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Malaysia, local business representatives have questioned whether they can remain competitive once the lower tariffs are withdrawn.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: IPO tide rising

Return of confidence after Malaysia’s general election has seen a surge in companies declaring their intention to go public, with more than $2bn worth of initial public offerings (IPOs) launched or mooted for the weeks following the poll.

In the months leading up to the May 5 election, IPO activity had been sluggish, with Malaysia having dropped from fifth globally in terms of funds generated by floats last year, to fifth in its region, according to international media reports. Most firms looking to tap the markets chose to hold off until after the poll, with concerns over potential political and economic instability weighing down sentiment. Now, with Prime Minister Najib Razak’s coalition returned to power, though with a reduced majority, confidence has returned, with a swathe of new IPOs either launched or flagged in the weeks following the ballot.

According to a recent Reuters report, the latest entrant into the IPO race is port operator Westports Malaysia, with the news agency citing sources as saying the firm is planning to list on the Bursa Malaysia in October. Westports, which operates Port Klang – Malaysia’s busiest export hub – is aiming to raise some $500m through the float, which is being arranged by Goldman Sachs, Credit Suisse and Maybank.

The Westports offering is likely to be popular with investors, as its Klang facility is expected to see an increase in container traffic of 7% annually for the next five years as trade between fellow ASEAN member states gains momentum in the lead-up and beyond the launch of the ASEAN Economic Community (AEC) in 2015.

Maritime transporter Maybulk is also going to the markets, with the shipping line intended to float it partially owned subsidiary PACC Offshore Services Holdings (POSH) by the end of this year or early in 2014. However, Maybulk CEO Kuok Khoon Kuan said in mid-May the listing of POSH, which provides support vessel services to the offshore oil and gas industry, could be on the Singapore exchange, saying a final decision would depend on market conditions.

In mid-May, IOI Corporation – one of Malaysia’s leading palm oil producers, announced it would be spinning off the holding’s property arm through an IPO planned for September. The float, valued at around $635m, rolls back IOI’s move in 2009 to take its real estate business private. The corporation’s chairman, Lee Shin Cheng, said the relisting was aimed at unlocking IOI Property’s true value, though some of the funds raised through the float, and a subsequent offer of shares to existing stakeholders, would be used to buy down the firm’s debt ahead of further expansion.

While the subdued activity in the first third of the year may hold back the 12-month total for IPOs, meaning the year-end figure could fall short of the number completed in 2012, Zulkifli Hamzah, head of Kuala Lumpur-based MIDF Research, believes trading will be brisk for the forthcoming offerings.

“We expect the Malaysian IPO market to remain healthy, with strong underlying demand,” he told Reuters in an interview on May 30. “There is a tremendous amount of liquidity in the system to support any offering.”

Though there is more confidence after the election and high levels of liquidity, some observers remain wary, including M&A Securities dealer Ooi Chin Hock, who cautioned that the market may not be as welcoming as some have forecast.

“It really is not a great time,” he said in an interview with AFP on May 17. “Things will turn defensive. But things could improve late in the year, and next year should be good.”

This caution may have influenced construction and utilities firm MMC Corp, which on May 13 announced it was postponing the IPO of its power unit Malakoff until next year. Initially MMC had planned to return Malakoff to the exchange’s boards in the second half of 2013, having taken it private in 2006.

While the company cited the need to improve its assets through maintenance work at one of its power stations, MMC is also looking to build up value by adding to Malakoff’s holdings, with the firm bidding on the tender for a new coal fired-power station in its home market and other projects abroad. Should these bids be successful, these additions could push its IPO worth past the $1bn that was predicted for the now-delayed float.

Early indications in the post-election period are that the market has an appetite for IPOs, with the float of property developer Matrix Concepts, which closed in mid-May, being oversubscribed more than 11 times. On its Bursa Malaysia debut, the firm’s shares gained 24%, a healthy return for its investors and a result that could encourage other companies to list.

Though the market may stage a correction some time this year, those companies that have announced they are looking to list are strong performers that can be judged by their financial soundness rather than general market sentiments. Indeed, rather than coming in on the end of a extended period of growth, the new wave of IPOs could help sustain the market’s upward climb.

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Malaysia: In search of broader tourist base

A focus to attract more tourists from growing regional markets will spearhead Malaysia’s efforts to boost visitor numbers in 2013. However, efforts to increase arrivals from certain key segments may not be enough to drive visitor figures up across the board.

Despite ranking as one of the world’s top 10 tourist destinations, the market base remains narrow, with more than half the visitors coming from neighbouring Singapore. This year will see Malaysia focus on broadening its reach to tap into emerging markets that are demonstrating significant growth, such as India.

Final figures still to be published are expected to show that despite global economic uncertainty, visitor numbers to Malaysia from India rose 36% in 2012, according to international media in mid-January.

A total of 514,926 tourists entered Malaysia from India in the first three quarters of 2012, already up 2.6% on full-year visitor numbers for 2011, according to the Tourist Development Corporation of Malaysia (TDC). Zulkifly Md Said, the director of the international marketing division for South Asia, East Asia and Africa at the Malaysia Tourism Promotion Board (MTPB), told reporters he expected the country to have met or topped its target of welcoming around 700,000 arrivals from India in 2012. Malaysia aims to push the number up to 780,000 this year, Said added.

The rise in visitor numbers from India is thought to be due to a combination of improved connectivity between the two countries and an increase in the range of packages and products being offered to Indian tourists. Reports also suggest that India’s population, especially its affluent middle class, are increasingly looking at medium-haul destinations, such as Malaysia, which remain more affordable than Europe and North America, long popular with the Indian elite.

Zulkifly said Malaysia was benefitting from well-formulated packages aimed at targeted groups in the Indian market, including families and honeymooners. The country also offered quicker visa processing, a wide range of tourist attractions and affordable food and travel costs, he added. With the world economy still struggling, and many tourists from emerging-markets on tight budgets, officials have suggested that Malaysia’s relatively low costs are also giving the country an important competitive advantage.

Air connectivity has risen to meet growing demand, with Malaysia Airlines (MAS), the country’s flag carrier, increasing capacity between India and Malaysia by 25% in 2012. The airline expects to continue expanding its routes to India this year. Malaysia’s low-cost AirAsia, which has strengthened its regional presence in recent years, is also looking to increase the frequency of flights to the Indian cities it serves.

China is another growing market that offers potential for Malaysia’s tourism industry in both the leisure and business segments. The TDC set a target of attracting 1.5m visitors from China in 2012, up by 20% on 2011’s figures. As of end-September 2012, 1.18m Chinese tourists had visited Malaysia, up from 933,540 in the same nine months of 2011. The country hopes to break the 2m-barrier by 2014.

Boosting visitor numbers from emerging markets forms a key component of Malaysia’s bid to maintain its position as one of the world’s leading destinations. The country attracted 24.7m international visitors in 2011, placing ninth in the world, according to the UN World Tourism Organisation (UNWTO), just below Turkey, which received 29.3m visitors from abroad, and the UK, with 29.2m. France topped the list, registering 79m international arrivals.

However, the total number of international tourists in 2011 was only up 0.4% from 2010 figures, which reached 24.6m. This figure was a 4% rise on the number of visitor arrivals in 2009, when Malaysia received 23.6m international tourists. Over the same period, earnings from tourism also increased, rising from $15.8bn in 2009 to $18.2bn in 2010 and reaching $18.3bn in 2011.

But broadening its narrow market base remains a challenge for the country. Visitors from Singapore are expected to continue dominating numbers in 2013 and 2014, according to officials. In the first six months of 2012, the top 10 markets, including Singapore, China and India, accounted for 87.55% of the 11.6m arrivals.

Tourism industry leaders in the private sector are keen for the TDC to continue broadening its promotional activities, targeting both emerging markets, including Russia, the Middle East and Eastern European countries, alongside well-established outbound segments such as France and the US. Plans to boost arrivals from diverse sources should also stand the tourism industry in good stead, despite its remaining sensitive to fluctuations in the international economy.

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Malaysia: Push for liquefied natural gas

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: Rolling out plans for ICT

The government is moving forward with one of its flagship projects, an initiative that aims to make the information and communications technology (ICT) sector – already a major contributor to the Malaysian economy – one of its largest components. However, if the state is to achieve its goals there are several issues to be addressed.

Currently, the industry represents around 10% of GDP, a figure the government is keen to increase as it pushes to achieve developed nation status by 2020. That plan was given a boost in early July, when one of the government’s lead agencies in its drive to develop the sector unveiled the first major projects in the Digital Malaysia programme, which was initiated by the prime minister, Najib Razak, last October.

According to Badlisham Ghazali, CEO of Multimedia Development Corporation (MDeC), eight of the scheme’s projects have already been approved and will be rolled out in stages. These and other initiatives will generate $10bn in investment value based on a public-private partnership model and will increase ICT’s input to GDP to 17% – $94bn – by 2020, Badlisham announced on July 5. “The investments will be used to create 160,000 jobs, besides providing an additional $2300 in annual income for 350,000 citizens via digital income by 2020,” he added.

Among the projects that have cleared the approval stage are an “Asian e-fulfilment hub”, which seeks to develop Malaysia into a regional centre for servicing cross-border e-commerce shipments and e-payment services for micro-, small and medium-sized enterprises.

At the core of Digital Malaysia is the aim of moving the industry from a supply-focused approach to a demand-focused one; shifting behaviour from being centred on consumption to production; and helping local talent form a high-knowledge, innovative workforce.

According to Fadillah Yusof, the deputy minister at the Ministry of Science, Technology and Innovation, Digital Malaysia will help develop a cohesive digital ecosystem. “These thrusts include initiating more demand-focused activities to leverage on the supply, encouraging internet users to come up with products or services while they consume from digital technologies, and increasing the development of local talent in key industries,” he said. “Previously, our focus was just to drive the industry. Today, our role has evolved to empowering citizens and businesses to use digital technology to enhance their lives and businesses.”

Though the government and its agencies will need to provide more detail on many of the programmes that are in the pipeline, and on how it intends to attract private investment to those initiatives, moving to flesh out Digital Malaysia should encourage the ICT sector.

According to a statement issued by MDeC on July 2, the outlook for that industry should remain positive for the rest of the year, driven by strong domestic demand and higher consumer spending. This prognosis was supported by a recent forecast by the National ICT Association of Malaysia, which predicted growth of 8-10% for the sector in 2012.

One cloud on the horizon is the weakening health of the global economy, exacerbated by the ongoing crisis in the eurozone and the slowdown in China. While domestic demand is expected to remain strong in the near term, Malaysia’s overseas markets for ICT goods and services could experience a contraction in the latter half of this year and into 2013. Depending on how severe this reduction in demand is, the ICT sector’s growth rate may slow, perhaps significantly.

Another possible pothole is the shortage of skilled engineers and entrepreneurs, many of whom chose to live and work overseas, according to Pua Khein Seng, the chairman and CEO of Taiwan-based Phison Electronics. “There is potential in the IT industry in Malaysia; we have talents but many of them are overseas,” Pua said in an interview with the Borneo Post in July. “In Taiwan, we often hear stories of our seniors becoming successful entrepreneurs after graduating, and these instil the belief that ‘I might stand a chance to succeed if I choose to be an entrepreneur.’ In Malaysia, we don’t have these kinds of success stories.”

If the government can attract the sort of investment it is expecting and is able to do more to facilitate entrepreneurial endeavours, the ICT sector may yet be able to write a few stories of its own in the years ahead.

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Malaysia: Power plays

Change is in the air for Malaysia’s power sector, with recent developments including bids on new facilities and change of ownership for old ones. Government oversight has also been evolving, throwing up questions about what the sector’s make up will be in the near term.

The recent changes were set in motion in December 2011, when the government announced plans to build power plants with a total generating capacity of 4500 MW by 2016. The new power generators will replace the capacity lost from retiring plants and add supply to meet increasing demand.

In fact, the second half of 2012 could signal the beginning of a period of strong growth for the power engineering business, Chris Eng, the head of research at OSK Investment Bank, told The Star on December 31.

This will go hand–in-hand with the replacement of first-generation power purchase agreements (PPAs) with new contracts. Eng expected this to be positive in the longer term for both the independent power producers (IPPs) and Tenaga Nasional (TNB), the national electricity utility company.

“As the first-generation PPAs expire from 2015 to 2017,” Eng said, “it is crucial to start the competitive bidding process now to ensure that the new plants are ready by 2016. Without these new plants, Malaysia’s reserve margin is likely to drop to 10% by August 2017.” The country’s reserve margin officially stands at above 35%, but many believe the actual number is significantly lower.

Adding to the mix, the government is allowing bidders for the tenders to include foreign power players partnering with local companies. Many of these bidders will be looking forward to mid-March, when the Energy Commission (EC) is scheduled to release a shortlist of bidders for a combined–cycle, gas turbine (CCGT) power project worth approximately $10bn.

The project, a 1400-MW plant next to Malakoff Corporation’s existing 350-MW CCGT Prai Power Plant, will comprise part of the post-2016 plans to add 4500 MW of capacity. According to the EC’s chairman, Ahmad Tajuddin Ali, the successful bidder should be announced by the third quarter of this year. The plant itself is targeted to come on-stream by mid-2016.

In an interview with The Edge, Tajuddin also said the EC plans to invite tenders for the remaining 3100 MW capacity in two parts. The first would be to replace the 2000 MW that will go offline when the first-generation PPAs expire, and each new plant’s capacity will be between 750 MW and 1000 MW. Both will likely be gas powered, he added.

Meanwhile, French firm Alstom announced on February 23 that it had secured a $1.1bn contract to build a “supercritical” coal-fired power plant in Tanjung Bin. The contract was awarded to Alstom as part of a consortium that includes Malaysian building materials firm Mudajaya and construction company Shin Eversendai. The total value of the consortium’s contract is more than $1.34bn, according to Alstom’s website.

Alstom made its announcement the day after Malaysian business magnate, T. Ananda Krishnan, announced he was selling his entire power portfolio in Malaysia, South Asia and the Middle East, with local media reporting that unnamed sources have claimed a Malaysian company is in talks to buy the entire portfolio in a deal that could be worth between $3.2bn and $3.6bn.

Through his Tanjong Energy Group, Ananda owns stakes in approximately 12 power plants with a net generating capacity of nearly 4000 MW. In Malaysia, Tanjong’s power plants include the 720-MW gas-fired, combined-cycle Telok Gong Power Station Two; the 440-MW, gas-fired, open-cycle Telok Gong Power Station One; and the 330-MW gas-fired, combined-cycle Tanjung Kling Power Station.

Another change – this one of governmental organisation rather than of ownership – is that the new power plants will come under the EC’s purview. This is particularly relevant because the government recently swapped jurisdiction over the regulation of piped gas from the Economic Planning Unit to the EC. If the new plants do end up being gas-powered, the EC’s authority will be increased, as it will have the power to set gas tariffs for the new plants.

With so many changes taking place in such a short time, 2012 is thus looking to be an interesting year for the country’s power producers and energy players, with many watching closely to see how the sector will look in the long term.

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