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: Banks shift lending patterns

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

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

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

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

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

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

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

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

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

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

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

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

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

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Malaysia: 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: Investing in health

Investment in human capital has been identified as a key driver in boosting the quality of Malaysia’s health care standards while seeing growing economic returns from the industry. However, underinvestment in health services continues to pose a risk.

Under its Economic Transformation Programme (ETP), unveiled in September 2010, the government aims to transform the country into a high-income economy bracket by 2020, with the health sector targeted as central to this plan. As one of the 12 national key economic areas (NKEAs), health care is targeted to become a significant economic enabler by generating revenue through health tourism, as well as manufacturing drugs and equipment. The sector also aims to create 180,000 new positions in health care and attract up to 1m overseas health tourists annually by the beginning of the next decade.

To achieve that goal, however, spending in the sector will need a significant boost. Currently, Malaysia dedicates the equivalent of 4.7% GDP on health services. This is lower than most middle-income nations’ spend, which averages 6.5%, according to the World Health Organisation.

One of the core areas for that increased investment is human capital. The Health Ministry has set a series of targets to increase the ratios of health sciences professionals to the general public. Once the ETP has completed its term by 2020, officials believe Malaysia will have one doctor for every 400 citizens, compared with the present rate of around 1:800, and one nurse for every 200 people, up from the current level of 1:384.

To achieve this, Malaysia is boosting its health education training schemes. In late July, Muhyiddin Yassin, the deputy prime minister, said the government was planning to increase the number of higher education institutions in the field of health science to 150,000 by 2020, up from the present 55,000.

According to Muhyiddin, who is also Malaysia’s education minister, “I believe Malaysia can play a central role in answering the need for more health professionals in the region. As such, health sciences students, who are considered highly skilled and employable, can expect a brighter future in this field.”

On July 14, in a speech delivered on her behalf at a graduation ceremony at a health training institute in Sabah, Rosnah Abdul Rashid Shirlin, the deputy health minister, said the government was moving to accelerate the pace of improvements in sectoral education. The ministry was committed to ensuring that graduates have the knowledge and skills required, as well as providing training institutions equipped with modern facilities and qualified teaching staff.

“If we see the development of global health at present, the world needs specialists to develop public health,” Rosnah said.

The minister of health, Liow Tiong Lai, recently acknowledged that the task of increasing the number of specialists was a difficult one. Health education is a rapidly evolving segment, meaning the health sector and educators must move quickly to keep pace with needs of the industry.

“Although the system has been quite successful, we must not rest on our laurels but work tirelessly to ensure that our medical staff will be able to meet the demands of the market, which can change quite rapidly,” Liow said at an international health care conference in Kuala Lumpur on July 17. “However, quantity alone is no longer sufficient because quality also matters in the industry to achieve the excellence in not only curing but also caring.”

There are many challenges that Malaysia’s heath sector faces, including rising costs and more demanding and knowledgeable consumers, Liow said. One of the answers to these challenges will be the industry’s ability to train, attract and retain qualified personnel.

The issue of retention is a vital one, according to Dr Ismail Merican, the former director-general of health, as is the ongoing process of improving the skills base of those already in the system. In particular, Merican told local media, the government needs to step up investments in the public health care sector, strengthen its teaching role and ensure professionals are better compensated to keep them within the local system.

If Malaysia is to achieve its goals, it will need a strong health sector to underpin growth, both to ensure the wellness of society but also as a foundation for sectoral expansion. Increased spending, as well as further encouraging the already active private health services sector to ramp up investments along the training and development chain, will be required.

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Malaysia: Manufacturing growth

Malaysian officials are confident the country’s manufacturing sector will continue to post strong growth throughout this year and beyond, on the back of an increasing swell of both foreign and domestic investment. There are some suggestions, however, that a general slowing of the global economy and the prospect of sharp wage increases could take some of the momentum from industrial expansion.

According to data issued by the Malaysian Industrial Development Authority (MIDA), the manufacturing sector accounted for just over half of all foreign direct investment (FDI) inflows last year, almost double the 27% drawn in by the services sector. With FDI in 2011 increasing by 12.3% to around $11bn, manufacturing’s share of that total came to around $5.5bn.

Total investments in the sector also surged in 2011, with 846 manufacturing projects carrying a total value of $18.57bn approved last year, a 19% increase over the $15.6bn recorded in 2010. Of these investments, locals’ contributions numbered $7.3bn, or 39% of the total, while the balance came from FDI. A full third of new projects approved were in the electrical and electronic industry, followed by basic metal products, and chemicals and chemical products.

Commenting on the latest manufacturing sector figures, the international trade and industry minister, Mustapa Mohamed, said investors were upbeat over the opportunities in Malaysian manufacturing.

“Foreign and domestic investors continue to respond positively to the government’s initiatives to invest in new growth areas and emerging technologies, high value-added industries, high technology and capital-intensive industries, and research and development activities,” he said.

While Malaysia is well placed to post solid growth this year, there are some signs that the national economy, and with it the manufacturing sector, could be easing back a gear. Total exports in January 2012 came to $18.2bn, the lowest level in a year, according to data released in early March. The year-on-year rate of growth for the manufacturing sector as of December 2011 was 4.5%, somewhat better than the 4% recorded in the previous month but a long way off the 8.2% of September or the 6.2% in October.

The long-running uncertainty over the state of Europe’s economy also ate into January’s export figures, which were released on March 7. Shipments to the EU plunged by 14.5% to $1.6bn, with falling demand for electrical and electronic goods and metal products being cited as the main factors in the slump. Though the decline was slightly less dramatic, exports to China also dropped in January, down 12.2% year-on-year, again with electrical and electronics products leading the retreat.

Overall, Malaysia’s economy expanded by a creditable 5.1% last year, in line with the rate of expansion of the manufacturing sector but below the 7.2% posted in 2010. The 2011 result was one that some analysts saw as stemming from the easing in overseas demand for Malaysian exports, a trend that will probably continue through the first half of 2012 but start to reverse itself mid-year and beyond.

According to Lee Heng Guie, the head of economic research at CIMB Investment Bank, it was the volatile external environment that resulted in stagnant demand for consumer electronics, though this could be offset to some degree by domestic demand.

“The question is how sustainable is consumption going to be and this will depend on key drivers such as commodity prices and income,” Lee said in an interview with The Star in Malaysia late February.

Many manufacturers are also somewhat wary of the government’s plans to increase the minimum wage at a time when there is uncertainty over sales abroad and growing competition from other regional producers. There have been calls for the raise, which will see the base wage increase from $215 to between $265 and $330 a month, to be implemented in stages, rather than all at once so as to lessen the impact on the manufacturing sector.

On March 6, Lim Kok Boon, the president of the Malaysian Plastic Manufacturers Association, said at a press conference that the government had to consider what the impact of a sudden implementation of minimum wage would have on the manufacturing sector.

“Almost all manufacturing companies in Malaysia rely on the export market and when we offer a higher price to our export market, they will not absorb our access cost and will look at other countries for cheaper supply,” Lim said.

While suggestions that up to 4m jobs, the majority of which are in manufacturing, could be put at risk by the wage increase may be somewhat alarmist, employers’ concerns are real. Mindful of the importance of the sector to the national economy, Mukhriz Mahathir, the deputy minister for international trade and industry, said on March 8 that a balance needed to be struck between the expectations of workers and industry.

“The minimum wage policy has become an ongoing debate, and the important thing is, the ability of the government to strike a balance between increasing the income of the people and ensuring higher productivity,” he said.

How the government will achieve this balance has yet to be determined. If an increase in manufacturing output can be assured, the result would offset higher labour costs, though something of a question mark remains over whether there are markets for the stepped up production the government is hoping for.

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