Major economic reform is dominating the headlines in Malaysia this year. Prime minister Najib Razak, who took office in April, is introducing a new economic model that aims to raise Malaysia’s status to a developed nation by 2020. Mr Najib, who has already liberalised Bumiputra (ethnic Malay) quotas for several sectors, says: “Greater liberalisation means greater competition and efficiency. This will see the emergence of strong iconic companies which will be regional and global champions. We will help Bumiputra companies become more ­resilient.”

Mr Najib is striving to build greater confidence in the country’s economic policies as well as improve the services sector. The prime minister, who also acts as finance minister, says policies need to reflect a “fair and just society” which also spur domestic activity.

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The prime minister is determined to avoid Malaysia being caught in the middle-income country trap. His goal is to make the shift to a high-income economy to avoid risking the loss of economic growth and market vibrancy. “The challenge of managing such a major transition is not easy. It has been made more considerable by the weakness in the global financial architecture and intensifying competitive pressures arising from dramatic changes in the global economy,” he says. “Making this transition has become my key priority.” The new economic model is based on innovation, creativity and high value. It intends to move Malaysia’s reliance on a manufacturing base dependent on semi-skilled and low-cost labour to one based on high-tech and a modern services sector dependent on skilled workers. A holistic approach aims to bring about competition in all sectors of the economy.

Innovation is also a key driver of value-added sources of growth, such as private education, health, tourism, Islamic finance, IT, information and communications technology, creative industries and biotechnology.

 

Services focus

“It is critical to sustain momentum through policies that are market friendly and that create new sources of growth in the services sector,” says Mr Najib. “Therefore, we will continue to modify or eliminate policies that inhibit growth. We have already announced the liberalisation of 27 services sub-sectors and followed through with liberalisation measures to enhance the role of the financial sector as a key enabler and catalyst of economic growth. The government has also announced other wide-ranging measures to liberalise its economy, increasing foreign shareholding limits in existing stockbroking companies to 70% from the current 49%.

Ownership in the wholesale segment of the fund management industry will also be fully liberalised to allow 100% foreign ownership for qualified and leading fund management companies to establish operations in Malaysia. The fund management industry is growing rapidly and Malaysia now has the largest unit trust industry in the Association of South-east Asian Nations. The Islamic capital market is the largest in the world, with more than 60% of global sukuk (Islamic) issuance coming out of Malaysia, as well as the largest number of Islamic funds globally and a large number of sharia-compliant equities. Listed companies will not be required to allocate 30% of their stake to Bumiputras, as part of an affirmative action programme for the Malay majority. The removal of the 30% Malay ownership requirement for listed companies does not apply to ‘strategic industries’ such as telecommunications, water, ports and energy.

The prime minister’s remarks come against a backdrop of an expected drop of more than 50% in FDI in Malaysia this year. Like other developing nations, Malaysia is not immune to the global economic crisis. Mr Najib expresses concern that the sharp fall in FDI will result in a scramble for “the pool that is left”. He says: “All nations will be competing and it will be tougher to get a slice of the investment.” The expected decline in FDI follows a 21% drop in 2008. The prime minister says that next year’s budget should focus on ways to stimulate growth, which will require a focused consistency of policies without “flip-flopping”, a term that has been used to describe the policies of the powerful right-wing political coalition Barisan Nasional in the past. Mr Najib gave an indication of his economic priorities when he spoke of plans to make Malaysia a world-class healthcare provider.

 

Accelerating change

The prime minister says that liberalising ownership rules will allow more foreign players to use Malaysia as a base for their regional and international operations. “Liberalisation is inevitable, and we can only choose to manage its pace,” he says. “It would be to Malaysia’s advantage to liberalise at a faster pace, as this would also allow us the flexibility to tap international opportunities earlier. We also expect the wider participation of foreign players to raise the level of competition and promote innovation to drive growth at a faster pace. This would facilitate the Malaysian capital markets industry to attain higher competitiveness by rapidly expanding the range of choice and quality of offerings that are available.”

Mr Najib says that since June, RM9bn ($2.5bn)-worth of funding has been awarded to projects under the government’s two stimulus packages. He is confident that this will help cushion the impact of the external downturn and set the stage for economic recovery in the second half of this year. The prime minister also says that he expects the packages to also impact in the second half, resulting in 1% to 2% of additional growth.

 

Corridors of power

As part of the overall reform package, Malaysia will develop various corridors, in particular the Iskandar region in Johor in co-operation with Singapore. Malaysia does not expect FDI in Iskandar – the country’s highest-profile investment zone – to suffer as a result of the global economic slowdown. Its objective is to harness mostly private capital to turn 1368 square kilometres of the southern state into an industrial and tourist zone. The region has road links to Singapore and air and sea links to Indonesia. About $1.16bn has been allocated for the region under the Ninth Malaysia Plan and state-owned entities are expected to make investments worth $919m in various projects. Known as the Iskandar Dev­elopment Region Project, the plan envisages raising capital globally and hiring foreign workers, and hopes to raise $105bn-worth of investment over 20 years. In addition, more than 25 developers have submitted plans for housing, commercial and mixed development projects.

Two more corridors are on the cards in the Malaysian states of Sabah and Sarawak, which is on the island of Borneo. Sabah is a $32.4bn, 18-year development project. The state is rich in natural resources such as oil, natural gas, timber, palm oil and cocoa. Deals amounting to $4.95bn were signed at the project’s launch. Construction of palm oil and jatropha estates and agro-tourism ventures are planned.

The Sarawak corridor is expected to attract RM334bn in investment by 2030, with government spending accounting for 15% of the outlay. According to the Sarawak Corridor of Renewable Energy (Score) masterplan, the corridor will be developed in the central region, covering more than 70,811 square kilometres in Bintulu, Kapit, Sibu, Mukah and Sarikei. When complete, Sarawak is expected to achieve a GDP growth rate of 7% by 2030, up from its present figure of 5%. Score also aims to create 1.6 million high-value jobs.

The government’s vision is to achieve growth through investment in technology, talent, infrastructure, research and development and marketing, in order to maximise long-term revenue growth and enhance market vibrancy. “Our domestic players have built strong local operations,” says Mr Najib. “Some have even established a regional presence. They should now leverage on the flexibility granted to explore new opportunities and business models by establishing strategic partnerships and alliances to expand their global reach.”

 

COUNTRY PROFILE

 

MALAYSIA

Population: 25.7 million

Pop. growth rate: 1.72%

Area: 329,847 sq km

Real GDP growth: 5.1%

GDP per capita: $15,300

Current account: $27.44bn

Largest sector(% of GDP): Services 45.7%

Labour force: 11.2 million

Unemployment rate: 3.7%

Source: CIA World Factbook, 2009