Plenary 2
The Rapidly Developing Economies
MMrr.. AAllii AAbbdduull KKaaddiirr
Senior Advisor of Ernst and Young, Malaysia
7 April 2005
Challenges in Rapidly Developing Economies – The Malaysian Experience
Challenges in Rapidly Developing Economies – The Malaysian Experience
2
Agenda• The Malaysian
Experience
• Main Success Factors
• Challenges Faced
• Meeting the Challenges
3
The Malaysian economy has undergone profound structural changes
Agriculture baseAgriculture base
ManufacturingManufacturing
KnowledgeKnowledge--based based economyeconomy
In 1957 - agriculture, forestry & fishing = 40% of GDP
By 1987 - manufacturing played a more dominant role
Going forward - focusing on enhancing value-add of productive activities
4
Malaysia’s GDP growth has been relatively robust since the 1960s
• GDP grown by average 6.3% per annum in this period
• GNP per capita grew 18 times since independence
from US$200 in 1957 to US$3,600.8 in 2002
• By 2002, unemployment fell to 3.5% (1970: 7.7%), and incidence of poverty fell to 4.5% (1970: 52.4%)
6.3
7.7
6.65.8
0
2
4
6
8
1963-1972 1973-1982 1983-1992 1993-2002
%
Average annual real GDP growth
Source: Bank Negara Malaysia
5
High savings rates enabled strong economic growth with relative stable price
Gross national savings in 2001(% of GDP)
Source: IMF
Malaysia has a relatively high savings rate
12.5
16.5
19.8
23.9
26.2
29.4
32.1
33.8
0 10 20 30 40
Argentina
US
Germany
Hungary
Jordan
Thailand
Malaysia
Hong Kong
This has helped keep inflation low
Average annual CPI growth in Malaysia
1.6
7.0
2.7 3.0
0
2
4
6
8
1963-1972 1973-1982 1983-1992 1993-2002
%
Inflation pushed up by global oil
price shocks
Source: Bank Negara Malaysia
6
Social progress to ensure “growth with equity”• New Economic Policy (NEP) introduced in
1970 aimed at:
− Promoting national unity
− Restructuring society
− Eradicating poverty
− Equitable distribution of wealth
− Public sector to play major role
• Targets:
− No deprivation of economic benefits to any ethnic group / sector of society
− Employment patterns at all levels to reflect racial composition of the population
52.4
29.0
17.1
5.5
0
20
40
60
1970 1980 1990 2000%
of p
opul
atio
n
Population below national poverty line
Source: Economic Planning Unit, Malaysia
7
Diversifying the economy by pursuing industrialisation
• First Industrial Master Plan (IMP) outlined industrial strategy and established framework of developmental strategies to be undertaken from 1986-1995
– To create a more broad-based manufacturing sector
– To promote an export-led industrialisation strategy
8
Malaysia now has a widely-diversified production structure and range of exports
Agriculture, ForestryAgriculture, Forestryand Fishingand Fishing
8%8%
MiningMining 7%7%
Manufacturing Manufacturing 28%28%
ConstructionConstruction3%3%
ServicesServices54%54%
19601960 20022002
Manufacturing Manufacturing
Agriculture, Forestry and Agriculture, Forestry and FishingFishing
38%38%
MiningMining6%6%
8%8%
ConstructionConstruction3%3%
ServicesServices45%45%
Source: Bank Negara Malaysia
• Manufacturing accounts for 28% of GDP in 2002 1960: 8%)
• In 2002, Electrical & Electronic goods comprise 51% of exports
Composition of GDP by sector
9
“Malaysia Inc” policy to promote private sector as main engine of growth• Privatisation of major govt
entities:
– Telecom services transferred from Telecom Dept. to TelekomPLC, which was successfully listed on the KLSE in 1990
– National Electricity Board was corporatised and privatised in 1990; listed on KLSE in 1992
• Capital market provided efficient access to funding and facilitated social agenda on wealth creation
5374
4726
0%
20%
40%
60%
80%
100%
1985 1997
Private Public
Private sector investment as % of total investment
Source: EPU
10
The capital market has been a key driver of growth over the years
Funds raised in the capital market (RM bil)
0
10
20
30
40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Fund
s R
aise
d (R
M b
illio
n)
0
100
200
300
400
Nom
inal
GD
P (R
M b
illio
n)
New government issuesNew equity issuesNew corporate bond issuesNominal GDP (RHS)
11
Financial sector development• The corporate sector
increasingly turning to the capital market for funding needs
• In doing so, they reduce their over-dependence on the banking sector
• Ratio of the size of the capital market (equities and bonds) to banking sector assets is now 100% (at end-2002)
Ratio of capital market size tobanking sector assets
Sources: Respective central banks, World Federation of Exchanges, Bank for Intl Settlements
357
185
100
52
0
100
200
300
400
US South Africa Malaysia Thailand
%
12
Development of a knowledge-based economy is important going forward • New Development Policy (NDP) announced in 1991:
– Led to formation of Multimedia Super Corridor in 1996
– Formed the basis of “Vision 2020”
• 8th Malaysia Plan (5-year plan)
– Achieving sustainable growth with resilience to meet challenges of globalisation and liberalisation
– Facilitate devt of knowledge-based economy to raise value-added of all economic sectors
– Priority to increase supply of quality manpower, enhance R&D
13
Snapshot of economic development since 1957
0
1,000
2,000
3,000
4,000
5,000
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
US$
0
300
600
900
1,200
1,500
1,800
Index points
1957: Independence
1951: Employees Provident Fund set up
1956: Federal Land Development Authority (FELDA) set up
1959: Malaysia’s Central Bankestablished
1960: Stock Exchange formed
1970: New Economic
Policy introduced
1978: National Equity
Corporation set up
1983: Privatisation
policy announced
1986: Industrial Master Plan introduced
1984: National Agriculture Policy
formulated
1991: New Development
Policy introduced;
Privatisation Master Plan
implemented
1997-98: East Asian
financial crisis
1998: National Economic Recovery
Plan introduced;
2001: Capital controls fully removed
2001: Capital Market, Financial
Sector Master Plans introduced
2002
Real GNP/Capita (LHS) KLCI (RHS)
14
STABLE POLITICAL CLIMATE
PLANNING & IMPLEMENTA-
TION
The Malaysian Economy – Main successfactors
• Strong ruling coalition
• National Agriculture Policy
• Industrial Masterplans
• Privatisation Masterplan
• National Economic Recovery Plan
• Capital Market Masterplan
• Outline Perspective Plans
• 1st – 8th Malaysia Plans
15
Well Planned Structural
Changes to Economy
Development of Private Sector as Main Engine of
Growth
Mobilisation of Savings to Fund
Development
MAIN SUCCESS FACTORS- Key Policies and Key Enablers
• National Agricultural Policy (Federal Land Development Authority)
• Development of Manufacturing Sector (Malaysian Industrial Development Authority)
• Development of Knowledge Based Economy (Multi-media Super Corridor)
• Compulsory Savings (Employees Provident Fund)
• Voluntary Savings & Investments (National Equity Corporation, Pilgrim Savings Fund Board)
• PrivatisationMasterplan(Economic Planning Unit)
• Regional Development (State Economic Development Corporations)
16
Capital Market as Key Driver
of Growth
Economic Growth with
Equity
MAIN SUCCESS FACTORS- Key Policies and Key Enablers (Con’td)
• Access to Cheaper Funds (Kuala Lumpur Stock Exchange)
• Capital Market Masterplan(Securities Commission)
• New Economic Policy (Foreign Investment Committee)
• Distribution of Wealth (National Equity Corporation, BumiputraParticipation Unit)
17
Challenges Faced
• National Savings Rate is too high at 39.7% and is stifling domestic consumption.
• The Statutory Pension Fund grew to RM203.7 Billion by 2003 (40% of the Exchanges’ Market Capitalisation) has created liquidity in the Capital Market .
• The Government’s hand in the economy is still strong. The Privatisation Masterplan has resulted in 7 out of the Top 10 largest firms being Government-linked, and 34% of total market capitalisation of the Exchange (or more than half of Malaysia’s GDP)!
• The Industrial Masterplan was too successful, now more than 51% of Malaysia’s exports are electronic and electrical goods, accounting for more than the exports of oil and gas, palm-oil, timber, pepper and other exports combined!!.
18
Move Challenges!
The Asian Financial Crisis of 1997/98 highlighted the vulnerability of the Malaysian Financial sector e.g.
• The export boom internationalised the Ringgit, exposing it to manipulative attacks.
• Mismatch of borrowings to income by corporate sector.
• Exposure to short term capital flows without shareholder value and corporate governance.
• Unconsolidated markets and intermediaries.
19
Meeting the Challenges
• Liberalisation of credit to encourage domestic consumption.
- Savings rate has stopped growing and declined to 35%
• Review of Pension Funds Industry still on-going.
- Other provident funds being promoted.
• Governtment Linked Companies are being re-vamped.
- New CEOs with performance incentives, more independent boards,
20
Meeting the Challenges (Cont’d)
• Governtment Linked Companies are being re-vamped. (Cont’d)
- Government looking at reducing its shareholding in the GLCs.
• The 9th Malaysia Plan will push for a more knowledge-based economy.
- This will reduce over-dependence on export of E & E goods
21
Recovery from the Financial Crisis
• The Government implemented its National Economic Recovery Plan.
- Protecting the Malaysian Ringgit from attacks.
- Capital controls, Ringgit-peg.
- Danaharta, the National Asset Management Company, handled non-performing loans.
- Recapitalisatin of weakened banks through Danamodal.
- Revamp of Corporate Governance values, launch of Code of Ethics.
22
Recovery from the Financial Crisis (Con’td)
• After recovery, launch of Capital Market Masterplan and Financial Sector Masterplan.
- Improving Corporate Governnance and Investor Protection
- Developing the Bond Market to reduce mismatch of borrowings to Income.
- Consolidating, demutualising and listing the Malaysian Exchanges.
- Consolidating and strengthening the intermediaries.
- Improving areas to Capital Market by introduction of REITS etc.
23
A wide range of initiatives already completed or actively in progress
DisclosureDisclosure--Based Based
RegulationRegulation
EnforcementEnforcement
Consolidation & Consolidation & demutualisationdemutualisation of of market institutionsmarket institutions
Corporate Corporate governance governance
reformsreforms
Bond market Bond market development & development &
asset asset securitisationsecuritisation
Islamic Islamic capital capital marketmarket
StockbrokingStockbrokingconsolidation & consolidation &
Universal BrokersUniversal Brokers
EE--commercecommerce
MarketMarket--based based regulationregulation
Training & Training & educationeducation
24
Corporate Governance
Report on Corporate Governance (1999)
Report on Report on Corporate Corporate Governance (1999)Governance (1999)
• Some 70 recommendations for improving CG practices
• Some 70 recommendations for improving CG practices
Shareholder activism
Shareholder Shareholder activismactivism
• Minority Shareholder Watchdog Group
• Enhanced legal provisions for recourse
• Minority Shareholder Watchdog Group
• Enhanced legal provisions for recourse
Malaysian Code on Corporate Governance (2000)
Malaysian Code on Malaysian Code on Corporate Corporate Governance (2000)Governance (2000)
• Principles and best practices
• Statement of extent of compliance with Code required by revised KLSE Listing Rules (2001)
• Principles and best practices
• Statement of extent of compliance with Code required by revised KLSE Listing Rules (2001)
Professional management of
companies
Professional Professional management of management of
companiescompanies
• Mandatory accreditation programme for directors
• Regulatory reforms to encourage participation of non-executive directors
• Change in management in some companies
• Mandatory accreditation programme for directors
• Regulatory reforms to encourage participation of non-executive directors
• Change in management in some companies
Audit QualityAudit QualityAudit Quality
• Guidelines on Internal Audit function released July 2002
• Guidelines on Internal Audit function released July 2002
Enhanced Enforcement Focus
Enhanced Enhanced Enforcement FocusEnforcement Focus
• Increased emphasis on enforcing accountability of principal officers/ controlling stakeholders
• Increased emphasis on enforcing accountability of principal officers/ controlling stakeholders
Capital Market Masterplan (2001)Capital Market
Masterplan (2001)
Malaysian Accounting
Standards Board
Malaysian Malaysian Accounting Accounting
Standards BoardStandards Board
• Frameworks for accounting standard setting, compliance and enforcement are internationally benchmarked
• Frameworks for accounting standard setting, compliance and enforcement are internationally benchmarked
Transparency & disclosure
Transparency & Transparency & disclosuredisclosure
• Quarterly reporting (1999)
• Enhanced disclosure in prospectuses
• Quarterly reporting (1999)
• Enhanced disclosure in prospectuses
Holistic framework for longer-term market development, also covering corporate
governance
Holistic framework for longer-term market development, also covering corporate
governance
Investor Protection
25
Bond market development has been significant…
• Enhanced efficiency of issuance process
– Revised issuance framework regulatory requirements streamlined
• Broadened participation
– Reduced minimum investment in government bonds from 20% to 10% for insurance co.s
– Introduction of guidelines for UBs to deal directly in unlisted PDS
• Asset-backed securitisation framework
– Exemption on stamp duty and real property gains tax on transactions
Capital raising
26
Bond market development has been significant, broadening the sources of financing
Funds raised in the Malaysian capital market
0
2000
4000
6000
8000
10000
12000
14000
16000
1996 1997 1998 1999 2000 2001 2002 2003 2004
New
issu
ance
(US$
mill
ion)
0
5
10
15
20
25
30
Perc
enta
ge (%
)
Government Securities
Private Debt Securities
Equity
Total funds raised as a % of GDP
Source: Bank Negara Malaysia
Government Debt
Securities54%
Private Debt Securities39%
Equity
7%
In 2004In 2004
27
New funds raised in the New funds raised in the capital market in 2002capital market in 2002
Public sector debt
28%
Private sector debt
53%
Equity19%
Proportion of corporate debt over total funds raised has doubled to 53%, from
25% in 1992
New funds raised in the New funds raised in the capital market (1995 capital market (1995 ––
2002)2002)
…helping co.s raise funds amid challenging conditions
0
10
20
30
40
1995
1996
1997
1998
1999
2000
2001
2002
RM
bill
ion
New public sector debt issuesNew private sector debt issuesNew equity issues
Capital raising
Thank youThank you