Malaysia braced for austerity challenge

While rising domestic demand in Malaysia helped reassure investors after last summer’s regional downturn, concerns remain that the country is displaying an over-reliance on high domestic consumption levels to prop up growth.

According to the World Bank’s latest projections, Malaysia is expected to achieve 4.3% GDP growth in 2013, despite substantial capital outflows and a nearly 10% depreciation in the ringgit during the second half of the year.

Domestic demand’s key role

The significant contribution that strong domestic demand has made to Malaysia’s economic resilience is widely acknowledged, with officials, including Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the central bank, highlighting its impact.

“The domestic sector has been solid and the anchor to drive our growth during this more challenging period,” Zeti told Bloomberg in November. “Global trade slowed down very significantly [in 2013], and of course, that affected us because of the openness of our economy. But had we not rebalanced our economy, we would have had 1-2% growth.”

In the same month, Bank Negara Malaysia announced domestic demand grew 8.3% year-on-year in the third quarter of 2013.

High household debt

In December ratings agency Standard & Poor’s, said increasing levels of household debt in Malaysia, which now exceed 80% of GDP, would be “problematic” if the country’s growth rate slowed. The agency had cut its credit outlook for four Malaysian lenders in the preceding weeks over concerns stemming from a rise in home prices and consumer leverage.

Just two weeks earlier, Nancy Shukri, the minister in the prime minister’s department, said that 16,306 people, or an average of 60 Malaysians daily, had been declared bankrupt in the first nine months of 2013.

Malaysia has one of the highest ratios of household debt to disposable income in the world, with its current level of 140% outstripping even that of the US (123%).

In a move to slow consumer credit growth, in July the central bank introduced certain restrictions on lending, including a ten-year ceiling on personal loans, a maximum tenure of 35 years on property mortgages and a ban on pre-approved personal finance products.

However, conditions may not be as dire as some have made them out to be. As Zeti pointed out in September, less than 2% of household loans were non-performing as of that time.

Effect of new budget

While national efforts to rein in spending are taking shape, they follow a wave of populist interventions, including wage hikes for civil servants introduced ahead of last May’s elections, which almost certainly boosted domestic consumption.

However, Malaysia has been more generally moving to tighten its fiscal position. Under the 2014 budget introduced in October, the government will reduce certain subsidies this year and introduce a new goods and services tax (GST) in 2015. Everyday goods and services will be subjected to a 6% levy, although basic food items and some methods of transport are to be exempt.

International critics have urged Malaysia to break the cyclical nature of spending patterns, suggesting that a new strategy would improve investor sentiment in the long term.

“The new government elected in May must consolidate its credibility by meeting its commitments to reduce the public debt without reneging on its electoral promises,” wrote BNP Paribas in an October analysis. “The prime minister also said the 2014 budget would be marked by austerity … [But] these measures … will only stabilise the public debt ratio at best, without reducing it.”

Public debt stands at around 54% of GDP. According to Douglas McWilliams, economic advisor to the Institute of Chartered Accountants in England and Wales, keeping this figure under 60% is important in terms of maintaining investor confidence and, with reforms in place, is an attainable goal.

“The fast growth is helping taxation revenues and government’s budgetary consolidation, particularly on subsidies but also GST, which means Malaysia’s debt ratio will be below 60%,” he told the local media in December.

The national drive to slow lending to consumers and keep government spending in check has been given a largely positive reception. However, accelerating initiatives and increasing their impact may well help the country in its efforts to attract investors and allay their concerns.

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Malaysia’s oil and gas services looking farther afield

Companies servicing Malaysia’s oil and gas sector are using the experience and expertise gained during collaborative ventures with foreign firms as a launchpad for overseas expansion.

Four decades of developing solutions for Malaysia’s operational environment, under the state-owned hydrocarbons producer, Petronas, have put local outfits on a solid footing to enter the rapidly expanding global oil services industry.

However, the fast pace of growth has also produced challenges for firms embarking on international expansion, including project delays and equipment shortages, which are taking their toll on margins.

Production on the rise

At home, Malaysia’s oil sector services providers have benefited from Petronas’s efforts to galvanise production in recent years, spearheaded by a $30bn investment aimed at ramping up output, developing new offshore reserves and extending the production life of existing fields.

The country is looking to return oil and condensate production to more than 600,000 barrels per day (bpd) equivalent, having reversed a decline which saw output fall to a 20-year low in 2011 of 569,000 bpd.

Malaysia is also aggressively developing its natural gas resources. The country is now the world’s second-largest liquid natural gas (LNG) exporter behind Qatar. Like most of its oil fields, the majority of Malaysia’s gas reserves are located offshore, offering many growth opportunities for service providers.

With their overseas expansion well on track, key Malaysian firms now rank among the largest serving the international oil and gas sector. SapuraKencana has evolved to become a major provider of support platforms for drilling rigs after expanding its fleet to 24.

Firms eye new ventures

At the end of August, meanwhile, the Malaysian offshore oilfield services company, Bumi Armada, announced it had signed a joint venture agreement with Dutch geo-science specialist, Fugro, to provide well services.

Bumi Armada’s CEO, Hassan Basma, told the press that the initiative marked a new direction for the company, which has, to date, focused on floating production storage and offloading (FPSO), transport and installation, and offshore supply.

“This investment will represent our first foray into the lucrative and expanding subsea market where Bumi Armada intends to make its presence felt. These additional services will contribute to our footprint on a global scale with focus on our core markets,” he said. Bumi Armada will have a 51% stake in the new firm.

State-backed services provider UMW Oil &Gas Corporation is also eyeing expansion, with its plans to launch an initial public offering (IPO), tentatively valued at $850m, already generating considerable interest. The provider is expected to begin taking orders for its offering in October, while a scheduled listing is set to come in the following weeks. The Wall Street Journal reported in mid-September that both J P Morgan and US financial group Fidelity Investments have agreed to be two of eight key institutional investors in the IPO.

Funds raised will likely be used to pay down existing debt and boost capital expenditure for future expansion. A total of 39% of the company’s shares will be offered through the listing.

Offshore drilling fuels demand

Malaysia-based Scomi Group has already extended its reach into Africa, the Caucasus region and Asia, with the firm’s oil services unit underpinning a 13.3% increase in revenue in the quarter ending June 30 and posting profits of $7.3m.
“Strong demand for drilling fluids and drilling waste-management solutions in Malaysia, Thailand, Turkmenistan and West Africa contributed significantly to the group’s financial performance,” the company said in a statement filed with Bursa Malaysia in late August.

The firm’s expansion reflects the heightened activity taking place in the global offshore oil and gas industry. However, the rapid pace of expansion has also put several regional players under pressure, leading to cost overruns and increasing competition for both equipment and manpower, resulting in a squeeze on margins.

Reuters reported that despite winning work, Singapore’s Ezra Holdings posted a 68% fall in profits for the three months ended May 31, due to project delays and cost overruns incurred by its subsea division. SapuraKencana said it faced similar risks, Reuters added.

Operators will be aware of the pitfalls that rapid expansion can produce. However, with exploration and exploitation activities set to increase in the coming years, particularly across the offshore segment, Malaysia’s firms will be well placed to tap into the services that the global oil and gas sector requires.

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Malaysia: Keeping the economy running

The central bank in Malaysia is keeping an eye on macroeconomic stability at a time when a cooling external environment is putting pressure on growth. While international factors are starting to affect overall economic performance, domestic demand remains relatively robust, supported by consumer spending and public investments.

On July 11, the Bank Negara Malaysia (BNM), the central bank, announced it would be maintaining its key policy rate on hold for the 13th consecutive month. The bank kept its benchmark overnight rate at 3%, as analysts surveyed by Bloomberg had expected.

The BNM decision balanced concerns of both a slowdown in the economy and rising personal debt. Malaysia’s year-on-year GDP growth has dropped below 5% for the first time in seven quarters, while household borrowing has been increasing at an annual average 12% for five years.

In a statement, the bank noted that slow global growth had begun to act as a drag on the Malaysian economy, as in other emerging markets, despite healthy domestic demand. Domestic consumption has helped Malaysia and many of its neighbours weather the economic turbulence of recent years, with the rebalancing of the economy helping reduce dependence on exports, which have proved susceptible to slowdowns in Europe and the US.

“For the Malaysian economy, domestic demand has continued to support growth amid the continued moderation in external demand,” the bank said. “The sustained weakness in the external sector may, however, affect the overall growth momentum.”

Even so, the bank retains a positive outlook. It expects private consumption to stay steady, led by income growth and a stable labour market, and capital investment both from domestic-oriented industries and government infrastructure projects to help maintain economic momentum. Malaysia is in the process of rolling out the government’s Economic Transformation Programme (ETP), a wide-ranging package of projects, including infrastructure schemes, designed to boost productivity and increase the private sector’s ability to drive growth.

The BNM is also comfortable with Malaysia’s inflation outlook. Inflation averaged 1.6% in the first five months of the year –low given the rate of economic growth. And while the central bank expects the rate to pick up in the second half of the year, it does not foresee inflation becoming a serious risk factor.

Despite low inflation and slowing growth, the BNM avoided cutting rates, keeping a wary eye on rising debt in an economic climate that has become more volatile in recent months. Malaysia’s experience in the 1997 Asian financial crisis makes policy-makers particularly aware of the need for financial and macroeconomic stability.

In early July, the BNM tightened regulations on lending, cutting the maximum repayment terms on personal loans to 10 years and property loans to 35 years, down from 25 year and 45 years, respectively. Some analysts quoted in the international press suggest that the bank may become more hawkish on interest rates as well towards the end of the year, if growth remains resilient.

Following a period of strong capital flows to emerging markets, there has been a cooling off recently in the wake of signs from the US Federal Reserve that it would not push forward its quantitative easing (QE) policy. QE, a strategy of stimulating the economy through expansion of the monetary base, had boosted inflows to emerging markets as investors sought higher returns than those available in developed economies. Malaysia, with its macroeconomic and political stability and stable growth rate, proved particularly attractive: by February, foreigners held almost half the country’s outstanding sovereign debt.

With QE now likely to be phased out and signs of a slowdown in major emerging markets such as China (a key export market for Malaysia), investor appetite for Malaysian assets are expected to abate. However compared to advanced economies Malaysia along with the rest of South East Asia will continue to enjoy a higher rate of growth thanks to relatively stable domestic demand and investment.

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Malaysia: Broadening the skills base

The government has vowed to expand the Malaysian vocational education system to help bridge the widening gap between the demand for skilled labour and the available pool of trained workers.

According to the Educational Blueprint 2013-25, approved by the cabinet earlier this year, Malaysia has a skilled labour shortage of more than 700,000 workers, a figure set to be pushed far higher in coming years. Up to 3.3m new positions are expected to be added to the workforce by 2020, with at least 46% of them requiring jobholders to be trained to vocational diploma or certificate standard. By contrast, the education roadmap estimates that just 22% of new jobs created up until 2020 will require university degrees.

To close the supply-demand gap, the government has set out to create at least 50,000 additional places in the vocational education system each year, and to provide the infrastructure, materials and technical support to maintain the expanded network of schools and colleges called for by the blueprint.

Enrolment at vocational facilities accounts for just 10% of upper secondary students, a figure the government has said it wants to double, as it is well below the 44% average in OECD countries. Malaysia also falls short of some of its neighbours, with between 40% and 60% of secondary school students in Thailand and Indonesia pursuing vocational education, according to the Malaysian government.

Last year, while the blueprint was being drafted, the deputy prime minister, Muhyiddin Yassin, who is also the minister of education, warned that if Malaysia did not radically improve its vocational system to ensure it met the demands of a changing economy, the country risked falling behind regional rivals.

It was a theme that he took up again in the lead-up to the May 5 general election, which saw the government of Prime Minister Najib Razak returned to power, although with a reduced majority. “The core strengths of the education system in all developed nations are technical and vocational education,” he said while attending a vocational education fair in late April.

Even before the new educational blueprint was rolled out, the government had been moving to strengthen the system’s vocational offerings. Last year, 15 secondary schools were upgraded to the status of vocational colleges, providing places for more than 3100 students. This trial programme has been extended in 2013, with a further 72 vocational colleges opening their doors to 21,250 students. The number of secondary schools providing technical education has also been increased this year from 15 to 65.

According to Noor Azimah Abdul Rahim, chairperson of the Parent Action Group for Education Malaysia, the push to boost vocational education is a positive but it needs to be backed with the necessary resources and support to ensure students have a place to move into in the workforce on graduation.

“The doubling of vocational college enrolment to 20% is timely and jobs must be created to absorb the supply,” she wrote in an editorial piece carried by the Malaysian Star on April 28. “While the Europeans have up to 80% of their graduates qualify in vocational training, quality is kept extremely high to support the reputable state-of-the-art automotive industry the likes of BMW, Mercedes, etc.”

One of the greatest challenges Malaysia faces in expanding its vocational education system is finding quality teachers. According to the Educational Blueprint, a shortage of qualified instructors and the lack of an industry-recognised curriculum have resulted in graduates who are not equipped to meet industry needs.

The private sector might offer some relief in terms of boosting the supply of teachers. Skilled personnel working in the private sector could be encouraged to transition to positions at vocational education facilities, for example. Alternatively, businesses could provide workplace experience programmes. To promote the latter, the government will be offering incentives such as tax breaks.

While this may encourage firms to provide on-the-job training, it could still be difficult to meet the demand for teachers in the classroom or workshop. Skilled professionals are in high demand in Malaysia, and the government will likely find it hard to attract those with training and experience to move into public sector teaching positions. Without a broadening of the skills base at the core of the expanded vocational education system, the programme may find difficulty meeting its targets.

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Malaysia: Economic outlook bright despite election uncertainty

While a fiercely fought general election could send ripples through Malaysia’s economy in the next few months, the country otherwise looks set for another year of solid growth on the back of strong domestic demand and higher private investment driven by a number of public sector initiatives.

Experts are divided on whether the forthcoming election, which may prove to be the closest in Malaysia’s history, is likely to have anything more than a minor impact on capital flows and the ringgit, with consensus suggesting the economy is strong enough to weather a spell of uncertainty or change of government despite recent depreciation in the local currency.

In a move aimed at encouraging growth, the Bank Negara, Malaysia’s central bank, opted earlier this month to leave its benchmark overnight policy rate at 3%. Malaysia’s consumer price index was running at 1.3% in January, year-on-year (y-o-y), although there is a risk that the low lending rate could push up inflation in the coming months.

However, the central bank said it was confident that continuing strong investment activity and higher private consumption would steer the economy forward through 2013. “The Monetary Policy Committee considers the current stance of monetary policy to be appropriate given the outlook for inflation and growth,” the bank said in a statement issued on March 7.

The reserve’s confidence is echoed in the latest assessment on the country from the IMF, which left its forecast of 5.1% growth for 2013 unchanged. The figure marks a slight drop on last year’s economic expansion, which Bank Negara put at 5.6% in data it released in late February.

The IMF pointed to Malaysia’s sound fiscal policy, saying home-grown economic activity, strong investment and high domestic consumption should continue to drive growth.

It warned, however, that external factors, such as slower-than-expected expansion in the US or China, along with the threat of continued recession in the eurozone, could weigh on the economy. In a separate note issued in late February, the agency also cautioned that the forthcoming general election could cause “some market volatility”.

Malaysia’s parliament must be dissolved on April 28 at the latest and elections held within the ensuing 60 days. Politicians have already begun courting voters, with the election manifesto of the Pakatan Rakyat opposition coalition, led by Anwar Ibrahim, focusing heavily on economic issues. The opposition has pledged to boost employment, in part by reducing the numbers of foreign workers, and increase the basic wage. Its manifesto includes a promise to lower the cost of utilities, fuel and state services, while creating a $643m fund to help small and medium-sized businesses deal with the impact of its proposed salary hikes.

Critics of the opposition have described the programme as unsustainable in the present economic climate, adding that it lacked details on how the policies would be funded. The governing Barisan Nasional bloc has yet to release its own policy platform, although Prime Minister Najib Razak has called for a further term to complete the economic reforms initiated over the past five years.

Most pundits are anticipating one of Malaysia’s tightest elections to date, with some contrarians predicting that the Barisan Nasional could lose power for the first time since independence. While international analysts remain largely positive about the economy’s prospects for 2013, a number have joined the IMF in pointing to the forthcoming general election as a possible cause for concern.

In an investors’ note issued in late February, financial services group Credit Suisse warned a change of government could prompt disturbances in the market while money managers come to terms with the new situation. “An opposition victory would likely be disruptive to capital flows and the ringgit, not because it would necessarily be a ‘bad’ outcome, but because after decades of Barisan Nasional rule, it would create significant uncertainty for investors about the direction of policy and the structure of business in Malaysia,” the group’s report said.

However, other experts, including Kenneth Akintewe, fund manager with Aberdeen Asset Management, were confident that long term, Malaysia’s economy would weather a temporary disruption. “The reform agenda may be somewhat deflected in the near term but we think there’s enough momentum behind that process that it’s not going to come to a complete standstill,” he said in an interview with Bloomberg on March 4. “We would look for opportunities if the market overreacts to the election risk to actually reposition in the currency market.”

Gundy Cahyadi, an economist with Singapore-based bank OCBC, said he was confident any disturbances in the economy would dissipate soon after the polls close. “A lot of market players have been talking about the elections. Once that is over and done with, sentiment will shift back to the fundamentals of the economy,” he told Reuters news agency on March 7.

While the election could produce a degree of uncertainty in the coming weeks, experts have suggested that an awareness across the political divide of the need for Malaysia to continue its economic expansion and attract further investment, is likely to play a key part in future policy-making.

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Malaysia: Easing business practices

Malaysia has been one of the big movers in the latest World Bank survey on the ease of doing business, moving up six rungs on the international ladder to be ranked 12th overall. However, making it easier to obtain construction permits and start a business, two areas signalled out for improvement, will help the country achieve its goal of breaking into the top 10.

The annual study aims to provide an objective measure of business regulations for local firms and give an indication of the progress in facilitating private sector development. In the 2013 edition, released on October 23, Malaysia further consolidated its reputation for economic reform, building on its performance in 2011 when it moved from 23rd to 18th place. The improvement in the rankings puts Malaysia behind only Singapore, Hong Kong and South Korea in Asia, and ahead of regional heavyweights Japan and China.

The survey, titled “Doing Business 2013”, saw Malaysia improve its competitiveness in a number of areas, including registering property and trading across borders. The country continues to be ranked first globally in terms of gaining access to credit, and it also won accolades for the judicial network protecting investors, where it came in fourth among the 185 countries surveyed.

Recognition of the strong performance will help to further promote development and investment, said Annette Dixon, the country director for Malaysia at the World Bank. “This will help the private sector drive growth, particularly if Malaysia can build on its success by continuing to tackle long-term challenges, such as improving the quality of education,” Dixon said in a statement accompanying the release of the report.

According to Yeah Kim Leng, the group chief economist at RAM Holdings, a financial research firm, the improved business environment will help maintain Malaysia’s high profile as a prime investment destination. “It enhances business sentiment and confidence,” he said on October 24. “If the improvement is sustained, what we will likely see is an increase in business dynamism and a higher level of business activity.”

Mustapa Mohamed, the minister of international trade and industry, said that the findings of the study confirmed Malaysia’s competitiveness as an economy, and reflected the successful implementation by the government to improve the business environment, making it conducive for sustained economic growth. The next step, according to the minister, is putting in place further reforms that should move Malaysia even higher up the rankings. He did acknowledge, however, that the task would be a difficult one, given the competitive nature of the global economy.

“Our objective is to achieve a top-10 position in the World Bank’s rankings. Getting there will strengthen our position as a destination of choice for local and foreign investors,” Mustapa said. “This is with new competitors constantly emerging and economic uncertainties globally. It is apparent that more needs to be done in the shortest time possible if we are to stay ahead.”

While the study very much stressed the positives, it also detailed a few areas of improvement that will have to be dealt with before Malaysia can break into the higher rankings. Despite the government making it easier to obtain construction permits, it still placed only 96th overall in this category. There is also room for improvement in the ease of starting a business, in which was Malaysia ranked 54th this year.

Two state agencies, the Special Taskforce to Facilitate Business (Pemudah) and the Performance Management Delivery Unit (Pemandu), have been tasked with addressing these issues, as well as developing strategies to promote best bureaucratic and administrative practices, with Pemudah in particular working closely with the private sector to cut red tape.

In an opinion piece carried by The Malay Mail on October 26, Ramon Navaratnam, the chairman of the Centre of Public Policy Studies, an independent think tank within the Asian Strategy and Leadership Institute, said the World Bank study did not cover issues such as public services or the non-business sectors of society. Improvements in the provision of services in areas such as health, education and social welfare also need to be addressed when considering the state of the economy.

“The best way forward is for the public sector to adopt further best practices, forced by global competition to perform more competitively all the time or face the prospects of losing its profits and business opportunities for growth,” he said.

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Malaysia: Steady and growing

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: 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: Confronting the energy dilemma

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.


Malaysia: Confronting the energy dilemma

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Malaysia: Technology to the fore

With data use growing strongly and existing capacity under pressure, Malaysia’s broadband network is undergoing necessary expansion to keep up with demand. Indeed, as penetration growth slows, improving speeds and service quality have become a priority.

The Malaysian Communications and Multimedia Commission (MCMC), the industry regulator, expects household broadband penetration to rise to 65% by the end of 2012, up from 62.9% in 2011, the local press reported on April 16.

Mohamed Sharil Tarmizi, the chairman of the MCMC, stated that broadband growth would be driven by demand for higher internet speed in both the fixed-line and mobile segments. According to Sharil, the market may be nearing saturation, but there remains substantial scope for improving capacity.

Sharil cited the largely state-owned Telekom Malaysia’s UniFi high-speed broadband services as a market leader in strengthening broadband infrastructure. He said that lowering costs and broadening awareness would also support further penetration growth.

Malaysia’s new 2.6-gigahertz (GHz) spectrum for long-term evolution wireless communication (LTE), expected to be introduced in 2013, will be central to efforts to increase capacity. Sharil asserted that the new spectrum would complement those in the lower band, particularly those of 1 GHz and below.

In December 2011, the MCMC allocated spectrum in the 2.6-GHz band to nine companies, including the country’s four GSM operators. The development is expected to help support the expansion of mobile broadband services and ease existing bottlenecks in the system, as well as provide faster connectivity.

LTE comes none too soon, as current networks may be finding it harder to cope with the rapid expansion of data traffic driven by the increasing use of smartphones, tablets and other internet-reliant devices. According to Nitin Bhat, a partner and the head of consulting at Frost & Sullivan, data volumes are doubling every 12 to 15 months.

Sharil has said he expects the rollout of LTE to increase cooperation between operators on sharing infrastructure. He anticipates that some firms will opt to use mobile virtual network operator (MVNO) technology on existing infrastructure, rather than building extensive new network equipment, which is capital-intensive. This would be particularly useful to newcomers to the segment, who lack infrastructure of their own.

By sharing transmission networks, base stations and towers, operators can potentially lower capital and fixed costs, which will allow them to bring down prices to the consumer, strengthen services, or both. Joint investments could also reduce capital risk.

“Infrastructure rationalisation” is a relatively new trend in the competitive Malaysian information and communications technology (ICT) market, but one that could bear fruit.

In 2011, mobile firms Maxis and U Mobile agreed to share the former’s 3G radio access network (RAN), following an announcement in 2011 that Celcom Axiata and DiGi, the country’s other mobile operators, would look to collaborate on networks and infrastructure.

Some analysts have been critical of the decision to award so many players access to the 2.6-GHz spectrum, arguing that it could lead to a fragmented market, with some players under-utilising their allotted capacity, and the more successful finding their limited bandwidth pressured.

However, it is still unclear how many of the operators will actually commence operations in the near future. Overall, the introduction of LTE, with its capabilities for speed and volumes, is an important step forward for the sector.

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Malaysia: Technology to the fore

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