,000 by the end of 2014.

The need for Malaysia to increase retirement coverage for its population is becoming more pressing. While the population base is still young, that situation is changing, with more than 11% of citizens expected to be 60 years of age or older by 2020. According to estimates from the World Bank, some two-thirds of Malaysians are currently not adequately prepared for retirement, meaning that the state will have to carry an increasing burden in the coming decades unless there is a far greater take-up of private pension schemes.

Planning for the future

According to Steve Ong, the chief executive officer of PPA, more Malaysians need to ensure their financial security in the post-employment years.

“Currently, the income replacement ratio of an average Malaysian is at 30%, which falls short of the two-thirds, or around 66%, recommended by the World Bank. The two-thirds replacement ratio is to provide the financial means to continue with the same living standards and lifestyle one has become accustomed to when retired,” Ong told OBG.

“With the PRS, PPA envisages that over time the Malaysian public will have two retirement funds, namely the EPF and PRS, to support their retirement years,” he said.

Younger customers targeted

To deepen the savings pool and to spread out the demands on state-funded pension schemes, the government raised the minimum retirement age from 55 to 60 last year. This move allows workers to make a further five years of EPF contributions and also gives older workers the chance to buy into PRS funds.

In planning for the future, the government and fund managers have been looking at the younger segments of society, those under the age of 30, as being the priority target for the PRS market. At present, only 6% of contributors to private pension schemes are below the age of 30, according to PPA data. The agency hopes this will rise to 20% by the end of 2014 as promotional initiatives, including an incentive scheme launched in this year’s budget offering a one-off top-up contribution of $150 from the state to new subscribers, boost interest.

Capital markets boost

If, as expected, younger Malaysians start to buy into PRS, this will provide a sharp influx of funds under management, which in turn will serve to add long-term liquidity to the country’s capital markets, with pension investors not looking for a payout for 30 years or more.

In mid-March, the chairman of the Securities Commission, Ranjit Ajit Singh, said that the collective investments segment, which will increasingly be driven by pension funds, has a strong potential for growth. The market regulator will take steps to further expand PRS distribution channels and promote the use of employer-sponsored schemes as part of broader measures to encourage a more sustainable retirements savings culture, he said while launching the commission’s 2013 annual report.

If PRS providers are able to maintain the rate of growth foreseen by PPA through to 2020, they will have a massive asset base at their disposal. PPA anticipates funds under management by PRS providers reaching $9.5bn, even with the rising level of payouts expected by the end of the decade. This will make the funds managed by PRS providers a significant factor in Malaysia’s capital markets, one that is expected to see greater demand for long-term bonds and other longer-term asset classes, adding depth to the market and further strengthening its appeal to investors.

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Mixed reaction to Malaysia’s debt levels

Pressure is mounting on Malaysia’s central bank to tighten loan restrictions after its annual report showed household debt levels inching towards 87% of GDP at the end of 2013. With the highest household debt levels in Asia, demand for credit is driven primarily by the desire to buy properties and vehicles.

Keen to allay growing concerns, the central bank recently highlighted Malaysia’s strong fundamentals, while also pointing to measures introduced last year which, it said, had improved lending practices. Senior analysts have given Malaysia’s economy a vote of confidence, although concern is growing that a future talent shortage could weigh on the bank’s financial projections.

Vetting brings improvements

Household debt levels hit 86.8% of GDP at the end of December 2013, marking a record high, but signalling slower growth.

Bank Negara Malaysia governor, Zeti Akhtar Aziz, voiced her confidence that efforts to tighten up lending were producing results. “Household loans from the banking system continued to improve in quality across all loan segments, with delinquencies remaining low and continuing to trend downwards. … This has been supported by sustained improvements in the lending and risk management practices of banks,” she said at a press briefing.

The central bank limited the tenure of personal loans to a maximum of ten years last July, while also banning pre-approved personal financing products. Later in 2013, the government announced plans to bring an end to the practice of developers absorbing interest payments on loans. It also raised capital gains tax to 30% on homes sold within five years in a bid to rein in speculation.

Despite the bank’s efforts, Standard & Poor’s cut its credit outlook for four Malaysian lenders in November, citing concerns that rising home prices and household debt were contributing to economic imbalances.

“The negative outlook recognises the potential for deterioration in the banks’ asset quality and financial profile, if the consumer debt burden proves excessive in an unfavourable economic scenario,” S&P analysts Ivan Tan and Deepali V. Seth wrote in a report.

Conflicting sentiment

Official data from the Malaysia Department of Insolvency issued in the same month showed that 60 people, aged between 35 and 44, were being declared bankrupt each day.

Yet several financial experts remain optimistic about the Malaysian economy’s potential. “If you look at the demographics of the country, we have a young working population and with urbanisation, it is supporting spending,” Alan Tan, chief economist at Affin Investment Bank told The Malay Mail Online in late March.

His sentiments were echoed on the same day by the World Bank senior economist for Malaysia, Frederico Gil Sander. “As long as household income is growing, as long as there is growth in the economy, and people can service their debt, it’s not necessarily… a bad thing,” he commented.

Projections made by market analysis firms support their views. RHB Research said in March that Malaysia’s GDP looked likely to grow at 5.4% in 2014.

Supporting transformation

Kuala Lumpur has set a target of achieving a per capita income of $15,000 by 2020, up from its 2013 level of $10,500, as part of its Economic Transformation Programme. Prime Minister Datuk Seri Najib Raza said in early January that the government was looking to create more than 3m job opportunities by the same year, in line with its target of achieving high-income, developed nation status.

Critics, however, warn that positive income and job creation predictions depend heavily on having the people in place to fill those roles. Malaysian students ranked 52nd out of 65 countries featured in the PISA 2012 survey of world student performance, released in December.

Writing in the FTAdviser on March 24, two professors from the University of Nottingham – Malaysia Campus, Christine Ennew and Nafis Alam, said that the effectiveness of any international financial centre was underpinned by the quality of its people. “Poor scores in international student assessments and declining English-language capabilities do not augur well,” they said. “In short, Malaysia has a people problem.”

While managing risk and improving lending practices will help ease fears about the debt situation, bringing through the next generation of achievers and creating roles for them is likely to be equally important in steering Malaysia towards its longer-term economic targets.

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Malaysia forms ties to the Gulf to develop Islamic financial services

A cooperation agreement between the bourses of Malaysia and Saudi Arabia – the world’s two largest Islamic financial services markets – stands to help the industry grow at a greater clip in both countries.

The deal, signed on February 20, will see the exchanges in Kuala Lumpur and Riyadh share expertise and develop human resources jointly. It covers topics such as equities, mutual funds and sukuk (Islamic bonds), and comes after an agreement between Malaysia’s central bank and the UAE in October on bolstering economic ties, including in the arena of IFS.

Combined, Malaysia and Saudi Arabia hold $682bn in Islamic banking assets, according to Reuters. The Saudi exchange, Tadawul, lists the world’s biggest Islamic banks, while Bursa Malaysia hosts the largest and most liquid market for sukuk.

Expanding its draw

The Malaysian market in particular is set to expand this year thanks to greater international interest, according to ratings agency Standard & Poor’s (S&P). “Malaysia already benefits from a broad sukuk investor base and liquid debt market. So the increased interest from issuers – notably in the Middle East and Asia – in tapping the Malaysian ringgit and dollar market should in our view continue over the next few years as Malaysia cements its leading position in the industry,” S&P wrote on February 4.

Major international investors, too, are extending Malaysia’s clout in IFS. AIG, the US-based insurance company, revealed in early February that by June it plans to start a sharia-compliant reinsurance business in Malaysia – a country that accounted for 11% of the $20bn global takaful (Islamic insurance) market in 2013, according to a February 13 report from the Malaysia International Islamic Financial Centre

Also in February, Libya’s ambassador to Malaysia, Anwar A Y Elfeitori, said his country was seeking more cooperation with Malaysia to assist in the development of its Islamic banking sector.

As a result of such global positioning, the IFS market has the potential to provide a significant boost to the economy, particularly in talent and employment, Adnan Alias, CEO of the Islamic Banking and Finance Institute Malaysia, told the local media recently.

“Malaysia has the right landscape and regulatory framework to further spur the development of talent in Islamic finance,” he said, adding that the IFS workforce was expected to grow from 144,000 to 200,000 in the next eight years. He noted the contribution of IFS to GDP was set to be around 10-12% in 2020, compared with the latest figure of 8.6% in 2010.

Steps toward further growth

While Malaysia has had a significant degree of success in the international IFS market – the Kuala Lumpur-based IFS Board, for example, is one of two global standards-setting bodies – the South-east Asian country faces increasing competition. Potential competitors include Dubai, which in recent months has signalled its intentions to establish the emirate as a centre for IFS.

According to some observers, Malaysia could be doing more to ensure continued growth in the IFS market. Islamic banking and finance could account for 50% of the financial sector if domestic banks like Maybank and CIMB Group give “a big push” to their IFS strategies, Humayon Dar, visiting professor of Islamic Finance at the Academy for Contemporary Islamic Studies, Universiti Teknologi MARA, wrote in an op-ed published by Malaysian Reserve on February 24.

Humayon said this would involve “Islamising” businesses by making more procedures sharia-compliant. “This is perhaps the time for the government to consider converting Cagamas [the Malaysian national mortgage company] into a fully-fledged Islamic financial institution, as almost 50% of its business is already sharia-compliant,” he added.

Others say the local IFS sector could receive a boost if Malaysia were to adopt sharia-compliant laws. Speaking in February at a conference on Islamic banking and finance law in Kuala Lumpur, former chief justice Tun Abdul Hamid Mohamad pointed out that many countries have set up regulatory frameworks to facilitate the development of Islamic finance products such as sukuk, but none has drafted sharia-compliant laws that could be used to settle the disputes that arise from their use. This could provide an edge for Malaysia, which is already viewed as a “model Islamic country”, he said.

As the global market grows – Islamic financial assets are currently valued at $1.3trn and S&P expects the industry to grow 20% annually from 2011 to 2015 – Malaysia is in pole position to capitalise on its early entry into the sector. While linking up with Gulf countries will help spread and develop Malaysian expertise on Islamic finance, new competitors in the sector continue to arise. This means that Kuala Lumpur must strive for the innovation that will keep its IFS sector ahead of developing trends.

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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: Infrastructure investments to drive loan growth

With Malaysia’s economy expected to post growth of just above 5% in 2013, investors expect further increases in lending to the private sector. While rising household debt remains a concern in the medium term, domestic bank capitalisation leaves some room for further growth in their portfolios.

On May 15, Moody’s announced it was maintaining a stable outlook on the Malaysian banking sector for the next 12 to 18 months. The ratings agency said its assessment was based on an expectation of favourable operating conditions, as well as high levels of capitalisation.

Moody’s has projected that loan portfolios will rise by 10% in 2013, in part driven by a 5% increase in GDP. Economic expansion will be supported by government investment in infrastructure projects and pro-growth monetary policy, both domestically and internationally. With interest rates in developed countries at historic lows, investors are drawn by Asia’s growth markets, with Malaysia attracting particular attention due to its economic stability.

As the IMF noted in a February report, Malaysia’s economy has continued to grow as domestic demand, driven by public and private investment, has offset a weak external environment. Low inflation – averaging 1.7% in 2012 – has allowed the central bank to maintain a loose monetary policy stance for a sustained period.

The IMF also expressed a favourable view on Malaysia’s financial system, noting that it is “robust, highly capitalised and underpinned by a sound supervisory and regulatory framework”. Similarly, stress tests carried out by Moody’s indicate that banks have built up substantial loss-absorbing buffers, allowing them to withstand a possible deterioration in asset quality without their capital levels falling below regulatory minimums. Moreover, as lenders work to implement Basel III, capital requirements will increase further, “locking in” these buffers, the ratings agency said. Liquidity is also ample – the loan-to deposit ratio stands at 79%, and banks have access to global debt markets to raise capital.

However, both Moody’s and the IMF warn that the outlook is not risk-free. The IMF mentions the growth of unsecured consumer lending, while Moody’s “cautions over the looming risk posed by the twin trends of household leveraging and house price appreciation”.

The ratings agency asserts that risks are low for its forecast period, although it says an increase in interest rates would have an adverse effect on certain types of loans, including high loan-to-valuation mortgages, credit extended to export-oriented businesses and consumer debt held by highly leveraged households. However, these asset classes account for less than one-fifth of total loans in the banking system, it added.

Moreover, the bulk of growth in lending in the near term is expected to come from business loans, not consumers. In the wake of the recent victory of the ruling Barisan Nasional (BN) party, big-ticket projects linked to the government’s Economic Transformation Programme (ETP) are more likely to be implemented. In addition, businesses that had been holding back investments while waiting to see how the political landscape took shape after the election may now also push forward. Indeed, in a report issued in May, Kuala Lumpur-based RHB Research said that loans to businesses, particularly government-linked companies, slowed in recent months as firms adopted a “wait and see” approach.

Meanwhile, consumers are expected to borrow less, in part the result of stricter regulations put in place in 2012, Nor Zahidi Alias, chief economist at the Malaysian Rating Corp, said in an interview with local media. This is a “welcome development” he added, as the level of household debt is at historically high levels, equivalent to 80.5% of GDP. Nonetheless, he said, “We do not foresee a significant drop in the overall loan growth, as robust economy activity and stiff competition in the banking sector would continue to support loan growth in 2013.”

The challenge for banks, however, may be declining profitability, as competition for loans drives down net interest margins. Nonetheless, with the rate of non-performing loans low, ample liquidity in the system and high demand in certain sectors associated with the ETP, now may be the time for banks to expand their loan books.

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Malaysia: Year in Review 2012

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: Industrial production up

Growth in Malaysia’s industrial production has so far been above expectations, suggesting that the manufacturing sector is supported by domestic expansion and reorientation toward the region even though demand in traditional export markets in the US and Europe look uncertain.

Industrial production grew by 4.9% in the first nine months of 2012, according to official data. Manufacturing output rose by 5.2% year-on-year (y-o-y), while the other indices included in industrial production – mining and electricity – rose by 5.9%.

Within the manufacturing sector, production of non-metallic minerals, as well as basic and fabricated metal products, grew by 17.7% over the first three quarters of the year; petroleum, chemical, rubber and plastics increased by 1.9%; and electrical and electronic (E&E) products by 4.4%.

Manufacturing is a vital economic driver for Malaysia, accounting for 35% of GDP when combined with the mining sector. The sector currently employs around 1.02m people, according to the Department of Statistics. The better than expected figures suggest that the regional economic slowdown is easing, supported by government spending, higher domestic consumption and a favourable interest environment. The manufacturing sector’s performance is particularly impressive, given the impact of the eurozone crisis and the slow recovery in the US, both of which have affected global growth this year. Indeed, Malaysia’s nominal exports fell 2% in the third quarter of 2012, bringing y-o-y GDP growth down to 4.9% from 5.4% in the second quarter.

However, the industrial sector may have received a boost from domestic and regional sales, offsetting broader international effects. The government’s investments in infrastructure, higher transfers to public employees, and inflows of foreign capital from investors seeking a haven from turbulent or slow-growing developed markets, have all played a role in keeping the Malaysian economy moving at an impressive pace.

In November, during a visit to Kuala Lumpur, Christine Lagarde, the managing director of the IMF, said she expected the Malaysian economy to grow by 4-5% this year, in line with the government’s target. Low and steady interest rates have helped in this regard. On November 8, Bank Negara Malaysia (BNM), the central bank, opted to keep its key overnight policy rate at 3%, where it has stood since July 2011, to support expansion. Interest rates are particularly important for the capital-intensive manufacturing sector, making it cheaper for industrial firms to borrow to invest, and easier for them to service existing debt.

However, Lee Heng Guie, the head of economic research at CIMB Investment Bank, sounded a note of caution over a possible slowdown in the fourth quarter, with a slowdown in China adding to the effect on Malaysia’s manufacturers.

Lee said that regional purchasing manager indices (PMI) were still in negative territory, and that Malaysia’s export-oriented electrical and electronics (E&E) segment could be affected by external factors. He added that industrial performance would continue to be linked to the strength of domestic consumption and investment.

Anthony Dass, the chief economist at MIDF Amanah Investment Bank, an Islamic investment and advisory services firm, said he expects the picture to be mixed, with some industrial segments performing better than others. He did suggest, however, that exports of primary industrial products, including chemicals, timber and timber goods, should hold up. Dass added that the construction materials industry would continue to benefit from the government’s investments through its long-term Economic Transformation Programme (ETP).

The ETP is a wide-ranging programme of investment and reform that aims to shift Malaysia’s economy up a gear to achieve the long-anticipated goal of “developed nation status” by 2020. Its impact on the manufacturing sector is significant, as the programme seeks to increase value-added across the economy. In the industrial sector, this entails leveraging Malaysia’s competitive advantages, including its ample natural resources, geographical position and existing strengths in certain segments.

Malaysia is also hoping to develop higher-value, higher-margin business, such as increasing its export of petrochemicals to taper down reliance on crude oil; expanding sectors such as biotechnology and medical equipment; and nurturing high-tech, knowledge-intensive businesses.

“Under the New Economic Model, growth areas that are being targeted in the manufacturing sector include biotechnology, advanced electronics, optics and photonics, renewable energy, aviation, pharmaceuticals and medical devices,” Mustapa Mohamed, the minister of international trade and industry, told OBG.

This cannot be done without capital and expertise, and, as a result, Malaysia is trying to bring in greater foreign investment through agencies such as the Malaysian Investment Development Authority (MIDA). In 2011, 61% of the $18.1bn worth of approved manufacturing projects were foreign, according to the MIDA. The development of value-added industry also goes hand-in-hand with Malaysia’s strong emphasis on improving and expanding its education system.

Malaysian manufacturers have benefitted from the relatively benign domestic climate this year, good news for a country that is rebalancing towards local consumption. The ETP is already having an effect on demand; in the coming years the challenge will be securing the investment that can drive industry up the value chain.

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Malaysia: Industrial production up

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Malaysia: Capital markets eye pension fund inflow

Malaysia’s capital markets are in line for a boost, as the introduction of private pension funds is expected to create a significant funding inflow that will be directed towards various investment vehicles. This should also serve to take some of the pressure off the state’s retirement schemes.

In early April, the Securities Commission (SC), Malaysia’s main financial regulatory authority, announced it had given approval to eight firms to offer private retirement scheme (PRS) services to the public, bringing non-state-backed superannuation funds a step closer. Most of those companies cleared to provide PRS services have said they will begin taking contributions in the second half of 2012.

The development of PRS services was set out in the Capital Market Master Plan 2 (CMP2), which was spearheaded by the SC and unveiled in April 2011. Among its key goals, CMP2 is intended to assist the markets in more effectively utilising domestic savings for capital formation, increasing the capacity and efficiency of the capital market in financing investment requirements for economic growth, and addressing efficiency of savings intermediation, with one of the paths towards these objectives being PRS.

At present, Malaysia’s main, state-backed superannuation programme is the Employees Provident Fund (EPF), which collects mandatory contributions from registered workers. The funds are then invested in a range of revenue-earning instruments. Estimates put the amount of funds under the control of the EPF at almost $165bn, roughly half of Malaysia’s GDP in 2011.

While generally seen as successful, the EPF only taps a relatively shallow pool of funds. PRS is considered an option that could siphon off more private savings and better utilise them in the economy, as well as spread investment risk and ensure that more members of society have their retirement needs met.

According to Yeah Kim Leng, the chief economist at RAM Consultancy Services, the launch of PRS will bring significant benefits to Malaysia’s capital markets.

“Besides relieving pressure on the EPF management, the PRS will help to mitigate over-concentration of investment funds in a single entity. It will add another layer of depth and liquidity to improve the efficiency of the markets,” Yeah said in an interview with the Malaysian Star in late April. “Secondly, well-designed PRS can better cater to the different income and age profiles, as well as risk appetites of contributors, as against the one-size-fit-all scheme currently in place.”

One of the eight firms given the green light by the SC to offer PRS products was CIMB-Principal Asset Management. According to the company’s CEO, Campbell Tupling, by supplementing the existing mandatory schemes, the PRS will promote greater flexibility in investments.

“With the emergence of the PRS industry, Malaysians will be further empowered to set aside additional voluntary savings for investment in a well-regulated and structured manner,” Tupling said in early April.

It will take time for PRS providers to sell their products to the public, which is long used to state-backed social insurance programmes. Some estimates suggest the level of funds under management through PRS will rise to around $10bn over the next 10 years. While a sizeable sum, and one that will be welcomed by the markets, it will be just a fraction of the total controlled by the EPF.

Though it will be up to PRS providers to promote their products and the concept of private pension programmes, the government has done its part to buy into the scheme. As an additional incentive for Malaysians to take out PRS coverage, workers will be able to get a tax write-off of up to $990 on their annual contributions, while employers will also be given tax deductions of up to 19% of their employees’ salaries on contributions to PRS made on behalf of their staff.

Few analysts or PRS providers are yet making predictions on returns from the investments, though most are upbeat about prospects for outperforming the EPF, which in February declared a 6% dividend for the 2011 financial year, posting investment gains of $9bn.

Having been given the go-ahead by the SC, Malaysians can expect the eight sanctioned PRS providers to start their respective promotional campaigns soon, and while it will be much longer before the full force of investments begins to be felt in the markets, that flow will serve to deepen the capital pool and stimulate growth.

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Malaysia: Capital markets eye pension fund inflow

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