Economic reforms are set to pick up under Malaysia’s new prime minister, Najib Razak, despite the dampening effect that the global recession is likely to have on policy liberalisation in many countries. In the government’s most symbolically important move, longstanding race-based investment quotas are to be dismantled. Other reforms of service sectors, including financial services, are also in the works. However, the government’s distorting role in the economy will remain substantial despite such moves.
On April 22nd the government announced plans to eliminate local-equity requirements for investment in sections of the services sector. Under the old rules, companies in the sector had to offer a 30% stake to investors from among the bumiputera (ethnic Malays and other indigenous peoples). The announcement that the rule would be scrapped was followed a few days later by the announcement of several liberalisation measures for the financial sector.
Mr Najib has made clear his determination to pursue business-friendly policies, to improve the efficiency and competitiveness of the Malaysian economy and to attract foreign investment. Prior to his appointment as prime minister on April 3rd, Mr Najib had hinted to the foreign press that he intended to introduce gradual reforms to the government’s policy of preferential treatment for ethnic Malays, who make up some 60% of the country’s population, as part of wider efforts to restructure the economy. The aim of such restructuring is to increase the share of the services sector in the economy from 55% of GDP to more than 60% by 2020. Mr Najib has said he believes that the services sector offers tremendous scope for growth over the medium term.
The lifting of the 30% bumiputera equity rule in certain parts of the services sector is politically the most significant of the government’s recent reforms, and has positive implications for foreign investment. The equity rule has been lifted in 27 services subsectors, including health and social services, tourism, transport services, business services, and computer and related services. In addition, up to five international law firms with expertise in Islamic financial services will be allowed to set up practices in Malaysia. The bumiputera equity requirement was part of a policy directive introduced in 1971 by Mr Najib’s father, Abdul Razak, Malaysia’s second prime minister, and was intended to reduce the economic and social backwardness of the Malay majority. Critics of the policy believe that it has acted as a barrier to foreign investment and that only the Malay elite has benefited from it. Preferential treatment for Malays is strongly resented by the country’s ethnic Chinese and Indians, and some have argued that it has harmed the efficiency, resilience and growth of the Malaysian economy.
Although the scrapping of the equity requirement represents a partial liberalisation of the service sector, the wider economy will continue to feel the heavy hand of government in the form of the dominance of government-linked corporations, excessive regulation and bureaucratic slowness.
Maintaining the 30% bumiputera equity rule would have proved unsustainable in a globalised economy, and would have hindered efforts to strengthen trade links with many of Malaysia’s neighbours. However, the special position of the Malays is laid down in the constitution, which specifies ways in which the king should protect the interests of the bumiputera. Article 153 of the constitution urges the establishment of quotas for entry to the civil service, public scholarships and state education. This special status of Malays has been championed by the United Malays National Organisation (UMNO), which dominates the ruling Barisan Nasional coalition. Fearing a backlash from its members against the elimination of the bumiputera equity rule, senior UMNO politicians have been at pains to stress that the move is merely an adjustment and should not be seen as a fundamental change of policy. Critics of the government have expressed doubts as to whether Malaysia’s slow-moving bureaucrac
y will actually implement the change. Trade unionists, meanwhile, are concerned over the possibility that an influx of foreign investment could result in an erosion of workers’ rights.
In a broader bid to restructure the economy and attract greater foreign investment, in April Mr Najib declared that the government would gradually liberalise other services subsectors. He said that such measures were necessary in order to comply with a commitment made to the Association of South-East Asian Nations (ASEAN) to open up Malaysia’s services sector. The government has announced the establishment of a M$100m (US$28.7m) capacity-development fund to strengthen the services sector, as well as the creation of a committee to vet investment applications for a large part of the services sector, with the major exception of financial services.
Approved investments in the services sector in 2008 totalled M$50.1bn (US$14.4bn); the share of foreign investments stood at 11%. In 2007-08 Malaysia recorded a surplus on the services account of the balance of payments, but this was largely owing to growth in tourism.
By contrast, there have been persistent deficits on transport and the “other services” category of the services account. The latter category is the most sensitive to a change in policy, as it includes all services subsectors not related to transport or travel, including communications, construction and insurance; financial services; computer and information services; royalties and licensee fees; and other business services. If the liberalisation policy succeeds in attracting foreign investment, the services surplus is likely to expand.
More licences for foreign financial-sector firms
Measures to liberalise the financial sector have proved to be less controversial than the decision to scrap the bumiputera equity rule. They include steps to increase the number of foreign financial institutions allowed to operate in Malaysia, to allow foreign institutions to raise their equity participation in Malaysian banks and insurance companies, and to grant greater operational flexibility to foreign banks. Malaysia currently hosts 13 locally incorporated foreign banks and three foreign Islamic-banking operators. No new licences for foreign commercial banks have been issued for a decade. However, Bank Negara Malaysia (the central bank) plans to issue new licences in the next three years. The central bank has stressed that preference will be given to applicants that could serve a previously untapped banking segment in the country. The central bank’s selective approach emphasises that foreign financial institutions wishing to establish operations in Malaysia will need to
be large, to have special expertise and offer international linkages, and to be able to promote the further development of the Malaysian financial sector (especially Islamic finance and insurance). The latest liberalisation measures do not signal a radical change in policy, as they broadly follow initiatives laid out in the Financial Sector Master Plan, which was unveiled in 2001.
Over the next three years new licences will be issued to foreign institutions: two for Islamic banks, five for commercial banks, and two for Islamic insurance (takaful). The two new Islamic banks will be allowed to have a foreign-equity interest of up to 100%, whereas the foreign-equity limit for local non-Islamic commercial banks will remain at 30%. Furthermore, with paid-up capital of at least US$1bn each, the two new Islamic banks would be the largest in the world. The new banks are expected to offer specialist expertise in areas such as the financing of infrastructure, agriculture and technology. Equity limits for foreign investors will be raised from 49% at present to 70% in existing local Islamic-finance institutions, including investment and commercial banks and takaful operators.
The measures to liberalise the financial sector are likely to have a far greater immediate economic impact than the removal of the 30% bumiputera equity rule. Financial services accounted for 11% of GDP in 2008. Growth in the financial and insurance sector has averaged 8.8% a year in the past three years, outpacing real GDP growth of 5.6% a year in the same period.
Source : EIU ViewsWire