Dato’ Sri Nazir Razak, Chairman, CIMB Group

On making ASEAN a main driver of global economic growth

You stated your view that Brexit proves ASEAN’s gradual integration approach is right. What tangible goals can be achieved in the short run?

SRI NAZIR RAZAK: Brexit is a reminder that ASEAN integration has to move in tandem with the will of the people across all countries. The so-called “ASEAN Way” is about unanimous decision-making so every country must agree to every initiative. It is a slow way of integrating and makes economic integration especially tough. The ASEAN Economic Community that we have is well short of our original aspirations, but the good news is that no country wants to leave or exit ASEAN. ASEAN also has considerable other achievements on the economic front: tariffs have been reduced as much as possible, there has been a proliferation of ASEAN multinationals, and there are lots of good integration initiatives at various stages of implementation.

Does this mean ASEAN has achieved what was possible and should remain this way?

RAZAK: Definitely not. While we must not understate what we have accomplished, we must also admit that there is so much more than can be done to integrate ASEAN further for the benefit of its people, and to move the region forward as one of not just Asia’s, but the world’s, main economic drivers.

If we do not embrace and take advantage of the region’s scaleble economies, we will wake up one day to realise that the ASEAN marketplace is dominated by global players, more so now that we have entered the Fourth Industrial Revolution, an era of accelerated change and one that will be unforgiving to companies that do not significantly adjust their approach to business.

The most obvious area is e-commerce, where companies such as China-based Alibaba have been able to grow exponentially in their own markets. ASEAN’s issue is that it is not a small market, but it operates as 10 different markets, and this has to change or we will be overwhelmed by global platform companies.

I would argue that the Fourth Industrial Revolution means that the old pace of integration will not do and we need an “ASEAN Way 2.0”.

What specific measures should be implemented specifically in the banking sector to remove these hurdles in the financial sector?

RAZAK: In the banking sector, integration is too focused on licensing issues when what is important is operating synergies across borders, such as back office outsourcing, data movement and people transfers.

What is your view on the prospects of creating new infrastructure funds to create access to long-term capital in the region?

RAZAK: ASEAN has massive infrastructure needs so we should welcome more funds to intermediate Asia’s high savings pool for ASEAN’s infrastructure needs. It is high time that Asian capital markets fund Asia’s infrastructure needs instead of depending on Western markets.


Malaysian exports grow thanks to favourable conditions

Led by electrical and electronic products shipments, Malaysia’s foreign trade rebounded strongly in March after a weaker performance the month before, though exports could come under pressure later in the year as demand fluctuates.

Exports rose 2.2% year-on-year (y-o-y) in March, according to data issued by the Ministry of International Trade and Industry in early May. Total outbound shipments were valued at RM84.5bn ($21.4bn), while imports fell to RM69.8bn ($17.7bn), a decline of 9.6%.

The results increased Malaysia’s total trade to RM154.2bn ($39bn), a 17.1% increase over the previous month, though y-o-y the figure dipped by 3.5%. Rising exports drove the results, with the trade surplus jumping 172% y-o-y and 62.9% over February.

Along with electronics and electrical products, which increased by 8.7% to RM31.8bn ($8bn), the value of crude oil exports also gained strongly, up 18.4% to RM3.6bn ($911.3m) on the back of higher volumes and prices.

Imports drop off in the first quarter due to cooling demand

The significant fall in imports – stemming from declines in consumer, intermediate and capital goods, which dropped by 12.4%, 14.4% and 30.5% y-o-y, respectively – indicates a possible cooling of domestic and industrial demand, although this trend could be reversed in the second half of the year if the new government, which was elected in early May, follows through with plans to scrap the goods and service tax from June.

The March results offer a contrast to the preceding month, when RM70.3bn ($17.8bn) in outbound sales was recorded, a 2% y-o-y decline, and imports saw a more moderate 2.8% dip to RM61.3bn ($15.5bn), interrupting a 15-month run of increases dating to November 2016.

The decline was more marked month-on-month (m-o-m), with outbound shipments falling by 15.1% compared to the January total and imports retreating 16.2%, drawn down by lower purchases of intermediate, capital and consumer goods.

Lower agricultural exports could dampen trade growth

While the March export figures were strong, they underscore the increasing vulnerability of Malaysia’s foreign trade to fluctuations and demand-side pressures on some key products, including palm oil and related products, which made up just over 7% of exports in March.

The previous administration had targeted palm oil exports of 20.5m tonnes for 2018, generating revenue of RM80bn ($20.2bn), up from RM78.8bn ($19.9bn) in 2017, according to a statement issued by the Plantation Industries and Commodities Ministry in late April.

To support this aim, the authorities extended an export duty exemption on crude palm oil through to the end of April, lengthening the suspension by three weeks in an effort to moderate stockpiles and support prices. However, industry data released at the end of that month shows palm oil exports fell by as much as 5.7% m-o-m in April, in part due to lower demand from India. The news pushed down palm oil futures by 1%, with price declines for the month coming in at 2.6%, a drop that will also have an impact on trade revenue.

This fall follows the 11.2% contraction in overall agricultural exports posted in March, pressured by lower rubber shipments as well as weaker palm oil results.

Growth forecast with potential downside risks

While declines in palm oil shipments could be offset by forecasts of higher earnings from crude oil and liquefied natural gas exports, oversupply in the market and economic volatility could weigh on energy earnings this year.

In its latest report on the Malaysian economy, released in April, the World Bank forecast strong growth on the back of higher export levels fuelled by rising global demand, though it did flag some potential downside risks.

The bank projected Malaysia’s GDP would expand by 5.4% in 2018, an increase on its forecast of 5% made in October, though still down on the 5.9% recorded in 2017 and below the outgoing government’s estimates of between 5.5% and 6% for the year.

It also warned that global financial market shocks or weak exports could have disproportionately negative spillover effects on Malaysia. In particular, the lender said the report had not factored any possible fall-out from a potential trade war between the US and China.

With 66% of the Chinese products on a proposed US list that could be targeted with tariff increases having input from East-Asian suppliers, new levies and restrictions would affect Malaysia and other links in the supply chain, Sudhir Shetty, the World Bank’s chief economist for East Asia and the Pacific region, said.

China is Malaysia’s largest trade partner and accounted for 12.3% of exports in the first quarter of 2018.

Ratings agency Fitch has also warned that Malaysia – as an economy with a high degree of trade openness – remains vulnerable to negative external developments, citing the possibility of increased trade protectionism.

Despite these concerns, Malaysia’s current account surplus should be in the range of 2-3% for 2018, with the upper end of the forecast being in line with the 2017 performance, according to a Fitch note issued at the end of March. The agency further expects export growth to moderate slightly this year while remaining strong, consistent with favourable global demand conditions.

Foreign investment in Malaysia’s petrochemicals industry gains momentum

Projects to expand refining capacity coupled with rising demand for downstream hydrocarbons products are attracting increased investment in Malaysia’s petrochemicals industry, while recovering oil prices are driving increased upstream expenditure.

In late March Malaysia’s national oil and gas company, Petronas, and Saudi Aramco announced the creation of two joint ventures for the Refinery and Petrochemicals Integrated Development (RAPID) project in Johor. This came a month after the two companies concluded negotiations regarding Saudi Aramco’s $7bn investment in the project.

This represents the largest offshore investment ever made by Saudi Aramco and is the largest-ever foreign direct investment (FDI) in Malaysia, according to government officials.

Saudi Aramco and Petronas conclude RAPID negotiations

The collaboration will give the two companies equal participation in and ownership of the RAPID project, which consists of a refinery with the capacity to process 300,000 barrels of crude oil per day, and six petrochemicals plants with a combined annual output of more than 3.5m tonnes.

Saudi Aramco will supply 50-70% of the crude feedstock for the refinery, while Petronas will provide natural gas, power and other utilities.

The refinery, which will produce products including petrol and diesel that will meet Euro 5 fuel specifications, is expected to come on-line at the start of 2019, followed by the petrochemicals plants towards the end of that year.

In addition to the Saudi oil giant, the downstream expansion has captured the attention of another international player. In late February SK Group announced it had begun talks with Petronas about potentially investing in the RAPID project, as well as a possible partnership in petrochemicals and renewable energy projects.

SK Group is South Korea’s second-largest conglomerate by market capitalisation and already has a presence in the Malaysian energy market, partnering with Petronas on oil and gas imports.

Investment levels exceed 2017 target

International downstream interest has been fuelled by rising internal and external demand for petroleum products, coupled with Malaysia’s efforts to expand its refining capabilities to position itself as a regional hub for major oil and gas services and equipment (OGSE) companies.

The country, which already fulfils most demand for refined products domestically, aims to double its production capacity with the help of wider downstream development in Johor, namely the $27bn Pengerang Integrated Complex (PIC), of which the RAPID project forms part.

Alongside the RAPID refinery and plants, the 6242-ha PIC will feature associated facilities including a 1220-MW cogeneration plant, a regasification terminal with annual capacity of 3.5m tonnes, a deepwater terminal, an air separation unit and raw water supply. The project is currently 87% complete.

The PIC is contained within the larger 22,000-ha Pengerang Integrated Petroleum Complex, the single largest investment project in the country.

With the help of such projects, last year Malaysia recorded more than RM724.5m ($187.1m) in FDI or domestic direct investment from OGSE companies, exceeding the year’s target of RM650m ($167.9m). According to a 2017 report on the progress of the National Transformation Programme, the national blueprint for achieving high-income status by 2020, this has put the sector on track to achieve its 2020 investment target of RM10bn ($2.6bn).

Petronas hikes capital expenditure in upstream activities

Petronas is also placing a greater focus on upstream investment this year, announcing in early March that it would increase capital expenditure by almost 24% to RM55bn ($13.2bn) in order to pursue its long-term growth strategy.

At an earnings briefing in March, Wan Zulkiflee Wan Ariffin, president and CEO of Petronas, said upstream investment will in part focus on expanding its resource base in geographically strategic regions, including ASEAN, the Indian sub-continent, the Middle East and the US.

It will be the first time in three years that Petronas has hiked capital expenditure outlays, a reflection of the improved operational environment resulting from production controls and rising oil prices.

Nevertheless, the projected spending for 2018 is well short of that of 2015, when Petronas allocated RM48.7bn ($11.7bn) for upstream activities. The more measured approach aims to avoid putting excessive pressure on supply and development chains, keeping prices in check.

Malaysia launches affordable housing plan to boost property market

The central bank of Malaysia has outlined a plan to strengthen the residential property market and improve access to affordable housing, as persistent oversupply and high prices continue to weigh on sector growth.

In mid-February Bank Negara Malaysia (BNM) set out its strategy to help bolster the real estate market, highlighting a range of potential administrative, educational and policy solutions.

Central to the strategy is the creation of a single entity to manage and process affordable housing initiatives between state agencies and private players; at present, there are more than 20 bodies that carry out housing policy and support. Streamlining administrative processes would end the current duplication of services, reduce costs and help the government deliver an additional 1m units between 2013 and 2018, according to BNM.

The bank has also placed an emphasis on cutting construction costs, suggesting employee upskilling, advanced construction practices and standardised housing codes as possible measures to achieve this.

Furthermore, the bank recommended steps be taken to improve financial literacy among Malaysians to allow them to better manage their finances, and suggested improvements be made to the legal framework of the rental market. This could help stimulate greater activity in a country with a traditionally small rental market.

Oversupply combines with affordability issues

The recommendations come amid decade-high levels of oversupply in the residential segment.

There were 146,000 unsold residential units as of mid-2017, up from the 131,000 recorded at the end of the first quarter, according to BNM data.

Of the unsold units, 82% were priced above RM250,000 ($63,900). Although the government considers the maximum price for affordable housing to be RM282,000 ($72,100), the actual median sale price of units during the period was RM313,000 ($80,000), out of reach for many people in a country where the monthly median household income is RM5230 ($1340).

The mismatch between prices and wages has been cited as a major factor affecting housing affordability in recent years. Central bank data shows housing prices rose by 9.8% between 2007 and 2016, while incomes increased by 8.3%. The discrepancy was more acute in 2012-14, when prices grew by 26.4%, against a 12.4% increase in wages.

In mid-February Sulaiman Akhmady Mohd Saheh, the research director of property consultancy Rahim & Co International, told local media that on average, a standard terrace house would cost Malaysians 5.3 times their annual household income.

The situation is more dramatic in some parts of the country; Rahim & Co’s “Property Market Review 2017/18” estimates that an average home would cost 8.4 times the annual median household income in Sabah, and 6.9 times that in both Kuala Lumpur and Penang.

Construction, land costs keeping prices high

Despite excess supply in the market, there has been little downward movement in asking prices.

Apart from a 10% contraction in high-end residential prices over the past 18-24 months, the rest of the market has remained largely steady.

A major reason for this, according to Rahim & Co, is the already tight margins faced by developers, who are restricted in their ability to cut prices due to high building costs.

Construction costs account for around 80% of property prices, according to the Real Estate and Housing Developers’ Association Malaysia, with bureaucratic processes, materials and equipment seen as key contributors.

Some industry stakeholders have highlighted the high cost of land as another major factor, leading to calls for both federal and state governments to release cheaper land for the purpose of affordable housing.

Transactions values, wage rises, point to industry rebound

Despite these challenges, the market is showing some signs of increased resilience, with the downturn in transaction volume flattening out last year.

While the number of property transactions to the end of September fell by 4.3% year-on-year (y-o-y), according to the Valuation and Property Services Department (JPPH), the decline compares favourably to the 11.9% drop posted over the same period in 2016.

Although year-end figures have yet to be finalised, the JPPH estimated that transactions would total around 300,000, close to the 320,000 of the preceding year.

Another encouraging sign came from transaction values, which rose 7% y-o-y to the end of the third quarter, the first recorded increase since 2015.

Any further rebound could be supported by an economic turnaround; GDP is expected to expand by 5.3% this year, according to the IMF, potentially firming up consumer and business confidence.

Combined with wage growth in 2018, which consultants Korn Ferry predict will rise by 3.2%, economic growth could translate into increased appetite for property, reinforcing expectations of a modest recovery later this year.

Launch of sustainable finance sees Malaysia go green

Malaysia is increasingly turning its focus towards environmentally friendly Islamic finance, with new product offerings looking to raise capital for sustainable development projects.

On November 8 state-backed asset management firm Permodalan Nasional Berhad (PNB) unveiled a RM2bn ($512.7m), 15-year green sukuk (Islamic bond) to fund the development of its Merdeka PNB118 tower project.

Merdeka PNB118, a 118-storey tower with office, retail and hospitality space, is being developed as an environmentally sustainable project, employing energy-efficient technology and environmentally friendly construction materials and processes to obtain certification as a LEED Platinum building, the highest standard awarded by the US Green Building Council.

The PNB offering is a significant step forward in the evolution of green sukuk, and a sign the product has entered the mainstream, according to Faris Hadad-Zervos, Malaysia country manager at the World Bank Group. “The fact that it is financing a green building highlights that green sukuk is not just about renewable energy, but also for a wider range of environmentally friendly projects,” he said.

The PNB deal is the third and largest green sukuk to be issued in Malaysia following the release in July last year of a RM250m ($64.1m) offering from Tadau Energy – the world’s first formal green sukuk – and a RM1bn ($256.4m) offering from Quantum Solar in October.

Incentives to encourage green sukuk development

The growing popularity of environmentally friendly Islamic finance products follows the launch in 2014 of the Sustainable Responsible Investment (SRI) framework.

The Securities Commission (SC), the framework’s developer, said that by offering sharia-compliant SRI products, Malaysia would be able to consolidate its leading position in the sukuk market and enhance its value proposition as a centre for Islamic finance and sustainable investment.

To further boost appetite for green sukuk the commission also introduced a package of incentives under the SRI initiative. These include tax deductions on issuance costs of any SRI sukuk approved, authorised by or lodged with the SC before 2020, along with tax breaks for green-technology activities in energy, transport, building, waste management and related services activities.

The SRI initiative was followed by the adoption of ASEAN-wide green bond standards in November. In addition to outlining common guidelines for green finance within the bloc, the standards aim to stimulate funding for eco-friendly projects across the region.

Increase in green bond demand provides growth opportunities

Not only will the development of environmentally sustainable investment tools provide the Islamic financial sector with another avenue in which to channel funds, it may help to arrest a downward slide in Malaysian sovereign sukuk issuances; offerings were down 19% in the first eight months of last year, according to a report released by ratings agency Moody’s in December.

Malaysia’s green sukuk issuances accounted for only a small percentage of global green bonds floated last year, and international trends suggest the segment has significant growth potential.

Global green bond issuances – sukuk or otherwise – grew by 78% in 2017 to reach $155.5bn, according to data released by the Climate Bonds Initiative, which forecasts this year’s total will be between $250bn and $300bn.

Meanwhile, on a regional level, growing populations and increasing infrastructure demands, combined with more awareness of environmental issues and the rise of value-based or ethical investors looks set to drive green investment in South-east Asia.

According to a World Bank report released in January, ASEAN economies are expected to expand by an average annual rate of 5.2% until 2020, while infrastructure investments are estimated to total $470bn over the period. As a result of this continuing growth, the bank predicts green investments will reach $3trn through to 2030, with development of Malaysia’s green sukuk sector set to contribute significantly.

Abdul Rasheed Ghaffour, the deputy governor of Bank Negara Malaysia (BNM), the central bank, also anticipates a rise in sustainable finance, telling the Symposium on Islamic Finance in December that demand for ethical investments to support environmental sustainability will only increase in the coming years.

He cited climate change and the increasing incidence of weather-related disasters as some of the major disruptors to economic activity in the modern world, noting that Malaysia’s Islamic finance sector was looking to combat such challenges.

“Within the Islamic capital market, we already see good examples of innovation in the form of green sukuk, an innovative financing vehicle to combat climate change,” he said.

“The recent issuances of the world’s first green sukuk by two energy companies in Malaysia have kick started the growth of green sukuk market and will significantly boost the ‘cleantech’ movement.”

This article was first published in Islamic Finance news, Volume 15, Issue 7, dated February 14, 2018.

Export tax freeze to support Malaysian palm oil industry

Malaysia has introduced temporary measures aimed at boosting palm oil exports and reducing stockpiles amid a slump in commodity prices.

On January 8 the government suspended export taxes on crude palm oil (CPO) for three months, a move Mah Siew Keong, the minister of plantation industries and commodities, described as a short-term, pre-emptive step to increase the product’s competitiveness in global markets.

Export duties are imposed on all palm oil exports above RM2250 ($568) per tonne at a rate determined by a monthly reference price. The January reference price saw the tax stand at around 5.5%.

Suspension of the duty will save CPO exporters around $36 per tonne for shipped products, according to the Ministry of Plantation Industries and Commodities, and increase Malaysia’s competitiveness on the global markets. The country is the world’s second-largest palm oil producer after Indonesia, whose CPO exports are subject to a $50-per-tonne levy.

Sales could be boosted by up to 15% over the period, according to some analysts, and could also benefit from seasonal upswings in demand from key markets, such as China and India.

Easing stockpile pressures

In tandem with increasing export competitiveness and sales, the measure also aims to reduce stockpiles of palm oil, an issue that has weighed on the industry in recent times.

Palm oil stocks in storage reached two-year highs at the end of December, rising by 59% year-on-year (y-o-y) to total 2.7m tonnes, according to the Malaysian Palm Oil Council.

The build up was largely attributed to good harvests and an increase in imports during 2017, rather than a slump in sales. In fact, exports over the first 11 months rose by 2.4%, despite a tapering off of activity late in the year.

The export tax holiday, which is scheduled to end on April 7, could be brought forward if stockpiles are reduced to around 1.6m tonnes, the government said, though production forecasts indicate that output from the country’s processing plants will continue to top up reserves in the months to come.

The high inventory level has weighed on commodity prices, which dropped by about 20% over the course of 2017, subsequently affecting earnings.

The tax measures had a positive effect on palm oil futures on the Bursa Malaysia Derivatives Exchange, with benchmark contract prices for March delivery edging up 1.2% on the day the tax break was announced, though it is unclear whether the raised pricing level will be sustained.

While futures prices on China’s Dalian Commodity Exchange also jumped in early January, they dipped again shortly after on the back of a stronger ringgit.

Currency appreciation and import taxes present challenges

The appreciation of the ringgit has been another factor affecting the palm oil industry in recent times, and one that could erode some of the advantages sought by the government’s tax suspension.

The ringgit was trading at RM4:$1 in January – its highest level since August 2016.

Given that CPO is traded in the local currency, a stronger ringgit generally makes products more expensive for foreign buyers and affects demand, with the government expecting a 10% reduction in earnings for the country’s palm oil exporters in 2018 as a result.

In addition, India – Malaysia’s biggest export market – increased import duties on both crude and refined palm oil in November.

While the levy hikes, which have risen from 15% to 30% for CPO and 25% to 40% for refined palm oil, are aimed at supporting domestic edible oil producers in India, they have coincided with a sharp fall in Malaysia palm oil shipments to that country. Indeed, exports to India dropped by 28.4% over 2017.

There are concerns that any improvement in commodity prices could be undercut by the higher import levy in India, which could serve as a disincentive for buyers.

Malaysia: Year in Review 2017

Rising domestic and international demand for goods and services saw Malaysia exceed GDP growth expectations this year. However, despite strong performances in most sectors, imbalances in the property market could pose a risk to economic growth heading into 2018.

Malaysia’s economy gained momentum throughout the year, according to the latest quarterly bulletin issued by the central bank, Bank Negara Malaysia (BNM); GDP expanded by 6.2% year-on-year (y-o-y) between July and September, up from 5.8% in the second quarter and 5.6% in the first.

The BNM said that due to the strong performance in the third quarter – the first time growth has exceeded 6% since 2014 – full-year expansion was on track to register at the upper end of official projections of between 5.2% and 5.7%.

Expansion bolstered by high domestic demand and external sector

Accelerating growth has been fuelled by more favourable economic conditions both at home and abroad.

According to a report from the Ministry of Finance, domestic demand rose by 6.7% in the first half of 2017, building on the 4.7% increase recorded in the first half of last year. This was supported by robust household consumption and rising private sector investment, which are forecast to increase by 6.9% and 9.3% this year, respectively. Much of this investment was concentrated in the manufacturing and services sectors, with the former seeing higher levels of capital spending in both export- and domestic-focused activities.

The external sector is also a key contributor; total trade increased by 22.6% between January and August this year, a sharp rise on the 0.6% recorded over the same period in 2016, according to the ministry. Export growth is being led by electrical and electronics products, with export earnings up 21.4% compared to 2.3% in 2016.

Moderate inflation, interest rate remains unchanged

Core inflation remained stable this year, mainly due to lower domestic fuel prices, which were another factor behind strong household consumption. Meanwhile, headline inflation, which stood at 3.9% between January and August, is expected to close out the year at the upper end of its projected bracket of 3% to 4%, according to the BNM.

As a result, the central bank kept its benchmark overnight policy rate at 3% in November, with the rate remaining unchanged since July last year.

With the bank’s monetary policy committee due to meet again in January, some analysts predict interest rates will be raised as a result of this year’s strong economic performance.

Favourable economic trends projected to continue

The positive economic trends are expected to continue in the near term, with recently tabled budgetary papers providing a positive outlook for Malaysia’s economy heading into 2018. State revenue is expected to increase by 6.4% to RM239.9 ($49.8bn), and the fiscal deficit is forecast to drop from 3% to 2.8% of GDP.

Expansion will continue to be underpinned by robust domestic and external conditions. Export growth in 2018 is expected to rise by 3.4%, building upon this year’s 16.6%, with real GDP predicted to grow by between 5% and 5.5%.

However, the ministry also sounded a note of caution, citing rising protectionism, uncertainty over the policies in many advanced economies and turbulence in financial markets as factors that could impede growth.

Oversupply of real estate

Despite the overall positive outlook, concerns have been raised over the real estate sector, as oversupply in some segments has the potential to affect the broader economy.

In mid-November Tan Sri Muhammad Ibrahim, the governor of BNM, told local media that the number of unsold residential properties had reached decade-high levels, with particular excesses in the mid- and upper-price ranges. Additionally, a strong flow of new office and retail properties in the development pipeline – 140 malls are expected to open in key areas, including Klang Valley, Penang and Johor – could further add to imbalances in the market.

While growth in the coming year may help soak up some of this excess supply, the sector remains exposed to any unforeseen shocks the economy may experience in 2018 and beyond.