ATTRACTING A CROWD

Malaysia 2016 | FINANCE | REVIEW: CAPITAL MARKETS

Malaysia is poised to continue its trend as a leader of the global capital market through market reforms and innovation in providing access to capital to fuel its growing economy.

Malaysia now holds the distinction of being the sixth most attractive destination for foreign investors in the world, according to Foreign Policy calculations of its proprietary Baseline Profitability Index (BPI). In addition to several other investment criteria, the BMI is an evaluation of a country's economic growth, exchange rates, financial stability, and capital controls. The Malaysian Investment Development Authority (MIDA) was also named as one of the top four investment promotion agencies by Site Selection magazine. Datuk Azman Mahmud, CEO of MIDA, hoped that these recognitions of the country's commitment to a proactive approach toward restructuring the capital markets within the context of ongoing economic transformations would help further assure foreign investors of the attractiveness and security of capital investment projects in Malaysia's growing economy.

SHOW ME THE MONEY

Malaysia stands out as a country where capital market growth figures are tied to real economic developments covering the full spectrum of scope and sector. There is a strong demand by businesses for new sources of capital, illustrated by the steady YoY increase in loan applications and loan approvals for both large corporate borrowers as well as the burgeoning SME segment. According to the central bank, Bank Negara Malaysia (BNM), net loans to businesses from financial institutions increased by $1.9 billion during 2Q2015. By end 2Q2015, YoY outstanding business loans had grown by 8.7%. Together with new government policies designed to create a regulatory environment more conducive to new sustainable growth, developments in the private sector fueled high levels of credit extended to areas such as manufacturing, tourism, wholesale and retail trade, agriculture, logistics, ICT, and oil and gas.

The 11th Malaysia Plan (11MP) set a target, among many others, of $35 billion in average annual investments. That target has been consistently exceeded since then, and gross fixed capital formation (GFCF) has grown by 12.6% per annum since 2010. At end 1Q2015, YoY GFCF had grown 13.6% to $12 billion. The private sector alone raised $68 billion through Malaysia's financial markets during 2Q2015, a nearly 3.0% increase from the $66 billion raised during 1Q2015. Underscoring the close ties in the trends of Malaysia's capital markets between public initiatives and private sector growth, as of end 2Q2015, MIDA is developing investment projects worth $6 billion.

These promising trends were reflected in the public sector as well, where 2015 outstanding bank loans and public debt securities (PDS) grew at a consistent rate of 8.3% during both 1Q2015 and 2Q2015. Despite continued volatility in the global financial markets, Malaysian Government Securities (MGS) yields remained stable through most of 1H2015. However, MGS yields declined in June 2015 when speculation of a looming increase in interest rates by the Fed led owners of medium and long-term PDS to sell back bonds. The Monetary Policy Committee (MPC) kept the overnight policy rate (OPR) at a steady 3.25% during 2Q2015, ensuring that monetary conditions were sufficient to support continued economic growth. BNM engaged in somewhat substantial reverse repurchasing of its securities, a move that injected welcome liquidity into the secondary market and eased the rate declines in longer-term securities.

UNIQUE OFFERINGS

A rapidly growing segment of the global financial system, the market for Sharia-compliant securities and financial services (known as sukuk) accounts for 56% of Malaysia's capital market and has been a major contributor to the country's continued economic and social development. Malaysia holds the claim to many pioneering achievements in the Islamic capital market, such as first global sovereign sukuk ($600 million), first exchangeable sukuk ($750 million), first Islamic residential mortgage-backed securities, first publicly listed Islamic real estate investment trust (REIT), first local currency sukuk issuance by the World Bank (MYR760 million), and both the first and largest Islamic exchange-traded fund (ETF). Sukuk institutions represent not only a method of financial management acceptable for observers of Sharia law, they also offer a differentiated business model for investors attracted to the typical investment profiles of most Islamic financial institutions.
With 65.6% of 2014 global sukuk issuances (40% of which were in the form of equity), Malaysia still holds the largest share of the global Islamic capital market. Malaysia is also a major player in the Islamic fund management industry, the fastest growing segment in the local sukuk market, and accounts for nearly 25% of the world's Islamic assets under management (AUM). Malaysia's overall Islamic capital market was worth $373 billion in 2014 after expanding at a CAGR of 11.3% from 2004, and this figure is projected to surpass $700 billion by 2020. According to Capital Markets Malaysia, 74.2% of all publicly listed companies are Sharia compliant and have a market capitalization of just over MYR1 trillion.

AHEAD OF THE CURVE

Malaysia's capital market has been an unlikely hotbed of recent developments. The Securities Commission Malaysia (SC) has broadened private retirement schemes (PRS), created a Fund Disclosure Guide, issued new categories of licenses for trading securities, developed new boutique fund management business models, and established new guidelines for venture capital, private equity-based crowdfunding, and unlisted capital market products. Malaysia is well known in the capital markets for both the traditional Bursa Malaysia stock exchange as well as the innovative Alternative Stock market on Bursa Malaysia. In addition to workshops and roadshows, the SC is hopeful that education and outreach campaigns like its newly launched InvestSmart can leverage digital technology to better access younger demographics.

Anticipating shifts in the makeup of Malaysia's economy in line with the 2020 Vision and the 11MP, the capital markets have been especially supportive of the emerging SME segment, where outstanding SME loans grew by 17.2% in 1H2015. SMEs currently make up about 97% of all registered enterprises in Malaysia and are a major catalyst for job creation and economic growth. To enhance SME growth potential, the SC developed the SME Investment Partners program, which provides access to non-collateralized financing from private investors.

COMMAND AND CONTROL

Increasing access to capital to fund new economic development is a central pillar of the government's growth strategy. Public institutions, such as the BNM, SC, Bursa Malaysia, and the Malaysia International Islamic Financial Centre (MIFC), are all showing signs of increased commitment to ensuring that the industry adheres to international standards of ethics, transparency, corporate governance, and regulation. This is welcome news for a capital market that, despite its strong performance, has recently seen 63 criminal charges filed by the SC for offenses ranging from insider trading to market manipulation. The SC is broadening the reach of its market surveillance and strengthening oversight for auditors of publicly listed companies to foster compliance of market institutions and better detect systemic risk.

A significant development in market reforms is the implementation of the Liquidity Coverage Ratio (LCR), which will ensure that financial institutions maintain sufficient high-quality liquid assets to withstand short-term liquidity stress scenarios. The central bank first announced in 2011 its plans to adopt the Basel III reform measures to further strengthen existing capital and liquidity standards, which in addition to the LCR also includes provisions for a net stable funding ratio (NSFR) and various liquidity risk management standards. Effective 1 June, 2015 with a minimum LCR of 60% and increasing annually to 100% in 2019, these new measures will promote greater confidence in the stability of Malaysia's capital market.

As the current chair of the ASEAN Capital Markets Forum, Malaysia's Securities Commission is in a position to further integrate the country's capital markets into the international financial system. By continually improving compliance with market controls and responding to the evolving needs of both individuals and business in all areas of the economy, Malaysia's capital markets show no sign of faltering amid the country's drive towards achieving the status of a developed nation within the next five years.