PNB WORLD INVESTMENT CHALLENGE 2006

FINANCIAL SECTOR AND CORPORATE MALAYSIA:
ADDRESSING THE GLOBAL COMPETITIVE CHALLENGES

KEYNOTE ADDRESS

BY

TAN SRI NOR MOHAMED YAKCOP

MINISTER OF FINANCE II

ILHAM RESORT, PORT DICKSON

Saturday, 25 November 2006

Y. Bhg. Tan Sri Dato' Seri Dr. Ahmad Sarji Abdul Hamid
Chairman,
Permodalan Nasional Berhad

Y. Bhg. Tan Sri Dato' Hamad Kama Piah Che Othman
President and Group Chief Executive
Pemodalan Nasional Berhad

Distinguished guests

Ladies and gentlemen.

Assalamualaikum Warahmatullahi Wabarakatuh and good morning.

It is an honour for me to be here today at the PNB World Investment Challenge 2006. I would like to take this opportunity to congratulate PNB for their efforts, once again, in bringing together participants from both local and foreign fund managers, analysts and industry professionals to today's gathering.

2. Last year, in my keynote address at the same forum, i.e. PNB World Investment Challenge 2005, I had focused on Malaysia's progress and transformation in the three and a half decades since the seventies, and on our policies and strategies towards achieving growth with stability, as we transitioned towards a more competitive and challenging global environment.

3. Today, I would like to focus on the core policy of strengthening the initial economic turnaround of the Malaysian economy since 2004, outlined in the Nine Malaysia Plan, launched in March this year by the Honourable Prime Minister.

Current state of the Malaysian economy

4. The growth momentum of the Malaysian economy has accelerated markedly, even as the Government continues to rein-in its fiscal deficit. At the same time, both the current and capital account of the balance of payments have improved significantly and inflation has stayed moderate, despite surging global oil prices.

5. The nation's GDP performance continues to remain strong, with growth in the first nine months of this year of 6 percent. With growth gaining momentum in the second half year, we are confident that the economy is on track to achieve or even exceed the target of 5.8 percent for the whole of 2006. Growth, which peaked at 7.2 percent in 2004, the highest since the financial crisis, has not only averaged at almost 6 percent over the last three years, but had surpassed earlier estimates. This growth was driven mainly by private sector activities, underpinned by supportive macroeconomic policies.

Sustaining the performance of Stock market

6. The feel good sentiments in the Malaysian stock market have returned. With continued buying interests, the benchmark Kuala Lumpur Composite Index had finally surpassed the psychological 1,000 barrier for the first time since the financial crisis. Stronger investor confidence, including foreign equity investors, has led to higher turnover volumes.

7. While markets will continue to move up and down in the short run, to sustain a long-term rise, it is important that the fundamentals of the market-place continue to remain strong. I believe that we now have a market, supported by stronger economic fundamentals and enhanced shareholder value, as well as ranked favourably for corporate governance standards and for investor protection.

The Ninth Malaysian Plan

8. A key policy document launched this year was the Ninth Malaysia Plan which charts the growth prospects and the policy focus of economic development for the country. As the Plan marks the mid-point of the implementation of Vision 2020, the National Mission provides the nation's development framework for the next 15 years. The National Mission is founded on five key thrusts as follows:

First: To move the economy up the value chain;

Second: To raise the capacity for knowledge and innovation and nurture first class mentality;

Third: To address persistent socio-economic inequalities constructively and productively;

Fourth: To improve the standard and sustainability of quality of life; and

Fifth: To strengthen the institutional and implementation capacity.

Private sector as engine of growth

9. In moving the economy up the value chain, the revival of the private sector as the engine of growth for the economy is important. While the growth of private investment has rebounded since 2004, its share to GDP remains low at about 12 percent in 2005 compared with almost 36 percent just before the financial crisis.

10. The National Mission, therefore, calls for the private sector to resume its role as the catalyst to spearhead economic development. In line with this, the Government continues to provide a conducive environment to spur private sector dynamism in generating economic growth. A major initiative towards this end has been the continuous efforts by the Government to put in place a tax regime that will ensure greater competitiveness and resilience of the private sector.

11. Our past experience has shown that when we undertook a gradual reduction in corporate tax in 1989 from 40 percent to 30 percent by 1995, private investment rose by double digit, with growth rates of 28 percent and 25 percent in 1994 and 1995, respectively. Its share to GDP increased from 22 percent in 1990 to 36 percent in 1996 and 1997. Recognising this, the Government took a bold step in the 2007 Budget to reduce the corporate tax to 27 percent and 26 percent for year of assessment 2007 and 2008, respectively.

12. A Tax Review Panel was established in 2004, with the view to ensuring our taxation system is more efficient and business friendly, its provisions remain relevant, and to improve clarity and transparency of tax administration. Other key tax measures to promote private investment include:

i. expedite tax refunds through establishment of Fund for Tax Refund;

ii. greater flexibility in tax estimation whereby companies are allowed to estimate their tax payable not less than 85 percent of their preceding year's tax estimate, compared with 100 percent previously; and

iii. improving tax administration through:
- establishment of Customs Tribunal to consider appeals;
- issuance of advance tax rulings to ensure certainty of tax treatment; and
- issuance of guidelines on IRB audit and investigation framework.

13. Malaysian corporates will have to increasingly grow to eventually become MNCs themselves, having not only large domestic operations but also building judicious international networks of assets. The Government continues to encourage mergers among private sector's companies with a view, particularly to increasing the number of high quality and large public listed companies (PLCs) on Bursa Malaysia. Towards this end, a facilitative regulatory regime and tax incentives were introduced to promote mergers and acquisitions. Group relief was introduced to enable 50 percent of company's current year losses to be offset against profits of other companies in the same group. In addition, exemption from stamp duty and real property gains tax was provided to create a more conducive environment for M&As and business restructuring. There has been strong growth with regards to domestic mergers and acquisitions, with total domestic mergers and acquisition deals for 2005 valued at 36.7 billion ringgit and has risen to 41.5 billion ringgit during the period January to November this year.

14. In addition, to encourage our private sector to expand their scope of operations to international borders to overcome limits to growth, measures to facilitate cross-border listings were introduced on 22 June 2006. With this, large foreign-owned corporations having operations outside Malaysia can now seek listings on the Main Board of Bursa Malaysia. Eligible Malaysian owned corporations with foreign based operations are now given the flexibility to seek listing without having to comply with the minimum ownership period as previously required. In addition, Malaysian companies listed on the Main Board of Bursa Malaysia can seek secondary listings on foreign stock exchanges, with a view to attaining international recognition and presence.

15. I would like to say a few words on Agriculture, which is given emphasis on the Ninth Malaysia Plan. There is always this skepticism in agriculture. Why agriculture? We believe it is important to focus on commercializing agriculture given the scope for enhancing income in rural areas and given the potential of this sector as a key contributor to growth. We believe the potential gains from agriculture are large and very much achievable due to the following factors:-
i. the scale and scope for improvement and growth from modernization arises due to the previous lack of focus and resources invested in this area;

ii. large and growing demand for both agriculture based commodities and foodstuff, both locally and overseas, leveraging also on branding Halal;

iii. there remain large areas to be opened for commercial cultivation, particularly in Sabah and Sarawak; and

iv. Malaysia's tropical climate is a natural comparative advantage. It is suitable for various crops and its bio-diversity is conducive for biotechnology.

16. The key to maximizing returns of agriculture is to ensure that the value add and downstream activities, eg. biodiesel, are carried out in Malaysia.

Promoting Private Financing Initiatives (PFIs)

17. The Government is also actively implementing a new approach to privatization, i.e. the Private Financing Initiatives (PFIs) to stimulate private investment. In this regard, the Government has identified projects valued at 20 billion ringgit to be implemented on a build, lease and transfer (BLT) basis. In addition, the PFI Facilitation Fund of 5 billion ringgit has also been established to support projects with significant spin-off effects on economic growth, identified by the private sector.

Promoting FDIs

18. The Government is committed to ensure that we remain attractive to foreign investors, since foreign investment has brought about significant improvement to the economy, particularly in terms of fund flows, technology and management as well as industrial linkages. We will continue to build on the nation’s comparative advantage, in particular political stability, skilled and educated workforce, relatively lower cost of doing business as well as maintaining liberal policies through the provision of increasingly attractive investment incentives.

19. A recent major initiative by the Government to promote foreign investment is to facilitate and expedite the approval process and the implementation of projects which have high impact on the growth of the Malaysian economy. Towards this end, A Cabinet Committee on Investment, chaired by the Honourable Deputy Prime Minister, has been set up. Amongst others, the Committee will coordinate and resolve problems, especially with respect to licensing and approvals, and provide special assistance in financing to facilitate projects implementation.

GLCs Reforms

20. The transformation of GLCs is critical to create competitive, resilient and sustainable corporations, which are rooted in best practice management and possess exemplary corporate governance. This is important as GLCs activities contribute significantly to the nation's economy, with listed GLCs representing almost 40 percent of the market capitalisation of Bursa Malaysia. The GLCs Transformation Program was launched by the Prime Minister in July 2005. Under the Program, ten Initiatives have been identified to be developed and implemented across GLCs. Areas addressed in the GLC Transformation Manual ranged from enhancing Board effectiveness to operational efficiency and effectiveness.

21. The Initiatives established clear standards or benchmarks for GLCs to aspire, and targets set for GLCs in each Initiative, such that GLCs are clear as to what is required of them and can calibrate their performance accordingly. Initiatives, like the Silver Book on Social Responsibility, is even pushing the boundaries by setting standards far greater than that set by even private sector companies.

22. The Green Book clarified that Boards should be assessed, and provided a framework for either GLCs, top management or Boards themselves, to improve Board effectiveness. Similarly, the Red Book elevated the importance and value attached to good procurement processes; while the Blue Book established that performance should be differentiated, and compensation should be linked to performance. To date, several milestones in the GLC transformation program have been achieved. The improvements achieved can be seen in the GLCs currently out-performing the KLCI index.

23. In March 2006, the main GLCs announced Headline KPIs with targets for 2006 to 2007. Such an announcement by GLCs is indicative of several achievements. Firstly, KPIs increase transparency and accountability, which historically had been lacking at GLCs. Clarity has now been provided to stakeholders along with a strong signal of an increased commitment to delivering on promises of improved performance. Secondly, it reinforces the fact that the primary objective of GLCs should be on sustainable economic profits; and thirdly, these metrics and targets provided a basis for stakeholder feedback to the GLCs.

24. The GLC Transformation Program of this scale will take time and perseverance, expected to last for at least 5 to 10 years. Notwithstanding this, the transformation journey thus far, has shown initial signs of success. GLCs have made achievements in terms of both financial performance as well as in laying the groundwork for sustainable improvements. As with all change and transformation programs, it is critical to stay the course, adapt where necessary and push forward. As such, the GLCT Program will continue to remain a major policy thrust by the Government in order to drive higher performance at GLCs. To drive the transformation of the GLCs to the next higher level, the Putrajaya Committee on GLCs high performance will continue to manage, track and monitor the progress of the transformation.

Financing private sector initiatives

25. To support and facilitate the growth of the private sector, significant progress has been made to ensure more cost effective and greater diversity in financing sources to finance private sector initiatives. In this regard, various measures have already been implemented to enhance alternative sources of financing from the capital market, development financial institutions as well as venture capital funds.

26. In the capital market, the development of the private debt securities market has enabled it to increasingly become an important source of financing for the corporate sector. The new issuance of PDS increased significantly from 22 billion ringgit in 2000 to 31 billion ringgit in the first nine months this year. We will continue to expand the breadth and pace of product development to meet the needs of investors.

27. The Real Estate Investment Trust (REITs) industry has seen an acceleration in its growth since the introduction of the Guidelines on REITs in January 2005. REITs is an investment vehicle that invests in properties, and enable the unlocking of capital in the real estate and re deploy it to other high-yielding business activities. As at end September 2006, there were five listed REITs players in Malaysia, including one Islamic REIT. The total turnover was significant, reaching 342 million ringgit in 2005 and 311 million ringgit in the first six months of 2006.

28. To further promote its growth, the Government extended tax concession of 15 percent on dividends received by individual investors, both domestic and foreign, as well as domestic institutional investors for a period of five years. Where previously, the individual's tax bracket and the corporate tax rate applies. For foreign institutional investors, they are taxed at 20 percent compared with 28 percent, previously. Budget 2007 also announced tax exemption on undistributed income from REITs.

Enhancing international participation in the Malaysian capital market

29. Recognising the need to enhance global competitiveness, promote innovation and widen market coverage, several measures were taken to enhance international participation in the Malaysian capital market. In this regard, five foreign stockbrokers and five global fund managers have been allowed to operate in Malaysia. To date, five foreign brokers and one foreign funds management companies are already operating, while two fund management companies have been approved to operate in our domestic capital market.

30. In addition, foreign equity ownership in futures broking and venture capital companies has been abolished and the limit on the number of foreign dealer's representatives employed by stockbroking companies removed.

31. The Government also announced further liberalization of the foreign exchange administration rules effective from 1 April 2004, to enable multilateral development banks to issue ringgit-denominated bonds in Malaysia. The proceeds of the issuance may be used locally or abroad. This is to allow the issuance of high-quality papers in the Malaysian bond market , to contribute towards product diversity and diversified investor base, and equally important to raise the international profile of our market.

32. To date, three supranational have issued ringgit bonds, i.e. the Asian Development Bank (ADB) in November 2004, with an issue size of 400 million ringgit, International Financial Corporation (IFC) in December 2004 with an issuance of 500 million ringgit Bai' Bithaman Ajil Islamic Debt Securities, and the World Bank in April 2005, with its inaugural issue of 760 million ringgit Islamic bond. This represents the World Bank first Islamic bond issuance in any market.

Strengthening Malaysia's positioning as an international Islamic financial market

33. In the development of Islamic financial services, Malaysia continues to take a leading position in market development, product innovation and regulatory capacity. Our financial system now offers investment opportunities not merely for conventional fund managers but also for those looking for investment which are in accordance with the principle of the Syariah. Supported by the necessary infrastructure, such as Islamic stockbroking companies, Islamic banking facilities and Islamic insurance, an investor can choose to invest in a holistic Islamic manner in Malaysia. With this, we are already positioning ourselves as a premier international Islamic financial center.

34. Our achievements in the area of Islamic capital market has been formidable. For instance, 85 per cent of all listed securities on Bursa Malaysia are Syariah-compliant, accounting for almost two third of market capitalisation of the Bursa. In addition, we have also developed the Kuala Lumpur Syariah Index (KLSI) which is a broad based price weighted average index constructed from the list of Syariah compliant securities approved. Currently this index has 509 stocks.

35. We also have Syariah compliant or Islamic unit trust funds, managed by professional portfolio managers in accordance with Syariah principles. There are currently 86 such unit trust funds with net asset value in excess of 8.7 billion ringgit. Islamic private debt securities or corporate bonds have also developed in parallel with the equities market. Outstanding Islamic-based papers currently total almost 99 billion ringgit, accounting for more than 45 percent of the total outstanding private debt securities issued in the domestic capital market. With this, Malaysia currently accounts for 70 percent of total global Islamic bonds and 40 percent of global Islamic unit trust.

36. We were also the first to issue a rated Islamic Asset Backed Securitisation or ABS, while the first Islamic ringgit bonds by Multilateral financial institutions was issued by the International Finance Corporation in 2005. Recently, the first issuance of Islamic REITS under a structured guideline has also been approved.

37. The Government recently launched the Malaysia International Islamic Financial Centre (MIFC), whereby Islamic financial products and services that are transacted in international currencies may now be conducted from anywhere in Malaysia. Several measures and incentives are in place to promote the centre in the offering of Islamic financial products and services. These include:

i. issuance of new conditional licenses for the setting up of International Islamic Banks and International Takaful Operators to qualified foreign and Malaysian financial institutions to conduct business in international currencies;

ii. approval for the setting up of International Currency Business Units within the existing Islamic banks and Takaful organizations and they are allowed to conduct Islamic commercial banking, investment banking and other banking businesses;

iii. income tax exemption for ten years on management fees for fund managers managing funds of foreign investors based on Syariah principles; and

iv. flexibilities for Labuan offshore Islamic banks and the Islamic divisions of offshore banks, as well as offshore Takaful operators to open operation offices anywhere in Malaysia with minimal presence in Labuan.

38. These measures and attractive incentives are part of the Government's initiatives to promote and strengthen Malaysia's position as a centre of origination, distribution and trading of Islamic capital market and treasury instruments, Islamic fund and wealth management, international currency financial services, and Takaful and re-Takaful business. It is aimed at positioning Malaysia as the gateway for tapping investment opportunities in the region.

Enhancing SME Development

39. SMEs represent an important segment of the economy as they form an integral part of the value chain in the overall production network. To ensure our SMEs are successful in moving up the value chain, the Government has focused on a comprehensive approach towards SMEs development by increasing their access to capital, providing greater access to business services and improving the business enabling environment in which they operate.

40. A strategic direction for the development of SMEs undertaken by the Government has been the establishment of the SME Bank in October 2005. Two of the Government's development financial institutions, namely Bank Pembangunan and Infrastruktur Malaysia Berhad and Bank Industri and Teknologi Malaysia Berhad, were merged to create a larger and stronger development financial institution specializing in infrastructure, maritime and high-technology sectors, and a subsidiary company which would specialize in providing both financial and non-financial assistance to SMEs, i.e. the SME Bank.

41. At the same time, the merger of EXIM Bank and Export Credit Insurance Berhad (MECIB), the subsidiaries of Bank Industri, was also undertaken. The merger was part of the Government's efforts to enhance the availability of trade finance and exports insurance to Malaysian exporters, with the view to further increasing their competitiveness in the global market.

42. To ensure that our economy continues to achieve sustainable growth in the long term, Malaysia has identified new areas of comparative advantage and where we have the leading edge, such as high technology, biotechnology, pharmaceuticals and halal food products. To facilitate entrepreneurs to venture in business start-ups in high growth ventures, the Government has put in place several venture capital funds, including those managed by MDV, MAVCAP and MTDC. These funds have been established primarily to provide expedient capital to sectors which are critical to the growth of the economy, but are not adequately served by banking institutions. To further complement these existing funds, the SME Bank recently launched the SME Growth Acceleration Fund of 1 billion ringgit.

Conclusion

43. As we move into the second phase of the Vision 2020 and into an even more competitive landscape, we require an economy that is resilient and well positioned to compete efficiently in a more globalised market. Therefore, the focus of our policy thrusts is to build on the gains of the strong recovery in the economy in the last three years. We will build upon the strength of our economic fundamentals and create a conducive environment for sustainable performance of the economy. Moving forward, the role of the private sector will become increasingly important in income generation and wealth creation.
Distinguished guests,

44. In concluding, let me once again congratulate PNB for its efforts in organizing World Investment Challenge 2006. On this note, I wish you a successful and productive dialogue.

Thank you.
Wassalamualaikum Warahmatullahi Wabarakatuh.

Ministry of Finance
Putrajaya

25 November 2006