Malaysia’s tourism sector aims to blow past headwinds

A strong showing by Malaysia’s tourism industry in the first three months of the year may be offset by an expected drop-off in arrivals from China. But officials and travel bodies remain confident that any cooling in sentiment from the mainland will ease by the latter part of the year, giving the sector a lift in the final quarter.

The tourism industry posted arrivals up 10% year-on-year for the first quarter of the year, with just over 7m visitors, up from 6.5m for the same period in 2013, according to data issued by the Immigration Department of Malaysia in mid-June.

Fellow ASEAN members continued to provide the bulk of Malaysia’s inbound visitors, contributing 72% of the total – 5.1m arrivals – with Vietnam, Thailand, Cambodia, the Philippines and Singapore all showing double-digit increases for the quarter. Indonesia, the second-largest source of tourists, delivered 676,000 passengers that represented a 7.3% increase.

Malaysia will need to maintain this rate of growth if it is to reach the aim of 36m annual arrivals set by the government for 2020, more than 10m up on the 25.7m arrivals recorded last year. The government is also looking to greatly expand tourism revenue, targeting earnings of $52bn annually by the end of the decade, more than two and a half times the 2013 total of $20.3bn.

Headwinds cooling Chinese interest

Despite the good performance, the real proof of the resilience of the tourism sector will come with the release of the second quarter figures, with a number of factors set to have a negative impact on performance.

The disappearance of Malaysia Airlines Flight 370 on a flight from Kuala Lumpur to Beijing in March, with 239 passengers and crew – many of the former being Chinese nationals – combined with the kidnapping of a number of Chinese nationals in Sabah recently, has hurt Malaysia’s standing as a tourism destination in the eyes of many potential travellers from China. Some estimates put the drop in arrivals from mainland China at around 40% since the incidents, putting at risk the industry’s target of hosting 2m Chinese tourists this year compared with 1.4m arrivals in 2013.

Tourism and Culture Minister Datuk Seri Nazri Aziz told Parliament in June that a total of 76 flights to Kota Kinabalu, the capital of Sabah, from China were cancelled recently in response to three kidnapping cases on the east coast of the Malaysian state in three months.

Another factor that could impact Chinese visitor numbers is the simmering tension between Beijing and a number of countries in the region, including Malaysia, relating to territorial disputes in the South China Sea and elsewhere. These tensions have seen at times violent anti-Chinese protests in Vietnam and while sentiment in Malaysia is not as heated, some Chinese tourists may look further when planning their holidays, away from any states in which their government is at odds.

Promotional push

Malaysia is now moving to shore up its Chinese market, having curtailed promotional activity in the wake of the Flight 370 disaster. Tourism authorities are again starting to increase advertising activities and attend trade fairs.

Speaking in Hong Kong in early June, Azizan Noordin, the deputy director-general of promotions for Tourism Malaysia, said he remained confident Chinese arrivals would hit 2m this year, representing a 15% increase year-on-year. Echoing these comments, the Malaysia-Chinese Tourism Association, a group representing Malaysian Chinese travel agents, predicts that arrivals from China are likely to rebound in the third quarter and into the last three months of the year while officials are confident year-end targets will be met.

But it remains unclear how deeply the loss of Flight 370 and the kidnappings in Sabah impact Chinese sentiment in the second quarter and beyond.

In for the long haul

Visitor numbers from China may well fall short of expectations for 2014, but this gap may be bridged by holidaymakers from other countries seeking an alternative to troubled Thailand.

Malaysia’s tourism appeal is spreading further with visitors from countries such as Australia a target. Though only representing a fraction of the overall total, long-haul visitors from countries in Europe or North America added significantly to Malaysia’s arrival numbers, with 500,000 landing in the first three months of the year, according to the Immigration Department. While only 8% of all arrivals, these long-haul markets represent an area of strong growth potential, one that has been given increased support by improved flight connections to Europe in particular.

Another more distant market that both the government and operators are working to expand is in the Middle East and other predominantly Muslim markets. Muslim visitors to Malaysia were estimated to account for a fifth of the total last year. This amounted to 5.2m according to the Islamic Tourism Center, an almost four-fold increase on the 2000 figure. By building on its credentials as a Muslim-friendly destination, Malaysia should be able to further broaden its tourism base.

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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: Keeping the economy running

The central bank in Malaysia is keeping an eye on macroeconomic stability at a time when a cooling external environment is putting pressure on growth. While international factors are starting to affect overall economic performance, domestic demand remains relatively robust, supported by consumer spending and public investments.

On July 11, the Bank Negara Malaysia (BNM), the central bank, announced it would be maintaining its key policy rate on hold for the 13th consecutive month. The bank kept its benchmark overnight rate at 3%, as analysts surveyed by Bloomberg had expected.

The BNM decision balanced concerns of both a slowdown in the economy and rising personal debt. Malaysia’s year-on-year GDP growth has dropped below 5% for the first time in seven quarters, while household borrowing has been increasing at an annual average 12% for five years.

In a statement, the bank noted that slow global growth had begun to act as a drag on the Malaysian economy, as in other emerging markets, despite healthy domestic demand. Domestic consumption has helped Malaysia and many of its neighbours weather the economic turbulence of recent years, with the rebalancing of the economy helping reduce dependence on exports, which have proved susceptible to slowdowns in Europe and the US.

“For the Malaysian economy, domestic demand has continued to support growth amid the continued moderation in external demand,” the bank said. “The sustained weakness in the external sector may, however, affect the overall growth momentum.”

Even so, the bank retains a positive outlook. It expects private consumption to stay steady, led by income growth and a stable labour market, and capital investment both from domestic-oriented industries and government infrastructure projects to help maintain economic momentum. Malaysia is in the process of rolling out the government’s Economic Transformation Programme (ETP), a wide-ranging package of projects, including infrastructure schemes, designed to boost productivity and increase the private sector’s ability to drive growth.

The BNM is also comfortable with Malaysia’s inflation outlook. Inflation averaged 1.6% in the first five months of the year –low given the rate of economic growth. And while the central bank expects the rate to pick up in the second half of the year, it does not foresee inflation becoming a serious risk factor.

Despite low inflation and slowing growth, the BNM avoided cutting rates, keeping a wary eye on rising debt in an economic climate that has become more volatile in recent months. Malaysia’s experience in the 1997 Asian financial crisis makes policy-makers particularly aware of the need for financial and macroeconomic stability.

In early July, the BNM tightened regulations on lending, cutting the maximum repayment terms on personal loans to 10 years and property loans to 35 years, down from 25 year and 45 years, respectively. Some analysts quoted in the international press suggest that the bank may become more hawkish on interest rates as well towards the end of the year, if growth remains resilient.

Following a period of strong capital flows to emerging markets, there has been a cooling off recently in the wake of signs from the US Federal Reserve that it would not push forward its quantitative easing (QE) policy. QE, a strategy of stimulating the economy through expansion of the monetary base, had boosted inflows to emerging markets as investors sought higher returns than those available in developed economies. Malaysia, with its macroeconomic and political stability and stable growth rate, proved particularly attractive: by February, foreigners held almost half the country’s outstanding sovereign debt.

With QE now likely to be phased out and signs of a slowdown in major emerging markets such as China (a key export market for Malaysia), investor appetite for Malaysian assets are expected to abate. However compared to advanced economies Malaysia along with the rest of South East Asia will continue to enjoy a higher rate of growth thanks to relatively stable domestic demand and investment.

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Malaysia: Broadening the skills base

The government has vowed to expand the Malaysian vocational education system to help bridge the widening gap between the demand for skilled labour and the available pool of trained workers.

According to the Educational Blueprint 2013-25, approved by the cabinet earlier this year, Malaysia has a skilled labour shortage of more than 700,000 workers, a figure set to be pushed far higher in coming years. Up to 3.3m new positions are expected to be added to the workforce by 2020, with at least 46% of them requiring jobholders to be trained to vocational diploma or certificate standard. By contrast, the education roadmap estimates that just 22% of new jobs created up until 2020 will require university degrees.

To close the supply-demand gap, the government has set out to create at least 50,000 additional places in the vocational education system each year, and to provide the infrastructure, materials and technical support to maintain the expanded network of schools and colleges called for by the blueprint.

Enrolment at vocational facilities accounts for just 10% of upper secondary students, a figure the government has said it wants to double, as it is well below the 44% average in OECD countries. Malaysia also falls short of some of its neighbours, with between 40% and 60% of secondary school students in Thailand and Indonesia pursuing vocational education, according to the Malaysian government.

Last year, while the blueprint was being drafted, the deputy prime minister, Muhyiddin Yassin, who is also the minister of education, warned that if Malaysia did not radically improve its vocational system to ensure it met the demands of a changing economy, the country risked falling behind regional rivals.

It was a theme that he took up again in the lead-up to the May 5 general election, which saw the government of Prime Minister Najib Razak returned to power, although with a reduced majority. “The core strengths of the education system in all developed nations are technical and vocational education,” he said while attending a vocational education fair in late April.

Even before the new educational blueprint was rolled out, the government had been moving to strengthen the system’s vocational offerings. Last year, 15 secondary schools were upgraded to the status of vocational colleges, providing places for more than 3100 students. This trial programme has been extended in 2013, with a further 72 vocational colleges opening their doors to 21,250 students. The number of secondary schools providing technical education has also been increased this year from 15 to 65.

According to Noor Azimah Abdul Rahim, chairperson of the Parent Action Group for Education Malaysia, the push to boost vocational education is a positive but it needs to be backed with the necessary resources and support to ensure students have a place to move into in the workforce on graduation.

“The doubling of vocational college enrolment to 20% is timely and jobs must be created to absorb the supply,” she wrote in an editorial piece carried by the Malaysian Star on April 28. “While the Europeans have up to 80% of their graduates qualify in vocational training, quality is kept extremely high to support the reputable state-of-the-art automotive industry the likes of BMW, Mercedes, etc.”

One of the greatest challenges Malaysia faces in expanding its vocational education system is finding quality teachers. According to the Educational Blueprint, a shortage of qualified instructors and the lack of an industry-recognised curriculum have resulted in graduates who are not equipped to meet industry needs.

The private sector might offer some relief in terms of boosting the supply of teachers. Skilled personnel working in the private sector could be encouraged to transition to positions at vocational education facilities, for example. Alternatively, businesses could provide workplace experience programmes. To promote the latter, the government will be offering incentives such as tax breaks.

While this may encourage firms to provide on-the-job training, it could still be difficult to meet the demand for teachers in the classroom or workshop. Skilled professionals are in high demand in Malaysia, and the government will likely find it hard to attract those with training and experience to move into public sector teaching positions. Without a broadening of the skills base at the core of the expanded vocational education system, the programme may find difficulty meeting its targets.

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Malaysia: The year of LTE telecoms

Following the launch of Malaysia’s first long-term evolution (LTE) mobile telephone network in January, this year should see a rush to market as major operators look to expand their data earnings. The rollout of new technologies and products offered by telecoms firms in Malaysia is in line with growth in the region, which has ambitions to become a global leader in mobile broadband access.

Mobile data traffic in Malaysia should double this year, following the global trend, according to a recent report by telecoms equipment firm Ericsson. The company said it expected mobile data volumes to rise by a compound annual growth rate of around 50% between 2012 and 2018, with video a major contributor to the increase. Growing data volumes, which generate higher earnings than voice traffic, should help bolster operators’ earnings at a time when the voice market is not far from saturation.

Todd Ashton, Ericsson’s new president for Malaysia and Sri Lanka, said this implied twelve-fold growth in the 2012-18 period. Malaysians are increasingly using mobile data services as smartphones become more widespread. The roll-out of LTE networks, which is to an extent fourth-generation (4G) mobile technology, should provide greater capacity for the rapidly growing data volumes.

In January, Maxis, the mobile market leader by subscriptions, announced the launch of Malaysia’s first LTE network, focusing on parts of the Klang Valley, the region around Kuala Lumpur where more than one-fifth of Malaysia’s population lives. Maxis says that speeds average 10-30 megabits per second (Mbps) and reach up to 75 Mbps.

The company also offers LTE-compatible USB internet through dongles and is strongly targeting the handset market, offering subscribers LTE mobile telephones to encourage them to access high-speed services. “As more and more LTE devices come into the market, the coverage and expansion will have to be matched,” Sandip Das, CEO of Maxis, said at a press conference in late March.

Maxis is planning to expand its LTE coverage to several major metropolitan areas by the end of the second or third quarter of 2013. Das said that LTE rollout was currently limited due to the requirement that it use fibre-supported networks. The telecoms firm also expects revenue growth to rise this year, partly thanks to growing data business. In 2012 the company’s revenue grew 1.9% to RM8.97bn ($2.95bn) from RM8.8bn ($2.89bn) in 2011, in part due to higher revenue from its corporate business across the board.

Several other operators are set to swiftly follow Maxis’ adoption of LTE technology. In March Celcom Axiata, Malaysia’s second-largest mobile operator by subscriptions, announced that it would be allocating RM100m ($32.9m) in capital expenditure to roll out LTE, with commercial launch of the high-speed network due to be announced in the second quarter of this year.

Ole Martin Gunhildsbu, the chief technology officer at DiGi, Malaysia’s third-largest mobile operator by market capitalisation, said in March that the company would complete its network modernisation by the end of the year, allowing its customers to be able to enjoy “wireless fibre-like speeds” on LTE-compatible devices. DiGi started the upgrade in 2011, and dedicated a substantial part of its RM700m ($230.5m) capital expenditure in 2012 to the process. DiGi is deploying a single radio access network, which provides multi-spectrum data access on 2G, 3G and LTE. Local press reports suggest the introduction of this technology could lower costs per user.

The planned launches this year make Malaysia one of the leaders in the Asia-Pacific region in LTE rollout, along with Singapore and the Philippines. Ericsson’s Ashton said that he expected LTE coverage in the region to overtake the global average in 2017, reaching 60% against 50% internationally, and could account for around two-thirds of the world’s LTE population coverage.

He added that Malaysia’s high demand for broadband through other media – fibre-to-the-home has take-up of nearly 40% and household broadband penetration tops 65% – bodes well for the growth of the LTE market. “As broadband goes mobile, Malaysians will expect good coverage, with higher speeds and better quality of service, which is what our LTE technology will enable,” Ashton said.

The launch of LTE networks is the latest stage in the evolution of Malaysia’s telecoms market. While rollout will be incremental at first, it is likely to pick up as more competitors join the market and investments in capacity are completed. Indeed, as the country moves toward high-income status, the opportunities for capitalising on strong demand for broadband will continue to grow.

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Malaysia: CPO Power

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

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

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

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

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

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

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

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

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

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

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Malaysia: Retail optimism tempered by caution

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Malaysia: 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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