Yesterday, the repetition by the Prime Minister, Datuk Seri Abdullah Ahmad Badawi that Malaysia will not be hit by the global financial meltdown is most disturbing as Malaysia has both strong and weak economic fundamentals.

Malaysia’s past economic performance was in part linked to high rates of domestic savings and FDI flows. Capital was readily available – it was directed by the state, not necessarily into the most productive sectors.

Paul Krugman, the much-acclaimed economist now awarded the 2008 Nobel Prize for Economics, in his analysis about the Malaysian economy had drawn attention to this issue and questioned the capacity of the country to remain competitive.

It is indeed remarkable that no heed was paid this feature in government policies. Both in the Mahathir and Abdullah eras the essential economic policies remained unchanged — directed investments into large projects with low returns; a less than transparent and accountable use of national resources thus contributing to the growing level of corruption and abuse. Read the rest of this entry »

Maintaining Islamic Finance Leadership

As highlighted in the previous years’ budget, Malaysia has progressed significantly in the development of Islamic financial services, especially in terms of the size of investments and an increase in the number of institutions. Malaysia was the first to issue a global sukuk in 2002, as well as the first country where supranationals have issued ringgit-denominated Islamic bonds, namely the International Finance Corporation with an issuance of RM500 million and the World Bank, RM2 billion. In 2006, Malaysia was the largest issuer of Islamic bonds in the global capital market, accounting for USD30 billion, which is more than 70% of the overall global issuance of USD41 billion.

With the continued growth of importance in Islamic finance, we want to encourage more of this business to come to Malaysia. There is approximately US$500 billion of funds within the Islamic finance system, growing at around 15% annually. In the Gulf and Asia, Standard & Poor’s estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.

However the market’s growth in importance has also attracted some of the largest capital markets in the world such as the United Kingdom and Singapore to develop financial services and products to capture this market, which will result in a loss of market share for Malaysia. For example, one of the largest sukuk to date issued by Dubai Ports was written out of the London office of Barclays Capital in January 2006. And in August 2006, the first billion dollar sukuk to be listed on the London Stock Exchange raised £2.5 billion (US$5 billion). In addition, ambitious plans have been announced to make London the western capital of Islamic finance as the government announced tax relief for sukuk in March this year.

Nearer home, Singapore is increasingly serving as a bridge between the Middle East and Asia. More Middle Eastern banks are setting up in Singapore, which is experiencing double-digit growth in funds originating from the Middle East, for investment in Asian capital markets and real estate. Given Singapore’s lead in the Over-The-Counter (OTC) derivative market as the fourth-largest foreign exchange trading centre in the world, they will certain provide stiff competition for Malaysia. Read the rest of this entry »

Malaysia is a country blessed with abundant natural resources. In particular, we are thankful that the country is rich in oil and gas, which created Malaysia’s sole representative in the Fortune 500, Petroliam Nasional Berhad (Petronas).

In the most recent financial year ending March 2007, Petronas achieved record profits before tax of RM76.3 billion thanks to record high crude oil prices which increased from under US$25 per barrel to above US$70 all within four years.

Of greatest importance, was the fact that Petronas contributed RM53.7 billion to our national coffers in taxes, royalties, dividends and export duties last year.

Contribution from Petronas and other oil and gas companies operating in Malaysia was budgeted to make up some 46.8% of the government revenue for 2007.

This represents a steep increase from approximately 30% in 2006 and 25% in 2004. These statistics marks Malaysia’s heavy reliance on oil and gas industry today.

Malaysia’s abundance of oil & gas resources is akin to striking lottery. It is a once-off affair, and at some point of time, our reserves will run dry.

According to Oil & Gas Journal, Malaysia held proven oil reserves of 3.0 billion barrels as of January 2007, down from a peak of 4.6 billion barrels in 1996. These reserves will last us for only another 20 years or so.

In addition, Malaysia is expected to become a net oil importer by 2010 assuming a conservative growth of 4% in petroleum products consumption. Our trade current account surplus has also been boosted significantly by oil and gas related products which constitutes more than 11% of our exports.

The frightful acceleration of dependence on our limited oil and gas resources places the country’s economy at great risks. Read the rest of this entry »

Globalisation brings both new threats and opportunities for the Malaysian economy. Should we rest on our laurels and continue to believe that we can be sheltered by the proverbial coconut shell, it will only result in irreparable damage to the economy. However, if we were to instil in our economy the spirit of resilience as well as the ethics of competition, hard work and innovation, Malaysia will be able to achieve its full potential via the vast opportunities provided by globalisation.

Today, capital, enterprise and talent are flowing to countries where government can be trusted, where the workforce is well-educated and skilled, and where the quality of life is high. These are key pillars of our economy and our country which we must build in order to reap the full benefits of globalisation.

Malaysia used to attract some of the biggest technological giants such as Intel, Motorola and Dell to develop and manufacture their latest technologies in the country. However, in the past decade, we have clearly fallen behind in terms of advancement in manufacturing technology. For example, Malaysia’s current leading semi-conductor wafer-fabricator, SilTerra Malaysia Sdn Bhd offers major foundry compatible CMOS logic, high-voltage and mixed-signal/RF technologies down to 130 nanometer feature size. SilTerra’s wafer fab has a design capacity of 40,000 eight-inch wafers per month.

However, semi-conductor technology has advanced significantly with state-of-the-art 90-nm technology on 300-mm wafers, and 65-nm production. In fact, 45-nm process technology is now under aggressive development. Our neighbours, Singapore, for example, is attracting more of the ‘first-of-its-kind’ investments such as the chip used in the latest PlayStation3 and Xbox. A French semiconductor company, Soitec, is investing $700 million to set up in Singapore its first offshore facility to make the wafer for this chip. It is high precision, high technology. The wafers have alternating layers of silicon and insulator, unlike conventional wafers which use silicon throughout. Singapore became the only country in Asia that it trusts well enough to set up its first manufacturing campus outside of France. Hence, it is key for Malaysia, in the age of globalisation, to bring back global investments in leading age technologies. Read the rest of this entry »