Regional Focus

Malaysia: 20/20 vision

Published: May 2014

Key facts

29,628,392 (July 2013)1
GDP per capita:
$312.5 billion (2013)2
GDP growth (annual %):
Doing Business (2014) rank:
6th (out of 189 economies)2

Like many economies in South East Asia, Malaysia boomed during the late 20th century, transforming from a primarily agrarian economy to a multi-sector economy dominated by manufacturing and exports. The Asian financial crisis of 1997, however, put a halt to Malaysia’s development, damaging its economy and sending it into recession. Thankfully though, driven by exports and government spending, Malaysia recovered more quickly from the crisis than neighbouring countries, growing steadily though the 2000s and only suffering a slight recession at the tail end of the financial crisis in 2009.

Current economy

Malaysia is now home to an open, stable and vibrant economy which, according to statistics from the country’s central bank, Bank Negara Malaysia, grew by 4.7% in 2013. Inflation in the country is low, as is unemployment, with per capita income averaging around $10,000, which is $5,000 shy of the World Bank’s threshold for a high-income nation. Growth is predicted to continue in 2014 due to an increase in domestic demand, continued foreign direct investment, and a greater demand for exports.

Indeed, exports continue to be the main driver of the Malaysian economy, contributing $247 billion in 2012, according to CIA statistics. Electronic equipment, palm oil and natural gas comprise some of Malaysia’s key exports with Singapore, China, Japan and the United States among its main trading partners. In recent years however, the government has looked to diversify the economy to maintain growth and strengthen its position through increasing domestic demand and relying less on its exports and natural resources.

20/20 vision

Malaysia’s goal of becoming a fully developed nation was revisited following the recent global financial crisis as the nation looked to get back on course to meet its 2020 target. As a result, the wide-ranging New Economic Model (NEM) was introduced in 2010 to achieve this. At the heart of the NEM is the Economic Transformation Programme (ETP) implemented to attract $444 billion in investment and create 3.3 million new jobs by 2020. The ETP is also intended to strengthen the commercial environment and make Malaysian businesses globally competitive. This will be achieved by increasing competition, improving standards, reforming public finances and service delivery, changing the government’s role in business and developing human capital.

The effectiveness of the plan was immediately evident as, eight months after its launch, the Malaysian government announced that the country had received MYR 170 billion ($55.84 billion) in investment and that it expected to create 362,396 jobs.

To achieve developed nation status by 2020 the NEM called for 6% year-on-year GNI growth. However, in 2012 Malaysia only posted a 4% GNI increase, 2% lower than its target of 6%. Despite this disappointing growth, the government believes that Malaysia is “on the right track to hit high-income status by 2020”.

Trouble spots

Nevertheless, the country faces some challenges ahead. Malaysia has continually run a budget deficit since 1998, which currently sits at 4.5% of the country’s GDP. The rate of this debt has been increasing since the global financial crisis as government investment has increased in an attempt to stimulate the economy. The government has expressed a desire to reduce the deficit to 3.5% over the coming year.

The Asia Foundation, a non-profit international development organisation, highlights another worry for the Malaysian economy, claiming that it risks falling victim to the middle-income trap. A lack of innovation, low investment in technology, declining standards in education and stagnating productivity are cited as areas of concern for Malaysia. A RBS report issues a similar warning, highlighting that the country faces future economic problems as it has exhausted its fiscal flexibility.

Financial sector

On a more positive note, the World Bank has recently given Malaysia’s financial sector a vote of confidence. Citing it as stable and well capitalised, the World Bank believes the sector’s growth can continue over the coming years. Following the 1997 financial crisis, a Financial Services Master Plan (FSMP) was introduced with a view to creating a modern, healthy, forward-looking financial sector. This has seen the sector greatly improve, adopting global standards of supervision and regulation.

In 2011, the government released a blueprint for the financial sector leading up to 2020. The blueprint calls for the further development of the sector in order for it to become more competitive, dynamic, inclusive and diversified over the coming years. Further regional and international integration is also called for to allow the financial sector to meet both domestic and international needs. The overarching goal of the blueprint is to drive the sector beyond being an enabler of growth and to becoming a catalyst for growth.

Thus far, the development of the financial sector has created a banking landscape shared by both local and global banks. “Local banks tend to be used by corporates primarily for vanilla products,” says Anne Rodrigues, President of the Malaysian Association of Corporate Treasurers (MACT). “Global banks, on the other hand, are quite active in hybrid products, especially those which involve cross-border interactions.”

Islamic banking

Malaysia is also host to one the world’s foremost Islamic financial sectors alongside the GCC nations. The first Islamic bank in Malaysia was established following the Islamic Banking Act of 1983. Since then, the liberalisation of Islamic finance and the welcoming business environment has only seen the sector increase in strength. Islamic institutions in Malaysia now account for around 25% of all financial assets in the country.

According to the Malaysian International Islamic Finance Centre, the country’s Islamic banking sector outpaces the regular sector with average yearly asset growth of 18.6%. This is shared amongst a diverse range of banks including foreign-owned subsidiaries which can offer corporates in the country a diverse range of Islamic financial products.

Capital markets

A 2014 study by the International Organisation of Securities Committees (IOSCO) highlights the strength of the Malaysian Stock Exchange. The IOSCO study concluded that the development and increased regulation of Malaysia’s capital markets was beginning to attract long-term investment. IOSCO Chairman Greg Medcraft cited the Malaysian capital markets as a “great template for emerging markets.”

“The robustness of the capital markets,” says Krishna Chetti, CEO of BNP Paribas Malaysia, “can be attributed to the market acceptance of clearly defined, stable and transparent guidelines in addition to continuous stakeholder investment allowing for orderly market activities.” The strength of the Malaysian capital markets means that it is not only domestic companies which use them. “In recent years, foreign corporates have also commenced tapping debt and equity funds from the Malaysian capital markets,” says Chetti.

“The Malaysian capital markets certainly offer what corporates require,” says Mohamed bin Derwish, General Manager of Corporate Finance at Telekom Malaysia. “They have grown substantially since the 1990s and are now very large and deep.” Indeed, statistics released last year by the Securities Commission highlight that, since 2000, the size of the market has tripled to RM 2.5 trillion, or 264% of the country’s GDP. In 2012, Malaysia was the fifth largest IPO destination in the world and the fourth most active corporate bond issuer in Asia.

With greater integration of the ASEAN region and the creation of the ASEAN economic community, Derwish expects the capital markets to further improve. “There are already programmes in place for the integration of ASEAN and going forward the tapping of funds and liquidity will increasingly become cross-border,” he says. “Malaysia will be well equipped to take advantage of this.”

The development of the Malaysian capital markets has also been boosted by the growth of Islamic bonds, known as Sukuk. Malaysia is currently the world’s primary issuer of Sukuk, accounting for 60% of the global total as of June 2013. “Sukuk are popular with corporates in the country and over the last year the majority of issues have been Islamic,” says the MACTS Rodrigues. “Many companies in the Middle East are also using Malaysia to issue Sukuks. Malaysia’s lower funding costs are one of the main drivers of this.”

Malaysia is keen on growing its Sukuk market, introducing the Islamic Financial Services Act 2013 to further strengthen Islamic financial institutions. “Being a conducive environment for Sukuk transactions, I believe that Malaysia has what it takes to attract more institutions from all over aiming to tap Malaysia’s Islamic finance marketplace and the pool of liquidity,” stated Deputy Prime Minister Tan Sri Muhyiddin Yassin in 2013. For Yassin, future growth depends on expertise, Sharia governance and practices, and improved legal and regulatory frameworks.

Payments systems

“The payments systems in Malaysia,” says Abdul Raof Latiff, Head of Treasury Services, ASEAN, J.P. Morgan, “have come a long way.” The legacy system in Malaysia during the ‘80s and ‘90s comprised a multi-state clearing system which has now been replaced with a single clearing zone. “This has made payment execution in the country much faster and more efficient for banks and their clients from both a time and cost perspective,” says Latiff. Improved cross-border payments have also been on the central bank’s radar and recent developments have seen the real-time electronic transfer of funds and securities system (RENTAS) extend its services to include the renminbi, further facilitating regional trade and allowing corporates to reduce settlement risk for renminbi transactions.

Malaysia has also looked to adopt new payments technology. One recent example of this is the central bank’s adoption of SWIFT as its access channel to connect to RENTAS. “Malaysia keeps a watchful eye over developments in the payments space and looks to keep improving,” says Latiff. “Due to this, Malaysia now has an advanced payments system compared with developed countries.”

Drive towards electronic payments

In 2013, 1.6 billion financial transactions were carried out via electronic means in Malaysia, according to statistics from the central bank. The government is looking to further increase this over the next few years, creating a cashless society by developing the payment infrastructure – allowing annual savings of up to 1% of GDP.

“The policies which are being introduced to reach a cashless society are very aggressive,” says MACT’s Rodrigues. “Cheques currently make up 2% of the GDP and they want to eradicate this completely.” In 2013, 204 million cheques were issued according to the central bank and the aim is to reduce this to 100 million by 2020. To achieve this, charges associated with issuing cheques have increased to 50 sen (cents), as of 1st April 2014. This cost is set to rise until 2020 when it will match the cost of providing the service, currently 3 MYR ($0.93).

“The move towards a cashless society will certainly benefit corporates in the country,” asserts Rodrigues. “Some of these benefits include improving the efficiency of working capital and use of the balance sheet. There will also be a reduction in idle cash and delays in payments (which cheques can cause).” BNP Paribas’s Chetti agrees, highlighting that, “improvements in e-transactions have aided corporates in their daily tasks such as reconciliation and reporting.”

As the move to cashless payments gathers pace, companies may need to make some alterations to their operations. “At Telekom Malaysia we are working with our procurement department to ensure our vendors have the correct banking structure for electronic payments,” says Derwish. “Around 50% of our payments are already made electronically. We want to increase this to 80% over the coming year to reduce the cost of making payments.”

Treasury landscape

“The development of corporate treasury in Malaysia means that on the spectrum between Indonesia, Hong Kong and Singapore, Malaysia would be somewhere in the middle,” says Rodrigues. “The movement of cash in Malaysia is smooth and both netting and pooling arrangements are permitted both in-country and cross-border, due to the lifting of foreign exchange controls.”

“At Telekom Malaysia, we have been able to adopt the best international standards, we have taken advantage of cash pooling and we now centralise our operations and carry out inter-company lending from within the group,” says Telekom Malaysia’s Derwish. Through synchronising the company’s cash management system with their financial services, Telekom Malaysia has been able to create more efficiency and streamline its operations. “We are now able to fully maximise the use of money within the group and meet group demands on a daily basis.”

Over the last decade, many Malaysian companies have grown to have large international operations and so the development of corporate treasury has followed this growth. “Traditionally,” says J.P. Morgan’s Latiff, “the primary issue for a treasurer was ensuring their company was able to conduct its day-to-day business. Little time and money was spent on technology and the design of the treasury.” As companies in the country are expanding however, many treasurers are now looking at ways that they can improve their treasury operations. “They typically only begin to focus on this as they grow and become more operationally complex,” says Latiff. “At that point, it’s a question of how they can get back to basics around visibility, control and efficiency of their cash, leading to better yields. To achieve this, companies are increasingly looking towards different models of centralisation through which they can potentially consolidate their accounts and streamline credit relationships, for example.”

With the growth of Malaysian companies across borders, another area which Latiff highlights as being important for corporates is maximising their yield in foreign countries. “Many Malaysian companies conduct overseas business in the ASEAN countries and many of these are restrictive,” says Laftiff. The inability to repatriate cash easily in many of these countries often leaves it trapped. “Our customers are therefore asking for ways in which they can make the most of their money in these countries.”

Regional treasury management

Traditionally a hub for shared service centres (SSC), Malaysia has recently begun to take steps to promote itself as a Regional Treasury Centre (RTC) to compete with Singapore and Hong Kong. To initiate this drive, the 2012 Malaysia budget, which focused on national transformation, contained tax incentives to entice corporates to locate their RTC in Malaysia. As part of a wider strategy to bring more investment into the country, the incentives include a 70% tax exemption for five years on income from qualifying treasury services, such as cash management and investment, rendered to related companies. Also a withholding tax exception and stamp duty exemption is offered, among other incentives.

To obtain the benefits of the incentives however, a company has to have at least three related foreign companies and derive 80% of its treasury income outside Malaysia. “For Malaysian companies like ours,” says Derwish, “we are unable to benefit from the incentives. We have therefore begun discussions to extend to Malaysian-based operations as well.”

Traditionally corporates may look to the well-established treasury centres of Singapore and Hong Kong. However Rodrigues believes that “Malaysia does have one key edge over these being an established manufacturing centre. This means Malaysia already has a large number of multinationals based in the country. It would therefore make sense for these companies to base their RTMC where their manufacturing centre is,” she says. “It may be because of this that we see a number of MNC’s in the manufacturing industry start looking toward relocating to Malaysia.”

“Malaysia also has the advantage of providing stability, politically and economically,” says BNP Paribas’s Chetti. “Coupled with the push to become a leading international and regional Islamic finance hub and the incentives offered by global corporates who establish their operations in the country, it shows that Malaysia is committed to establishing itself as a prominent treasury destination.”


Last year, telecommunications group Axiata became one of the first companies to establish a RTC in Malaysia. On the whole however, companies have been slow to adopt Malaysia as their RTC, something which Rodrigues puts down to the infancy of the incentives. “We also have strong competitors in Singapore and Hong Kong,” highlights Rodrigues, “Malaysia must therefore continue to review and renew its incentives to see how it can encourage MNCs treasuries to use the country.” In doing so, Malaysia can continue to develop its financial sectors and infrastructure, further raising its appeal and enhancing its position as a hub of treasury operations in the region.

“Overall,” says Rodrigues, “I see corporate treasury becoming an increasingly vibrant industry in Malaysia over the coming years.”

  1. Index Mundi

  2. World Bank

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