Global Pensions, in collaboration with Bursa Malaysia, gathered industry experts to discuss how the country's evolving economy is paving a smoother road for foreign investors
Raquel Pichardo-Allison: Good morning and thank you all for being here today. The Malaysian market is undergoing a transformation, thanks to strong moves by the government and market players to privatise the economy.
In June, Prime Minster Dato’ Sri Mohd Najib released details of the 10th Malaysia Plan, part of which was designed to lower barriers to investments and encourage foreign investors to participate in the privatisation of state-owned companies. In a note about Malaysia, Barclays Capital analysts said, “This is a clear signal the government is promoting competition; this is good news for foreign asset owners”. Amirsham, could you provide an overview of the 10th Malaysia Plan and the new economic model?
Tan Sri Amirsham A. Aziz: The work laid out in the 10th Plan will clearly transform Malaysia from an advanced developing country into a developed country. We have a target to move from $7,000 GNI (gross national income) per capita to around $12,000 GNI per capita in five years. The government intends to do and has been doing three major things; the first is the Government Implementation Plan which was put in place in January 2010. This clearly sends out the signal that the government is serious about transforming the delivery system to allow it to deal with the sort of investment that we are looking for. There have already been some achievements in terms of the government’s transformation of the delivery system as shown by the IMD World Competitiveness Yearbook 2010 upgrading of Malaysia’s competitive ranking from eighteenth last year, to tenth this year.
The Competitive Yearbook has identified a couple of areas in which Malaysia has shown tremendous improvement. Firstly, Malaysia is ranked thirteenth for business efficiency; government efficiency has gone from nineteenth position to ninth position; economic performance has moved up from ninth to eighth and infrastructure has moved from twenty-sixth to twenty-fifth. The government’s transformation plan is in place and we are looking to achieve its various key performance indices within a two year target.
The second aspect to be implemented in the 10th Plan itself, which is due to begin in 2011, will be the
Economic Transformation Plan and this will address the competitiveness issue in respect of private sector compatibility and participation in the growth of the economy. Its target will be in the region of MYR115bn ($36bn) per annum in terms of new investment and reinvestment by companies in Malaysia. To be able to achieve that, the Economic Transformation Plan will address the issue of talent management which is key for the people of Malaysia to secure the role of the private sector in transforming the economy. In terms of sustainability, we are talking about government transformation in respect of fiscal sustainability over a period of time, and to get industry going the government is currently identifying key areas in which there is a higher trajectory of growth and 11 of these sectors have already been released in the 10th Plan.
There is currently some work in progress around the various policy initiatives that will enable Malaysia to attract investment from oil and gas, palm oil related activities, financial services, wholesale and retail, tourism and many other investment opportunities. This work will be released in October this year.
Raquel Pichardo-Allison: What role will the government play in all of this? As you move some of these assets away from government control to more private hands, where will the balance ultimately be?
Tan Sri Amirsham A. Aziz: The government will continue to provide the right investment climate for the rest of the country by providing and ensuring that there is political stability and that there is a safety net to ensure that displaced groups of people or those people who are less prosperous economically are pushed up the economic scale.
The government has a regulatory and facilitating role and there are also some areas where the government participates directly in the economy.
Raquel Pichardo-Allison: Foreign investors are concerned with some of the capital controls put in place in the 1990s. Can you provide an overview of some of the capital controls still in place and how you plan to remove them?
Dato’Ooi Sang Kuang: That is a very important question at this stage as this is more of a perception than a reality. The reality is that all of the capital controls have been removed, and quite some time ago. What we have in place today is even more liberal than pre-1998 crisis.
Pre-1998, there were still some restrictions over which Malaysian companies could invest and raise capital abroad, and for foreign owned companies to raise domestic capital. Today, however, and from 2005, we have liberalised across the board. Foreigners can buy and sell any amount of foreign exchange in Malaysia for ringgit, they can trade any amount of ringgit securities in Malaysia and there are no restrictions whatsoever on income derived and capital gains repatriation from Malaysia. As I have said we have gone even beyond what many others have done. Today, Malaysia has even become a funding base for foreign issuers of securities.
Now we see the Asian Development Bank, the IFC, Korean and Indian corporates raising ringgit bonds; we see companies raising capital via initial public offerings where the ringgit proceeds are being used for investment overseas. So we have become an exporter of capital and that is where the significant change has been. Pre-1998, we were not an exporter of capital whereas today, we have even gone beyond capital controls and have an open capital account.
The only thing that is left is that the ringgit is not yet traded in the international market, it is traded in the Malaysian market. This one legacy remains because we believe that we should develop the Malaysian foreign exchange market into one with greater breadth and depth and greater liquidity. If there is greater liquidity, then you can execute your transactions more efficiently, you can have a better price discovery mechanism and that is reflected also in the daily larger volume of foreign exchange transactions in Malaysia. In 2005, the average daily volume of foreign exchange transactions was about $2bn. Today, it is closer to $5bn. So over a five-year period, volume has more than doubled.
More importantly, the bid and offer spread has narrowed very significantly. In 2005, the spread was around 50 basis points; today, it is closer to 15 bps. For any foreign investor who wants to buy and sell ringgit for any other currencies, if they do it in the Malaysian foreign exchange market they will be able to transact larger volumes, enjoy faster execution and very importantly, better pricing.
Raquel Pichardo-Allison: Is that something that you can potentially see changing?
Dato’Ooi Sang Kuang: In terms of the ringgit being traded in the international market? Yes, why not? We are reviewing that regularly but as I said, the important thing is first to ensure there is a very efficient and liquid foreign exchange market in Kuala Lumpur. We believe that a single large market with greater depth and breadth rather than a number of fragmented markets, will better serve investors and everyone.
Raquel Pichardo-Allison: What led to the restrictions being implemented in the first place?
Tan Sri Amirsham A. Aziz: The most painful experience in the 1997/1998 crisis when Malaysia enforced capital controls was the restriction over what foreigners were allowed to take out of the capital and that restriction lasted about nine months or so, but today there are no restrictions whatsoever.
Dato’Ooi Sang Kuang: There was a sell down on the ringgit as well as equities by speculators to reinforce the downward spiral causing great loss of confidence and leading to market failure. There was also a run on some of the banks just as we have seen recently in the advanced economies during the latest financial crisis. What made it worse was that banks outside of Malaysia, such as those in Singapore, were offering interest rates on ringgit deposits as high as 25%, attracting large capital outflows. These ringgit funds were then lent to speculators to short the ringgit. These actions negated the stabilisation measures Malaysia was trying to implement, for example, lower interest rates to stimulate economic growth. We were facing an issue where the banks in neighbouring countries were taking a different position of supporting speculation while we were trying to stabilise the ringgit, financial markets and the economy.
As we saw the recent collapse of financial markets in the Euro region as speculators take hold, the situation in Malaysia was no different then. The Germans have introduced measures that we introduced in Malaysia 1997/98 and the Americans have also introduced measures on restricting markets that we introduced in 1997/98. When we did, we were criticised heavily by everyone then.
Dato’Yusli Mohamed Yusoff: As you can see, this was a very extreme situation for the country and the country felt that we needed to do something to protect the local economy.
Dato’Ooi Sang Kuang: The lesson learnt from the 1997/98 crisis, the 2008/09 global financial crisis and the latest sovereign debt crisis in Europe is that when a financial crisis emerges, financial markets go into a panic state and the market ceases to function. A vicious spiral takes place. You have to ring-fence the financial system in order to stabilise the financial market and that is what we did.
Datuk Ranjit Ajit Singh: It is also worth looking at it from the perspective of how regulations are evolving. For example, restrictions on short-selling were imposed during the recent global financial crisis and there is an active debate about the subject. However, in 1998 when Malaysia imposed these restrictions, it was seen to be against conventional wisdom. But it must be recognised that an emerging market that was putting components of growth in place in the capital markets faced with a crisis must use all available tools including, at that time, restricting short selling. In a report published by IOSCO (International Organisation of Securities Commissions), we talk about the fact that there needed to be some degree of intervention towards unfettered capital flows, including the degree of transparency associated with the trading of some players and we feel that all market players have a role in achieving this aim.
Interestingly enough, 12 years down the track, many of these same points are beginning to be more widely accepted in light of experiences in the developed markets.
Mark Makepeace: In October 1998, FTSE felt the situation with the capital controls was so bad that we removed Malaysia. We often forget that Malaysia was a developed market. We removed Malaysia from our indices completely at that stage. Ten years ago, in June 2000, we brought Malaysia back into our indices as an emerging market and we have seen enormous change in those ten years. Ranjit is right, the tools available to the regulators and the way the central banks and exchanges work together these days, is much more sophisticated; they have a broader set of tools. We often think about Malaysia or hark back to some of these international investors who, as developed investors were last investing in Malaysia some 14 years ago and they still have that in their mind.
Raquel Pichardo-Allison: Why has it been a struggle to shed that image? Why is there a question about these capital controls, for example, if most of them are gone?
Dato’Ooi Sang Kuang: There is still some confusion about what capital control is and what trading of the ringgit is. We need to separate the two because as far as capital controls are concerned, we have removed everything; the only legacy policy that is left is the trading of the ringgit in international markets. People confuse the two and think that just because the ringgit is not traded in London or New York, the capital controls are still in place when actually, those are two separate functionalities.
Datuk Ranjit Ajit Singh: Raquel’s question also touches on why people even talk about this in the context of Malaysia. The reality is that we ourselves have to reach out to the investors. Today investors, particularly those looking at the emerging market space, are focused on China, India and Brazil and if they have any time beyond these three markets, they might go to a few others. For countries like Malaysia, therefore, it is necessary to reach out and show them exactly what the existing environment is in Malaysia. It is partly an education process, it is partly an awareness process, but mostly a promotion exercise to showcase the opportunities in Malaysia.
Dato’Yusli Mohamed Yusoff: The lingering perception is also to do with the fact that at the time that it happened, we were the largest emerging market in the world. A lot of fund managers in the emerging market space experienced ... pain ... and it takes time for this pain to fade away. It also coincided with the rise of the BRIC markets so a lot of investors left the Malaysian market because index providers such as FTSE and MSCI removed us from their indices and the investors moved into some of the other emerging markets. We have seen over the last few years that the relative weight of Malaysia as an emerging market has come down drastically, not because Malaysia has shrunk as a country but because the other emerging markets have grown.
Our task is really to try and get ourselves back onto the radar screen of a lot of these investors who have shifted their focus to other markets.
Raquel Pichardo-Allison: Mark, can you tell us about the FTSE Classification Project?
Mark Makepeace: What FTSE has done is divide the emerging markets into two parts; there are the basic emerging markets but also those we call the advanced emerging markets. Advanced emerging markets are those that not only have higher GNI or GDP levels per capita but those where the standards are higher. By that, I mean it is easier, quicker and less costly to invest in these countries for international investors.
It has been important therefore, not just for the investors that benchmark and use our indices but also for the markets themselves. For the first time, we can put a mirror up against all of them and show how they are structured relative to their peers and other choices of investment in a consistent way.
We identified a number of years ago that Malaysia was looking more and more like an advanced emerging market… and therefore, we have been working with the central bank, the regulator, the exchange and the government in supporting their activities to improve the efficiency and the quality of that market across the board. It is not just about trading activity, it is also about the custodian, the settlement and the foreign exchange and we have really reflected our views and the views of global investors back to them in order to help them structure a programme to see that improvement in quality. We have been very encouraged to see the way that Malaysia has coordinated itself in terms of having the central bank and the regulator working together with the exchange and to achieve that actually takes an enormous amount of effort.
We have already heard that liquidity in the foreign exchange has improved, and it has; over the last few years it has more than doubled. We have seen foreign ownership restrictions reduced substantially so we have seen improvements across the board. We have also seen the authorities encourage the practices in Malaysia to match the changes in the regulations.
We have a very important decision to make in September which is whether we will promote Malaysia to an advanced emerging market.
Raquel Pichardo-Allison: What questions will you still have for those around the room as you are coming up to that September decision?
Mark Makepeace: We are always looking for further change and improvements; …the economic wealth of the country has to improve. As the market attracts more investment flows, we would clearly expect to see foreign exchange open up even further so trading of the ringgit is freely available offshore and that happens in steps and is something that we would expect to see happen. These are things about moving from where we are today, not just to advanced emerging but beyond, and we can clearly see that Malaysia has the ambition to do that.
Raquel Pichardo-Allison: Ranjit, how is Malaysia working to encourage foreign investment in the country?
Datuk Ranjit Ajit Singh: From a foreign investment standpoint, there are several dimensions that we are looking at. From the perspective of foreign portfolio investments, which to us is very important, promoting Malaysia through investment road shows, having reverse investments road shows in which we bring investors to Malaysia are all part and parcel of our work to encourage foreign investment flows. At the moment, foreign ownership of Malaysian stocks is around 21% and foreign trading could go up to 40%. So, to us foreign investment is very much a feature of the landscape. We are also working very closely with our counterparts in ASEAN to be able to work towards bringing in more investment flows within the region.
Intra-Asian investment flows are very critical for us; promoting the integration of capital markets within Asia to develop cross-markets is critical. To do that, we have not only created a harmonised structure, which we are leading in driving with our counterparts in the region, but we have also created a market infrastructure with stock exchanges. We are creating more pipes between different markets and we are working towards linking up exchanges in places such as Singapore and Thailand, with a view to tapping into these investment flows.
More recently, outside of the region, we have been recognised by China as a QDII country. Becoming a qualified domestic institutional investor for them is important in drawing in the Chinese investment flows which we are targeting. We did something with India earlier in the year and we also work very closely with respect to tapping the Gulf markets.
From an FDI (foreign direct investor) angle, there is a lot more work being done around efficiency, the delivery system in the government and the competitiveness of the country as a whole; it is about making it more attractive for FDI investments as well. On the financial services side, we have been able to attract major foreign direct investments in the form of new financial firms setting up operations in Malaysia, including leading fund managers establishing entities in Malaysia.
Raquel Pichardo-Allison: Can you name some of them?
Datuk Ranjit Ajit Singh: In the fund management area, we have seen firms like Franklin Templeton Investments, Nomura, BNP Paribas, Aberdeen, Amundi (formerly Credit Agricole) and Goldman Sachs, to name a few. There are also leading firms like CIMB-Principal and Prudential, who have established their global Islamic fund management hubs in Kuala Lumpur. These are top global names and they are located in only selected emerging markets. The fact that they have taken a view to establish a base in Malaysia underscores the potential for the asset management and fund management industry to grow here.
We have also seen foreign broker dealers set up operations, including the likes of Credit Suisse, UBS, Citigroup; Nomura, CLSA, Macquarie and JP Morgan.
Raquel Pichardo-Allison: Yusli, Ranjit mentioned harmonisation and the linking up of platforms in different countries; does that go back to your partnership with CME and Euronext?
Dato’Yusli Mohamed Yusoff: We think that working together with certain exchanges can be beneficial, especially for a market of our size. In the tie with CME, we really wanted to achieve a number of things; the first one was to raise the profile of our derivatives market. With CME, we are going to start using their Globex trading platform which is known as the best trading platform for derivatives. We are going to move all of our derivatives contracts onto the Globex platform by the end of the year. This will enable all of the investors who are linked to the Globex system around the world to view our products on that platform so it will raise our profile.
In our derivatives market in Malaysia today, we have probably 800 screens which are looking at our market but when we move to Globex, that number will increase to probably one million screens around the world. So in terms of profiling our products, that will be very important.
Very recently, we also received approval from the US Commodities Futures Trading Commission to recognise our products and allow them to be marketed to US investors. In order for CFTC to give that approval, they had to be confident that investor protection standards in our market are comparable to what is available in America. This is a very important development for our market and it will assist us in developing our derivatives market which will allow us to meet FTSE’s Country Classification quality of markets criteria to eventually become a developed market.
Raquel Pichardo-Allison: Why is developing the derivatives market in particular an important step?
Mark Makepeace: It helps to improve efficiency and reduce the costs of trading. If I am an international investor and I have cash inflows or outflows, I can use the derivatives to change my positions if it is a short-term move. If it is a longer-term move I would then move out of the derivatives into the cash markets. Having an efficient and liquid derivatives market available is another quality factor that helps and encourages international investors to in investing in those markets.
Dato’Yusli Mohamed Yusoff: CME has also taken a 25% stake in our derivatives business so we are not just using their technology but they are also a shareholder in the business. As far as our equities markets are concerned, we use technology which is currently provided by NYSE Euronext group and we have also appointed them to help develop the system for the Asian link platform. This will create a system that will link the different stock exchanges within the Asian region and we hope to commence this project in the latter part of this year. We hope to have the first linkage ready by the end of next year. We are trying to create a framework which will allow more Asian investors to trade within the Asian market.
As NYSE Euronext is helping us with the system development, we are also working with them to see how they can help to bring flows from Europe and America through their own networks as they have a lot of brokers and investors linked up to them. This is how we hope to tap into the international fund flows for both our equities and derivatives markets.
Two things that Malaysia is fairly well known for are commodities and Islamic finance and last year we launched a system that actually combines these two elements. We initially called it the Commodity Murabahah House which is a system that is used by Islamic banks to facilitate liquidity management and financing. Islamic banks cannot tap the conventional money markets so they need to have a framework that can do this efficiently. We have developed the world’s first electronic platform to do this. Today, we have nearly all of Malaysian Islamic banks using the system and we are now moving to the Middle East region where we have been engaging with a number of Saudi Arabian Islamic banks for them to start using this platform.
This combines the use of our star commodity product in Malaysia, palm oil as the underlying asset, and Islamic finance principles on one platform. As we market and profile this system overseas, it is actually a very good story for Malaysia to show that we have developed two of the country’s strong elements.
Raquel Pichardo-Allison: There is clearly a signal to liberalise the economy in order to move it forward but how can international investors rest assured that it is not going to move backwards again?
Tan Sri Amirsham A. Aziz: There is one way which is oil. We look at ourselves and where we are today against the rest of the world and we are competing for the same capital and the same investment. Today, you see the emergence of large emerging economies and the emergence of many other smaller emerging countries like Indonesia, Thailand, even Vietnam and Cambodia. For Malaysia therefore, when we put our transformation programme in place, it is only oil that will attract those whom we are looking at to move ourselves forwards. To be able to stay competitive, to be able to continue to be attractive to both domestic and FDI investors, that is the only way for us to achieve the 6% growth that we require to move our nation to a high income economy. If you look at the political willingness for the 10th Plan which has gone to parliament recently and you look at the support from the people and the support from the private sectors, you will find the support that you need.
When we plan, we engage with FDI and local investors, capital market players and the man in the street including the farmers and the small retailers in every part of the country so our work clearly has tremendous acceptance. Now they want to see it gain traction as we move towards 2011 and I am very positive about the result that can be achieved.
Raquel Pichardo-Allison: Malaysia has clearly signalled its intention to become a developed market by 2020, will it reach that target?
Datuk Ranjit Ajit Singh: Definitely.
Tan Sri Amirsham A. Aziz: Definitely.
Dato’Ooi Sang Kuang: Yes.
Dato’Yusli Mohamed Yusoff: Of course.
Mark Makepeace: Hope so and if Malaysia can deliver on the intent that is so clearly there then, the answer is yes.
Raquel Pichardo-Allison, editor, Global Pensions Datuk Ranjit Ajit Singh, managing director, Securities Commission of Malaysia Tan Sri Amirsham A. Aziz, chairman of National Economic Advisory Council Mark Makepeace, chief executive, FTSE Dato’Ooi Sang Kuang, special advisor to Bank Negara Malaysia Dato’Yusli Mohamed Yusoff, chief executive officer of Bursa Malaysia
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