GCC economic relations with Malaysia are set to take off in a big way over the next few years. Current levels may still be modest, but the potential is huge. So says Dr. Awang Adek Hussin, Malaysia’s deputy finance minister. He was speaking in an interview with Mushtak Parker.
In 2006, according to the Malaysian Industrial Development Authority (MIDA), Middle East investment in Malaysian industry totaled a mere $25.7 million — comprising five projects and involving investors from the UAE ($10.9 million); Egypt ($4.7 million) and Turkey ($10.1 million).
In the first six months of 2007, however, Iran headed the table with an investment of $874.5 million in two projects followed by the UAE with a $12.5 million investment in two other projects. However, these do not include the investment in financial services through the three GCC-owned Islamic banks that were established in Malaysia in 2006 and early 2007. These include Al-Rajhi Bank (Malaysia), Kuwait Finance House (Malaysia) and Asian Finance Bank, a consortium whose major shareholder is Qatar Islamic Bank.
Dr. Awang believes that the launch of the four economic corridors this year by Prime Minister Abdullah Badawi and opening of the financial services sector, especially the Islamic finance sector, with various tax incentives, will drive greater foreign direct investment (FDI) flows into the country. However, he stresses that the investment flows are in both directions. Malaysia, according to the World Bank, is the 15th largest FDI investor in the world, including investments in the Middle East.
“Malaysia,” explains Dr. Awang, “is trying to attract investment from the Middle East through various initiatives, especially through the economic corridors: the Iskandar Development Region (IDR) (also called the South Johor Economic Corridor) situated opposite Singapore; the Northern Corridor centered around Penang; the Eastern Corridor centered around Kelantan, Terrenganu and Pahang, which was opened in early November 2007 by the prime minister; and the smaller Sabah Corridor.
“The idea is for GCC capital, and for that matter from anywhere else, instead of going to Singapore, where everything is more expensive, to come to IDR especially to take advantage of the various incentives. The government sees IDR as an alternative and complement to Singapore. Indeed, investment from Singapore itself will be heavily involved in IDR. Singapore has physical constraints of land, lack of labor and high costs.”
The GCC interest in IDR was highlighted in September when Kuwait Finance House, Mubadala Investments and Aldar properties from Abu Dhabi, and Dubai’s Millennium International Development Corporation signed MOUs with the IDR to invest $1.2 billion in three zones in the initial phase of the $45-billion overall project.
Malaysia earlier this year rebranded its Islamic finance sector as the Malaysia Islamic Finance Center (MIFC), a one-stop shop for developing Malaysia as the preferred choice for Sukuk issuances and for other Islamic financial products and services.
The aim is also to attract foreign banks to the sector. As such, the government is allowing 100-percent foreign-owned banks to operate and giving banks 10-year tax holidays for various offshore activities.
Not surprisingly, the yardstick for the success of MIFC is the volume of inward capital flow — the number of Sukuk originated out of the MIFC, which accounts for only 12 percent of the total banking sector market share and 6 percent of the total insurance market share of Malaysia. The World Bank and its private sector financing arm, the International Finance Corporation (IFC) last year launched two Sukuk issuances out of Malaysia.
Dr. Awang confirms that Malaysia is still on track to issue its second sovereign Sukuk, although he says that a lot more could be done by the Islamic Development Bank, for instance, to persuade its member countries to issue sovereign Sukuk to create critical mass in the market.
The Badawi government has expressed concern about the poaching of Malaysian human capital especially by GCC countries. Al-Bilad bank for instance recently recruited 10 Malaysian Islamic bankers in a single swoop.
The Malaysian Finance Ministry is locked in a policy battle with Bank Negara Malaysia, the central bank, over giving Malaysian Islamic bankers tax incentives to remain in the country, and so thus stemming a brain drain.
“We (the Finance Ministry) are not giving in yet. We are looking at it. Bank Negara is pushing quite hard for these incentives. We see this phenomenon as a natural market process, and are inclined to let the market sort it out. We are keen to see more training programs so as to increase the number of people entering the sector. Bank Negara has launched INCEIF (International Center for Education in Islamic Finance) with this aim.”
Dr. Awang is confident that the Malaysian economy is on track to achieve a 6-percent GDP growth rate. The Treasury Report for 2008 is even more optimistic in its projections.
Fortunately, the US sub-prime mortgage crisis and subsequent credit crunch has not affected the Malaysian banking sector because the banks had little or no exposure to the collateralized debt loans. On the contrary, the Bursa Malaysia, the stock exchange, is having a bull run, achieving record levels in the last few weeks
The Malaysian government, explained Dr. Awang, is not satisfied with the level of trade and investment with GCC countries. He believes that with better information flow and greater contact between the two regions through business and tourist flows in both, much greater activity would occur over the next few years.
“Things are changing for the better now. Middle East investors and tourists are coming in. Some 30 percent of the condos in the vicinity of the KLCC are owned by foreigners, including many GCC investors. Malaysian investment in the GCC is also increasing,” he adds.
Saudi Telecom for instance, has taken a stake in Maxis, the Malaysian mobile phone operator.
Tenaga Nasional, the electricity utility, is involved in projects in the Kingdom; and MTD Group is the main subcontractor for the Jamarat Bridge being built in Mina.
Malaysia is also promoting itself as a regional hub and gateway to ASEAN (Association of South East Asian Nations) and for East Asia, the largest market for Saudi and GCC oil and oil products.
The emergence of the ASEAN Free Trade Association in 2010 with its 5-percent tariffs could turn out to be a further incentive for greater GCC involvement in Malaysia to reach these other markets.
The prospects for the Malaysian economy are “quite good,” with GDP growth on track to reach at least six percent in 2007 and the country’s foreign exchange reserves at a healthy $100 billion.
The government is also giving renewed priority to the development of infrastructure to stimulate demand and to add to the resilience of the economy.
Malaysian stocks are trading at record levels.
Banks are doing well with record profits and inflation is low.
The high oil prices too have a positive effect given that Malaysia is a net exporter of oil. Malaysia has also had a RM60-billion ($18 billion) windfall from the activities of Petronas, the national oil company.
This is allowing the government to maintain subsidies in certain sectors such as the palm oil industry, although the aim is to eliminate all subsidies.
The government realizes it is not politically acceptable to do away with current subsidies, but it has made a start by telling the so-called Government-linked Companies (GLCs) to survive on their own balance sheets.
“The GLCs,” stresses Dr. Awang, “have to survive on their own. We have phased out all subsidies. The only subsidy that will remain is on the gas price. After the elections, some of the subsidies may have to go.”
Dr. Awang is sanguine on the relationship between the US dollar and the Malaysian ringgit. The ringgit is not pegged to the US dollar but on a managed float, within no particular band. Bank Negara is not navigating the rate up and down but trying to achieve a smooth one.
The long-term trend, however, will still mean that the value of the ringgit against the US dollar will be determined by the market.
