Ministry of Finance Malaysia
Investors Conference Malaysia: A New Dawn
Crouching Tiger, Hidden Dividends: The New Malaysia Story
9 October 2018
- When this government first took office after the historic 9 May general election, investors had questions about the direction of this country even as ordinary Malaysians were celebrating the political change. While our actions have answered some of those questions, some perhaps, still linger. This conference is designed to provide greater clarity to domestic and international investors about our plans to push Malaysia forward and achieve the country’s previously unfulfilled potential and promises.
- Malaysia had in the past been labelled as an economic tiger, crouching, ready to pounce any time. Those were the heady days of the 1980s and early 1990s, when we were the darling of investors, both local and foreign. However, it appears a s if we have fallen asleep, crouching, never really fully attaining anywhere near our full potential.
- It is a shame because in the 1970, data from the World Bank shows South Korean GNI per capita was only 76% of Malaysian level. But by 2017, South Koreans were almost 300% richer than Malaysians.
- Even more worryingly, Malaysian growth rate has been slower than its regional rivals. For example, the 2017 Malaysian GDP per capita in USD terms was only 4 times larger than in 1990. In contrast during the same period, Vietnam grew about 16 times and China grew more than 26 times. While Malaysia is no doubt richer than these two countries in per capita terms now, t here is a real danger that those two countries could overtake Malaysia if we remain complacent.
- There is no question that Malaysia has an immense potential still largely untapped . It is the objective of the new Pakatan Harapan Government to finally unleash this potential , and allow Malaysians and all you investors out there to uncover the hidden dividends .
- To this end, I will start off by touching on the global environment and challenges, [followed by the resiliency of the Malaysian economy ], and lastly the way forward.
- Malaysia is a small, open and highly diversified economy . We are deeply integrated with the global economy and international 3 financial markets. Thus , when discussing Malaysia’s economic prospects, there is no running away from looking at global developments – both the good and the bad.
- Global expansion is expected to continue with the IMF projected the world economy to grow at 3. 7% in 2018 and 3.9% in 2019 . However, emerging market economies (EMEs) including Malaysia are facing a challenging global economic and financi al environment. The US economy is expanding strongly but growth in other major economies such as the Eurozone , Japan and the UK has begun to soften. For the emerging markets , China and emerging Asian economies continue to provide strong support to regional and global growth, while others that are mired in country specific factors have seen their growth prospects being revised downwards.
- Against this backdrop of uneven global growth, downside risks have also intensified. Rising trade tensions between the US and its major trading partners are of significant concern. Geopolitical risks have risen as international economic and diplomatic relations are being tested. These uncertainties have led to significant volatility in global financial markets amid continue d monetary policy normalisation in the US and tightening global financial conditions. As a result, EMEs have experienced large capital outflows and currency depreciation pressures. Some EMEs have experienced worse than others, especially those that are viewed to have domestic vulnerabilities.
- The emerging markets are increasingly , and perhaps unfairly, being seen as a single asset class. Countries that exhibit similar vulnerability characteristics tend to be grouped together and 4 therefore face similar or intensified capital outflow and currency depreciation pressures. While the spill -overs have thus far been manageable, if there is anything we can learn from the Asian Financial Crisis , it is that contagion risks should not be taken lightly. Continued vigilance is warranted to guard against potential risks of contagion.
- Despite all the external headwinds and not forgetting a change of government f or the first time in 61 years , the Malaysian economy has proven to be incredibly strong and resilient. Our strengths can be seen from 6 factors:
- Firstly, the Malaysian economy is expected to remain on a steady growth path, driven by both domestic and external demand. While GDP growth is expected to moderate to around 5% for this year , Malaysia remains one of the fastest growing economies in the region.
- Secondly , we are a highly diversified economy. The services sector account for around 55% of GDP. Our exports are likewise diverse, with manufacturing exports accounting for more than 80% of our total exports.
- Thirdly, our favourable labour market conditions remain supportive of growth. This is evident from a low unemployment rate of 3.3% and firm private sector wage growth. The latter 5 remains strong, registering a growth of 6.2% in the first half of 2018.
- Fourth, we continue to have a healthy current account surplus. Malaysia’s current account surplus stood at 2.8% of GNI in 1H 2018 and is expected to remain in surplus going forward. Even more positively, the goods surplus will continue to be supported by a highly competitive and diversified export sector.
- Fifth, Malaysia will continue to have in place a flexible exchange rate. The ringgit has evolved since the Asian Financial Crisis to become a fully flexible or a floating currency. Having this flexibility is advantageous to Malaysia as i t allows the ringgit to play the role as a shock absorber during times of stress. Nevertheless, it is highly important for businesses to recognise that exchange rate adjustments are unavoidable and are ready to manage their currency exposures prudently. In the medium-term, as the Government continues to improve our economic fundamentals, the ringgit will eventually reflect these positive developments. An independent Bank Negara will of course guide and help ensure confidence of the currency’s stability.
- Sixth, we have continued to possess sufficient external buffers. Our international reserve position of USD103 billion is adequate to facilitate international transactions. Furthermore, international reserves account for only a quarter of Malaysia’s total external assets. Banks and corporations hold three-quarters of Malaysia’s external assets (as at end -2Q 2018: RM1.3 trillion), which can also be drawn upon to meet their external debt obligations 6 (RM740.9 billion), without creating a claim on international reserves. Our financial institutions are also very well-capitalised with more than sufficient liquidity to support intermediation within the economy.
- Perhaps most presciently, both business and consumer sentiments have been incredibly positive, reflecting posit ive outlook on the prospects of the domestic economy . The Consumer Sentiments Index produced by the Malaysian Institute of Economic Research (MIER) rose to 132.9 points in the second quarter of 2018 from 91.0 points in the first quarter. This is the highes t level recorded by the index since the 1997 Asian Financial Crisis. MIER also reported that its Business Conditions Index rose to 116.3 points from 98.6 points in the same period, the highest in the past 13 quarters.
- More recently, the September Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) data signaled the strongest improvement in Malaysian manufacturing conditions for ten months, driven by a faster rate of job creation. IHS Markit, which compiled the survey, said manufacturers added to their payrolls at a rate not seen since the opening month of the survey in July 2012. The reading remained above 50.0 in September, marking the first sequence of positive readings in three -and -a-half years
- The trade conflict between China and the United States has also created a unique opportunity for Malaysia, where we are extremely well positioned to take advantage. In the recent months, anecdotal surveys have shown increased interests from Chinese manufacturers to diversify their production base s into Malaysia as a 7 means of gaining entry into both the ASEAN and western markets. At the same time, we see investors from OECD countries who have previously set up plants in China, to shift part of their capacity here. We are not shy to highlight our multilingual strengths in both English and Mandarin to navigate between the two largest economic giants in the world. This is on top Malaysia, geographically located at the heart of ASEAN, aided by Bahasa Melayu as our national language, being best placed to tap into the 4th most populous region in the world.
- Indisputably, w e have a n established and diversified manufacturing and export ecosystem for both foreign and local investors to grow and tap on . Our education levels, quality of hard and soft infrastructure as well as the fluency in many languages gives us the natural edge. At the same time, we remain significantly cheaper investment destination than most other countries.
- As the Government gets down to business, we will prioritise on policies that will positively contribute to the growth outlook. The diversified nature of our economy also ensures that we will be able to weather any shocks that arise. The Government is also focusing on improving the we ll-being of the people of Malaysia. It is important to ensure that the dividends from growth are shared more evenly and that efforts to protect vulnerable groups continue.
- With all these factors in mind, there is no reason why one should not be optimistic about the prospects of the new Malaysia.
- You would have been aware of the RM1 trillion of debt and liabilities that was first revealed by our Prime Minister shortly after the new Government took over . These debt and liabilities are the result of the previous administration’s escalating ingenuity in adopting off - balance sheet financing for government expenses and financing over the past decade. These hidden debts, if left unchecked without a change of government during the May election would have brought ruin to the country.
- While the creative off -balance sheet debts and spending by the previous administration were not entirely a surprise, we were taken completely off -guard to discover that Government revenues had also been overstated in the previous financial budgets to present a false picture of prudent fiscal consolidation. What the previous government had failed to account for and disclose, was the snowballing GST and inc om e tax outstanding refunds which amounted to RM 35 billion as at May 2018.
As painful as it may be, this money doesn’t belong to the Government and this administration has made it a moral imperative to refund RM35 billion of outstanding refunds to the companies and people of Malaysia. The silver lining however, is that this enormous refund exercise will certainly act as a major stimulus to our private consumption and investment.
- However, in this context, to quote our Prime Minister, “ The budget is of sacrifice – everyone will have to sacrifice," and “ we have to accept that we must sacrifice.” The fiscal targets set by the previous administration are hence unrealistic in the short term and it would be foolish for this Government to maintain these targets. Over the medium term however, we will remain strictly on the path of fiscal consolidation as we reform our institutions and processes, increase our revenues, optimise our expenditures as well as rationalise our debts.
- Our new government is determined to clean-up our accounts and make the public sector more transparent in its finances. For a start, we are committed to a shift from cash-based to accrual accounting standards by 2021. This move, which will involve a transition period of 5 to 7 years, will inculcate the necessary fiscal discipline in the current and future governments, ensuring that the excesses of the past will not repeat themselves.
- As part of our fiscal reforms to strengthen the government’s fiscal position more systematically , we have established the Public Finance Committee (PFC) chaired by myself, with the Minister of Economic Affairs and the Governor of the Bank Negara as members. The PFC has the mandate to strike a balance between the government’s commitmen ts to fiscal consolidation and the government’s needs to make continuous productive spending and investments.
- However, while it is imperative for the Government to be prudent with our expenditure, we are equally cognizant that we must not fall into the austerity trap. What we want is merely to get a bigger bang for the buck, to make sure that every tax -payers ringgit will generate the equivalent value and maximum multiplier effect.
- Hence, for clear cut white elephant projects, such as the Multi - Product Pipeline and the Trans -Sabah Pipeline projects expected to cost more than RM10 billion have been cancelled . This is despite the fact we have paid approximately RM8.5 billion of the fees of the total project , even though less than 15% of the works have been completed. Suria Strategic Energy Resources, the project owner which is wholly-owned by the Ministry of Finance is in the process to negotiate with main contractor, China Petroleum and Pipeline Bureau (CPPB) to determine the compensation quantum and amount to be refunded to us.
- There are also many mega infrastructure which we recognise as crucial towards productivity and economic growth for Malaysia. They will include the rail -based public transport projects such as the LRT3 and MRT2. For these project s, we have every intention of continuing but we are committed to ensure that there are no unnecessary and excessive scope, while also ensuring that the cost is reasonable. Hence for LRT3, we had successfully re -negotiated with the main contractor and Syarikat Prasarana to reduce the overall cost of the project from RM31.6 billion to RM16.6 billion, a saving of RM 15 billion or 47%.
- As I announced 2 days ago, we had also successfully renegotiated the total scope cost for the MRT2 above ground contracts to be reduced by 23% from RM22.6 billion to RM17.4 billion. However, when we could not agree on the appropriate cost reduction for the MRT2 underground works, after receiving the necessary feedback from independent consulting engineers, we had little choice but to conduct an international open tender for the balance of the works of the underground portion .
- It must be highlighted that these actions are intended not only to save cost , we expect more savings from MRT2 when the international tender for the under ground portion is completed. But also to reduce the future debt and liabilities of the Malaysian Government. What’s more, a lower cost of construction means improved viability for the public transport system, lower ticket prices and higher passenger traffic.
- This new Government believes in the dictum, “the business of the Government is not to be in business.” And hence, in the coming years, you will see a slew of programmes designed in part to unleash the full potential of the private sector.
- While the previous administration only talked about a “private sector-led market economy”, this new administration will walk the talk. We have heard numerous complaints from investors and businessmen alike that our capital markets are too illiquid, controlled effectively by several government link investment corporations. This has resulted in a lower MSCI Emerging Markets weightage of only 2.48%.
- Let me repeat what I said, we heard you. We will reduce the Government’s direct participation in the equity ownership of companies so that the private sector can take the lead. For listed entities, this will definitely lead to higher average daily volumes for Bursa while improving market liquidity.
- Of course, I will also be honest with you because I promised to be an honest Finance Minister. The above move is a stone that will help us kill two birds. We will be unleashing the power of the private sector and reduce the crowding out effect caused by the Government. In addition, we will also be able to gradually realise the value of government owned assets and utilise these proceeds to pare down our debt obligations.
- At the same time, our Government will play our role as the single largest buyer in the country to promote efficiency and competitiveness of the private sector. As an example, previously an overwhelming majority of PPP projects were discovered directly negotiated. Contractor s carried out government project s such as building new affordable homes , schools, police stations, fire stations and army camps, in exhange of government land instead of being paid in cash . But unfortunately, they were negotiated directly so we do not know what is the real cost of the public project , or the real value of the government land being sold or exchanged. Under such opaque terms, corruption, extraordinary profits to crony companies and poor returns on investment were rife.
- Such a direct negotiated process pervert ed the model of PPP into a piratisation exercise or crony capitalism. Through direct negotiation, the real value of the government land was invariably under -priced whilst the cost of the public works project was over -priced.
- The new true PPP model, or what I would term as PPP 2.0 would decouple the land swap by carrying out open auctions for the land to be sold, while at the same time executing an open tender for the project to be built. This will enable the government to achieve the highest revenue for the asset disposed while receiving the best value for the project to be awarded. This new model will be applied for all PPP projects that are still waiting for approval as well as any projects in the future. There will be no cancellation of PPP projects. They will be continued but under a different format and mechanism.
- Through this process, the private sector will be revitalised as land assets can be sold to entities who are best able to maximise returns from their investment on the property while projects will go to companies who are most competitive and competent.
- The above are, but some of the many examples on how we intend to allow the private sector to flourish and drive economic growth in Malaysia. I will certainly spend more time elaborating on these public private initiatives and cooperation on how we can lever age on one another to bring back the roar of the Malaysian tiger.
- Finally , over the longer term, our focus is to ensure that we will have sufficient and stable sources of revenue for the country’s development. With this in mind, we have established the Ta x 14 Reform Committee (TRC) to undertake a comprehensive review and reform of the overall tax system. The TRC have been given the mandate to minimise the tax gap, diversify the tax revenue and make the tax system more efficient, neutral and progressive. It is also tasked to explore ways to minimise tax leakages and evasion. The same committee will review all tax incentives given out previously to ensure these measures are still relevant in supporting high-quality economic growth. And of course, our PM has revealed some additional tax measures which be announced in the up- coming budget speech on November 2nd.
- To realise our potential, we are committed to fiscal sustainability, strengthening our resilience, achieving a sustainable and equitable growth for Malaysia, forging an entrepreneurial state and improving the economic well -being of the rakyat. These are our main obstacles towards reclaiming our position as an Asian Tiger.
- Improving the well-being of the rakyat is basically about increasing their real incomes and higher purchasing power. Growth can only be sustainable if it is a private-sector led. Forging an entrepreneurial state would require collaboration from the main stakeholders principally a 4P partnership comprising of the public domains, private sector, professional bodies and the people.
- Fortunately , despite the sever e strains caused by the 1MD B scandals, economic fundamentals are still sound and Malaysia will not suffer from twin deficits but will continue to enjoy a current account surplus. Th e monetary sector is robust with banks enjoying low Non-Performing Loans(NPL) and well-capitalised with the capital market also stable.
- However , in the interests of transparency, fiscal consolidation will not be achieved easily , and we must be willing to expect some pain and even offer some sacrifice. We would need 3 years to resolve the fiscal issues caused by the RM 1 trillion debt and the RM35 billion GST and income tax refunds. We believe that institutional reforms will allow the Malaysian economy and investors certainty and confidence in the system. This will not be easy, but I believe it can be done. After all it is always darkest just before dawn.
- The new dawn in Malaysia after 9 May 2018, will not result in the “same old, same old .” Instead it will be viewed in history as an inflexion point which brought good governance and key institutional, political and economic reforms which will transform the nation .
- Only then this crouching tiger will be crouching no more.