We have made significant progress in financial restructuring since the Asian financial crisis. The closure of the Corporate Debt Restructuring Committee (CDRC), a voluntary platform for the workout of corporate debts in August 2002, marked an important milestone in financial and corporate restructuring efforts initiated since 1998. During its four years of operations, CDRC had successfully resolved 48 cases with debts worth M$52.6 billion. Danaharta, an asset management company, ceased to acquire NPLs from the financial sector in 2001, and has since dealt with all NPLS totalling M$47.8 billion under its purview. Danaharta expects to achieve an average recovery rate of 57% of its acquired and managed loans. Given the progress of its operations, Danaharta is on track to cease operations in 2005. Danamodal, a special-purpose vehicle established in 1998 to recapitalize the financial sector, has not made any capital injection since 1999. Its outstanding investment in three financial institutions, however, remains at M$2.1 billion as at end-March 2003 from an initial injection of M$7.59 billion into 10 banking institutions. Danamodal is also on schedule to cease operations in 2003.
Another important achievement in financial restructuring is the completion of the merger programme for domestic banking institutions. The merger has successfully transformed the once highly fragmented banking system comprising 71 banking institutions to 30 banking institutions under 10 banking groups. The banking institutions are now well-capitalised and better placed to reap the synergies of mergers, enabling them to offer a wider range of financial services as well as face increased competition. The next round of consolidation, involving the merger of commercial banks with finance companies, will be market-driven.
Will the new government continue with the policy of providing stimulus to the economy by building large projects such as the Petronas Towers, the airport and a new seaport?
It has always been the intention of the government to continuously improve and upgrade the infrastructure and transportation networks throughout the country. Strategic projects that are critical and viable and could act as catalysts for further stimulating the economy will be given due consideration. Our focus is on enhancing quality, efficiency as well as productivity of infrastructure facilities and services to effect better linkages and to support the growth and competitiveness of other sectors in the economy. We have witnessed that past infrastructure investments, which have long gestation periods, have begun to show positive results as they have expanded the productive capacity of the economy. Having said that, we believe that projects must be planned according to affordability, based on our revenue inflows and as well as on the economic viability. Besides, these projects are largely financed from our own domestic resources without resorting to large external borrowings.
What industries should be promoted to ensure Malaysia continues to achieve a healthy GDP growth? Can a healthy GDP growth be achieved via the country’s commodities base?
The growth of the Malaysian economy will have to depend on stronger domestic activities, particularly in an environment of continued greater uncertainties in the external sector. The nation’s growth has long been heavily reliant on FDI, trade and commodities, which are subjected to volatilities in business cycles of our major investment and trading partners.
To ensure Malaysia continues to achieve healthy growth, and reduce this high dependence, we are embarking on initiatives to vigorously explore and promote our domestic sources of growth. We must bolster domestic investment in new and niche areas, particularly in the services sector such as tourism, education, transport as well as making agriculture the third engine of growth.
We have been intensifying our efforts in developing the services sector as a catalyst for future growth as well as in exporting services and in substituting imported services. These efforts have borne positive results. Subsequently, the share of the services sector to real GDP has increased from 45% in 1987 to 56% in 2002.
Can the country continue to rely on export manufacturing?
Malaysia remains a competitive producer of manufactured products and is currently the 18th largest global trading nation. Our manufacturing exports grew from M$9 billion in 1983 to about M$300 billion in 2002. This shows that Malaysian manufacturing exporters were able to withstand stiff competition from new emerging economies during the past decades. The government will continue to undertake programmes and measures to enhance the resilience and competitiveness of the manufacturing sector, in particular the small-and medium-scale industries. Efforts to build capacity through technology, best manufacturing practices, R&D, training and retraining as well as innovations will be vigorously promoted. In addition, efforts to further improve competitiveness will be undertaken by reducing the cost of doing business, providing attractive tax and non-tax incentives and as well as improving the public sector delivery system. All these measures are undertaken to further enhance Malaysia’s competitive edge and to ensure that we continue to be a major global exporter of manufactured products.
Is the new government likely to remove the currency peg or consider re-pegging the currency?
The ringgit currency peg has benefited the Malaysian economy in terms of providing an environment of predictability and stability to facilitate pricing, trade and investment decisions to support economic growth. Given the volatility in the currency markets arising from the greater uncertainties in the external environment, the fixed exchange rate is a boon to the business community.
The government’s stance has been to ensure the ringgit peg remains sustainable and is supported by strong fundamentals and is not grossly misaligned with other currencies. As such, the ringgit peg continues to be supported by a strong current account surplus, high international reserves, low inflation, low external debt and a sound banking sector.
The government’s approach is not to respond to short-term fluctuations in the exchange rate of the ringgit. This stance is likely to continue with the new government. Any decision on the ringgit peg will have to be weighed against the benefits of a stable and predictable exchange rate to facilitate economic activities and the uncertainty arising from a volatile exchange rate.
How are the new stimulus initiatives announced by the KLSE likely to boost the stock market?
The main objective of the 10 new measures announced recently by the government is to stimulate and further enhance the Malaysian capital market. As part of the government’s effort to ensure continuous growth of the Malaysian economy, these measures are aimed at developing an efficient, competitive and resilient capital market. Specifically, the measures are intended at attracting greater investor participation, improving liquidity and efficiency in the capital market and strengthening the intermediation role in the capital market.
The lowering of the transaction cost would help increase investors’ participation. This is implemented through a capped stamp duty of M$200 per contract for all securities transactions on KLSE effective on 17 March 2003. Furthermore, standardization of board lots to 100 lots is also expected to make the purchase of stocks on KLSE more affordable and attractive, particularly for small investors while at the same time enhance the participation of investors in the overall market.
New guidelines have been finalised by the Government to allow companies with a minimum market capitalization of M$250 million and an after tax income of M$8 million for the latest financing year, starting from 1 April 2003, to be exempted from the three years profit record requirement. These new guidelines together with the reduction in the moratorium period from three years to one year will enhance the liquidity of companies and at the same time provide them with additional avenue to be listed on the KLSE. The government is also facilitating the merger of government-linked companies within the common sectors and this will encourage them to participate in a KLSE listing.
Reduction of IPO processing time by the Securities Commission, in consultation with the foreign investment community, to less than three months will reduce time-to-market and helps to enhance the efficiency of the capital raising process for issuers.
To strengthen the intermediation process, the capital market skills and the role of intermediaries will be improved. This will be affected through training and continuous skill upgrading as well as revisions of the current commission rates for brokers, which will create value to the securities industry in Malaysia and lead to improved market service.
Overall, the measures mentioned above will increase the attractiveness of the Malaysian capital market, particularly, in the long run on a cumulative and, more importantly, sustainable basis. It is important to emphasis that we do not see such initiatives as a one-off event but as a continuous process involving constant refinement of existing mechanisms reinforced by innovations that would enhance the overall value being offered by the Malaysian capital market consistent with the country’s long-term strategic plans.
Is the government keen to see further bank consolidation?
Consolidation in the banking sector will be determined by market forces, driven by the more competitive operating environment. The government will continue to encourage and facilitate efforts that will benefit the banking system, including further consolidation to accelerate the process of attaining larger size in terms of capital position, customer base and market share. However, consolidation is not the only route to achieve enhanced capacity and capability in meeting the new challenges. Improvements in business operations, customer service, risk management practices and corporate governance are also key to ensure that the Malaysian banking institutions are capable to compete in the long run.
How important is Islamic finance to Malaysia?
Since its inception in 1983, Islamic banking in Malaysia has made commendable progress. Over the years, the Islamic banking system has evolved into a viable component of the Malaysian financial system, operating in parallel with the conventional banking system. We have now a comprehensive Islamic financial system comprising banking, insurance or takaful, and the money and capital markets. As at end-March 2003, Islamic banking assets constitute approximately 9% of the total banking system with total assets of M$70.5 billion. For the takaful industry, the market share of takaful assets and takaful contributions constitute 5.2% and 5.6% of the total insurance industry, respectively. The Islamic capital market has also become an important component of the Malaysian capital market. As an example, the outstanding Islamic debt securities constitute approximately 45% of the total outstanding debt securities while the new issuance of Islamic debt securities constitute 56% of the total new issuance of debt securities.
As part of the initiatives to further increase the significance of Islamic banking and finance, the Financial Sector Masterplan (FSMP) launched in March 2001 outlined specific strategies to further develop the Islamic banking and takaful sector. On Islamic banking, the FSMP focuses on three main areas, specifically, institutional rapacity enhancement, financial infrastructure development and regulatory and supervisory framework development. These strategies are also aimed at towards making Malaysia as a regional Islamic financial centre. On the global front, Malaysia has contributed largely towards the development of Islamic banking and finance. Towards this end, we have successfully launched the first sovereign global Islamic bond, amounting to $600 million in June 2002.
The full version of this interview is in the June edition of FinanceAsia Magazine.