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Malaysia: Infrastructure investments to drive loan growth

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

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

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

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

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

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

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

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

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

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

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Malaysia: Retail optimism tempered by caution

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A gradually improving economic climate is expected to support continued retail growth in Malaysia in 2013. However, downside risks from the international environment and political uncertainty may affect economic expansion before the year is through.

In January, local press reports suggested the retail market would grow by 5-6% this year. The sector is expected to track or even outstrip broader economic growth, which official estimates suggest will come in at 4.5-5.5%.

Retail Group Malaysia, a local retail consulting firm, said in a recent report the sector would grow by 6% in 2013, following growth of 6.9%, 5.9%, 4.8% and 5.7% in the four quarters of 2012. The organisation said the market would receive a fillip in the first quarter of 2013 from the second round of the government’s 1Malaysia People’s Aid (Bantuan Raykat), which began in January.

Segments that are expected to benefit include electrical and electronics, largely due to a RM200 ($65) rebate on smartphone purchases for 21-30-year-olds who have monthly incomes that do not exceed RM3000 ($965); and bookshops capitalising on the RM250 ($80) book tokens to be given to all university students.

Spending associated with Chinese New Year should also have provided another boost at the beginning of 2013. Retailers often offer promotions during the holiday period, adding momentum during what is already a busy time of year. However, the holiday is usually followed by a dip in sales.

At the beginning of the year, Yen Global, a Malaysian clothes manufacturer, wholesaler and retailer, said the fashion and lifestyle segment had grown by a “modest” 5% in 2012. However, the company considers the outlook good enough to undertake significant investments in expansion, extending its branch network, revamping its products and providing incentives for frontline staff.

“Retail companies that want to chart a growth path will need to expand cautiously, and with the right timing and location in order to rise above the competition,” said Goh Kok Beng, executive chairman of Yen Global, in the company’s annual report.

Similarly, CapitaMalls Malaysia Trust, a real estate investment trust, said in January that it was continuing to look into mall acquisitions, expecting 6% retail growth in 2013 after a successful 2012. The fund focuses on suburban “neighbourhood” malls in which people do day-to-day shopping, a model that has become increasingly popular in recent years as the “destination mall” market has become more saturated.

The single-biggest reason for optimism among retailers, wholesalers and mall investors is Malaysia’s continued strong economic performance, despite a difficult international situation coloured by the eurozone crisis and the US’s debt troubles. Consumer confidence is currently at a two-year high. Momentum is being maintained by a variety of factors, including high prices for Malaysia’s commodity exports, but more importantly, domestic demand supported by investment, a favourable interest rate environment and low inflation.

Public and private investments under the Economic Transformation Programme (ETP), which seeks to boost value-added in the economy and put the private sector at the forefront of growth, is particularly important. The ETP, which involves a raft of investments and reforms, is being rolled out through to 2020 as part of Malaysia’s ambition to become a high-income country by the end of the decade.

Meanwhile, inflation in 2012 averaged 1.6%, half the level recorded in 2011. Analyst surveys forecast that the central bank will keep rates on hold until the second half of the year.

While these factors mean there is good reason to be upbeat about the outlook, there are a number of downside risks to take into account. First and foremost is the broader economy, which could take a hit if the global situation worsens. Significant softening in commodity prices, a worsening in the eurozone crisis affecting the international economy or other unforeseen challenges (such as an oil price spike caused by conflict in the Middle East) could all cool growth in Malaysia.

Another factor that retailers are taking into account is the general election, which is expected by June. Opinion is divided about the impact of the run-up to the poll on the sector; while some expect there to be little effect, others are already reporting a degree of caution among shoppers, particularly regarding big-ticket purchases. Depending on the result of the election, uncertainty after the vote could cause both investor and customer sentiment to dip.

The Malaysian retail sector performed well in 2012, and looks set for another good year in 2013. However, a number of factors, both internal and external, could have a dramatic impact on growth as the year unfolds.

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Malaysia: Banks shift lending patterns

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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: In search of broader tourist base

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

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

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

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

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

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

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

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

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

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

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

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

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Malaysia: Industrial production up

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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: Airline alliance

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The forthcoming entry of Malaysia’s largest airline into the oneworld alliance, a group of the world’s major airlines, plus efforts among airlines to boost connectivity in Asia and invest in capacity to support long-term growth, are set to increase flight frequency and services.

Duncan Bureau, the senior vice-president of global sales and distribution at Malaysia Airlines (MAS), the country’s flag carrier, said recently that the airline is making progress toward its planned membership in the oneworld airline alliance, which is expected to be completed in early 2013. MAS is forming bilateral agreements on code shares with a number of oneworld carriers, most recently Cathay Pacific and Royal Jordanian.

To prepare, the airline has made a number of recent investments in newer, more fuel-efficient aircraft, which is expected to reduce its long-term costs, particularly on fuel. In August, MAS took delivery of its second Airbus A380. The new aircraft will allow MAS to increase its A380 service between Kuala Lumpur and London from the current three times a week to every day. A third A380 should be commissioned by the end of November, which will fly daily between Kuala Lumpur and Sydney. Also in August, MAS received its 75th delivery of a Boeing 737, with a “next-generation” 737-800.

The airline also aims to increase passenger loads on its routes to India by 15% in 2012, the international press reported in mid-August. MAS flies a total of 40 weekly flights to five cities in India from Kuala Lumpur. The airline is planning to increase frequencies to Mumbai (Bombay), Chennai (Madras) and Bengaluru (Bangalore) from September 1 to strengthen connectivity and provide more options for passengers on these routes.

MAS is targeting a return to profitability next year as efforts to strengthen its financial position seem to be paying off. The airline cut its losses in the second quarter of 2012 to RM348.7m ($112.44m), from RM525.8m ($169.55m) in the first quarter. It has been particularly successful in tackling fuel costs (which accounted for 37% of expenses in the period), reducing them by 18%. The airline said that foreign exchange losses of RM173m ($55.79m) contributed to its losses.

“The group’s aggressive focus to consolidate our network is helping the turnaround, as already showing in the improvement in yield and lower operating expenses, specifically spending on fuel,” said Ahmad Jauhari Yahya, the CEO of MAS.

The industry is also seeing increasing expansion via MAS’s budget rival, AirAsia. The airline, headquartered in Kuala Lumpur but with subsidiaries in Indonesia and Thailand, continues to grow. In July, it announced the purchase of Indonesia’s Batavia Air for $80m, its first major acquisition and a foray into the fast-growing Indonesian market.

The same month, AirAsia X, the carrier’s long-haul division, announced that it aimed to double flights to Australia from Kuala Lumpur, as it increases its fleet of twin-aisle Airbus A330s to 25 from the current 11. This will see the airline compete with MAS on Australian routes, as well as with Singapore Airlines’ new budget line Scoot and Jetstar, the low-cost subsidiary of Australia’s Qantas.

Earlier this year, AirAsia pulled out of a share swap deal with MAS, citing the latter’s problems with management and labour unions. The deal was intended to ease the rivalry between the two carriers, and lead to a degree of route consolidation, loosening the squeeze on profitability. While the agreement fell through, some feel the groundwork for greater cooperation has now been laid.

The suspended talks notwithstanding, Malaysia’s air transport segment is on the cusp of imminent expansion as a result of MAS’s entry into oneworld and increasing flight frequencies between Kuala Lumpur and other regional capitals.

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Malaysia: Confronting the energy dilemma

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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.

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Malaysia: Going for green

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Malaysia has announced plans to boost its automotive sector through the production of electric cars, hoping to both develop a lucrative export trade while actively combating carbon emissions at home. The industry will face competition, however, from other countries in the region whose green automotive initiatives are more developed.

At present, there are 11 completely electric vehicles on Malaysia’s roads, according to government figures. Hybrid cars – which use both conventional fuel and an alternative power source for their engines – are more popular, with around 8000 hybrid vehicles currently on the roads.

This is set to change, however, with the government planning to announce a major policy shift that will promote the production and domestic use of electric vehicles. The highly anticipated revision of the National Automotive Policy (NAP), the government’s long-term plan for the industry, will introduce several new reforms and regulations.

Since late 2011, the Malaysian government has been promoting the establishment of a local electric vehicle manufacturing capacity. Both the government and industry lobby groups believe such a move will help broaden the base of the sector.

According to projections from the Malaysia Automotive Institute (MAI), reforms to the industry, coupled with higher local and international demand, will see the sector’s contribution to the economy triple by 2020. In a statement issued in early May, the MAI said it expected the industry’s share of GDP to rise from the present rate of 2.4% to 6.8%, largely due to an increased focus on the production of electric and other energy-efficient vehicles. This growth would be underpinned by a higher level of foreign direct investment and government efforts to encourage original equipment manufacturers (OEMs) to set up operations in Malaysia.

“Meeting vehicle standards for energy-efficient vehicles in Malaysia means bringing new technologies into the country,” Madani Sahari, the CEO of the MAI, told OBG. “As a result, OEMs are being targeted. Before this happens, however, the sector must be liberalised by allowing both local and foreign OEMs to qualify for manufacturing licences, which is expected to happen with the pending second revision of the NAP.”

While there is the potential for Malaysia to break into the regional and international market with a locally produced electric car, it will face stiff competition from both China and Thailand, which have established automotive sectors that include electric car production plants.

With this in mind, Malaysian officials are aware of the need to develop a domestic market for electric cars and their hybrid counterparts. In early May, Mustapa Mohamed, the minister of international trade and industry, announced that the government would offer incentives to Malaysians to buy electric or hybrid vehicles. While there is already a 100% import duty exemption for electric or hybrid cars below 2200 cu centimetres, the minister said additional measures would be enacted to promote the use of electric vehicles.

“We will continue to introduce incentives to accelerate the move towards zero-emission mobility,” Mustapa said. “Our goal is to increase the number of hybrid and electric cars on our roads by 10% by 2020. By then, we hope to be living in a much cleaner and greener environment.”

The government is also encouraging private firms to put in place the necessary infrastructure for these vehicles to operate. On May 29, Peter Chin, the minister of energy, green technology and water, said his department was developing regulations and standards for firms that plan to set up charging stations for electric vehicles. Such measures are needed to create an environment that would generate an interest in the use of alternatively powered cars.

“Until we have charging stations, we are not ready. Once the infrastructure is up, then people will be tempted to buy electric vehicles,” Chin said. “If we want to make it commercial, certain infrastructure must be in place, such as credit card facilities for consumers to pay for charging services.”

The minister also said that an electric vehicle infrastructure plan to enable pilot demonstration projects would be a part of the new NAP.

Local and international manufacturers are likely to wait until the latest version of the NAP is released before making any decisions on whether or not to tap into the electric vehicle sector. However, Malaysia-based vehicle producer Proton and Japan-based Nissan and Mitsubishi are all running trials of battery-powered cars in the country to raise awareness of the plug-in option and test their viability.

If Malaysia is to achieve its ambitious target of cutting emissions by 40%, it will need to move quickly to generate industry interest and acceptance of the new product among the public.

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Malaysia: Going for green

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Malaysia: Pushing on

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Despite an uncertain international climate, Malaysia is set to put in another strong economic performance this year. While growth is not expected to hit the heights achieved in recent years, a rate of 4-5% will serve to keep Malaysia on the right track.

In May, the UN Economic and Social Commission for Asia and the Pacific (ESCAP) announced its forecast for 4.5% growth in 2012, down somewhat from 5.1% last year and 7.2% in 2010. This is broadly in line with most expectations: in March, the Bank Negara Malaysia (BNM), the country’s central bank, forecast growth of 4-5%, while the IMF puts the figure at 4%.

While speaking at the launch of ESCAP’s economic report, Mohamed Ariff Abdul Kareem, a professor at the Kuala Lumpur-based Global University of Islamic Finance (ICIEF), said Malaysia’s economy will be driven both by private consumption at home and commodity exports.

According to Oliver Paddison, the economic affairs officer at ESCAP, countries in the Asia-Pacific area need to increase regional cooperation and realign their economies to increase domestic consumption. This will help offset the effects of a potential drop in exports to the developed world, which has been suffering the effects of debt and growth crisis.

Malaysia is already successfully moving in this direction, building trade with fast-growing emerging markets and supporting domestic demand. As Kareem noted, China is now Malaysia’s largest trading partner, behind Singapore. Overall, exports grew 7.1% year-on-year in the first two months of 2012, according to official figures.

The IMF reported in February that Malaysia’s “growth remains supported by robust consumption and investment”, praising “the ambitious reform agenda to boost potential growth, based on comprehensive diagnoses of the bottlenecks that hinder investment and productivity”.

Malaysia is implementing a number of strategic plans to boost productivity and growth in order to achieve its goal of becoming a “developed country” by 2020. These include the New Economic Model (NEM) and Economic Transformation Programme (ETP), which lay out reforms to increase the private sector’s role in driving growth and expanding value-added sectors in which Malaysia has competitive advantages. Extensive infrastructure investments and urban and rural development plans will also support the economy’s long-term trajectory.

Importantly, investors remain confident about the outlook for Malaysia. A May survey by international investment management firm Franklin Templeton found that 44% of Malaysian investors felt the domestic economy was improving, while only 24% felt it had worsened.

Foreigners are similarly upbeat; official figures show that foreign investment grew 12.3% in 2011, to RM33bn ($10.59bn). Government officials have said this has been spurred by the implementation of the NEM and ETP, as well as closer ties with other countries in the region.

Zeti Akhtar Aziz, the governor of the BNM, has said that domestic demand and investment by the private sector remain “highly robust”, despite global difficulties and some local inflationary pressures. Inflation is expected to be between 2% and 3% this year, underlining Malaysia’s reputation for macroeconomic stability, developed since the 1997-98 Asian financial crisis.

While the outlook for this year and beyond is indeed positive, officials and analysts are aware of the challenges Malaysia must tackle to continue its growth path.

In the IMF’s view, foremost among these is the need to maintain fiscal consolidation. The budget deficit is expected to be around 5.1%, down from 5.5% in 2011, but unsustainable in the long term, particularly given the country’s relatively high public debt.

The ICIEF’s Kareem identified over-reliance on oil and gas income (which contribute around 40% of the government’s revenue) and an unwieldy subsidy regime (which costs about 4% of GDP) as issues the government should address to strengthen its fiscal position in the future. Subsidy cuts proposed in 2011 are currently on hold due to concerns regarding the effect on inflation.

As the IMF stated, Malaysia has done well to bring down the deficit in recent years. To continue its growth path, Malaysia aims to push on with its ambitious reform and investment programmes, which should strengthen the business environment, broaden and deepen its export markets, and accelerate diversification.

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Malaysia: Pushing on

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Malaysia: Capital markets eye pension fund inflow

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

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

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

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

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

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

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

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

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

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

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

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

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

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Malaysia: Capital markets eye pension fund inflow

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