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Malaysia: Religious tourism boost

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Having been ranked the friendliest country for Muslim holidaymakers for the third year running, Malaysia has confirmed its position as a premier halal tourism destination. However, its position – and the revenue that comes with it – could be challenged by regional rivals seeking to cash in on the lucrative market.

The tourism sector is already a major contributor to the Malaysian economy, directly generating $21.4bn in 2012, the equivalent of 7% GDP, according to the latest report on the global industry’s economic impact, issued by the World Travel & Tourism Council (WTTC). The council’s report for 2013, released at the end of February, said tourism provided direct employment to more than 800,000 Malaysians, some 6.5% of the active workforce.

However, when indirect factors – such as state spending on tourism-related infrastructure and support, the supply and purchase of goods and services, transport, information technology and utilities – are taken into consideration, tourism’s total contribution to the economy came to $48bn, or 15.6% of GDP, and accounted for 1.7m jobs, 13.6% of the total.

The WTTC has also forecast Malaysia will continue to build on its achievements, with total tourism revenues expected to reach $81.5bn by 2023 on the back of a sharp increase in arrival numbers over the coming decade, as the number of visitors is projected to rise from 27m in 2013 to 45m in 10 years.

According to Jamil Bidin, CEO of local firm Halal Industry Development Corporation (HDC), Malaysia has made itself into a leading destination for visitors from the Middle East by making its halal brand what he called, “a seal of guarantee for consumers”. “If you want to encourage Muslim tourists to come to your country, halal-certified products and services are required,” Bidin told reporters at a halal trade fair in Kuala Lumpur in early April.

The international halal tourism trade is estimated to be worth more than $125bn per year, some 12.3% of the global outbound tourism market. This figure is set to rise by an estimated 4.8% annually through to 2020 – well above the forecast 3.8% global average – as disposable incomes in many Asian and Middle Eastern countries increase. Malaysia has already positioned itself to take a significant slice of the existing and future trade, being ranked first for the past three years in an international survey for being halal tourism friendly.

The annual market assessment, based on a number of factors, including the availability of halal food, prayer facilities, and halal-friendly accommodation, was carried out by Singapore-based consultancy and research firm Crescentrating. According to Fazal Bahardeen, CEO of the firm, the survey was conducted from the point of view of the traveller, meaning that it measured the ease of access by Muslim tourists rather than locals to halal food and services, with Malaysia scoring well across the board.

Malaysia’s continued strong showing was largely due to the fact that authorities have been focusing on the market for a number of years, he said. “Malaysia remains the top destination for Muslim holidaymakers,” said Fazal. “It is still the best place to enjoy your holiday and at the same time be completely worry-free when it comes to finding halal food and prayer places almost everywhere.”

Malaysia also benefits from being within a single flight of much of the world’s 1.7bn Muslims, as it has direct links to the Middle East, the Indian subcontinent and Asia.

While Malaysia may head the Crescentrating rankings, it is likely to face increasing competition from regional rivals in the years to come. The survey found that Indonesia was lagging when it came to catering for halal tourism, though Jakarta has announced it will launch a multi-faceted programme in June that aims to better Indonesia’s tourism sector to perform in the sharia-compliant segment of the global market. Singapore and Thailand also have strong market potential and hope to begin competing with Malaysia.

Under the government’s Tourism Transformation Plan 2020, launched in 2010, Malaysia is aiming to attract 36m overseas visitors by the end of the decade, a target it seems to be well on track to achieving, having seen arrivals hit a record 25m in 2012, some 40% up on the 2005 total. Similar progress over the next seven years will put Kuala Lumpur’s goal well within reach and on the road to the 45m the WTTC has forecast for 2023.

The Ministry of Tourism estimates that almost one-quarter of inbound visitors come from Muslim countries, which makes the need to maintain the flow of new services and facilities for this market essential to further growth and development of the sector, as well as to ensure it stays ahead of regional and international rivals.

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Malaysia: CPO Power

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After a slow year in 2012, Malaysian officials expect exports of crude palm oil (CPO) to expand in 2013. Prices that have fallen due to oversupply and slower demand are now on the rise again, and though they may moderate in the second half of the year, an average steady climb over the next two years seems likely.

CPO is a major export earner for the country, which is the world’s second-largest producer of the product. In 2012 Malaysia exported RM71.5bn ($23.03bn) worth of palm oil, down from RM80.4bn ($25.9bn) in 2011 – an all-time high. The 11% drop was largely attributed to a fall in CPO prices caused by a number of factors, including the uncertain international economic environment, a production glut and controls on the CPO trade. The average CPO price fell 27% year-on-year (y-o-y) and 24% quarter-on-quarter in the last quarter of 2012.

Despite this, officials believe the long-term outlook for CPO exports looks sound. In February Hamzah Zainuddin, deputy minister of plantation industries and commodities, said he expected CPO exports to exceed the 2011 record within three to five years. Even given ongoing issues of inventory surplus, the ministry forecasts growth in 2013, partly thanks to an export tax cut.

From January, the government brought the levy down from 23% to a sliding scale between 4.5% and 8.5%; if the CPO price falls below RM2250 ($725), the tax will be cancelled. Meanwhile, Indonesia, the world’s largest CPO exporter, raised its export tax from 7.5% to 9% in January.

Mohammad Jaaffar Ahmad, CEO of the Palm Oil Refiners Association of Malaysia (PORAM), said his members were already “seeing better margins as they ramp up production”. Jaaffar said rising exports would help lower Malaysia’s inventory, which was in substantial surplus at 2.53m tonnes at the end of January 2013, to a “manageable level” of 2m tonnes.

In the first half of February, Malaysian palm oil shipments rose 18%, to 673,555 tonnes, following a 10% decline in output and 1.6% fall in exports in January, the former partly attributable to a run-down of existing stocks and seasonal factors. Rabobank, a Dutch agricultural bank, said it expected Malaysia’s palm oil production to fall 2% y-o-y in the first six months of 2013 as the inventory is fed into exports. However, Malaysia-based Kenanga Research said that it did not expect stocks to fall below 2m tonnes in the first quarter of 2013 due to lower export demand.

Jaafaar said he expected the price of CPO to rise as inventories ran down. In early February, it climbed to around the RM2250 ($725) tax threshold, and by the end of the month, it stood at RM2330 ($751). Meanwhile, futures for delivery in April topped RM2500 ($805) in mid-February. Officials take the view that prices have now bottomed out, as the surplus falls and a number of demand factors kick in, but also due to a seasonal drop in production.

Local press reported that analysts expect prices to rise to RM2600-2700 ($838-870) by the middle of 2013. Kuala Lumpur-based RHB Research Institute, part of bank RHB, has said it has a price assumption of RM2800 ($902) per tonne for 2013, rising to RM3000 ($966) in 2014. It expects prices to fall again in the second half of this year due to the seasonal rise in output.

Meanwhile, Kenanga expects an average price of RM2500-2700 ($805-870) this year and next, and takes a more bearish view on planters’ stocks than some of its counterparts. PublicInvest Research has a neutral recommendation, expecting an average price of RM2750 ($886) this year and RM2850 ($918) in 2013.

As ever, CPO prices will be strongly influenced by the global economic situation, particularly by major importers, such as China and India. India’s proposal to levy a tax on CPO imports concerns Malaysian planters, for whom the country is the second-largest market. With the worldwide economy expected to grow only moderately in 2013 and 2014, it is little surprise that CPO prices are unlikely to reach the peaks seen five years ago. However, as oversupply moderates, a steady rise should boost the sector.

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Malaysia: Year in Review 2012

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It has been another year of good growth for Malaysia, even as the international economic climate has been uncertain. Strong domestic demand, government investment, greater diversification and regional resilience have all played their part.

GDP growth is expected to hit 5% this year or possibly exceed it, according to several analyses. The economy has been supported by higher incomes and accommodative monetary policy, as well as by government spending. Malaysia has been pushing ahead with its Economic Transformation Programme (ETP), which seeks to lift the country to its long-term target of achieving middle-income status by 2020.

To this end, the ETP entails large-scale investments in infrastructure, health and education, as well as interlinked efforts to push key sectors further up the value chain, in order to reduce Malaysia’s reliance on raw material exports and increase skill and income levels.

After talks between Malaysia and Singapore in January, the two countries agreed to strengthen transportation links to benefit bilateral trade and the construction sector. Progress has been made on a $9.7bn mass-transit railway system linking Malaysia’s southern Johor state and Singapore, which is part of a new line that will cut travel times from Kuala Lumpur to Singapore from six hours to 90 minutes.

In May, the international business press reported that AECOM Technology had been awarded the $42m contract for the design and engineering study for the Malaysia-Singapore Rapid Transit System (RTS) link by the relevant Singaporean and Malaysian authorities.

Infrastructure development also entails the expansion, upgrading and diversification of Malaysia’s power-generation capacity. In May, Peter Chin Fah Kui, the minister of energy, green technology and water, announced that Malaysia would increase the proportion of electricity it generated from coal to 44%, up from 30%, and lower the share derived from gas to 46% from 60%.

The government’s desire to lower dependency on gas supply was informed by rising gas prices, and a desire not to pass them on to customers, as well as by a connected gas supply shock in 2011. In May, the government confirmed plans to invest $3bn through state power firm Tenaga Nasional to construct two new hydropower plants and two new coal-fired stations, with a total of more than 2500 MW of installed capacity.

Meanwhile, further generation capacity is needed to support the demands of Malaysia’s manufacturing sector, which has performed well in 2012. Industrial production rose by 4.9% in the first nine months of 2012, according to official data. Manufacturing output rose by 5.2% year-on-year, while the other segments included in industrial production – mining and electricity – grew by 5.9%.

Growth came despite the uncertain global economic climate, which was affected by the eurozone crisis, the US’s debt problems and slowdowns in major emerging markets. However, strong domestic demand has helped manufacturers offset slower exports.

Together, manufacturing and mining contribute 35% of GDP, so the expansion of industry has been key to the economy’s good performance in 2012. Next year seems likely to see similarly healthy levels of GDP growth, as both upside and downside risks from 2012 are likely to continue into 2013. On one hand, the Malaysian economy should continue to benefit from its realignment towards domestic demand, supported by an expected maintenance of low-interest rate policy and the further roll-out of the ETP. The development of value-added industries, as well as service sectors such as tourism, should also help the economy.

On the other hand, Malaysia cannot be immune from international events. A significant worsening in the eurozone, the US, or a “hard landing” slowdown in China would undoubtedly have an impact. The Malaysian general election, due by June 2013, may also create an element of political uncertainty, though it is also spurring government spending. The economy, particularly government finances, remains sensitive to fluctuations in commodity prices, including that of oil.

Observers are split on whether there will be a slowdown, or if the economy can accelerate further. The UK’s Institute of Chartered Accountants in England and Wales sees a drop to 3.8%, and international investment bank Nomura expects a fall to 4.3% from 5.3% in 2012. Manokaran Mottain, the chief economist at Kuala Lumpur-based Alliance Investment Bank, forecasts a slight fall to 5% from the 5.2% he expects this year. The independent Malaysian Institute of Economic Research, however, forecasts a pick-up from 5.1% to 5.6%.

Policy-makers will be keeping a keen eye on the international environment, as Malaysia cannot go it alone. However, next year should see the developed and diversified future economy envisaged by the ETP move closer.

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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: Targeting tourism growth

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The hospitality sector, one of the region’s largest, is continuing to see visitor numbers grow this year, boosted by better transport connectivity with large emerging markets. This development is increasingly being linked with Malaysia’s overarching strategy of raising revenues and value in key economic sectors, a theme that is set to dominate the next few years.

According to Ng Yen Yen, the minister of tourism, Malaysia registered 11.63m arrivals in the first half of 2012, up 2.4% over the same period in 2011. Receipts grew more rapidly, increasing 4% over the same period to RM26.8bn ($8.81bn). Ng attributed the continuing rise in visitor numbers in part to improved connectivity (particularly with China) and events such as the F1 Malaysian Grand Prix and the Citrawarna cultural festival.

Other members of ASEAN accounted for around 73.8% of arrivals. Singapore, which has close cultural, economic and social ties to its northern neighbour, remained by far the biggest source of visitors, with 5.83m arrivals in the first half of this year. This number is likely to have been somewhat boosted by shuttle traders, who pass over the border on a regular basis, and day-trippers.

The other largest contributing countries were: Indonesia, with 1.11m arrivals; China (758,000); Thailand (639,000); Brunei Darussalam (588,000); India (365,000); Australia (243,000); the Philippines (238,000); Japan (216,000); and the UK (197,000). Arrivals from China were up 34.2% on the first half of 2011, India (6.9%) and Russia (28.2%). There was also impressive growth from established markets, including France (20.6%); the US (18.9%); South Korea (18%); Japan (32.5%); and the UK (5.9%).

Analysis of the figures by Tourism Malaysia, the official promotion and development agency under the Ministry of Tourism, indicates the importance of enhancing air connectivity in stimulating this growth. The organisation partly attributes the rise in arrivals from China to an increasing number of flights between Beijing and Kuala Lumpur, and Hong Kong and Penang and Kota Kinabalu, two major regional tourism centres.

Similarly, the increase in Japanese and Korean visitors is partly due to more flights between provincial cities in those countries and Kuala Lumpur and Kota Kinabalu. By the same token, Tourism Malaysia attributes declining visitor numbers from New Zealand, Australia and South Africa to fewer flights being operated. Meanwhile, Vijay K Gokhale, India’s high commissioner to Malaysia, said that if AirAsia restored flights to Delhi and Mumbai, which were suspended in March, Indian visitors to the South-east Asian market could rise to 1m annually by 2015 from around 693,000 in 2011.

With the importance of connectivity and tapping expanding markets in mind, the tourism authorities are continuing to work with Malaysian Airlines and AirAsia, the country’s two main carriers, to develop links internationally, and will continue to seek bilateral agreements with countries such as Russia to increase visitor traffic.

However, increasing visitor volumes is not the only priority. Indeed, over the coming years, this strategy seems likely to become less important than efforts to boost value and diversification. Malaysia’s Economic Transformation Programme (ETP), the government’s overarching strategy to push Malaysia towards developed-country status by 2020, notes that the country is a “high arrivals, low yield” tourism market.

The aim is to keep visitor numbers rising while building considerably greater value in the sector to increase earnings per tourist arrival. Tourism has been identified as a National Key Economic Area (NKEA) under the ETP, with the goal of attracting 36m visitors and generating RM168bn ($55.26bn) in tourism receipts by 2020.

In practical terms, this means focusing on high-value niche segments. The ETP has identified five such segments: luxury; nature adventure; family; events, entertainment, spa and sports; and business tourism. To develop these niche areas, a number of existing segments will need to be promoted, such as ecotourism and meetings, incentives, conventions and exhibitions (MICE). Malaysia will also need to be rebranded to well-heeled visitors as a “luxury” destination, leveraging the increasing number of top-end hotels, resorts and shopping malls.

Malaysia is in the fortunate position that it already has existing business in these high-value areas, as well as a strong international brand as a destination. But to meet the ETP’s targets, considerable investment will be needed, particularly from the private sector, in keeping with the plan’s priorities.

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Malaysia: Speculation over real estate levies

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With the aim of maintaining real estate prices at a reasonable level and to rein in any property speculation, the government is considering the use of tighter fiscal policies that have met with a mixed response from industry players.

Speaking on the sidelines of the 15th National Housing and Property Summit, held in Petaling Jaya on August 28, Chor Chee Heung, the minister of housing and local government, said there was a strong need for better government policies to maintain reasonable and affordable property prices, and to ensure sustainability in the real estate sector as Malaysian property prices steadily increase.

“The government has to mitigate excessive investment and speculative activity in the property market so as to prevent a property bubble,” said Chor. “To ensure sustainable housing development, all parties – including the state government, developers and government-linked companies – must keep abreast of real demand and the affordability level of locals for housing, especially in the Klang Valley.”

One of the tools the government has at its disposal to cool the real estate market is the Real Property Gain Tax (RPGT). As of January 1, charges under the RPGT were set at 10% on profits for real estate owned for two years or less and 2% for those owned between two and five years, with no tax on gains for properties sold after that term. Previously, a 5% tax was imposed if a property was sold within five years, with no tax levied on the capital gains if the sale was made following five years of ownership.

The tax on capital gains from property sales has undergone several adjustments in recent years. Prior to 2007, when the tax rate was cut to 5%, it reached as high as 30% for sales conducted within the first two years of ownership.

Jeffrey Cheah, the chairman of Sunway, a local property developer, said it was important for the government and the real estate industry to work together, adding that it was vital the government did not implement drastic measures that could slow down the property market.

“The government should not increase the RPGT. I also hope it will not further restrict lending to the property sector or introduce new measures that will make it more difficult for home buyers to purchase properties,” Cheah said at the end of August.

Unlike some in the industry, who are concerned that Malaysia’s real estate sector is overheating, Cheah said he was confident that no bubble was emerging. “Our property prices are still affordable compared with neighbouring cities in the region,” he said.

Another organisation to urge caution is the Real Estate and Housing Developers Association (REHDA), which said that the capital gains tax on property should either be left untouched or be lowered to its former level.

“Under the current market conditions, such as the softening market, early signs of better growth of the economy, and the uncertainties of the US and eurozone economies, we urge the government not to interfere with the existing policies, which are business friendly,” REHDA said in a statement in The Malaysian Star on August 21.

The Malaysian Developers’ Association (MDC) also spoke out against any increase in the RPGT or in stamp duty – another policy option available for use by the government – stating that much of the rise in property prices could be attributed to higher materials costs, rather than speculation.

“Increases in basic building materials, which are major components of construction, land and compliance costs, will ultimately lead to higher selling prices of homes,” the MDC said in a statement issued in early August.

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Malaysia: Rolling out plans for ICT

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

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

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

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

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

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

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

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

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

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

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

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Malaysia: Forecasting growth in insurance

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The insurance sector is forecast to see substantial growth in the next few years as continued diversification, consolidation and international activity spur rising premiums and uptake of new services. Moderate GDP growth for the rest of the year, however, could pose a challenge to growth as the effects of a weakening global economy trickle down to private consumers.

Gross direct premiums are expected to reach RM14.3bn ($4.48bn) in 2012 and rise to RM17.5bn ($5.49bn) in 2015, according to the Malaysia Rating Corporation (MARC), a full-service ratings agency, which released its forecasts in a research note in June. This represents a compound annual growth rate (CAGR) of 7%, which is likely to outstrip broader economic growth.

MARC expects new business premiums in the life insurance segment to reach RM10.2bn ($3.19bn) this year, rising to RM13bn ($4.08bn) by 2015. The non-life (general) segment is also forecast to grow from RM4.1bn ($1.29bn) in 2012 to RM4.5bn ($1.41bn) in five years’ time.

The agency said that the life insurance market would benefit from rising incomes, as well as increased deployment of “new and innovative products”. General insurance would see growth stimulated by the implementation of mega-projects, leading to greater demand in a number of segments, including workers’ compensation, employer liability, contractor risk and engineering. The medical and personal accident segments will also continue to perform well, MARC said.

Other observers are even more upbeat about the sector’s outlook. In May, the local press reported that the Life Insurance Association of Malaysia (LIAM) said the life sector could grow by 10% in 2012. Growth would be driven by “the large and growing middle-income population in the region with higher levels of disposable income and who are also financially literate,” Donald Joshua Jaganathan, the assistant governor of Bank Negara Malaysia, the central bank, has said.

The market’s recent growth and promising outlook have led several major international players enter the market. In 2009, the government lifted the ceiling on foreign ownership of insurers to 70% from 49%, allowing greater participation from international firms, which have brought an increased level of dynamism to the industry.

Competition is expected to rise further following the pending auction of the insurance joint venture between the UK’s Aviva and Malaysia’s CIMB Bank. Aviva is selling its 49% share in the local firm as it withdraws from non-core markets, partly to raise cash to offset its exposure to the eurozone crisis. CIMB may also sell a substantial portion of its 51% stake in the venture.

Competition, greater international participation and a new risk-based capital (RBC) framework are also driving consolidation in the industry, as players look to pool resources and capitalise on economies of scale and strategic fits. The RBC regulations require firms to have a minimum 130% of supervisory capital-adequacy ratio (CAR).

According to Matt Harris, the CEO of Chartis Malaysia, the local branch of the international insurer, “RBC implementation helped accelerate the pace of consolidation, with seven mergers and acquisitions taking place in 2011. Many of the local conglomerates took RBC as an opportunity to consolidate. It is widely known that other existing players in the market would entertain potential suitors if approached, so more consolidation is expected.”

Harris told OBG that he expects the sharia-compliant Islamic insurance segment – known as takaful – to continue to grow strongly. In June, the local press reported that Etiqua Insurance & Takaful, the insurance branch of Maybank, the country’s largest bank, has forecast that the family takaful market, which accounted for 80% of the Malaysian takaful segment in 2010, could grow to RM7.2bn ($2.26bn) in two to three years from the current RM4.2bn ($1.32bn).

CAR regulations for the takaful segment similar to those rolled out for conventional insurance are being introduced and are expected to be in effect by the beginning of 2013. While the Malaysian Takaful Association is confident that existing industry players will be able to meet the new requirements, Tunku Dato’ Ya’acob Bin Tunku Tan Sri Abdullah, the CEO of MAA Group (MAAG), which has interests in the takaful sector, told OBG that he expected the new legislation to catalyse mergers and acquisitions in the segment.

According to Abdullah, conventional insurance firms owned by banks have survived better since the CAR regulations were tightened, as the high profits of the banking divisions have funded the increased capital requirements of the insurance business. The insurance divisions, which tend to make a smaller contribution to profits, are not able to meet the significant increase in CAR themselves.

With the insurance market in the process of dynamic change, due to rising demand and regulatory changes that aim both to increase solidity and allow greater international participation, consolidation, diversification and the rise of the takaful segment look set to transform the sector over the coming years.

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Malaysia: Forecasting growth in insurance

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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: 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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