Merger plans set to transform Malaysian banking sector

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

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

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

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

Slow start

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

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

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

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

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

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

Regional aspirations

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

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

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

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

Integration hurdles

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

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

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

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

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Moving ahead with Malaysia’s trade pacts

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

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

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

Compromises

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

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

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

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

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

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

Small may be best

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

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

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

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

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

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

Export growth

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

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

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

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Malaysian markets to gain from pension planning

State agencies and the private sector are combining to promote private pension schemes, both as a measure to strengthen provisions for Malaysians in retirement and to boost liquidity in the nation’s capital markets. However, longer-term success will depend on convincing the younger segments of society of the need to prepare for life after work.

Malaysia is trying to move away from state-funded pension schemes and a traditional reliance by the elderly on family support in its planning for a society with higher incomes but also an ageing population. At the core of this is the Private Retirement Schemes (PRS) initiative, a range of investment funds intended to offer Malaysians the option of building up a private pension as a supplement to a state pension and the existing mandatory private pension scheme administered by the Employees Provident Fund (EPF).

Launched in mid-2012, there are now eight PRS providers, providing 44 PRS funds among them, with take-up of the scheme starting to gain momentum. As of end-December 2013, PRS providers have some RM280m ($86.87m) worth of assets under management, a figure that is expected to double by the end of this year. According to the Private Pension Administrator (PPA), the central administrator of the PRS industry, the contributor base will grow from 65,000 members as of the end of 2013 to between 140,000 and 150,000 by the end of 2014.

The need for Malaysia to increase retirement coverage for its population is becoming more pressing. While the population base is still young, that situation is changing, with more than 11% of citizens expected to be 60 years of age or older by 2020. According to estimates from the World Bank, some two-thirds of Malaysians are currently not adequately prepared for retirement, meaning that the state will have to carry an increasing burden in the coming decades unless there is a far greater take-up of private pension schemes.

Planning for the future

According to Steve Ong, the chief executive officer of PPA, more Malaysians need to ensure their financial security in the post-employment years.

“Currently, the income replacement ratio of an average Malaysian is at 30%, which falls short of the two-thirds, or around 66%, recommended by the World Bank. The two-thirds replacement ratio is to provide the financial means to continue with the same living standards and lifestyle one has become accustomed to when retired,” Ong told OBG.

“With the PRS, PPA envisages that over time the Malaysian public will have two retirement funds, namely the EPF and PRS, to support their retirement years,” he said.

Younger customers targeted

To deepen the savings pool and to spread out the demands on state-funded pension schemes, the government raised the minimum retirement age from 55 to 60 last year. This move allows workers to make a further five years of EPF contributions and also gives older workers the chance to buy into PRS funds.

In planning for the future, the government and fund managers have been looking at the younger segments of society, those under the age of 30, as being the priority target for the PRS market. At present, only 6% of contributors to private pension schemes are below the age of 30, according to PPA data. The agency hopes this will rise to 20% by the end of 2014 as promotional initiatives, including an incentive scheme launched in this year’s budget offering a one-off top-up contribution of $150 from the state to new subscribers, boost interest.

Capital markets boost

If, as expected, younger Malaysians start to buy into PRS, this will provide a sharp influx of funds under management, which in turn will serve to add long-term liquidity to the country’s capital markets, with pension investors not looking for a payout for 30 years or more.

In mid-March, the chairman of the Securities Commission, Ranjit Ajit Singh, said that the collective investments segment, which will increasingly be driven by pension funds, has a strong potential for growth. The market regulator will take steps to further expand PRS distribution channels and promote the use of employer-sponsored schemes as part of broader measures to encourage a more sustainable retirements savings culture, he said while launching the commission’s 2013 annual report.

If PRS providers are able to maintain the rate of growth foreseen by PPA through to 2020, they will have a massive asset base at their disposal. PPA anticipates funds under management by PRS providers reaching $9.5bn, even with the rising level of payouts expected by the end of the decade. This will make the funds managed by PRS providers a significant factor in Malaysia’s capital markets, one that is expected to see greater demand for long-term bonds and other longer-term asset classes, adding depth to the market and further strengthening its appeal to investors.

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Mixed reaction to Malaysia’s debt levels

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

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

Vetting brings improvements

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

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

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

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

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

Conflicting sentiment

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

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

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

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

Supporting transformation

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

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

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

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

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Malaysia’s universities working to make the grade

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

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

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

Working to make the grade

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

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

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

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

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

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

Academic credence, economic gain

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

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

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

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Malaysia braced for austerity challenge

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

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

Domestic demand’s key role

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

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

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

High household debt

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

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

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

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

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

Effect of new budget

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Foreigners eased out of the low end of the market

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

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

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

Boost for low-cost residential segment

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

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

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

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

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Malaysia’s palm oil industry faces tough market

The palm oil industry in Malaysia appears set for an uncertain few months, with a number of factors coming into play over the last quarter of the year that could push already low prices down even further, just at the time when production is about to peak.

As of the end of September, Malaysian palm oil prices were down 6% on the beginning of the year. Moving into October, the commodity was trading at $716 a tonne, with predictions it could fall further in the lead-up to the new year.

Malaysia has seen output rise monthly through to August, and while September’s figures have yet to be released, it is expected that volume will again be up. Some estimates put September’s production at close to 2m tonnes, a sharp jump from the 1.74m tonnes of the month before, which itself represented a 3.6% rise over July. This continued increase in output, which is likely to be maintained for the rest of the year – the high season – could further force down global prices as supply overtakes demand.

Also bearing on palm oil prices is the rising tide of soy oil flowing into the market, with the US soy crop set for a better-than-expected harvest and soybean stocks at higher levels than normal for this time of year. This has pushed soybean prices down to near two-year lows as of early October, a trend that will undercut demand for Malaysian palm oil.

Falling oil prices also set to weigh on sales

Another factor weighing down palm oil sales and pressuring prices is the drop in the cost of conventional crude oil. With oil prices falling, there is less appeal for biofuels in the market, and rising output from Libya combined with concerns over demand in the US as part of the fall-out from the shutdown of government, have pushed oil prices down. Benchmark Brent crude was trading at less than $108 a barrel in early October; WTI crude was lower still, dipping below $102, with analysts predicting a further decline in the weeks ahead as price instability posed by a potential US military strike against Syria recedes.

According to Dorab Mistry, head of vegetable oil trading with Indian conglomerate Godrej Industries, palm oil could fall to a four-year low of $617 a tonne in 2014 if crude oil prices go below the $100-a-barrel mark. This would represent a 13% fall on present prices, Mistry told an industry conference in late September.

“The fundamentals of the oilseed and vegetable oils complex are clearly bearish,” he said.

One factor that could boost sales is the drop in the value of the ringgit, which has retreated almost 9% since May. This has made exports more appealing, at least in some markets, though not in those that, like Malaysia, have been hit by the outflow of funds from developing economies. While the weaker ringgit may boost overseas sales, an easing of local currencies against the dollar has taken place in many of Malaysia’s key markets, such as India where the rupee has fallen by 12% since the beginning of the year. This means that any advantage accrued from the devaluation of the ringgit is offset by similar downward moves elsewhere.

Government plans could drain off excess

While palm oil producers may face difficulties in boosting sales abroad, help may be at hand at home. The government has said it is considering lifting the levels of palm oil added to diesel fuel as a way of boosting domestic demand. Malaysia requires a 5% palm oil additive to diesel; the resulting biofuel accounts for a significant portion of palm oil consumption, with nearly 250,000 tonnes of palm oil/diesel blend consumed in 2012, a figure the state aims to double by 2014. Indonesia recently announced it would be raising its palm oil input to biodiesel from 7.5% to 10% next year. Any similar move by Malaysia would help soak up excess production, though the government has yet to set any timeframe for an increase or how far above the current levels the rise would be.

Further state support came in mid-September, when the government decided to keep taxes on palm oil exports unchanged in October, maintaining the 4.5% tariff that has been in place since March. The decision is expected to help boost overseas sales during the peak harvest season and reduce the risk of a large build-up in stockpiles.

It may not be until well into the new year, when local production tapers off, that prices may start to move upwards to any significant degree, though crop losses due to adverse weather or a sudden jump in crude oil prices could give a boost to Malaysia’s palm oil sales. For the present, it seems the best producers can hope for are steady sales and for prices to remain at current levels.

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Malaysia’s palm oil industry faces tough market

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Malaysia’s oil and gas services looking farther afield

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

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

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

Production on the rise

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

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

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

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

Firms eye new ventures

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

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

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

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

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

Offshore drilling fuels demand

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

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

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

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

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Malaysia’s oil and gas services looking farther afield

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Malaysia 2020 targets elusive at current trajectory

Despite a low inflation rate and relatively stable sovereign and corporate balance sheets, Malaysia is set to miss the targets set out in its Vision 2020. As part of a long-term analysis of the South-east Asian country, Oxford Business Group recently contributed an article entitled ‘The Malaysian Quandary’ to local media website FMT, looking at the basis for this assessment and calling into question the private sector’s reliance on the government.

We invite you to read the full article and join a vibrant discussion about the Oxford Business Group view on Malaysia . We encourage you to share the link with others who might be interested.

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Malaysia 2020 targets elusive at current trajectory

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