Thursday, April 23, 2009

Highly Commendable, Timely and Useful Decision


The longstanding 30% bumiputra equity requirement will be lifted immediately for 27 sub-sectors, including health and social services, tourism, transport, business and computer-related services for foreign companies and investors. While some may still be a bit cynical, this is a very significant move, and will cause many more international funds to consider Malaysia. It is a well known fact that many companies and investment funds have bypassed Malaysia, either as a long term investment destination or even Malaysian equities, just because of the rule.

While the country may not see an immediate benefit, the cumulative goodwill will ensure a more competitive landscape for Malaysia in attracting foreign investments. I can bet you that Singapore should be pretty pissed with this development, so too for Thailand and Indonesia. The ruling unnecessarily put two huge boulders on our feet whenever Malaysia is being considered as a mid-term or long term investment option by foreign companies. Now we can allow our natural advantages, such as cheap flat land, a reasonable and knowledgeable work force, a pretty impressive logistic and infrastructure for movement of goods and services and overall low operating cost (thanks to direct and indirect subsidy).

The government hopes that lifting the requirement will boost investment and make the services sector more competitive. The decision comes amid official warnings that the economy could shrink by as much as 1 per cent this year. Malaysia has been hard hit by the global economic crisis, with exports down 15.9 per cent in February from a year ago. The services sector is the largest, contributing 55 per cent to Malaysia's gross domestic product last year.The move is very crucial in moving our reliance on services to at least 60 percent, and which would then lessen our reliance on electronics exports and commodities.

Within the services sector, financial services is the biggest, followed by tourism, one of the top foreign exchange earners. The government plans to liberalise other sectors in stages, with details for the financial sector to be unveiled next week.


The areas that still will have the 30% rule include sectors that may be politically sensitive and/or have a heavy state presence, such as air travel, utilities and retail. Malaysia is already the third most dependent economy in Asia after HK and Singapore - to compete better, we need a stronger structure to lure a different set of FDI that will add layers and move the country further up the value chain. We also need to diversify faster away from a dependence on commodities and electronics.


That rule has always made it very difficult for some companies that does not agree with the "relevance" and "the need" for such a requirement. Strategically and economically, it might not make much business sense, thus causing a huge downgrade in Malaysia's viability as a long term investment destination when compared to other countries. Its a highly commendable, timely and useful decision.

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Malaysia will scrap ownership limits for overseas companies in dozens of services industries after forecasting a 50 per cent slump in foreign investment this year. The government will immediately drop a rule in 27 sectors, from healthcare to tourism, that requires foreign companies to set aside 30 per cent of their units in Malaysia for ethnic Malay investors, Prime Minister Datu Seri Najib Razak said in a statement today.

Najib said last month that foreign direct investment may halve to RM26 billion (US$7 billion) in 2009 as the global recession delays projects. Malaysia’s government expects the US$181 billion economy to expand 1 per cent this year or shrink the same amount at worst, and many economists expect a larger contraction. Sales at electronics manufacturers have been hammered in the slowdown, and crude and palm oil exports are fetching lower prices.


“The services sector is targeted to be a new growth sector,” Najib said. Other industries freed from equity conditions include computer-related businesses such as repair and maintenance, providers of veterinary services, and transport and ship-rental businesses, he said.


Many foreign investors have said for years that the rules restrict competition and hold back growth. This year, local businessmen including Najib’s brother, Datuk Nazir Razak, who leads Malaysia’s second-biggest bank, CIMB Group, said the program needed reviewing. Today’s announcement should make services more attractive to investors, Najib said. The liberalization is part of Najib’s plan to increase the proportion of gross domestic product derived from the services industry to 60 per cent from 55 per cent in 2008.

Of RM50.1 billion of approved investments in Malaysia’s services industry in 2008, 11 per cent was from foreigners, according to the government.



p/s photos: Angelababy Yang Wing







8 comments:

rainkiller said...

hi I follow your blogs, and it's really nice to read (some are a bit technical but I still enjoy it very much)
I would say this is a right move and at the right time! the gov is trying to win back the Rakyat and of course to battle the financial crisis - this is a long term solution of it.
what's next? co. and personal tax reduction - looking forward!

RAD said...

Dear Dali
I need your advice on something
Assuming one has about RM50,000 investible cash, what are the sectors or stocks that would be worth considering over a 3-5 years investment horizon from now

Regards
S. Radhakrishnan

Salvatore_Dali said...

RAD,

if u have 50k now, u should use it to pay down outstanding debt... there r other ways to have an equity exposure...

use yr epf to buy units trust or stocks to improve yr returns

3-5 years, i would see a huge reflationary period just on the amount of liquidity being inject by the US and also many other governments... commodities will rule the day n hard assets...

oil n gas, timber, plantations...
land bank rich companies

ksq said...

can't help but think of all the missed opportunities over the years - business relocated to china/vietnam, Indonesia overtook malaysia in FDI, malaysian companies listed in spore bourses and the list goes on...

don'n forget that by liberising our economy, we are merely putting ourselves on par with other countries which never had to deal with affirmative-action policies in the very first place!

government must exploit the competitive edge of their respective country to the fullest. Think china - low ocst producer, think Japan - innovation, think india - IT skill, think spore - financial hub and services.

in the same breath, malaysia must create a niche market of its own in order to be among the big boys.

Winston Siew said...

Yup, cool move there. Najib's administration should look into corporate tax and import duty as well.

But Dali can you enlighten me, why other countries working so hard to flood the market with freshly printed money our government actually allows PNB to mop up the market liquidity with 3.33b units of ASM and 2b unit of ASW2020?

METALRAGE said...

Hi Dali,

Relatively new reader. Love your well-formed thoughts. Could I use you as sounding/sparring board in the future? Hoping to think like you eventually.


Winston,

If I hazard a guess, the liquidity PNB is targeting are those belonging to the super savers, parked in FD's, Mutual Funds and the like. PNB use those funds as a vehicle to channel those liquidity to their hands, to be redistributed back to the economy according to their liking.

Dali?

bendan said...

Hi Dali,

Love your blog, its such a pleasure reading your thoughts. Thanks for sharing..

When you say hard assets, does this apply to reits, or do you mean properties?

TIA!

panacea said...

Hi,
How come your Asian girls have a lot of caucasoid features?

Regards,
tricin