The Malaysian government’s ambitions to transform its economy put the country on the cusp of change. However, before its economic vision can be achieved there are a number of challenges that need to be overcome. Malaysia stands at a juncture. The government reforms could push the country to the level of high-income status, but there are plenty of cynics who claim that the reforms are just another set of political ambitions that will never be realised.
Observers point to the ‘middle-income trap’ that Malaysia faces; it is competing with the cheaper resources of other emerging economies while also facing a brain drain of its top talent to developed countries.
Plan after plan after plan...
Malaysia’s prime minister, Najib Razak, who is also the country's finance minister, aims to double Malaysia’s gross domestic product (GDP) per capita to $15,000 by 2020. The reforms are an alphabet soup of acronyms: they are part of the New Economic Model (NEM), the growth is to be achieved through the Economic Transformation Programme (ETP), alongside the implementation of the Government Transformation Programme (GTP) with seven National Key Result Areas (NKRAs) and eight Strategic Reform Initiatives (SRIs).
The reforms follow in a line of other government initiatives aimed at building Malaysia’s economy. The prime minister, in his budget speech for 2012, noted that since the country gained independence from the UK in 1957 it has seen 53 budgets, 10 Five-Year Development Plans and three Outline Perspective Plans, which fell under the New Economic Policy of 1971-90, the National Development Policy of 1991-2000 and the National Vision Policy of 2001-10.
And now Malaysia is undergoing another stage of reform and transformation. “Malaysia needs to reinvent itself,” says Tai Hui, Standard Chartered’s regional head of research for south-east Asia. He explains that Malaysia, like Thailand, is threatened by the rise of China and could lose its competitive edge. The Malaysian government’s reforms address this and aim to upgrade the country to the level of a developed economy. “The key is implementation,” Mr Hui says of the ETP, which was launched in September 2010. While some Malaysians may be sceptical of the government’s ability to achieve this economic growth, Mr Hui notes that with this economic plan the goals have been clearly laid out and there is transparency in whether the targets are being reached.
International appeal
While there may be scepticism at home, foreign investors are responding to the government’s initiatives. According to government figures, foreign direct investment increased six-fold to RM29bn ($9.3bn) in 2010. In the first half of 2011, it increased to RM21.2bn, compared with RM12.1bn for the same period in 2010.
“Malaysia is transforming,” says Abdul Wahid Omar, president and CEO of Maybank. He adds that the objectives of the government’s vision are not just about reaching the target for GDP per capita of $15,000, but also improving living standards.
[Malaysia was] unscathed by the first financial crisis but we have been watching developments... The overall environment in Malaysia is fairly good
The government’s budget for 2012 is based on a GDP growth of 5% to 6%. Standard Chartered, however, is more pessimistic and expects GDP growth to slow to 2.7% in 2012, from an estimated 4.8% in 2011. The research also states that Malaysia’s relatively open economy leaves it susceptible to weak global growth, and commodities will be key to the country’s growth prospects.
Chan Kok Seong, CEO of UOB (Malaysia) argues that even if there is a drop in commodity prices, the profit margin on palm oil is so large that the industry will continue to be profitable even in the event of a slowdown. “The only sector that will be impacted by the euro crisis will be manufacturing,” says Mr Chan. For the year ahead, he is optimistic that Malaysia will have moderate GDP growth of about 4% to 5%.
As for the impact of the global economy on Malaysia’s banking sector, Mr Chan says: "I'm hopeful that the banking system will remain healthy; I do not see a non-performing loan problem – there is no credit crunch or spike in interest rates – we do not foresee a vicious cycle of credit tightening, business failures and rising unemployment."
Banking role
Under the economic plans for the country, the banking sector is not seen as a driver of growth. Mr Chan says: “We differ from Singapore as we still view the banks in Malaysia as more of an enabler to economic development rather than a driver for growth.” Since Malaysia has a larger domestic economy, it does not need to pursue ambitions of becoming an international financial centre to rival Singapore, says Mr Chan. He adds that the ambitions of making Kuala Lumpur a financial services powerhouse may have been dampened by the global financial crisis as the risks of being so open and dependent on the financial services industry became apparent.
Mr Omar at Maybank agrees with this view on the role of financial services in the economy. “Malaysia has been consistent: we do not regard financial services as driving the economy per se. Fundamentally, financial services are meant to facilitate trade and services and support the real economy,” he says.
Nazir Razak, managing director and CEO of CIMB Group, says: “There are identified sectors within the economic transformation plan, and we need a financial system that is able to support that transformation.”
As part of the vision to reach developed-country status, the financial services industry is one of 12 National Key Economic Areas of Malaysia’s economic plan. But the banking industry, like many others, is affected by events further afield. Mr Razak, commenting on the events in Europe, says: “We were unscathed by the first financial crisis but for some time we have been watching developments. In terms of business, the overall environment in Malaysia is fairly good, but there are increasing voices of caution.”
Debt worries
Consumer debt has been an issue, but Mr Razak points out that the central bank has intervened to cool its growth. Besides, says Mr Razak, the proportion of unsecured debt in Malaysia is quite small.
Moody’s notes that the banking sector’s loan growth has been mainly driven by the household sector. Household debt to GDP was 76% at end of 2010, which Moody’s states is high relative to other developing countries. While the increasing level of household indebtedness may be a concern and undermine consumer credit quality, Standard & Poor’s views Malaysian banks as having a stable financial profile with generally prudent risk appetites. The banks are experiencing margin pressures in a competitive environment. And added to this pressure is the increase in the number of foreign players, which have have entered the country through the central bank’s liberalisation of the sector. Standard & Poor’s notes that in 2010, five foreign institutions were issued new commercial banking licences in Malaysia.
Mr Razak at CIMB, however, points out that there has been a migration of market share to local banks away from foreign banks. Malaysia used to be dominated by foreign banks, says Mr Razak, but these days the local players are able to compete with them.
Consolidation trend
A trend of consolidation has been affecting these domestic players. For example, in May 2011, Hong Leong Bank acquired EON Bank, which were ranking as sixth and ninth largest banks in Malaysia, respectively, in The Banker's Top 1000 World Banks listing in July 2011.
The fifth largest bank in the country, RHB Bank, was also part of merger discussions last year. However, CIMB Group and Maybank walked away from discussions to buy RHB Capital, the owner of RHB Bank. RHB Capital has now applied for regulatory approval to merge its banking group with the investment bank of OSK Holdings.
Of these consolidation prospects, Mr Omar at Maybank says: “We were keen on RHB to strengthen our domestic franchise and to extend our regional footprint in the Association of South-east Asian Nations. That merger did not materialise given the higher price expectation of certain RHB shareholders. Our default position is to grow organically – that has always been the default position anyway.”
Consolidation has been a theme for Malaysia’s domestic banking market, while at the same time banks such as CIMB and Maybank are looking overseas for expansion opportunities. Back home in Malaysia, however, the banking executives will be closely following the progress of the government’s plans for economic transformation and whether Malaysia will stay on target in its bid to become a developed country.
