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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Mixed reaction to Malaysia’s debt levels

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Malaysia: Banks shift lending patterns

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

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

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

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

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

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

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

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

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

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

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

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

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

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Malaysia: Targeting tourism growth

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: Investing in health

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

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

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

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

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

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

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

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

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

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

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

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

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

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Malaysia: Steady growth

Healthy domestic demand is expected to drive growth in Malaysia’s banking sector this year as public projects help to stimulate lending. While international factors mean banks may take a more cautious outlook, the system as a whole is well capitalised and soundly managed, standing it in good stead for the future.

Loan growth is expected to reach some 8-9% this year, according to a recent report from RAM Ratings, a Malaysian credit research and advisory firm. Though good, this is much lower than 2011, when banks’ loan books grew by 14%. According to Wong Yin Ching, the head of financial institution ratings at RAM, the banking system is “shifting into lower gear”. Lending is likely to slow somewhat due to banks’ caution about the global outlook, but Yin Ching noted that, “the local banking industry is still fundamentally sturdy and the domestic economy remains resilient”.

Indeed, despite some uncertainty over the effects of the eurozone crisis, Malaysia’s domestic position looks strong, with a number of factors likely to support the growth of banks. GDP is expected to expand by 4-5% this year after growing 5.2% in 2011, according to the IMF, and continued low interest rates should drive banking expansion.

RAM expects Bank Negara Malaysia (BNM), the country’s central bank, to keep interest rates low, sticking to the current overnight policy rate of 3% – or possibly even lowering it if it sees the need to stimulate growth. This is good news for the country’s developers, who will likely need project financing to fund a number of big-ticket projects planned under the Economic Transformation Programme (ETP) and the 10th Malaysia Plan (10MP).

The firm’s analysis of the outlook is broadly shared by Standard Chartered Bank Malaysia, which expects single-digit retail loan growth this year. Tiew Siew Chuen, the country head of consumer banking at Standard Chartered, told local press she expected new BNM guidelines to cool retail lending, but the stimulus from the ETP would help support commercial loan growth, particularly to the rising small and medium-sized enterprise (SME) segment.

RAM expects the sector’s gross impaired-loan ratio to rise only slightly in 2012, from 2.7% to 3%. The loans-to-deposits ratio was 76% at the end of January, a “comfortable” level that the report suggests will be maintained through the year.

The health of the banking sector is heartening for foreign investors and Malaysian businesspeople alike, as it is clear the system has been successfully reformed since the 1997-98 Asian financial crisis. BNM is well regarded for its oversight of the sector and is largely responsible for the leaner, stronger and better-managed banking system that exists today.

To keep banks up to speed on best practices, structural reform is ongoing, with plans to implement Basel III requirements, as well as its own Financial Sector Blueprint 2011-20 (FSB). The implementation of Basel III capital requirements is due to start in 2013 and will be complete by 2019. RAM expects most Malaysian banks to have little difficulty in meeting the new standards, which will help bolster the system against shocks.

The FSB follows on from the successful Financial Sector Masterplan of 2001-10 and has been expanded further to liberalise banking, opening it to more international participation and boosting Malaysia’s role as a regional financial centre. Industry leaders and analysts have welcomed the reforms, though some questions remain about the specifics of implementation.

“There is no issue with the contents of the new FSB 2011-20, but the issue is what the timeline will be,” Sanjeev Nanavati, the CEO of Citibank Malaysia, told OBG (Oxford Business Group). “There are a lot of things to be achieved over a 10-year period, but it is unclear which of these are more urgent than others. Specificity in terms of timelines would be helpful.”

Malaysia’s banking sector has seen quite an overhaul in the past decade and is now a model of stability. While it seems likely that the international situation will slow lending somewhat in 2012, it will still rise at a respectable rate, and the long-term path should see further growth and reform.

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Malaysia: Ties that bind

The recent strengthening of bilateral ties between Malaysia and Singapore bodes well for their construction sectors, as several planned projects between the two countries should bring lucrative business opportunities to both. A foreseen labour shortage in Malaysia, however, could stymie some projects’ development.

The construction and services sectors are expected to be the Malaysian economy’s main growth drivers in 2012 amid a forecasted drop in exports due to the difficult global economic environment. The government has targeted growth of 7% for the construction sector in 2012.

“Thus, construction projects will be a key economic stimulus due to their multiplier effect,” said Kwan Foh Kwai, the president of the Master Builders Association Malaysia (MBAM), when speaking with local media outlets at the end of December.

On January 5, the leaders of Malaysia and Singapore announced plans to boost transport links between the two nations, with a road tunnel and water taxi service the first of many projects.

Plans are already under way for joint operations to begin building projects worth $9.8bn and a mass-transit railway system linking Malaysia’s southern Johor state and Singapore that could begin operations by 2018. The leaders said they are also now looking to partner in areas such as aviation, with Malaysia’s Senai International Airport potentially cooperating with Singapore’s Changi Airport.

“There are many more areas for potential cooperation,” Malaysian Prime Minister Najib Razak told reporters in early January after talks with Singaporean Prime Minister Lee Hsien Loong. “All the current agreements that both countries have managed to reach will pave the way for stronger bilateral ties.”

The agreement was widely seen as symbolic of continued improvements in relations between the two neighbours, which between 1963 and 1965 formed one nation. Relations improved in 2011 when a decades-old land usage dispute was resolved, which saw Malaysia agree to relocate its railway station away from Singapore’s central business district.

Both governments appear to be eager to continue the process. “There should be more new initiatives taken between both countries,” the Singaporean prime minister told local reporters.

Examples of these new initiatives are many. Last year, Khazanah Nasional and Temasek Holdings, the state-owned investment companies of Malaysia and Singapore, respectively, announced plans to cooperate on property projects, including $8.67bn of retail and residential developments in Singapore’s downtown area. These developments will incorporate the former site of Malaysia’s train station.

The two investment firms also plan to jointly construct RM3bn ($968.73m) of projects in Malaysia’s southern Iskandar economic development zone region that will include retail and residential offerings. Located adjacent to Singapore, at the apex of Malaysia’s East Coast Economic Corridor (ECER), Iskandar is a territory of around 2217 sq km.

“The development of Iskandar and its success is very important for Singapore as it will benefit both sides in many ways,” said the Malaysian prime minister.

The planned railway linking southern Johor state and Singapore will make Johor Baru City — long the entry point for many visitors to Malaysia from neighbouring Singapore — something of a satellite city for Singaporeans, who are keen to take advantage of Iskandar’s much lower cost of living.

However, there has recently been a shortage of foreign labour in Malaysia, causing some to question how all these projects will get built – and causing some sector leaders to call for immigration changes to address this issue.

Foreseeing such an industry-wide labour shortage on the horizon, the MBAM appealed on January 20 to the Home Ministry to lift a temporary suspension of workers’ quota applications.

MBAM’s Kwan said the ministry has not allocated a new foreign workers’ quota, which means contractors have been unable to secure enough workers for their projects.

“The construction industry is facing a severe shortage of manpower resources as too many construction companies in Malaysia are competing for a limited supply of talent,” Kwan said in a statement. He added that the shortage of foreign workers could undermine the many construction projects planned under the 10th Malaysia Plan and the Economic Transformation Programme.

“We face a shortage in terms of volume and quality of skilled workers, technicians and supervisors,” said Kwan, adding that he hopes the government will relax the policy involving the entry of new foreign construction workers.

With the bulk of the country’s economic performance for the year hanging in the balance, the Home Office will likely be under increasing pressure to act quickly on the quota issue. However, with elections widely expected in March, the hot-button issue may well be one that is not easily solved. Meanwhile, builders and investors on both sides of the Straits of Johor will no doubt be eager to break ground on the many contracts that have now been signed.

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