Economic Outlook and Business Opportunities in Malaysia
Excerpts from Dato’ Mohd Razif bin Abd. Kadir, Deputy Governor, Bank Negara Malaysia, Central Bank of Malaysia during a visit to Dubai
on the 14th May 2007
“A decade after the fi nancial crisis, the Malaysian economy including the fi nancial system is at its strongest position. Malaysia has greater economic fl exibility to shift to new areas of growth and thus sustain the development momentum. Economic growth has been achieved with relative price stability, low unemployment and strong external balances. The level of savings remains high at 37 percent as a percentage to the GDP and the level of external reserves remains strong at US$91 billion. Malaysia has also taken advantage of globalization to strengthen its economic and fi nancial relationships with the major trading blocs across the globe. In 2006, the total value of the external trade exceeded RM1 trillion (US$294 billion) for the fi rst time. Foreign direct investment has been sustained, particularly into the new areas of growth. The private sector continues as the main driver of growth for the fi fth consecutive year, while the public sector plays have a supportive role. GDP per capita at current prices has increased to about US$ 6,000 in 2006.
While Malaysia continues to attract investment, both domestic and foreign from the traditional sectors, new sectors are gaining in importance. The services sector such as information technology services, shared services and outsourcing, health and medical tourism, and fi nancial services, in particular Islamic fi nance has increased its market share.
The Malaysian Islamic banking system saw in particular strong performance in 2006 with higher profi tability, and has remained well capitalized. Islamic banking assets amounting to about US$34 billion or 13 percent in terms of market share. The Takaful sector stands at US$1.7 billion. The Malaysian Islamic capital market has been equally encouraging. Islamic corporate bonds now amounting to US$36 billion, or 48 percent of the total corporate bond issuance in Malaysia. The domestic bond market plays a crucial role in ensuring that the fi nancing needs of the economy are being fulfi lled. The multinationals and multilateral institutions such as the International Finance Corporation and the International Bank for Reconstruction and Development has begun to tap the fund from the Malaysian capital market by issuing ringgit Sukuk, thus increasing its depth and diversity. The Malaysian private debt securities market including the conventional market has become the second largest market in Asia.
The economic and fi nancial linkages between Asia and the Middle East are growing. While the world trade has on the average expanded by 10% over the period 2001-2005, Asia’s trade with the Middle East has increased on the average by 24%. More than half of the exports from the Gulf states goes to Asia and more than one-fi fth of its imports are from Asia. While the US remains the major recipient of investment fl ows from the GCC, Asia has surpassed the Euro region as the second most popular investment destination.
Malaysia is well positioned to provide the linkages through Islamic fi nance to support the fl ow of this kind of investment. We have put in place a comprehensive Islamic fi nancial system that includes the legal, Shariah and regulatory infrastructure, supported by a diversity of players and a wide range of products and services. Our capital market has depth and breadth that is supported by an active secondary bond market. Situated centrally in the Asian time zone, Malaysia offers to serve as an investment gateway to the region, specializing in Islamic fund and wealth management, and providing a platform for the issuance of Sukuk. Malaysia launched the MIFC initiative last year in order to provide a more conducive business environment. We have liberalized the foreign equity to a maximum of 49 percent in existing Islamic banks and Takaful companies.
New licenses for International Islamic Bank and International Takaful Operator for the conduct of full range Islamic banking business or Takaful and re-Takaful business in international currencies are being offered. Operational fl exibility is given to new licensees to be set up as a branch or subsidiary who will enjoy tax holiday for 10 years under the Income Tax Act. Stamp duty exemption for ten years beginning this year has been granted on foreign currency instruments executed by these participants, and on instruments relating to ringgit and foreign currency Islamic securities. Approval has been granted to fully exempt from withholding tax any profi ts or income on non-residents’ investments in non-ringgit Islamic securities including Sukuk issued in Malaysia.
Malaysia maintains a liberal foreign exchange administratio n regime where investors are freely able to obtain ringgit and foreign currencies to fund their investments in Malaysia. We have relaxed the rules further to allow resident and foreign issuers to raise foreign currencydenominated bonds, including Islamic bonds. Foreigners investing in Malaysia are also free to hedge with onshore banks their committed fl ow of funds such as the repatriation of investment proceeds, dividends and profi ts from Malaysia as well as the purchase of ringgit assets in Malaysia. There is free mobility of inward and outward movement of funds relating to both foreign direct investment and portfolio capital investments. Multilateral development banks and multinational corporations may also issue ringgit or non-ringgit denominated instruments in the domestic bond market.
To enhance the delivery system, an executive committee of key government offi cials, fi nancial regulators and industry players has been has been set up for the implementation of the initiatives to support the operations in the Islamic fi nancial system. Among others, an “executive green lane” has been accorded to expedite applications by expatriates for long-term employment passes with multiple entry visas. The Foreign Investment Committee rules will also be relaxed further to allow 100 percent foreign equity ownership in these fi nancial institutions. Moreover, the Islamic fi nancial system will also adopt a conducive stance on Shariah interpretations and practices, consistent with its international dimensions. It will mutually recognize and accommodate the various juristic reasoning that has been approved by recognized Shariah advisers.