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