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 EU trade negotiations in spotlight

With the end of an agreement granting Malaysia preferential access to the EU market looming, all eyes are on ongoing negotiations between Kuala Lumpur and Brussels aimed at securing a replacement free trade pact.

Malaysia currently benefits from the EU’s generalised system of preferences (GSP) scheme, which provides developing countries with generous tariff reductions on exports. However, the World Bank’s decision to award the South-east Asian state upper-middle-income-nation status will end its eligibility for the lower levies from January 2014.

While EU representatives are confident that a new free trade agreement (FTA) will deepen economic integration between its member states and Malaysia, local business representatives have questioned whether they can remain competitive once the lower tariffs are withdrawn.

Strong bilateral trade

The EU is a major importer of Malaysia’s goods. Figures show its members purchased 13%, or 2.22m tonnes, of the country’s palm oil exports in 2012, and spend more than $1.3bn each year on Malaysian timber. On October 22, the Malaysia External Trade Development Corporation (MATRADE) said it expected total bilateral trade to reach RM120bn ($38.2bn) in 2013. Results so far this year suggest this is an attainable goal, with exports to the EU for the first eight months amounting to RM41bn ($13bn), while imports stood at RM45bn ($14bn).

Susila Devi, the senior director of MATRADE’s Strategic Planning Division, told reporters that Europe offered Malaysia a broad range of business and investment opportunities across the industries. “It also includes information communication technology, chemicals, automotives, renewable energy, logistics, agro food processing, pharmaceuticals and financial services,” she commented.

FTA negotiations

Business leaders, however, have highlighted the significant impact that the end of GSP status is set to have on trade and investment.

The GSP scheme provides duty reductions of up to 66% on sales to the EU. Malaysia’s exports to Europe under the initiative were valued at RM13.5bn ($4.3bn) in 2011, or 17% of its overseas shipments, according to a report published by the EdgeMalaysia in April.

Tan Sri Lee Oi Hian, CEO of Kuala Lumpur Kepong, a Malaysia conglomerate with interests in the palm oil industry, warned in March that without the GSP, the tax rate on some Malaysian oleochemicals heading for the EU would be between 4% and 6%. “We will just not be competitive,” he said at a Global Malaysia Series workshop.

Lee, together with other business leaders, said the impending withdrawal of the GSP scheme heightened the need for the government to secure an FTA with Europe. The loss of the GSP could be “another nail in the coffin” for the local palm oil industry, he said.

The EU and Malaysia first entered into discussions on a FTA in late 2010, with the next round of negotiations scheduled for the fourth quarter of this year. The ambassador and head of the EU delegation to Malaysia, Luc Vandebon, told Bernama in June that if the next round of talks is held before the end of 2013, then “it should be possible to conclude negotiations in late 2014/early 2015”.

The EU delegation’s former ambassador to Malaysia, Vincent Piket, said last year that an FTA would boost the country’s GDP by 8% by 2020.

“The conclusion of the FTA would be a landmark step in the fostering of bilateral trade between the two partners and deepen economic integration,” he said.

Looking long term

FTA supporters say a deal will, over time, increase market access for goods and services, facilitate trade and investment flows, enable mutual recognition of standards and qualifications, and increase joint capacity-building programmes.

However, not all Malaysians feel that an EU trade pact, at least in its current proposed form, is the best path for securing long-term economic growth.

In a report published in late 2012 by the IFRI Centre for Asian Studies, part of a French think tank, author Tham Siew Yean noted that the proposed FTA was in conflict with key interests of Malaysia. Tham raised particular concerns about the impact of intellectual property rules on the pharmaceutical sector.

“A small trading economy such as Malaysia’s is keen to lock in its market access to other countries. … [But] Malaysia’s focus has always been in the ASEAN as well as the wider East Asian market. In this scenario, ASEAN agreements, including Malaysia’s commitments in extra-ASEAN-wide agreements, will hold more weight than an agreement with the EU,” he wrote.

Concerns have been raised that with regional competitors also vying for the EU market, Malaysia could be tempted to negotiate a deal with the union from a position of weakness or sign an agreement lacking transparency. Many Malaysians, it would seem, are keen to avoid landing an unbalanced deal that fails to dovetail with the country’s broader vision for growth.

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Malaysia’s tourism sector targets niche markets

A tourism leader in the region, Malaysia has seen its position challenged in recent years as nearby rivals have stepped up efforts to attract more visitors.

Official statistics show that just over 25m visitors arrived in 2012, a rise of around 300,000 compared to the prior year. Despite this increase, Malaysia saw its ranking fall on the 2012 UN World Tourism Organisation (UNWTO) list of most-visited countries, published in August. The country dropped one place on the UNWTO ladder to 10th, being overtaken by Russia.

The sector nonetheless remains a major source of foreign currency earnings, second only to the manufacturing industry, as well as the seventh-largest overall contributor to the national economy. The 2013 World Travel and Tourism Council report noted that tourism employs 1.7m people, or 13.6% of all jobs, when taking into account positions indirectly supported by the industry.

While the 1.3% increase in the number of visitors was a modest improvement on the 0.6% rise recorded in 2011, growth in the market has been slow in comparison to Malaysia’s neighbours. Thailand saw arrivals go up 16% last year, and fast-movers Cambodia and Vietnam posted increases of 24% and 14%, respectively, though both are coming off a far lower base.

In terms of arrivals, Malaysia remains number one in the South-east Asian region, but it faces challenges when it comes to capitalising on arrivals volume. Though it attracted just over half as many visitors, Singapore generated similar revenue from its tourism sector, while Thailand received almost 3m fewer visitors than Malaysia in 2012, but earned 50% more from them, according to UNWTO data.

This suggests that Malaysia needs to do more to encourage greater spending by tourists. The country may also need to look further afield when expanding its client base, with around 75% of all arrivals coming from neighbouring states such as Singapore, Indonesia, Thailand, Brunei and the Philippines, with Singaporeans making up well over one-third of all arrivals.

One of Malaysia’s appeals as a tourism destination for fellow members of the ASEAN bloc is its proximity, Tan Kok Liang, a vice-president of the Malaysian Association of Tour and Travel Agents, told the local press on August 6. By not having to endure long-haul flights, ASEAN visitors can easily take short breaks in Malaysia, he said. However, Tan also acknowledged that the predominance of tourists from nearby countries also has a downside.

“Because many of these are still developing countries, tourists’ purchasing power will be lower than those from developed countries,” he said.

One answer to the comparatively low per-capita earnings power of the Malaysian tourism industry is to develop high-spending niche markets. On August 15, Prime Minister Najib Razak told delegates attending an international insurance congress in Kuala Lumpur that such events would become increasingly important for the tourism industry. Najib said inbound business tourist numbers are set to rise from the present level of 1.2m to 2.9m by 2020, with the government’s Malaysia Convention and Exhibition Bureau aiming to have the country recognised as a leading business destination.

Other niche segments that have been targeted under the government’s development programme are medical, spa and wellness tourism, as well as shopping and duty free sales, though regional rivals are also offering similar projects, potentially narrowing the scope for Malaysia to fully capitalise on these markets.

Despite strong government support and a solid improvement in arrivals this year – inbound tourists numbered 6.5m for the first quarter of 2013, compared to 5.5m for the same three months last year – it may be difficult to achieve some of the goals set by the state, which has identified the sector as one of its 12 National Key Economic Areas. Tourism Malaysia, the agency tasked with promoting the country as a travel destination, has targeted 26.8m inbound visitors this year and 28m in 2014, rising to 36m by 2020.

In the shorter term, the slowing of the economy in China – the third-largest source market for Malaysia – could have a negative impact on the sector, both in terms of a reduction in the number of Chinese visitors as well as any knock-on effects on regional economies. Further down the track, the increased competition posed by other south-east Asian nations could also cut into Malaysia’s tourism growth unless it is able to broaden its appeal.

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Malaysia: Religious tourism boost

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: 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: Islamic finance pensions

Moves to liberalise Malaysia’s pensions market are expected to galvanise the Islamic finance market, already a key segment of the country’s economy, though greater regulatory oversight will be needed to bolster investor confidence in the sector.

On July 23, the international press reported that Malaysia was introducing “sweeping reforms” to its pension system. The changes introduce a new, voluntary Private Retirement Scheme (PRS) to run alongside the existing Employees Provident Fund (EPF). The PRS will allow Malaysians to purchase a wide variety of products from private fund management firms, making it easier for them to focus on Islamic investment. Currently, the EPF collects pension contributions and invests the cash; contributors can place up to 20% in a single mutual fund.

By facilitating investment in private products by individuals, the reforms are expected to kick-start the growth of Malaysia’s small private pensions sector, which the government now expects to be worth RM73bn ($22.92bn) by 2020. Though some think the prediction is rather optimistic, most agree that there is a lot of potential for growth given the regulatory changes, growing disposable incomes and a rising culture of saving for the future.

Officials – and the structure of the new regulations – make it clear that increasing investment in Islamic products is one of the aims of the changes. “The PRS will contribute to the growth of Islamic fund products,” Zakie Ahmad Shariff, a board member of the Private Pension Administrator (newly founded to oversee the PRS funds) and CEO of the Federation of Investment Managers Malaysia, told international press. Analysts agreed that those investing in the new system would gain from sharia-compliant offerings in particular.

Of the first 30 products offered through the PRS, only six will be Islamic, with the expectation that there will be more to come. The eight existing PRS providers ¬– all of which have sharia-compliant arms – can offer between three and seven conventional products through the system, but can provide up to 10 products if they offer Islamic schemes as well.

As the domestic market grows in new segments, Malaysia continues to cement its position as one of the world’s leading sharia-compliant sectors. It is particularly strong in sukuk (Islamic bonds), which accounted for 68.7% of the $84.4bn issued globally last year and 71% of the $43.5bn launched in the first quarter of 2012 (a 55% increase on 2011’s first quarter).

In July, Axiata, Malaysia’s leading mobile telephone operator, announced it was looking to raise up to $1.5bn in sukuk issues to tap low-cost long-term funds and increase its capital efficiency. It will be the first Asian telecoms firm to issue multiple currency sukuk, according to the company. The launch was “strategic” and targeted at investors in the region, as well as the Middle East and Europe, and officials said the move would help strengthen Malaysia’s position as a global sukuk leader.

The private sector and government bodies are likely to provide further issuances in the near future as Malaysia rolls out its ambitious Economic Transformation Programme, which envisages large investments in infrastructure and services and aims to develop the economy to boost value added and strengthen value chains.

While Malaysia’s Islamic finance sector continues to be a world leader, the industry’s rise to global prominence is relatively new. As elsewhere in the world, growth has brought on regulatory challenges, and some parts of the industry lag behind others.

“Sharia-compliant trustee management needs to move forward,” Abdul Jalil Rasheed, the CEO of Aberdeen Asset Management, which moved into Islamic finance in Malaysia in 2009 and counts the EPF as its biggest customer, told OBG. “Asset management is still a very locally driven business in Malaysia. There are currently 16 licences in the market for Islamic asset management, not all of which are doing well.”

Rasheed suggests that “innovation needs to slow” so that Islamic finance can put down deeper regulatory roots and to prevent firms from over-extending themselves, adding that the market may still not be mature enough for sharia-compliant hedge funds to flourish.

As Deputy Finance Minister Datuk Awang Adek Hussin noted last year, greater cooperation among Islamic finance experts, religious scholars, government bodies and the private sector is needed to support and consolidate the industry. “Although Malaysia’s Islamic financial performance has shown encouraging development, we should not be complacent with our achievements thus far,” he said.

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