After decades of industrial growth, Malaysia has cemented its place as one of Southeast Asia’s most vibrant trading economies. Jason McGee-Abe takes a closer look at the country taking over the Asean chairmanship.
Malaysia, one of the five founding members of Asean in 1967, takes over the chairmanship of the association from Myanmar in 2015. Asean (the Association of Southeast Asian Nations) comprises of 10 countries and is poised to establish the Asean Economic Community (AEC) – a plan to economically integrate the member countries into a single market and production base, similar to the European market – before the end of 2015.
As part of this initiative and by taking over the chairmanship, Malaysia will be embracing an ambitious economic agenda to increase intra-regional trade and accelerate economic growth in the regional bloc.
Commenting on the “historic responsibility that Malaysia will shoulder” as it assumes the position in 2015, Anifah Ahman, the country’s minister of foreign affairs, says: “The creation of the AEC in 2015 will enlarge trade volumes within our region, which will help to diversify export markets.”
However, it will be a tough test for Malaysia, as there is still some unwillingness amongst Asean members to truly come together and ratify a single multilateral market agreement for fear of true open competition.
But the chairmanship will also bring about great opportunities for the nation to develop and drive the AEC’s agenda forward. “As chair of Asean in 2015, Malaysia can encourage member countries to adopt trade policies that will benefit entrepreneurs, workers, and consumers,” adds Ulrich Zachau, World Bank country director for Southeast Asia. “Malaysia can take the lead and seek commitments from Asean countries to make regulations more trade friendly and transparent.”
One of the goals of Malaysia when coming into the Asean hot seat will be to enhance the capability of SMEs in the Asean member states (AMSs), a policy the country is already domestically supporting.
MALAYSIA’S 2015 BUDGET
Malaysia is attempting to achieve high-income status by 2020 and to move further up the value-added production chain, new investments in SME export funds, Islamic finance and new trade policies are being initiated by the government.
Asean trade is critical to Malaysia’s transformation into a high-income economy, says Frederico Gil Sander, World Bank senior economist: “More than half of goods and services produced in Malaysia are ultimately consumed abroad, highlighting the benefits of boosting trade competitiveness,” he says to GTR. Moreover, the country has now risen to sixth place in the World Bank’s 2014 Ease of Doing Business Survey.
Presenting the government’s annual 2015 budget speech in October, prime minister Najib Razak announced a host
of fiscal tightening policies and measures to invigorate the export and services sectors in the country. He said the government would be “reintroducing the services export fund (SEF), totalling RM300mn, to encourage SMEs to conduct market feasibility studies and undertake export promotion to penetrate new markets”.
To support high-performing businesses, Najib announced the introduction of a pre-export programme for “enhanced branding, international certification and market surveys” for Malaysian products. The programme will target 60 companies to increase their capacity and penetrate international markets.
Looking at the country’s specific exports, he also announced the extension of the export duty exemption for crude palm oil (CPO) until December 2014.
Malaysia is an emerging multi-sector economy and exports such as palm oil, oil and gas, electronics and rubber, are now significant drivers of its economy.
GDP growth in the country slowed in 2013 from the previous year, but the latest Finance Ministry’s Economic Report 2014/2015 highlights that economic growth rose by 6.3% in the first half of the year, with higher export volumes reinforcing this growth. Overall, gross exports expanded strongly by 10.7% for the first seven months of the year, versus a contraction of 2.8% in the corresponding quarter in 2013.
“Malaysian exports have been increasingly shifting to Asian economies, notably to North Asian and Southeast Asian markets, at the expense of the developed markets,” head of global advisory and research department, Export-Import Bank of Malaysia, Zabedah Giw, says to GTR.
Since 2000, Malaysian exports to North Asia have increased by almost 150%, whilst trade to Asean has doubled. This highlights the increased trade integration within the Asian, says Giw, who adds: “This is largely due to the electronics supply chain in Asia playing
a larger role over time.”
Vincent Sugianto, HSBC’s Malaysia global trade and receivable finance head, reveals that 81% of 5,200 respondents in its recent trade confidence index (TCI) survey identify Asia as the land of opportunity for Malaysian businesses and with the best chances for growth over the next six months.
In the survey, nearly a quarter of Malaysian businesses identify China as the country they traded with most. Malaysia is China’s third-largest trade partner in Asia with US$106bn of trade completed in 2013.
To further capitalise on the strong Malaysia/China trade link, Maybank, which holds around a quarter of the trade finance market in Malaysia, started in February to offer ringgit trade financing, which includes letters of credit, financing of imports, exports and currency swaps, in its Chinese branches.
John Wong, Maybank’s global head of transaction banking, says it provides a new liquid currency with hedging options, helps minimise foreign exchange exposures and more importantly, “enables both parties to benefit from better trade terms and reduced supply chain costs”.
THE ROAD AHEAD
The country has been able to attract substantial foreign direct investment (FDI) over the years. According to Bank of America Merrill Lynch (BofAML) data, FDI inflows into Asean’s five largest trading countries – Singapore, Malaysia, Indonesia, and Thailand – is at an all-time high, totalling US$128.4bn in 2013. FDI into Malaysia increased by 19% in 2013, with its manufacturing industry, a main recipient of investment, becoming a key hub in the region.
“With global demand poised to accelerate in the near future, a stable and competitive business environment should boost foreign direct investment and provide a strong base from which Malaysian businesses can expand into other fast-growing emerging markets,” Sugianto says.
ISLAMIC TRADE FINANCE
Islamic finance is a key trend in the region, with an array of shariah-compliant deals announced this year reaffirming Malaysia’s position as a leading Islamic financial centre. Onshore Islamic finance is still prohibited in Japan, which has seen BTMU and SMBC expand their Islamic businesses in Malaysia.
In September this year, BTMU Malaysia signed a US$100mn commodity murabahah agreement, to be utilised alongside the Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the Islamic Development Bank (IDB), to finance projects in ICD member countries. BTMU Malaysia is one of a number of Japanese banks including SMBC Malaysia, Mizuho Bank and Nomura Islamic Asset Management to offer Islamic finance products in Malaysia.
In the same month, the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), a member of the IDB, and SMBC signed a memorandum of understanding (MoU) to enable the Malaysian shariah-compliant arm of SMBC to use ICIEC insurance programmes with project and export finance deals.
A month earlier, Agrobank became the first development finance institute in Malaysia to have its own trade financing service, launching shariah-based facilities. The facilities are being used to facilitate its SME, commercial and corporate customers with short-term working capital financing.
Zarina Mohd Yazid, section head of sales, trade finance department, Agrobank says to GTR: “We can now deal in local transactions as well as foreign and business transactions.” Among the Agrobank trade finance products now available are letters of credit, murabahah trust receipts, trade working capital financing, bank guarantees, shipping guarantees and forward exchange contracts, which are being used to intensify its trading activity.
Against the backdrop of robust intra-Asian trade growth, M&A discussions are underway within Malaysia which may see the creation of a mega-Islamic bank. As GTR goes to print, Malaysia’s CIMB is rumoured to be closing in on a US$22bn merger with RHB Capital and Malaysia Building Society.
“We are extremely pleased to have been able to reach this stage in the process. This exercise will cement CIMB Group’s position amongst the top banks in Asean,” says CIMB’s acting chief executive Zafrul Abdul Aziz. The bank hopes to sign an agreement in early 2015.