Domestic demand and exports fuel Malaysian growth

The economy defied expectations in Malaysia by maintaining a high level of growth in the first half of 2014 at 6.3%, according to new figures released in mid-August, though any weakening in exports could see the rate of expansion ease marginally towards the end of the year and into 2015.

GDP in the second quarter surged by 6.4%, the strongest growth since the fourth quarter of 2012, and ahead of analyst expectations. “The very strong export performance was better than expected,” the governor of Bank Negara, Zeti Akhtar Aziz, told journalists at a press conference. “It’s very likely that the overall growth for the year will exceed growth projections made earlier,” the head of the central bank added.

Growth in the first half was fuelled by continuing strong domestic demand, despite Bank Negara pushing up interest rates in July by 25 basis points to 3.25% with further interest rate hikes likely. The intervention is aimed at reining in household spending and keeping a lid on inflation, which was running at 3.3% as of June.

Possible headwinds blowing from abroad

Growing demand at home was matched by a rise in exports, with shipments up 8.8% in value for the second quarter, led by strong sales of electronics and manufactured products, and outpacing the 7.9% increase in the first three months of the year. However, it is possible the contribution of overseas sales to GDP could weaken.

The Malaysian economy is built around international trade, with export revenues in 2013 equal to 83% of GDP, according to the Department of Statistics (DoS), making it more sensitive to fluctuations in the global economy.

With a number of leading economies, including Germany, France and Japan, either seeing their GDP retreat or stagnate in the second quarter, global recovery may be further off than predicted, while the threat of a hard landing in China is still seen as a near-term risk to the Malaysian economy.

“Moving forward, we hold our view that the strength of exports would likely soften in the second half of 2014, on account of uncertainties in the advanced economies due to heightened geopolitical concerns,” said Manokaran Mottain, economist at AllianceDBS Research quoted by local press from a research note.

Budget boost

However, any potential scaling back of exports could be offset by increased state spending next year. On August 12, Prime Minister Najib Razak said the 2015 budget, to be tabled in October, would contain a number of initiatives to further promote economic growth, including increased spending on infrastructure development, fiscal support for low-income earners and low-cost housing developments.

Among the main objectives of the 2015 budget, the prime minister said, were to keep inflation in check while maintaining living standards and balancing state finances.

To achieve the last goal, the government is to launch its biggest tax reform in many years, with the introduction of a goods and services tax (GST) in April 2015. The broad-based tax will see a 6% charge added to two-thirds of the 944 items covered by Malaysia’s consumer price index basket, though the list of exempted items will be expanded, Deputy Finance Minister Ahmad Maslan said on August 12. Basic foods like rice, flour and oil, as well as essential services like household water supply and public transportation are likely to be tax-free.

The government stressed that the GST is not an additional charge, but one that will replace the existing service and sales tax (SST), which is levied on a narrower basis, though at a much higher rate of 16%. Officials also believe the GST will push the state budget into surplus by 2020, allowing for increased funding for social welfare programmes in the future.

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Malaysia and China look to boost two-way trade

A diplomatic approach towards regional issues has strengthened Malaysia’s efforts to boost trade and investment ties with China, setting the scene for the two countries to roll out an ambitious programme of increased financial cooperation.

Last October, China and Malaysia agreed to raise bilateral ties to a “comprehensive strategic partnership”, with a focus on boosting military cooperation and increasing two-way trade almost three-fold to $160bn by 2017.

Deputy Minister of International Trade and Industry, Datuk Lee Chee Leong, announced in July that Malaysia’s exports to China for the year had already reached $106bn (RM341bn). He added that Malaysian exports currently accounted for 23.9% of China’s total trade with Asean countries.

Although Malaysia is China’s largest Asean trading partner, more can still be done to help the dynamic reach its full potential say Malaysian business groups in particular.

Building ties

The strengthening of bilateral ties comes against a backdrop of growing tension between Beijing and key Southeast Asian nations over maritime disputes in the South China Sea.

While the sovereignty issues simmer, however, diplomatic relations between China and Malaysia remain positive, as US state department envoy John Finkbeiner pointed out in a 2013 study. “Malaysia appears to pursue a non-confrontational approach in the sovereignty dispute, which differs markedly compared to Vietnam and the Philippines,” he wrote. “The first pillar regards Malaysia’s firm commitment to increase its trade and investment ties with the world’s most dynamic economy [China] in order to hedge its other strong economic ties, with the US in particular.”

However Malaysia’s approach has contributed to a growing imbalance in bilateral cross flows between the two countries. Malaysia has channelled almost $7bn of investment into China, but received just $1bn from the Asian giant in return.

Last year, the National Chamber of Commerce and Industry Malaysia (NCCIM) called on the government to intervene by adopting a more pro-active stance in correcting the current investment imbalance, which falls in China’s favour.

The Chinese ambassador to Malaysia, Huang Huikang, has given a reassurance that efforts to address the imbalance are making headway. Chinese interest in Kuantan Industrial Park is expected to help take the country’s investment in Malaysia past the $2bn (RM6.42bn) mark this year, he said. The ambassador added that Beijing aimed to encourage more of its companies to increase their investments in Malaysia.

While Malaysian exports to China remain dominated by agricultural products, such as palm oil, Chinese firms are strengthening their presence in the technological sector as well as in cultural initiatives such as the $91.47m Impression Melaka venture, a live theatre project, which is being rolled out jointly by Malaysia’s PTS Impression Sdn Bhd and China Impression Wonders Art Development Co. Ltd in Malacca.

A readiness to do business in the Chinese currency renminbi (RMB) is giving Malaysia’s exporters an added advantage, according to a HSBC Commercial Banking survey released in July.

“The settlement of goods and services in RMB will remove the foreign exchange risk exposure from the Chinese companies and hence allow them to reduce their cost,” HSBC Bank Malaysia Bhd head of global trade and receivable finance, Vincent Sugianto, said in a statement. “Ability to trade in RMB also allows Malaysian companies to tap into a wider customer base in China which currently does not have access to foreign currency trades.”

Containing shocks

Despite Malaysia’s healthy trade relations with China, however, external factors risk weighing on bilateral ties.

The disappearance of Malaysia Airlines’ Flight MH370 in March put a strain on the relationship between the two countries, sparking a 19% drop in visitors from China for the month of April year-on-year (y-o-y), although these figures have since rallied. The casualties included 153 passengers who were Chinese nationals.

“That the Chinese press has begun to soften its tone towards Malaysia’s government [over the MH370 search] reflects the view that China is better off swallowing a tough pill than taking any action that could provide the US with a major strategic advantage at Beijing’s expense,” the South China Morning Post said.

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Merger plans set to transform Malaysian banking sector

Plans by three of Malaysia’s biggest lenders to merge into the country’s largest bank conglomerate have thrown a spotlight on the health of the industry.

CIMB Group last week revealed plans to buy smaller rivals RHB Capital and the Malaysia Building Society, a plan that would create a group with total assets of RM 614bn ($192.8bn) and a 23% market share of domestic loans. This would eclipse the current market leader Maybank’s worth of about RM 578bn ($181.49bn) and market share of 18%.

The three confirmed on July 2 that they had obtained approval from Malaysia’s Central Bank or Bank Negara Malaysia for the deal and have since entered into a 90-day exclusivity agreement to negotiate and finalise pricing, structure, and other relevant terms and conditions. The banks say part of the aim is to create a ‘mega Islamic bank’ by tapping in to the country’s status as one of the world’s leading Islamic finance centres.

“Bank Negara has long been talking about creating regional [banking] champions. Given that the Malaysian banking industry has reached a challenging level in terms of organic growth, size does matter,” Sue Lin Lim, an analyst at AllianceDBS, told London’s Financial Times.

Slow start

The deal may also give the domestic banking sector a boost amid criticism that growth has been stale this year. Bank Negara this month revealed that loan growth had slowed to 9.7% year-on-year (y-o-y) in May from 10% y-o-y in April, due mainly to a slowdown in business loan growth.

“Suddenly an industry faced with dull growth prospects amid growing competition is abuzz again,” wrote the Edge magazine in an editorial. “This will be the largest banking merger in a very long time and which could potentially change the current landscape.”

Although mainly related to business growth loan, the decline in May follows central bank measures last July that saw the maximum tenure for personal loans reduced to 10 years, home loans restricted to no more than 35 years, and prohibiting offers for pre-approved personal loans.

An RHB Research survey in July saw the agency downgrade its rating on Malaysian banks to “neutral” from “overweight”.

“A consistent message that came out of our recent meetings with banks was that business lending has been subdued, while capital markets remain quiet,” RHB Research analyst David Chong noted in his report.

The loan decline contrasts with rosy predictions made by the World Bank last December. Touting Malaysia as a success story in terms of financial inclusion and quality of banking regulations and supervision, the bank said the sector was poised for further growth this year.

Regional aspirations

Despite global fluctuations in the economy caused by higher US interest rates, Malaysia’s banks recorded 17% profit growth overall in 2013. The World Bank forecast opportunities for the expansion of banks, both in the domestic and regional marketplaces.

It is the latter market that the new group is expected to target, with some considering the deal a statement of intent as ASEAN deepens its financial integration. A table of top 10 banks’ pretax profits in ASEAN compiled by The Banker shows Maybank in fourth place behind Singapore’s OCBC, DBS and United Overseas Bank.

“The next big thing for Malaysian banks is to venture abroad, and with this merger, it could be a game changer for CIMB in the ASEAN region,” an analyst who wished to remain anonymous told Malay Mail.

However those in the market had expected the push towards Islamic banking to come from BIMB Holdings, a holding company for various sharia-compliant businesses in Islamic banking, insurance and stockbroking. The combined assets of the three banks will still rank second after Maybank in terms of Islamic banking assets, Lim pointed out.

Integration hurdles

But before the new conglomerate can start targeting Southeast Asia, it will first need to navigate the complex three-way merger process and address challenging integration issues.

For instance, critics have noted overlap between CIMB and RHB in investment banking services and retail services. A similar deal touted in 2011 was likely scrapped because it was felt the companies offerings would blur. Because the prospective merger’s branch total would equal 550, compared to Maybank’s 399, it seems likely that the new grouping would face a potentially painful period of consolidation.

“The ability to extract these cost synergies may be a hurdle in the near term as it would largely depend on rationalising branches and staff, which could be politically unpalatable,” said ratings agency Fitch in an analysis of the proposed merger.

Although analysts differ on the logic behind the merger, most agree that it signifies a new dawn for the banking sector where size will matter more than before as lenders look to compete on a regional level.

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Moving ahead with Malaysia’s trade pacts

Malaysia’s leadership is forging ahead with plans for entry to the US-led Trans-Pacific Partnership (TPP) despite domestic concerns that the multilateral trade agreement will negatively impact some domestic sectors and international concerns over delays in its progress.

Prime Minister Najib Razak said in May the agreement would be ratified by the end of this year, though only on “Malaysia’s terms” with the content being more important than the deadline, he noted.

This has led to some speculation that regional and bilateral trade deals may give Malaysia more tailored and long-term benefits than sweeping global arrangements, even though the changes are taking place on a smaller scale.

Compromises

The free trade agreement (FTA), which involves 12 countries including Australia, Brunei, Canada, the US and Vietnam, would strengthen Malaysia’s ties with the wider world with the aim of expanding trade and market access in terms of economic and investment growth, said Razak.

His remarks came after anti-TPP rallies were held in the region, in response to a visit by US President Barack Obama in April. Opposition leaders in Kuala Lumpur warned that Washington would use pressure tactics to get Kuala Lumpur’s approval for the deal.

“The US might offer security enhancement as a trade-off if Malaysia compromises on its red lines in the TPP. The US regime has always used trade and security hand-in-hand to twist arms of nations to accept its economic hegemony,” Parti Sosialis Malaysia treasurer A Sivarajan said.

Malaysia is reluctant to accept changes to its government procurement policies that could result from the deal, while domestic critics say it will impact on equality initiatives such as pro-ethnic Malay affirmative action introduced after 1969 race riots.

“[Joining the proposed TPP agreement] may mean disruption of our effort to reduce national tension caused by economic disparities,” the former Malaysian Prime Minister and recently-appointed chairman of the automotive manufacturer Proton, Mahathir Mohamad, told the Nikkei Asian Review. He added that retaining some trade barriers was necessary to protect local industries. “To ask us to compete with fully developed countries, that is a task that is almost impossible.”

Proponents of the TPP say it will help dismantle non-tariff barriers and enforce best practice, while obliging countries with closed economies to tackle domestic monopolies. But even its supporters claim its free trade principles are being diluted as divergent economies such as those of Australia and Vietnam demand changes.

Small may be best

Critics have suggested that potential signatories to the TPP, such as Malaysia, would benefit more from focusing on smaller-scale, bilateral or regional free trade agreements rather than joining global initiatives which include economies on the scale of the US and Japan.

The Asian Development Bank (ADB) said in May that the time spent on negotiating “mega” trade deals such as the Trans-Pacific Partnership (TPP) would be better spent consolidating more bilateral trade agreements.

“Whether or not countries wish to pursue mega-regional agreements, in the meantime they should simply pick the lowest tariff among their myriad agreements and adopt this single measure. The solution would also apply to many non-tariff barriers, and would have clear economic benefits, in addition to furthering the cause of global free trade,” Jayant Menon, lead economist for trade and regional co-operation at ADB, told Emerging Markets.

In this vein, the Malaysian and Turkish governments signed an FTA in April that is expected to boost trade to $5bn by 2018 by providing preferential market access for Malaysian goods entering the Turkish market and vice-versa. It also included key bilateral conditions such as reducing the tariff on crude palm oil exports to 20% from 31%.

Under the provisions of the FTA, which took several years to negotiate, Malaysia and Turkey will co-operate in areas encompassing small and medium-sized enterprises, halal-related areas, agriculture and food industry, research development and innovation, health, energy, e-commerce, and automation.

Malaysia already has existing free trade agreements with China, South Korea, Japan, India and Australia and New Zealand.

Export growth

Such preferential agreements have helped Malaysian exports hit a sweet spot this year, accelerating at their fastest pace in four years to nearly 19% year-on-year (y-o-y) growth in April and charging ahead of analysts’ expectations.

This marked the 10th consecutive month of expanding exports, following five successive months of contraction. The institute said this was due to a sharp rise in the shipments of electrical and electronic (E&E) products (32% share of total exports) and commodity (19% share) during the month. At a regional level, observers also point out the advantages of the Regional Comprehensive Economic Partnership (RCEP), which includes Malaysia and the other nine members of the Association of South-east Asian Nations.

“While the TPP aims to be a high-quality preferential trade agreement… the RCEP… sets the bar low and accepts that countries will reduce trade barriers at different rates – especially among less-developed members – and also makes limited demands for regulatory harmonisation,” wrote the Australian Strategic Policy Institute in April 2013.

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High hopes for low-cost air in Malaysia

Malaysia’s transport sector marked a major milestone in early May when a new terminal for the rapidly growing budget air-travel business opened at Kuala Lumpur International Airport (KLIA).

Known as “klia2” and billed as the largest purpose-built low-cost carrier (LCC) terminal in the world, the facility began operations a year behind schedule. Supporters of the project, however, insist that klia2 is nothing short of a game-changer for the country’s ambitions as both regional transport hub and global tourism destination.

A cloud has loomed over those ambitions since March 8, when Malaysia Airlines Flight 370, bound from Kuala Lumpur to Beijing, went missing. The aircraft’s fate remains a mystery, and persistent worldwide media coverage of the tragedy has produced a wave of negative publicity. Both the airline, Malaysia’s flag carrier, and the government have repeatedly stressed that locating the aircraft is their top priority, but having the spotlight shift elsewhere is likely welcome news.

Focus on LLCs

klia2 has the capacity to handle 45m passengers a year, a significant improvement on its predecessor, which topped out at 10m. Even more importantly, it caters specifically to LCCs, already the fastest-growing category in the Asia Pacific air-travel market and widely expected to experience further expansion in the near future. In a market forecast published on its website, Boeing predicts that “[d]uring the next 20 years, nearly half of the world’s air traffic growth will be driven by travel to, from, or within the Asia Pacific region.”

And the LCCs are leading the charge: according to statistics published by CAPA – Centre for Aviation, an industry information consultancy, LCCs went from operating 2% to 15% of the Asia Pacific region’s total fleet numbers in the 10 years to 2013. They take an even larger share – 20% – of seat capacity, and both figures look set to increase. The region had 47 LCCs (including five new ones) active in 2013, most of which added capacity at double-digit rates, and no fewer than 10 additional entrants are expected to begin operations in 2014.

Perhaps most tellingly, according to CAPA, LCCs account for 50% of the region’s orders for new aircraft – not counting orders on behalf of budget airlines that are actually subsidiaries of traditional or full-service carriers. The 1500 units on order will more than double the Asia Pacific LCC fleet to 2500 planes, vastly raising the scope for competition with conventional airlines. In addition, bulk purchases like those of the sector’s two heavyweights, AirAsia and Lion Air, will significantly reduce unit costs, increasing the intensity of that competition.

Home advantage

Malaysia enjoys something of a head start in the race to cash in on the sector’s expansion. First and foremost, while North Asia has significant long-term potential, the focus for the foreseeable future will be on Malaysia’s own backyard of South-east Asia, where LCCs already account for 30% of the commercial fleet. Also, the country enjoys a positive image as a model of development and a bastion of stability, qualities that set it apart from its neighbours.

As with many large and complex airport facilities, however, the launch of klia2 has not been entirely smooth. Total costs, for instance, have risen sharply: while the original 2007 budget was about $500m, the project has thus far absorbed some $1.3bn. Completion and operational readiness were achieved a year late, due in part at least to tensions between the terminal’s operator, Malaysia Airports Holding, and its largest tenant, AirAsia. Allegations that its taxiways and parking bays are vulnerable to undermining by torrential rains may necessitate millions in repair costs and service delays.

Nevertheless, klia2 is designed to serve as a catalyst, compounding the impact of Malaysia’s inherent tourism and air-transport advantages to ensure that Kuala Lumpur’s early lead is never lost. To do this, it has been built with modern infrastructure and technologies aimed at maximising competitiveness, capacity and convenience.

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Mixed reaction to Malaysia’s debt levels

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

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

Vetting brings improvements

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

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

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

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

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

Conflicting sentiment

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

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

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

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

Supporting transformation

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

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

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

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

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Malaysia’s universities working to make the grade

Universities in Malaysia have been given a key role in government plans to raise the country to developed-nation status within the decade, but more investments may be necessary if higher education institutions are to meet the targets that have been set by the state.

According to government figures, 25% of all Malaysians between the ages of 18 and 24 are taking part in some form of higher education, a level of participation that Prime Minister Najib Razak says will help the country overcome income inequality and reach its goal of being a high-income nation by 2020.

“The odds of people succeeding in their socioeconomic upward mobility are significantly improved by raising access to education,” he said while attending a ceremony at the Unitar International University in Kelana Jaya on February 27. “Only with equity can we narrow the gap of income inequality and achieve a resilient national unity.”

Working to make the grade

However, it is not just greater access to higher education that is in the government’s sights – Malaysia is aiming to boost the quality of academics as well. The goal is to have at least one local institution ranked among the top 50 global universities by 2020, with a minimum of three in the top 100.

Meeting this target may prove difficult to achieve by the deadline set. In the latest edition of the QS World University Rankings, the preferred benchmark according to the Ministry of Education, the highest-placed Malaysian institution was Universiti Malaya, which came in at 167, followed by Universiti Kebangsaan Malaysia (269), Universiti Sains Malaysia (355) and Universiti Teknologi Malaysia (355).

Malaysia’s universities fared better in the QS World University Rankings by Subject, however, which was released at the end of February. Eight institutions are rated within the top 200 in at least one of the 30 disciplines reviewed, two more than made the grade last year.

Best-performing was Universiti Sains Malaysia, which ranked 28 for environmental sciences, while also joining the top 100 for computer science and information systems, chemical engineering, civil engineering and mechanical engineering. Universiti Malaya reached the top 100 in six categories, including computer science and information systems, chemical engineering, electrical engineering and mechanical engineering.

This year’s results show that Malaysian universities are operating at an increasingly high level within a range of academic disciplines, QS head of research, Ben Sowter, told the local media.

“Overall, the performance of Malaysian institutions has improved compared to last year,” he said. “Through taking a more targeted approach to ranking universities, we have been able to pick up on the particular strengths of Malaysian institutions much more effectively than is possible in overall institutional rankings.”

Academic credence, economic gain

Apart from gaining credibility in the academic world, success in various ratings surveys are of importance to individual universities and the country, and can bring clear financial benefits. Better rankings help universities attract more international students, staff, business investment and research partners.

Another advantage of a stronger higher education system could be a reduction in the flow of Malaysian students overseas, with up to 80,000 studying abroad annually, of whom roughly one third have some form of sponsorship. While a similar number of international students come to Malaysia, the balance of revenue from higher education could be swung more firmly in the country’s favour if it was able to keep more of its students at home while attracting additional fee-paying foreigners from other markets.

One encouraging fact is that many of the disciplines where Malaysian universities scored high in the QS rankings were in technical and scientific fields, indicating strength in areas that have practical applications for economic development. Though Malaysia may find it a challenge to reach the upper tiers of global university rankings, the country appears to be making the grade in terms of moving closer to its national economic targets.

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Malaysia forms ties to the Gulf to develop Islamic financial services

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

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

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

Expanding its draw

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

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

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

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

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

Steps toward further growth

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

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

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

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

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

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Malaysia moves to maintain halal edge

The halal industry in Malaysia is fast becoming a magnet for international investment, as major players move to acquire a share of a growing global market.

Malaysia is carving a niche as a key producer and exporter of halal products. However, with regional competition growing, its domestic players have been urged to seek out new opportunities beyond their borders, in line with a national drive to boost growth and transform the industry into a pillar of the local economy.

New facilities to open

US food manufacturer, Kelloggs, announced plans in January to build a $130m halal facility in Malaysia which will create 300 jobs when the first phase is completed in the middle of next year.

The news comes after international dairy giant Nestle said it planned to expand its operations in Malaysia by opening a plant in Shah Alam in mid 2014. US confectionery firm Hershey also outlined plans in 2013 to construct a $250m plant next year in Johor.

The emergence of new players is a welcome boost for the Halal Industry Development Corporation (HDC), which is looking to position the country as an international player in the market.

The Department of Islamic Development Malaysia (Jakim), the industry regulator, hopes that a bid to have Malaysia’s M1500: 2009 Halal standard adopted as a global benchmark will raise the country’s profile across the industry.

A total of 73 organisations, comprising 57 NGOs and 16 government bodies, have been granted permission to carry the Jakim certification, which verifies the traceability of ingredients and raw materials. Muslims are required to eat, drink and take medicinal halal products in accordance with religious requirements.

“Globally Jakim is the leader in promoting halal and its standards. Its counterparts in Dubai and Indonesia are also establishing their own standards,” Mohamed Hazli Mohamed Hussain, group CEO of DagangHalal, told OBG.

DagangHalal is a digital marketplace for halal products as well as a repository of halal certificates that works closely with Jakim and international certification bodies, matching Malaysian small and medium-sized businesses with buyers around the world. The company also provides a platform for halal applicants to find alternative suppliers and download the corresponding halal certificates.

Competition on the rise

According to government figures, Malaysia exported RM32.84bn ($9.86bn) worth of halal products in 2013, making it one of the largest suppliers in the Organisation of Islamic Cooperation, an international group with 57 members.

However, regional competitors are also ramping up their activities in the sector. Indonesia, which has the world’s largest Muslim population, revealed plans last October to establish a centre for the halal industry by 2015. The market is also expanding in Thailand, where more than a quarter of food factories are now participating in halal production.

Speaking in January, HDC managing director, Jamil Bidin, suggested that local manufacturers would need to look beyond Malaysia’s borders if the country is to retain its competitive edge.

Companies based in Malaysia should invest in overseas operations to take advantage of the procurement of raw materials and the proximity of markets to catapult the export industry onto the global stage, he told the local media.

Bidin said countries such as China, India, Bangladesh and Indonesia not only offered huge potential as markets for Malaysia’s halal products, but could also provide raw materials.

However, critics believe domestic producers will need to increase their focus on developing marketing strategies if they are to compete globally.

A 2013 report published in the Malaysia Journal of Society and Space concluded that some halal food suppliers were insufficiently informed about the legal, social and cultural environment of importing countries. “They are not able to identify consumer needs accurately in terms of taste and preferences,” it said. “They enjoy little strategic and long term alliances with importers or distributors or private market agents to promote their products.”

Any marketing weaknesses are likely to be exposed further as Malaysia steps up its efforts to expand the halal industry.

Plans include a push to attract non-Muslim consumers to halal foods as healthier and higher-quality options. The strategy is already proving successful in Asia, where food scares have sparked major fears.

“Halal is no longer about religion, but rather about safety, hygiene and quality,” Hussain told OBG.

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Oxford Business Group | Budget shake-up for Malaysian real estate

The Malaysian government has taken steps to cool speculation in the property market by imposing a capital gains levy on real estate sales, tightening up regulations governing developers and raising the price bar for foreign investors, moves that have won mixed reviews from analysts.

On October 25 Prime Minister Najib Tun Razak tabled the draft budget for 2014, which has a strong emphasis on raising state revenue and cutting spending. According to the plan, subsidies will be restructured in the coming years and public debt – currently at 53% of GDP – will be lowered.

Among the revenue-generating proposals are a number of new taxes, including a real property gains tax (RPGT), which is also intended to ease property speculation and reduce inflation in housing. Under the new provisions, set to come into effect on January 1, a tax of 30% is to be imposed on gains from real estate sales on properties owned for three years or less, with the rate sliding to 20% if the property is sold in the fourth year of ownership and 15% in the fifth. Any sales after the fifth year will not be charged a capital gains levy. Previously, the capital gains tax on property sales had been set at 10% when introduced in 2010 and later increased to 15%, and applied to sales within two years of purchase.

For foreign property buyers, a different tax scale will be applied, with non-citizens required to pay a tax of 30% on the capital gains for a property sold at any time over the first five years of ownership, after which the rate falls to 5%.

Another move, one seen as even more likely to cool speculation, was the banning of developer interest bearing schemes (DIBS). As their name suggests, developers that offer DIBS agree to pay any interest on home loans during the construction period, making the purchase more attractive to potential buyers. The new provisions also prevent commercial lenders from involving themselves in DIBS-related projects. This measure will probably result in a slowing of off-plan sales by developers, while also reducing the property lending component of some of Malaysia’s larger banks.

While many in the sector have said banning DIBS was a positive move, one that would directly target speculation, others believed it would make it more difficult for first-home buyers to enter the market. One critic of the reform was Michael KC Yam, the president of the Real Estate and Housing Developers Association. Yam told the local media on October 25 that DIBS had been of benefit to many.

“We think that innovative home financing packages such as the DIBS offered by developers of high premium properties should be encouraged to facilitate financing and promote home ownership,” he said.

The RPGT also had its supporters and opponents, with Foo Gee Jen, managing director at property consultancy CH Williams Talhar and Wong, describing the increased levy as a measure that would boost stability in the market.

“The increase in RPGT is a wake-up call for flippers,” he told the local media on November 6. “Investors will have to go back to investing in property fundamentals, such as location and yield.”

However, some analysts have queried whether speculation is as rife in the sector as has been suggested, saying that the higher tax rate on capital gains will do little to reduce price increases for residential properties, one of the stated aims of the bolstered levy.

Foreigners eased out of the low end of the market

The budget also lifts the minimum value of a property that foreign investors can buy from the current RM500,000 ($161,000) to RM1,000,000 ($322,000), a move that may cool some of the speculation by overseas players.

Given the still relatively low price and solid value of Malaysian property, even the increased threshold may not curb foreign interest, though Chang Kim Loong, the honorary secretary-general of the National House Buyers Association, believed the higher ceiling will ease pricing pressures for Malaysian buyers.

“Foreigners must be prevented from snapping up property meant for the lower- and middle-income and thus artificially inflating property prices and creating a domino effect which can result in higher property prices across the industry,” he said in a statement issued the day after the budget was handed down.

Boost for low-cost residential segment

The budget also lays out a plan to add 223,000 new residential units to the national accommodation stocks in 2014, with both the government and the private sector expected to play a role.

The state will directly provide funding for the construction of low-cost housing, while at the same time offering a subsidy of $6000 per unit to private developers that build homes directed at low- and middle-income buyers.

It will be well into the new year before the full impact of the 2014 budget articles dealing with real estate will become apparent. To some degree at least, the buoyancy of the property market will depend on the strength of the Malaysian economy. The government has predicted growth of 5-5.5% in 2014, though ratings agencies and analysts are predicting GDP expansion may fall somewhat short of this target, at 4-4.5%. It could be that a relatively sluggish economy, rather than any increased tax, could slow activity in the property market.

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Oxford Business Group | Budget shake-up for Malaysian real estate

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