KUALA LUMPUR, Dec 24 — By all accounts, next year marks a crossroads for Malaysia. Having grown stagnant and uncompetitive against other emerging markets, the low value-added, low-wage economy is struggling to transform itself into a higher-income economy at a time of low investor confidence, declining private investment and a shortage of talent.
The continuous outflow of capital for the greater part of this year underscores how diffident investors have become, a problem Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah recently acknowledged. “Our manufacturing sector is not investing up the value chain, while our services sector remains low in growth and under-developed,” he said.
Private investment has declined significantly over the past decade — so much so Malaysia’s growth now trails that of most of its neighbours.
Private investment formed over 30 per cent of gross domestic product in 1997 before the Asian financial crisis — but constituted only 11 per cent last year. Foreign direct investment has halved in the same period, falling from an average 6.3 per cent of GDP to 3.3 per cent last year.
The plunge in private investments makes it all the harder for the government to step back from its leading role, even as it grapples with the huge fiscal deficit, which it aims to cut to 5.6 per cent of GDP next year from over 7 per cent now.
At the same time, Malaysia needs to achieve an average growth of 6 per cent annually for the next 11 years if it is to achieve its goal of becoming a high-income nation by 2020.
To incentivise the private sector to function as the primary engine of growth and to move the economy up the value chain, the government has promised a new economic model in February, which it believes will get the “transformational process” off the ground.
But as Ahmad Husni pointed out, to do that, the government needs “to build an environment that gives confidence to the private investor”.
If the lukewarm response to moves this year by Prime Minister Datuk Seri Najib Razak to liberalise certain sectors of the economy is any indication, Malaysia will need to unveil quite extraordinary initiatives — and more importantly, back them with action — if it is to galvanise local and foreign investors into putting their money down.
In what was perceived by some segments of the population as fairly drastic, Najib, who is also Finance Minister, liberalised over 20 services sub-sectors in April by removing equity restrictions. He also did away with a cumbersome investment process, slashing the power of an investment committee to veto applications. A decades-long stringent 30 per cent bumiputra equity requirement for initial public offers was also reduced to 12.5 per cent.
And in the various promoted regional economic corridors —principally in Iskandar Malaysia in south Johor — numerous tax breaks and incentives have been dangled at corporations to get them to invest.
But to the government’s consternation, the response so far has been one of scepticism and indifference — a corollary of it being long on rhetoric and short on delivery, critics have been quick to note.
Worryingly, Malaysia’s petroleum earnings, which last year contributed a whopping 44 per cent to federal revenue, were sharply down on lower crude oil prices at the half-way mark this year. National oil company Petronas’s revenue for the six months to September was RM98 billion, or RM59 billion less, while its net profit was halved to RM31 billion.
In the interim, initiatives to get the economy out of the recession and efforts to stimulate the capital markets yielded some results, following a RM67 billion stimulus package to counter the global financial meltdown.
October trade and manufacturing data point to a turnaround in the economy, which shrank 6.2 per cent in the first quarter of this year, 3.9 in the second and 1.2 in the third. Economists have forecast growth of 3-plus per cent next year, following a contraction of 2-3 per cent for full-year 2009.
In the equity market, the main and second boards have been combined, and the tech-heavy Mesdaq Market converted into the Ace Market, a board aimed at emerging companies.
The Kuala Lumpur bourse landed its first foreign initial public offer this year in the form of China’s Xidelang Holdings. Since then, another two mainland Chinese sports-shoe makers have followed suit. But the amounts raised in the public share sales were a fraction of that raised when telco Maxis re-listed. The re-listing was undoubtedly the highlight of the year for the KL bourse. Maxis raised over RM11 billion, marking its
IPO as the region’s largest for the year and sixth-biggest globally.
Notwithstanding its return and the 40-plus per cent gain by Bursa Malaysia this year, Malaysia remains a laggard in the region. The regulators have assured that the capital markets will continue to be liberalised, the most recent example being the granting of a licence to Goldman Sachs to establish local fund management and corporate finance advisory operations.
Significantly, state investment agencies are beginning to reduce their large holdings in government-linked companies (GLCs) to improve market liquidity. Khazanah Nasional has made a number of large disposals over the past months, totalling an estimated RM1 billion at least.
Although the opposition has alluded to the federal government’s desperation for funds in the sell-down, fund managers say the programme also needs to be expedited to allow the private sector to take the initiative. The government has also spoken of plans to list some of the bigger GLCs next year — a likely one being Felda, the Federal Land Development Agency, which is one of the biggest oil palm planters in the country — to attract foreign equity funds.
In terms of stockmarket performance, the KL bourse could hit a high next year of 1,345, according to OSK Research, while RHB Research pegs it at 1,400, giving upside of 7-11 per cent. Analysts believe the market is likely to perform better in the first half before tapering off on economic concerns. Corporate earnings are expected to average 15 per cent. — Business Times Singapore
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