Playing Catch Up With SingaporeChristine Hill
Malaysia may have the biggest stock market in Southeast Asia, but up until now, neighboring Singapore has been grabbing all the juicy business. Over the past two years, Malaysia's leaders have watched with dismay as more and more international financial players chose Singapore as an alternative to Hong Kong for setting up trading and other operations. Authorities worried that Malaysia might play permanent second fiddle to its smaller neighbors.
That's all set to change. Malaysia's Deputy Prime Minister Anwar Ibrahim has put into effect bold capital-market reforms to help Malaysia compete head-to-head with Singapore, and possibly overtake Hong Kong, as Southeast Asia's premier finance center. Anwar has done everything from inviting in foreign fund managers to giving local brokers easier credit. Analysts welcome the initiatives. "Malaysia could become a center for the whole region," says Stephen Weller, an investment analyst at Pesaka Jardine Fleming.
BIG LEAD. There's certainly a strong foundation to build on. Malaysia's stock market has a capitalization of $216 billion and lists 640 companies. Private investors regularly raise 100% of their project financing needs through the local capital markets--a feat unparalleled in the developing world--in part by tapping Malaysians' rich pension funds.
Yet Singapore has a headstart in many areas. It boasts Southeast Asia's most developed infrastructure. Its financial markets are highly sophisticated, with international currency and over-the-counter stock markets. Foreign brokers can buy seats on the Stock Exchange of Singapore. And Singapore's leaders have gone all out to entice new business with tax incentives.
Now, Malaysia is playing catch-up. By the end of 1995, a futures and options market will be up and running in Kuala Lumpur. Anwar has abolished rules that allowed only 10 local stockbrokers to list on the Kuala Lumpur Stock Exchange (KLSE). He also gave brokers easier access to bank loans by letting them collateralize a higher percentage of borrowing with shares. The relief among brokers is palpable. Ami Moris, vice-president for dealing at CapitalCorp, says she has often turned away big orders because her firm had run out of operating cash for the day.
Anwar has also made trading simpler and cheaper. Previously, Malaysia's markets had among the region's highest transaction costs. Now, brokerage commissions have been slashed from a flat rate of 1% to a regionally competitive sliding scale of 0.5% to 1%.
By far the most significant reforms are in the fund management industry. Mimicking changes launched in Singapore last year, Anwar has granted foreign fund managers a concessionary 10% tax rate on net profits, plus the chance to manage part of Malaysia's pension funds. That's no small enticement. The Employees' Provident Fund alone, a nationwide compulsory savings scheme, has funds of more than $43 billion. In permitting foreign competition, Anwar intends to light a fire under domestic fund managers, whose skills don't always meet international standards. "Many local fund managers lack basic financial knowledge, such as the difference between a bond and a warrant," says one dealer.
Next, Anwar plans to speed up development of an international financial exchange on Labuan, an island north of Borneo. Done right, the new money market on Labuan would be the most serious challenge yet to Singapore's status as a regional foreign exchange center. Since Malaysia established Labuan as an offshore financial center with special bank secrecy laws in 1990, 41 banks and 442 companies have registered there. Most now operate from Kuala Lumpur as they wait for Bank Negara, the national bank, to complete a $360 million financial park on the island. Anwar intends to abolish Labuan's already low taxes and make it easier for Labuan-based businesses to use the Malaysian ringgit, rather than hard currencies, in transactions.
Nobody expects Malaysia to eclipse Singapore overnight. Problems still abound; there are three-month waits for new telephone lines and other infrastructure bottlenecks. But by 1998, Kuala Lumpur is expected to be saturated with phone lines, and the capital will also have a new airport, a mass transit system, and surplus power-generation capability. And Anwar has indicated that more reforms are in the works. The further he goes, the better Malaysia's chances of getting out in front of the pack in Southeast Asia.
Malaysia Revs Up Its Markets
-- Letting foreigners into the fund-management industry
-- Making it easier for local brokers to raise and borrow funds
-- Rushing to develop an offshore foreign exchange center
-- Slashing high commissions to make trading more competitive
-- Opening a futures and options exchange