Gan Kim Khoon, executive director at AmResearch, the research subsidiary of AmBank in Malaysia, talks to FinanceAsia about the recent rise in sentiment within and towards Malaysia.
FA: The Malaysian economy and public sentiment seem to be on the rise this year. What's your take?
I think you'll find that consumer confidence is very high here, as evidenced by car sales figures. The figures for the first five months of the year showed surprisingly strong numbers - already up 22% year on year. This has even surpassed our own expectations: we were looking at between 6% to 8% growth.
It's partly a result of low interest rates, which has not only made cars more affordable but mortgages too. Of course it depends on location, but good locations and affordably priced houses, i.e. those below M$250,000 are selling very, very well.
If you also look at external trade. Because the US dollar is weak and the ringgit is pegged to the dollar, it means the ringgit is no longer perceived to be overvalued vis-a-vis other Asian currencies. This should really help our export markets, especially in the second half of the year. Also, as a result of trade surpluses over a number of months, our foreign currency reserves have increased and are now at US$32.7 billion: the highest ever.
In the second half, I think the economy's growth will be largely driven by the external sector, while the first half has been more driven by domestic demand. If the US recovery is stronger than expected, exports are going to be very important going forward.
You've mentioned the improvement in consumer confidence. What underpins that: what has made people go out and spend money?
As I said, one of the main reasons is low interest rates, because you can go out and buy a car at 4% interest, which is very low historically. You can also buy a house and for the first year, the banks are offering as low as 2.8%, also a historic low. Another reason for the pick up in housing is that there is a lot of pent up demand. During the crisis, people put off buying houses - this year the outlook is better, and people are committing to that.
Is there anything that could set back the economic recovery in Malaysia?
I don't really see any impediments unless of course we see any more terrorist attacks on the US, which could derail the US economy and have a knock-on effect here. But domestically, things are very much on track. We're buffered by having crude palm oil, which has reached the M$1400 per ton level. Although this isn't an all time high, it's certainly come up from the low of M$700 at the beginning of last year.
What is sentiment like in the domestic equity markets?
In terms of retail investors, sentiment is still quite weak because they got their fingers burnt in 1998, 1999 and again in 2000. Most of them are still being very cautious, even though they have the money. If you look at new customer deposits in the banking system, these are growing on average by M$1.6 billion per month. People have money, but they're not putting much of it into the equity markets.
This year, the improvement in the equity markets has resulted from improving sentiment from both local and foreign investors.
What is the reason for that?
I think there's a belief or perception that corporate governance and transparency is improving in Malaysia, and that the government is really intent on improving in these areas. You can see the work being done through agencies such as the Corporate Debt Restructuring Committee and Danaharta. You also see new regulations being introduced by the KLSE, such as requiring disclosures on related party transactions.
Take the KSLE requirements - they are a lot more stringent in Malaysia than other parts of Asia. We have quarterly reporting requirements; just like the US, and for us as a bank these are very detailed, running into16 pages or more. Nowadays, most companies are aware of the importance of corporate governance and there are fewer examples of the exploitation of minority shareholders.
Malaysia has not enjoyed the best PR for corporate governance and there have been widespread accusations of crony capitalism. There is talk of that changing - people that have run their companies badly are now being replaced by younger professionals. Is that true?
In most cases there has been genuine change. Most of the people who have replaced the old guard are younger professionals and are there because they have the credentials and experience to do the job. I won't say this is 100% the case because you may still see cases of favoritism, and at the end of the day who you know is still important and will never be totally removed from Malaysia.
What are your top picks for investors?
The banking sector is definitely one, because it acts as a proxy for the rest of the economy. We have seen a peaking of NPLs in the system and on a net basis these are falling.
Construction is another sector to look at because the government is continuing its pump priming of the economy. They have already awarded construction contracts but there are many more infrastructure projects that will be awarded over the next two or three years.
Plantations should do well because of our bullish expectations for palm oil prices, while the motor industry should also do well. Food and cigarette companies should also do well because they offer very good dividend yields, stocks like BAT.
You mention a fall in NPLs. Does this suggest that the lessons have been learnt from the bad lending of the past?
Since the crisis, many banks have formed credit risk management units and introduced risk evaluation programmes. The central bank has also formed the Central Credit Bureau Information System, where banks can exchange information with each other about the borrowings of potential customers.
If you look at the past three years, the banks have generally been very cautious. Loan growth has been 5% or less. Perhaps banks are actually being overcautious now.
What about bank consolidation? How positive has it been for the industry and how far do you see it going?
Generally it's been good because now we are reduced to 10 larger banks. There have been costs savings and at least three banking groups have implemented retrenchment schemes for their staff after the mergers. The process has helped strengthen the 10 remaining anchor banks in terms of their balance sheets and profitability.
That said, I do expect more consolidation going forward because 10 banks is still too many. Of the 10, the bottom four are still very small and will not be able to compete effectively when the next phase of liberalization is due in 2007/2008. Commercial forces will drive more mergers in the future.
On another issue, YTL has obviously been involved with the high profile acquisition of Wessex Water in the UK. Is this a sign of things to come? Could we see more big Malaysian corporates/individuals buying assets outside Malaysia?
Perhaps. Companies that are owned by people like Ananda Krishnan or Robert Kwok are potential bidders for overseas assets - as well as YTL and a few other Malaysian groups. Look at the construction sector - Malaysia is now getting the lion's share of contracts in India. In the past we were always awarding contracts to the Japanese and Koreans but now we are doing it ourselves.
What about foreign activity within Malaysia? It obviously has cost advantages over countries such as Singapore and Hong Kong, and there seem to be signs that companies like BMW and HSBC are choosing to base their OHQ's here.
Malaysia is definitely selling itself as far as operating headquarters for multinational corporates that want to have a base in Southeast Asia. Other companies such as Standard Chartered and HSBC are using Malaysia for their regional back office centres, and Citibank has already done that, while DHL has chosen Malaysia as its regional hub.
I think it isn't just the fact that our labour costs are low - you probably could get cheaper labour in Indonesia for example. But Malaysia does have relatively cheap skilled labour: trained people who can speak and read English, who have at least secondary level education. Indonesia and China, even Thailand, does not really offer that.
We also have the infrastructure: excellent airports, seaports, roads and telecommunications systems. We're definitely competitive in that area. And, as far as attracting manufacturing companies here, the availability of clean water is very important, for example in the semiconductor industry, and also the uninterrupted supply of power. These all give Malaysia advantages: we have the land, the space and the infrastructure. The process started with roads, progressed to air and seaports and next will be electrifying the rail system.
China may be our biggest threat in terms of labour costs, but then you have to weigh that against things like corruption and added bureaucracy, even the lack of rule of law.