Overview of Malaysian Economy PDF

OVERVIEW OF MALAYSIAN ECONOMY MALAYSIAN ECONOMIC BUSINESS CYCLE Malaysia experienced economic The steady growth stage from transformation during 1970s....

OVERVIEW OF MALAYSIAN ECONOMY MALAYSIAN ECONOMIC BUSINESS CYCLE Malaysia experienced economic The steady growth stage from transformation during 1970s. Strong relationship between 1976-1984 - characterised by growth, employment and Agricultural diversification the switch in public policy from Liberalisation measures were introduced inflation. across the board to help improve import-substitution to export- competitiveness and productivity. orientation policy. MALAYSIAN ECONOMIC BUSINESS CYCLE The establishment of Free Trade The acceleration in private From 1970 to the mid-1990s, the The implementation of the Zones (FTZs) and Licensed investments during the 1980s country’s investment ratio was Promotion of Investment Act in Manufacturing Warehouses coincided with the Malaysian among the highest in the region. 1986 offered generous tax (LMWs) and Incentives under the Government’s privatisation incentives and 100% foreign implementation of Investment initiatives to attract FDI. equity ownership in selected Incentives Act (IIA) 1968 industries, was successful in -encouraged the shift of the attracting FDI. Malaysian’s growth strategy from import-substitution to export- orientation strategies. MALAYSIAN ECONOMIC BUSINESS CYCLE Economic diversification helped Sustained high growth during the 1980s transform the country into a middle- brought significant improvements in the income emerging market by the end of standard of living and social cohesion. the decade. The collapse in the price of primary The nation’s growth began to slow down products aggravated the situation that led in 1983 due to the prolonged world to serious resource constraints and recession following the second oil shock drove the economy into a twin deficit in 1979. position with respect to the budget and BOP. MALAYSIAN ECONOMIC BUSINESS CYCLE  Government instituted major structural adjustments during 1984-1990. These included:  restraining public sector expenditure to reduce budgetary deficits  adopting a private sector-led growth strategy  introducing deregulation and improving investment policies  incentives to promote private sector participation  privatising public sector enterprises.  The economy recovered in 1987, registering a high growth record of 13% per annum during 1988-1990.  By 1989, the contribution of the private sector to economic growth surpassed that of the public sector, heralding the transformation of the Malaysian economy to that of a private sector-driven economy.   Malaysia’s economic performance remained strong and continued during the 1990s prior to the Asian financial crisis.  This period was viewed by many as the golden age of Malaysian economic growth.  real GDP growth averaged at 9.2% per annum THE  current account deficit gap closed EXPANSION  unemployment was below 3% PHASE (1990-  low inflation rate of 3.5% 1997 PRE  stable exchange rate of 2.5%. CRISIS)  Economic growth was brought by technological innovation and positive external forces.   Strong fundamentals growth  Substantial poverty reduction KEY FACTORS  Improve quality of life and standard of living  Political stability and harmonious society (after the racial LEAD tension and riots in 1970, Malaysia has enjoyed peaceful coexistence) MALAYSIA’S  Supportive government policies towards FDI STRONG  High-quality social services ECONOMIC  Well-developed infrastructure PERFORMANCE  Educated and trainable workforce  Competitive investment incentives DURING THE  Encouraging private sector-led growth EXPANSION  Investment in human resource development PHASE  Supportive fundamental policy framework, particularly in agricultural and industrial sectors.   Domestic economy fluctuated widely due to the financial crisis of July 1997.  On 1 September 1998, Malaysia implemented capital control to tighten control on capital mobility.  Advantages of capital control  it increased the efficiency of capital allocation THE  prevented external capital transactions from having an adverse impact SLOWDOWN on the domestic economy PHASE  On 2 September 1998, the government announced a fixed exchange rate system and set the rate at RM3.8 per US$.  Capital outflow reduces the value of domestic currency and capital inflow increases money supply. Hence, both enhance the acceleration of inflation  Malaysia’s recovery in 1999 was supported by accommodating macroeconomic policies.  Strong GDP growth  a gradual easing of capital controls  helped to improve investors’ confidence. THE  Some firms gained much progress with operational restructuring of the corporate sector via the corporate debt restructuring programme. RECOVERY  Sharp depreciation of the regional currencies, especially the yen AND UPTURN  resulted in a large effective appreciation of the ringgit during late March and early April 2001 PHASE  causing the outflow of short-term capital and the loss of reserves  adversely affect market confidence.  The Government introduced the four strategies of the Package of New Strategies to stimulate economic growth in May 2003. THE  promote private sector investment,  strengthen the nation’s competitiveness, RECOVERY  develop new sources of growth AND UPTURN  enhance the effectiveness of the delivery system. PHASE  Malaysia managed to recover and grew faster after the financial crisis  substantial potential for catching up;  relatively well-educated workers,  strategic geographical and favourable structural policies; FACTORS  demographic changes working in favour of more rapid growth  economic policies and strategies that were conducive to sustained growth. CHALLENGES  Food and Fuel Crisis  Global Financial Crisis  Russian-Ukraine War  The Covid-19  Post-pandemic recovery  Cost of living  Labour market 12 IMPORTANCE MEASURES  Gross Domestic Product (GDP)  Unemployment  Consumer Price Index  Inflation  Interest rate  Quality of life MALAYSIAN ECONOMY IN A GLOBALIZED WORLD  1 1971-1990 NEW ECONOMIC POLICY (NEP) FACTORS NATIONAL DEVELOPMENT SUCCEEDING IN 2 1991-2000 POLICY (NVP) MALAYSIA'S ECONOMIC 3 2001-2010 NATIONAL VISION POLICY (NDP) POLICY 4 2011-2020 NATIONAL ECONOMIC MODEL NEW ECONOMIC POLICY (NEP) 1971-1990  NEW ECONOMIC POLICY (NEP) 1971-1990 ⚬ ⚬ ⚬ ⚬ ⚬  NEW ECONOMIC POLICY (NEP) 1971-1990  ⚬ ⚬ NATIONAL DEVELOPMENT ⚬ POLICY (NDP) ⚬ 1991-2000  NATIONAL VISION POLICY (NVP) 2001-2010  NATIONAL VISION POLICY (NVP) 2001-2010 ⚬ ⚬ ⚬ ⚬ ⚬ ⚬ ⚬ ⚬  NEW ECONOMIC MODEL (NEM) 2011-2020 NEW ECONOMIC MODEL (NEM) 2011-2020 8 STRATEGIC REFORM INITIATIVES (SRIS) BUMIPUTERA ECONOMIC ⚬ EMPOWERMENT ⚬ (BEE) ⚬ ⚬ ⚬ CHALLENGES TO MALAYSIAN ECONOMIC POLICIES PRE NEW ECONOMIC POLICY 1969 1965 1963 1957-1958 1955 NEW ECONOMIC POLICY 1985-1986 1980-1981 1979 1973  FURTHER CHALLENGES TO MALAYSIAN ECONOMIC POLICIES 1991-2000 2006-2020 2011-2020 2000-2010  PLANNING HORIZON  PLANNING HORIZON Vision 2020, 1991-2020 New Economic Model (NEM), 2011-2020 Corridor Malaysia  VISION 2020 The 30-year vision from 1991 to 2020 VISION Envision Malaysia to become a developed nation by 2020, 2020 focusing to build a competitive nation. The objectives are: ⚬ Establishing a united Malaysian nation ⚬ Creating a psychologically liberated, secure and developed Malaysia society ⚬ Fostering and developing a mature, democratic society ⚬ Establishing a fully moral, ethical, liberal, tolerant, and fully caring society ⚬ Establishing a scientific and progressive society ⚬ Establishing a fully competitive, dynamic, robust, and resilient economy ⚬ Ensuring fair and equitable distribution of the nation’s wealth STRATEGIES OF VISION Export-led growth and free Accelerated industrialisation drive market forces 2020 The government developed a framework of four pillars to drive Technology-intensive industries changes and move the country forward to achieve Vision 2020 (Slide 21). High-tech and knowledge- Internationalisation intensive THE FOUR PILLARS OF NATIONAL TRANSFORMATION UNDER VISION 2020 Government Economic 10th Malaysian Plan 1Malaysia Transformation Transformation Programme (GTP) Programme (ETP) GOVERNMENT TRANFORMATION PROGRAMME (GTP)  ECONOMIC TRANSFORMATION PROGRAMME (ETP)  PLANNING HORIZON Short-Term Plan Medium-Term plan Long-Term Plan  OUTLINE PERSPECTIVE PLAN First Outline Perspective Plan Second Outline Perspective Plan Third Outline Perspective Plan  INDUSTRIAL MASTER PLAN Industrial Master Plan 1 Industrial Master Plan 2 Industrial Master Plan 3 GOVERNMENT INITIATIVES IN ECONOMIC POLICIES BEFORE THE ESTABLISHMENT OF MALAYSIA 1956-1960 1961-1965 Focused on Enchance rural economic development growth and Diversifying narrowing economic the income sources gap *MP = Malaya Plan  AFTER THE ESTABLISHMENT OF MALAYSIA 1st MP 6th MP 1st MP 6th MP 2nd MP 5th MP 3rd MP 4th MP 4th MP  12th MP 7th MP 8th MP 11th MP 9th MP 10th MP BENCHMARK ECONOMIC POLICY GDP GROWTH RATE (1970-2018) INFLATION RATE (1970-2018) GDP PER CAPITA (1970-2018) 9 CHALLENGES Establishing a united Malaysian nation Creating a Fostering and psychologically developing a mature SET OUT FOR liberated, secure, and democratic society VISION 2020 developed Malaysian Society Establishing a fully moral and ethical society Establishing a Establishing a mature, scientific and liberal and tolerant progressive society society Establishing a fully caring society will come before self Ensuring an Establishing a economically-just prosperous society society Other 1 National Agriculture Policy (NAP), Policies 1984 2 Look East Policy 3 70-Million Population Policy 4 Malaysia Incorporated Policy 5 Privatisation Policy  PRIVATISATION POLICY The Privatisation policy was announced in 1983. It represented a policy shift from public sector led to private sector led growth. Objectives of privatisation policy is to: ⚬ Relieve the government of the financial and administrative burden, ⚬ Improve efficiency and productivity, ⚬ Facilitate economic growth through private entrepreneurship and investments, ⚬ Reduce the size and presence of the public sector in the economy, and most importantly of the five policy objectives, ⚬ Help meet the objectives of the NEP.  PRIVATISATION POLICY Privatisation relieves the public sector of financial and administrative burden, only profitable enterprises are attractive to the private sector. Revenue generated from privatisation may reduce the fiscal deficit temporarily since the state would lose income from the more profitable privatised public enterprises and finance the remaining unprofitable assets. Selling of public enterprises carries an opportunity cost. Therefore, an ‘improved’ budgetary situation is not always achieved via privatisation. Instead, it sometimes worsens public sector deficit performance which undermines the potential for cross-subsidisation within the public sector. Privatisation is expected to help achieve NEP objectives.  TRANSFORMASI NASIONAL 2050 The Transformasi Nasional 2050 strive to be among top 20 countries in economic development, citizen well-being and innovation. I aims to target issues that are problematic for individuals now, and those that are relevant to the general calling of the world. There are also challenges for the tranformasi nasional 2050 which are: Larger population Longer life expectancy Shifths in jobs and training Mega urbanisation Climate change Economic power shift Faster Islamic growth Science and technology PUBLIC SECTOR: BUDGET AND EXPENDITURE  INTRODUCTION ▪ Budgeting: a quantitative financial statement ▪ two major components: public expenditures revenue ▪ serves as financial management tool and shows a direction of fiscal policy.  Fiscal Policy Expansionary Contractionary fiscal policy fiscal policy The use of tax cuts and rising reducing government revenue government government and government spending spending or expenditure to larger increasing tax rate influence aggregate government budg Smaller demand and the et deficit government budg economic growth of smaller budget et deficit the country surplus larger budget surplus.  INTRODUCTION ▪ Budget deficit ▪ the amount by which the expenditure of the Federal government exceeds its revenue ▪ increase government borrowing ▪ raise national debt ▪ reducing government expenditures - less borrowing ▪ National debt ▪ total amount of money the government owes or borrowed ▪ Domestic borrowings – auction of bonds to the public ▪ Foreign borrowings – ▪ Asian Development Bank (ADB) ▪ International Monetary Fund (IMF)  INTRODUCTION ▪ Budget surplus ▪ situation in which government revenue exceeds expenditures ▪ government is running efficiently ▪ to pay off some of the government debt ▪ save the money for precautionary purpose ▪ Balanced budget ▪ situation in which revenue equals expenditures ▪ welfare maximizing policy to the society ▪ very rare ▪ cyclically balanced budget ▪ balanced over the economic cycle ▪ surplus in boom years and deficit in lean years SOURCES OF FINANCE Primary source: revenue from tax and non-tax Budget deficit: an external source is required sell fixed assets from domestic and foreign markets with bond issuance or withdraw from fiscal reserves Fiscal reserve: surplus from budget surplus saved for future use during budget deficits to finance developments or expenditure invested in either local currency or any financial instrument that may be traded later  Tax Revenue Non-tax revenue Non-revenue receipts Income gained by the government through taxation – direct and Major components: Repayment and indirect tax Petronas Dividend reimbursements Direct taxes collected by Petroleum Royalty such as refund of the Inland Revenue Board and Gas expenditure and Income taxes on Road tax Bank Negara overpayment in corporations and individuals Dividend previous fiscal years, Petroleum (PITA) Revenue from: repayment of loans Stamp Duty issuance of licenses from Federal Real Property Gain and permits Government’s Tax (RPGT) fines and penalties Consolidated Fund Estate Duty proceeds from sale Indirect taxes collected by (Revenue account) of government receive from other the Royal Customs and assets Excise Department federal government rental of import duties government or state government export duties property excise duties sales tax service tax  Government inject extra spending into the economy to boost the aggregate demand and economic activity Government supplies goods and COMPOSITION OF services FEDERAL FINANCIAL transportation merit goods – hospital and schools STATEMENT: common defense EXPENDITURE welfare payments and benefits improve supply-side in the macroeconomics – spend on education and training to improve labour productivity 1 3 OPERATING EXPENDITURE DEVELOPMENT EXPENDITURE Emoluments Economic service Subsidies Social service Debt service charges Security Grants to state governments and General administration statutory bodies Pensions and gratuities Supplies and services Refunds and write-off 2 4  Public sectors are divided into three levels; national state local (city or county) Three types of organizations: Core government relates to ministries and branches of government that are accountable, and it reports directly to the central authority. Agencies play a part in governmental bodies while being partially operational and independent Public enterprises also serve public services and programmes; they usually have their own source of revenue in order to provide public funding. ▪ Government’s spending - main contributor in boosting economy ▪ increase the consumption expenditure to increase the market vitality during the market downtrend. ▪ Public sector - important role ▪ to stimulate economic growth ▪ maintain quality of living of citizens ▪ supports equitable policies, ______ Management Issues of Innovation inefficiency THE PROBLEMS FACED … Accountability Talent development AGRICULTURE SECTOR  INTRODUCTION ▪ The agricultural sector has contributed to the growth of the Malaysian economy. ▪ major contributors to national income and export earnings. ▪ foundation of economic growth and was the main contributor to the national economy prior to the 1970s. ▪ Remained a stronghold of the major sectors contributing to the economy after the manufacturing and service industries ▪ rapid growth in the agricultural sector was initially derived from the increase in the production of livestock, fisheries, and other miscellaneous crops. INTRODUCTION ▪ The agricultural industry ▪ is moving to more valuable cash crops owing to the increase in earnings from major commodities such as palm oil, rubber, and food commodities. ▪ The increasing demand for food due to urbanisation and population growth had increased the country’s import bill. ▪ focus on self-sufficiency in certain commodities to avoid insufficient global supply of food due to the increasing population growth rate. ▪ For Malaysia, the agricultural sector provides a livelihood for farmers, fishermen, and agro-based industry employees, while also ensuring sufficient food supply for the country.  GDP Growth – Malaysian Economy Experiences The contribution The growth of the structural changes in of the agricultural agricultural sector the past decades. sector to the – driven by the economy is robust growth in relatively small in the production of GDP terms though crude palm oil its absolute value (CPO) and other has been agricultural increasing over products. the years. VALUE ADDED ▪ Improved performance of the agricultural sector. ▪ Utilisation of new technologies ▪ Shift to large-scale commercial production ▪ Wider adoption of the group farming system ▪ Increased market accessibility ▪ Better commodity prices. ▪ Various tax incentives were given to the firms to attract foreign direct investment in the agricultural sector. ▪ High priority in national development planning as one of the National Key Economic Areas (NKEAs) identified agriculture in the Tenth Malaysia Plan (10th MP). ▪ Hard-core poverty in this sector remains significant. Poverty eradication encompasses an important issue in national development progress, and the agricultural sector is seen to be vital in reducing the urban-rural disparity gap. ▪ The new focus in the agricultural sector is expected to increase the income of the rural population through agricultural entrepreneurship and narrow the urban- rural disparity gap.  PRODUCTION ▪ The National Agricultural Policy (NAP) emphasises the re-development of alienated agricultural land, particularly to expedite modernisation and improve productivity ▪ The agricultural sector supplies raw materials to the manufacturing sector to support the resource-based industries ▪ Rubber-based products ▪ Palm oil-based products ▪ Wood-based products ▪ This has strengthened the upstream role of agricultural and forestry industries – encouraged vertical integration, and increased farm income.  ▪ ASEAN countries produce almost 80% of the world natural rubber production. RUBBER ▪ Malaysia is among the largest producer of natural rubber in the world. ▪ The rubber products industry comprises four sub-sectors: ▪ Latex products ▪ Tyres and tyre-related products ▪ Industrial and general rubber products ▪ Footwear ▪ It is mainly due to conversion of plantation land to commercial use. Besides, shortage of plantation workers due migration of workers to more lucrative jobs in other sectors of the economy  ▪ The internal consumption of natural rubber rests in the range of 10-15%, while the rest is exported as raw and semi-raw material, especially as smoke of sheet rubber latex and rubber blocks. RUBBER ▪ Malaysia is the world’s leading producer and exporter of Latex products including rubber gloves, catheters, latex thread, condoms, and foam products, supplying more than 80% of the world market for catheters and 70% for latex threads. ▪ Furthermore, Malaysia commands about 60% of the global rubber glove market and is currently the largest exporter of rubber gloves, followed by Thailand and Indonesia. ▪ The introduction of synthetic gloves (PVC) to replace latex gloves has affected the Malaysian rubber industry, and it was worsened with the propaganda about possible allergic reactions to latex protein. ▪ The growth of production of pneumatic tyres was marginally primarily due to the stiff competition from competitively-priced tyres originating from other ASEAN countries and the China.  ▪ The industry provides socio-economic benefits by providing direct employment workers and helping to reduce poverty PALM OIL in rural areas. ▪ The value of palm oil has been increasing ever since the import tariffs for palm oil were reduced and the hectares for palm oil plantation were increased. ▪ However, Malaysia now stands to lose this competitive advantage as she competes with palm oil from other countries in Asia, Africa, and South America, and close substitutes such as oil and fat products such as soybean, sunflower and rapeseed oils.  GOVERNMENT INSTITUTIONS The Federal Land FELCRA Berhad Rubber Industry Development Smallholders Authority (FELDA) It was established under Development Authority the National Land (RISDA) and FELDA Formed in 1956 to Rehabilitation and help the rural Malays Consolidation Authority Replanting by giving them a (Incorporation) Act 1966 programme for rubber long-term advance to to improve the and oil palm involves maintain their productivity and 383,010 hectares smallholdings under livelihood of settlers not during the Ninth land development covered under FELDA. Malaysia Plan period. schemes. Replanting of rubber trees using latex timber clones for rubber wood.  GOVERNMENT INSTITUTIONS The Malaysian Rubber Other related research Malaysian Palm Oil Board (MRB) institutes Promotion Council (MPOPC) ▪ encourage foreign ▪ Oil Palm Research direct investments Institute (OPRI) Formed in 1990 in rubber products ▪ Palm Oil Refiners’ For promoting and ▪ promote products Association of marketing activities of to local and Malaysia (PORAM) the Malaysian palm oil overseas ▪ Agriculture Research industry consumers. & Advisory Bureau (Malaysia)  GOVERNMENT INSTITUTIONS Bank Pertanian Malaysia Palm Oil Research Palm Oil Registration and (Agricultural Bank of Institute of Malaysia Licensing Authority Malaysia or BPM) (PORIM) (PORLA) ▪ established in 1969 ▪ expands the current Incorporated by the ▪ carries out the primary uses of palm oil Act of Parliament at objective of products the end of October promoting sound ▪ improves product 1977 agricultural efficiency and quality ensure proper conduct development in of products with respect to Malaysia. ▪ promotes the use of regulatory ▪ Loans extended by oil palm products vis- requirements and ABM are mainly for à-vis other oils and licensing of the financing small- and fats Malaysian palm oil medium-scale ▪ coordinates publicity industry. projects. and marketing ▪ This semi-government activities related to body provides credit palm oil products. facility solely to the agricultural sector to develop products’ marketing and distribution. GOVERNMENT INSTITUTIONS ▪ However, the functions of both PORIM and PORLA have been taken over by the MPOB. ▪ MPOB is responsible for conducting and promoting R&D activities related to the palm oil industry ▪ commercializing research findings ▪ providing advisory and consultancy services to the oil palm industry ▪ liaising and coordinating other bodies within and outside Malaysia  POLICY – NATIONAL AGRICULTURAL POLICY (NAP) ▪ National Agricultural Policy (NAP1) was introduced in 1984. ▪ NAP was formulated to lessen poverty and raise efficiency, particularly in the non-estate sector or smallholdings ▪ protect the income of rural residences. ▪ emphasises the expansion of export crop estate, especially in oil palm and cocoa. ▪ Farmers face great difficulties without government support, partly due to the fluctuation of commodity prices in the market.  POLICY – NATIONAL AGRICULTURAL POLICY (NAP) ▪ NAP2 was implemented in year 1992-1998 ▪ had similar objectives to its predecessor. ▪ emphasis on the role of the private sector’s participation in short- and medium-term food production and marketing reform ▪ emphasis on the importance of biological diversification. ▪ Recognising the need to achieve balanced development in other sectors, it had to increase agricultural productivity, efficiency, and competitiveness through the commercialisation of agricultural activities and linkages. ▪ To meet the challenges posed by the continued focus on industrialisation in the national economy, NAP2 was reviewed and NAP3 (1998-2010) was formulated based on the revised NAP2.  POLICY – NATIONAL AGRICULTURAL POLICY (NAP) ▪ NAP3 was launched in 1998 and implemented to 2010 ▪ contained an overriding goal of income maximisation to optimal utilisation of the sector’s resources. ▪ takes into account the volatility of the currency market and liberalisation of the financial market. ▪ designed to conform to the favourable environment to promote growth in the agricultural sector ▪ emphasise on food security, increased productivity and competitiveness, private sector investment, enhancement of exports of domestic food production, deepened links with agro-based industry, reduced dependency on imports, the venture into new frontier areas, as well as the efficient utilisation of natural resources. ______ Optimization of Research and Acceleration of Resource Use Development Agro-Based (R&D) Industries STRATEGIES OF Development Practices NAP3 … Reformed Marketing Development of a Dynamic Food Industry  FUTURE PROSPECTS ▪ As technological advancement moves further ahead, structural transformation of the economy from agriculture and primary commodities to commercially oriented entities is crucial. ▪ Commercial agriculture like cocoa, palm oil, coconut, pineapple, vegetables, and flowers are major cash crops for export. ▪ More prominence should be given to ▪ disease resistance and yield for rice production ▪ tissue-cultured elite clones, oil quality and secondary plant products from oil palm ▪ production of high-value products from rubber ▪ insect and disease resistance, high butter content, and cocoa flavour in cocoa, and finally ▪ control ripening and pest and disease resistance in spices  FUTURE PROSPECTS ▪ Tariffs mean less incentive to workers. Under the Uruguay Round, tariff reductions have been favourable to smallholders. ▪ Small farms should merge in the future to produce more for exportation. ▪ Restructuring the production framework allows consolidation farming to strive for better economic of scale. ▪ Without removing those subsidies, domestic farmers will never be able to prepare themselves for the challenges of market globalisation and compete even with farmers from neighbouring countries. ▪ However, market interventions play an important role in guaranteeing a minimum price for the farmer and direct output price support ▪ The agricultural sector has been one of the main contributors to national income since independence. ▪ It has maintained real GDP growth constantly for years. For decades, the sector has been able to provide labour enforcement and promote employment, particularly in rural areas. ▪ The effects of trade liberalisation on Malaysian CONCLUSION agriculture would bring benefits only to those industries that are truly competitive and vice versa. Therefore, different types of problems will arise when the country opens the market. ▪ Remedies for the sustainability of the agricultural sector are extremely crucial. It is impossible to move towards the realisation of the vision of a developed country without a systematic self-sufficiency in major crops and commodities in the future. SMALL MEDIUM ENTERPRISES (SMEs) INTRODUCTION Small Medium Enterprise (SMEs) are the key driver of employment and economic growth of Malaysia and almost 99% of total business establishments in Malaysia are SMEs. Its is important to enable Malaysian SMEs to move towards digitalization to continue accelerating the Digital Economy. INTRODUCTION Source: SMECORP  Given that there have been many developments in the economy since 2005, such as price inflation, structural changes and changes in business trends, a review of the definition was undertaken in 2013, and a new SME definition was endorsed at the 14th NSDC Meeting in July 2013. The definition covers all sectors, namely services, manufacturing, agriculture, construction and mining & quarrying. Sales turnover and number of full-time employees are the two criteria used in determining the definition with the “OR” basis as follows: For the manufacturing sector, SMEs are defined as firms with sales turnover not exceeding RM50 million OR number of full-time employees not exceeding 200. For the services and other sectors, SMEs are defined as firms with sales turnover not exceeding RM20 million OR number of full-time employees not exceeding 75.  Under the new definition, all SMEs must be entities registered with SSM or other equivalent bodies. But excludes: Entities that are public-listed on the main board; and Subsidiaries of: Publicly-listed companies on the main board; Multinational corporations (MNCs); Government-linked companies (GLCs); Syarikat Menteri Kewangan Diperbadankan (MKDs); and State-owned enterprises. SMEs are a critical component of the Malaysian economy, contributing more than a third of gross domestic product (GDP) and providing job opportunities to more than four million workers in Malaysia. Banking institutions is the main source of financing for SMEs, providing more than 90% of total financing. Provision of SME financing is also complemented by the Development Financial Institutions, Bank Negara Malaysia’s Funds for SMEs and Government Funds. Over the years, there have been various initiatives implemented to enhance SME Financing in Malaysia. ENHANCING THE PERFORMANCE OF SMES As the need to rely on domestic demand and domestic-oriented industries for the nation’s economic growth increases, the Government will continue to provide support to strengthen the SMEs by introducing new measures and rationalizing existing efforts to further develop resilient SMEs. Among the measures that has been identified, are:- To improve the institutional support system; To facilitate accessibility to financing; To upgrade technological skills; To enhance market access; To promote the greater usage of ICT; and To increase awareness of product branding and protection of intellectual property rights.  In promoting and upgrading Bumiputera SMEs under the Bumiputera Commercial and Industrial Community (BCIC), efforts will be intensified to assist Bumiputera entrepreneurs improve their skills in business management, ICT, R&D, product development and marketing as well as establish strategic alliances with non- Bumiputera entrepreneurs. To enable SMEs in rural industries to penetrate world markets, efforts to enhance their competitiveness will be intensified. The concept of one district one industry will be strengthened to cover a wider area of participation. Efforts will be geared towards enhancing the use of technology in rural industry production processes, acquiring quality accreditation and upgrading market promotion by establishing links with corporate and international clients. THE DEVELOPMENT OF MALAYSIAN SME: SUPPORT POLICIES Phase I (1957 - mid 1970s): Scant Support for SMEs For a decade after independence in 1957, no major government support programmes designed specifically for SMEs were planned or prepared, and until 1970 no specific incentives were provided to SMEs (Fong 1990, 156). During the 1960s, while Malaysia was focusing on resource-based industrialisation, the first SME support programmes were officially mentioned in the First Malaysia Plan (1966-70). However, this SME “support” was largely verbal and lacked substance (Chee 1986). As is clearly indicated by the introduction of the Investment Incentives Act of 1968, the government’s political emphasis was still on nurturing large enterprises by attracting more FDI (Oikawa, 2020) Source: Oikawa, 2020  The important role that SMEs played in the Malaysian economy first received political attention in these plans in the sense that development of SMEs was expected to contribute to the economy in modernisation, generating employment and income, and reducing poverty and economic imbalance among different ethnic groups (Meyanathan & Salleh 1994). The government’s attention to SME promotion and programmes was exclusively focused on the development of indigenous, i.e., Bumiputera, entrepreneurs. Several minor SME agencies were set up, such as the Coordinating Council for Development of Small-scale Industries (CCDSI), in order to provide support exclusively to Bumiputera enterprises (Chee 1986). Phase II (mid 70s mid 80s): Emphasis on Bumiputera Support Until the early 1980s, Malaysia’s SME policies were conducted along the lines of the political philosophy embodied in the NEP. The Fourth Malaysia Plan (1981-1985) provided the most comprehensive listing of government guidelines for SME development to that time. These guidelines emphasised, among other things, the following three points (Moha Asri1999a): 1. SMEs should not duplicate activities already undertaken by larger-scale enterprises, and preference should be given to SMEs which complement the activities of larger scale businesses; 2. the selection of industries must satisfy the need to achieve the New Economic Policy, particularly in encouraging Bumiputera participation in business and othercommercial activities; and 3. the promotion of SMEs should be considered an integral part of the overall development of the manufacturing sector.  Regarding the development of the institutional framework, an important step was the establishment of the Division of Small Enterprise (DSE) under the MITI in 1981, whose sole responsibility was to look after the interests of Malaysian-owned SMEs. Its fundamental function was to harmonise and coordinate the policies and strategies formerly conducted in an uncoordinated manner by various government agencies involved in SME development. The main functions of this division can be summarised as follows (Hashim 2000): 1. to study and evaluate the existing and forthcoming policies for the development of SMEs; 2. to identify opportunities in industries for involvement of SMEs; 3. to provide advice and guidance to entrepreneurs on policies and programmes implemented by government agencies through conferences, dialogues, talks, and workshops; 4. to collect and distribute publications on projects, studies, and pamphlets on SMEs; and 5. to create and implement specific programmes for the development of small firms.  Malaysian SME policies in the 1970s and early 1980s have two negative implications. First, the policies were basically “inward-looking,” “import-substituting,” and “domestic-market oriented” because they concentrated on promoting Bumiputera enterprises. The major products of Bumiputera SMEs were processed items such as food, furniture, and miscellaneous goods, which mainly served domestic markets or, at best, replaced imported consumer goods under tariff protection. Consequently, the development of Bumiputera SMEs was weakly correlated with the growing presence of foreign affiliates in FTZs (Foreign-Trade Zones).  Second, the political emphasis on Bumiputera participation was inconsistent with unleashing the full potential of Malaysian SME development. The Industrial Coordination Act (ICA) of 1975 required local firms (with equity above RM 250,000 or a full-time workforce of more than 24 persons) to comply with Bumiputera ownership and employment targets. This caused a great deal of inconvenience and uncertainty in the investment environment for non-Bumiputera, particularly Chinese, entrepreneurs, who were the majority of industrial capitalists in Malaysia. In spite of the numerous incentives that accompanied the loan, however, Bumiputera entrepreneurs were slow and few to respond; as a result, only ten percent of the financing target was achieved by 1986. The requirements then had to be relaxed to allow non-Bumiputera SMEs to apply so that full use could be made of the fund (Fong 1990, 158). Phase III (mid 80s mid 90s): Forced Creation of Linkages By the early 1980s, several structural problems associated with SME support policies were becoming clearer in Malaysia (Chee 1987, Fong 1990, Lall 1996). First, the great majority of local SMEs were in a disadvantageous position vis-a-vis large local enterprises, including TNCs (Transnational corporations). For example, most SMEs were too small in terms of employee numbers and capital to be able to take advantage of the Investment Incentives Act of 1968. Second, the development of non-Bumiputera SMEs was hindered by the ICA 1975 requirements for enterprises employing more than 24 full-time workers. These requirements discouraged local SMEs, especially local Chinese-owned firms, from investing further capital and human resources (Stoever 1986). Third, the increasing focus of local SMEs, especially Bumiputera companies, on domestic market-oriented products prevented them from reaping larger benefits from the outward-oriented industrialisation taking place in Malaysia.  Because of these structural problems, the development of local SMEs lagged far behind and was largely disconnected from the successful development of the country’s export-oriented industries. As a result, the slow growth of the SME sector became a bottleneck that slowed further development and upgrading of the Malaysian economy (Moha Asri 1999a). These structural problems were intensified when the Malaysian economy suffered from a serious economic recession in the mid-1980s. To overcome recession, the government sought to attract more TNCs in order to aggressively pursue further export-oriented growth (Edwards & Jomo 1993).  To work productively with such TNCs, which required meeting their quality standards, local SMEs were expected to produce more overseas-oriented and high-quality output. Thus, to hasten Malaysian SME development, well functioning SME support programmes were seriously needed (Meyanathan & Salleh 1994). The Investment Incentive Act of 1968 was replaced by the Promotion of Investment Act in 1986, under which the minimum capital requirements for enjoying incentives were removed. As a result, all SMEs became entitled to benefit from incentives such as tax exemptions, pioneer status, reinvestment allowance for facility expansion, and other advantages. Industrial policies after the mid-1980s thus emphasised the development of all Malaysian SMEs, regardless of whether they were Bumiputera or non-Bumiputera (Meyanathan & Salleh 1994).  The First Industrial Master Plan (IMP1) in 1985 proposed policy support programmes for SME expansion and modernisation via the provision of financial assistance, improvement of the incentive system, and promotion of R&D activities (MITI 1986). IMP1 was characterised by two parallel pillars of economic policy: further liberalization for export-oriented industries and heavy government intervention in the automobile industries (Jomo & Edwards 1993). In line with the first pillar, the incentives for SMEs were further strengthened in the 1989 budget by according ‘pioneer’ status automatically to all SMEs producing output from a list of designated products, such as electronics items. In the automobile industry, the Vendor Development Programme (VDP) introduced in 1988 encouraged the emergence of Bumiputera suppliers to Proton, a national car maker established in 1983. …Proton was designated as the “anchor firm,” which obliged it to purchase as many components as possible from qualified Bumiputera SMEs (called the “vendors) and at the same time to provide Bumiputera vendors with technical and financial assistance. The VDP was later expanded to more anchor firms, including large electronics firms. Phase IV (after the mid-90s): Upgrading SMEs through Cluster-based Development After the launch of IMP1, the Malaysian government continued to put greater effort into strengthening the performance of local SMEs by introducing a number of support programmes and incentives covering a wide spectrum of SME needs. Such new dimensions for SME development called for a broader policy framework, which was embodied in the Second Industrial Master Plan (IMP2) for the period 1996 to 2005 (MITI 1996). IMP2 called for SMEs to play a vital role in supporting national industrial development throughout the value chains linked with large global firms. These concepts were applied to eight target industries, including electrical and electronics industries (MITI 1996).  Regarding institutional change, the Division of Small Enterprise (DSE) was upgraded to the Small and Medium Industry Development Corporation (SMIDEC) in May 1996. The establishment of SMIDEC was epoch-making in the history of Malaysian SME support policies. It was expected to play a major role in coordinating the various assistance programmes related to SME development. DES had been set up to fulfil a similar responsibility, but it was no more than a very small division within MITI with insufficient resources to carry out its various programmes. Because numerous different divisions and agencies were involved in SME policies, there was a lack of direction, consistency, effective planning, and systematic policy formation (Shanmugan 1988). Moreover, DSE’s orientation was concentrated on domestic market-oriented Bumiputera companies. SMIDEC was Malaysia’s first one-stop agency for coordinating all SME-related programmes.  The establishment of SMIDEC was in line with the recognition of the need for a specialised agency to further promote the development of all SMEs as an integral part of nationwide industrialisation. The main tasks of this agency are, among others: 1. to coordinate the overall development of SMEs in Malaysia, 2. to promote the development of modern and sophisticated indigenous SMEs in tandem with the strategic direction of industrial development and 3. to develop Malaysian SMEs into an efficient and competitive sector, capable of producing high value-added and quality products, components, and related services for the global market (Felker & Jomo 2007).  Under the supervision of SMIDEC, which worked with other government agencies, various programmes and financial assistance schemes were introduced. Among these, the Industrial Linkage Programme (ILP) and the Global Supplier Programme (GSP) were widely used. These programmes were closely related to the development and upgrading of SMEs in the electrical and electronics sectors. As of 2002, 953 SMEs were registered in the ILP, among which more than half (50.1%) belonged to E&E sectors, 14.8% to automotive, 24.8% to machinery and engineering, and 24.8% to resource-based industries (VDF 2011). These figures highlight the relative success of linkage formation in the electrical and electronics sector. THE SME MASTERPLAN Small and medium-sized enterprises (SMEs) are a crucial component of Malaysia’s strategy to become a high-income nation. As SMEs account for all but 1.5% of firms and the bulk of production and employment, they are central to Malaysia’s objective of becoming a high-income economy. SMEs form the bedrock of the private sector and innovation and can contribute to growth by supplying multinationals or accessing international markets directly. The Government of Malaysia decided to leverage the potential of SMEs to increase productivity and promote inclusive growth, The launch of the SME Masterplan 2012-2020 sparked a major shift in the trajectory of Malaysian SMEs - to influence overall SME development by focusing on six high- impact programs (HIPs) and 26 policy measures.  Today, under the leadership of NESDC and the numerous policy initiatives thereafter, SMEs have started to show more dynamism in the economy. SMEs have consistently provided substantial gains to Malaysia’s overall GDP, frequently outperforming overall economic growth, particularly since the establishment of the National Entrepreneurship and SME Development Council in 2004 (formerly known as the National SME Development Council (NSDC) In Malaysia, SMEs contribute more than one-third of the economy.  There has been growing dynamism amongst SMEs in Malaysia, however, there is room for further improvement. In 2018, SMEs contributed RM521.7 billion to the economy with a GDP growth rate of 6.2%, a slower growth compared to the 7.1% growth rate achieved in 2017. The GDP contribution of SMEs increased further to 38.3% in 2018 from 37.8% in 2017. SME employment also grew at 3.2% during the year, resulting in SME contribution to overall employment at 66.2%, a marginal increase from 66% in 2017. While recording an increase in export value from RM166.2 billion in 2017 to RM171.9 billion in 2018, SME contribution to the total exports remained at the same rate as 2017 at 17.3% attributed to higher export growth by large firms.  Being grounded in solid analysis, designed with the agility to adapt, the SME Masterplan continues to be highly relevant. Given the ambitious scope of the Masterplan and the significant coordination challenges posed by its execution, progress to date has been noteworthy. The main findings of an early assessment conducted on the implementation of the Masterplan are twofold. First, the implementation of the HIPs is uneven, with some functioning largely as intended and others requiring more attention. Second, more consistent monitoring and evaluation is needed across the Masterplan. Without serious attention to regular data collection, data management and analysis, it will be difficult for the Government of Malaysia to track the efficiency and impact of the SME programs in place and maximize the economic additionality from the programs over the longer term.  Given the ambitious, comprehensive nature of the SME Masterplan, some implementation challenges have emerged. Coordination among agencies has been fragmented. Further, not all HIPs operate with a sufficient budget. Coordination of SME development programs across Ministries and agencies has been particularly difficult. While SME Corp played a critical, active role in building awareness and outreach around the HIPs, contributing to their design and facilitating their rollout, the agency has somehow been constrained in its ability to coordinate across Ministries and other agencies. Most importantly, Malaysia lacks the legislative framework on SME Development that provides the legal authorizing environment for SME Corp, unlike in the United States, Japan and Korea, where SME Development, its governance, and clarity of responsibilities and accountability for implementation among implementing agencies were clearly mandated… KEY CHALLENGES ABILITY TO INNOVATE Production capabilities were already existing in Malaysia, in large part due to the country’s outward orientation in participating in global and regional production networks, with some level of technology transfer taking place. Among the contributing factors was the lack of incentive for SMEs to innovate. Most SMEs did not engage in any Research and Development (R&D), and those that did, had scarce resources to really commit to this activity. Further, while Malaysia had established tax incentives for R&D, most small businesses, particularly startups, were not able to utilize these credits given their limited income. Moreover, only a small fraction of SMEs in Malaysia operated at the technological frontier, developing novel products or processes based on scientific or engineering advances. ACCESS TO EARLY-STAGE AND START-UP FINANCE Over the years, substantial progress has been made in improving SMEs’ access to financial services in Malaysia, particularly through banks. The share of SME financing outstanding to total business financing increased from 30% in 1999 to 41% in 2011. The share of SMEs with access to credit was relatively high in Malaysia compared to regional peers in East Asia including Thailand, and comparable to the levels of many OECD countries. Additionally, the government also supported SMEs to have greater access to financing through loan guarantees. An especially financially constrained group were start-ups. As in most countries, particularly start-ups faced challenges in accessing financing from financial institutions. New firms were found to be less likely to have access to finance, controlling for other firm characteristics. This was due to a variety of reasons, ranging from firm age, but also particular challenges facing their operations in often more innovative growth areas including a lack of public understanding of the product or service. ACCESS TO MARKETS The existing and potential exporters in Malaysia, especially SMEs, faced big challenges entering new export markets. SMEs had to: (a) identify the right target market, product segment, and selling channel; (b) learn how to adapt their products for these markets; (c) understand their competitors; (d) launch a marketing and selling campaign; and (e) deliver the product on time and collect on sales. These activities require significant investments, not only in terms of financial resources and market intelligence, but also in skilled and albeit scarce managerial resources. Further, it was discovered during the early analysis that only 12.6% of SMEs undertook marketing and promotion activities for their products and services. These programs had been implemented primarily by state agencies that provided commercial intelligence, marketing information, assisted foreign buyers, advise on transport and packaging, and facilitated group promotion. #The SME Masterplan remains relevant to achieving many of the objectives set forth in the NEP. FINANCIAL AND MONETARY SECTOR THE EVOLUTION OF THE MALAYSIAN FINANCIAL SECTOR ▪Board of Commissioners of Currency, Malaya and British Borneo - monetary authority in Federation of Malaya ▪Bank Negara Malaya opened on 24 January 1959 ▪ set up as the instrument for the deliberate management of the money and credit situation ▪Objectives: ▪ maintain a strong ringgit ▪ promote financial stability ▪ foster the growth of a sound financial structure ▪Branches of British banks ▪ serve the well-being of Britain ▪ finance the supplies of raw materials ▪ mainly to ensure a captive market for British manufacturers. ▪Tun Ismail bin Mohamed Ali (2nd governor: 1962-1980) ▪ strengthened domestic banks ▪ initiated the establishment of the related financial institutions ▪ Building up the financial infrastructure during 1960s ▪ Development of strong domestic commercial banks ▪ Widespread branching of banking services ▪ New financial markets and institutions: ▪ Kuala Lumpur Stock Exchange (KLSE), ▪ Discount houses to form the nucleus of the money market, ▪ Pilgrims Management and Fund Board (LUTH), ▪ PERNAS (The National Investment And Trading Corporation), ▪ Agricultural Bank, ▪ Capital Issues Committee ▪ Malaysian Industrial Development Finance (the leading medium and long-term financing institution for the manufacturing industry)  Finance companies were brought under the jurisdiction of the Bank Negara Malaysia (BNM) Banking Ordinance 1958 Banking Act 1973 Banking and Financial Institutions Act 1989 (BAFIA) October 1994, 14 foreign banks locally incorporated 1970S - BREAKDOWN OF THE FIXED EXCHANGE RATE SYSTEM ▪Emphasized on instilling integrity and professionalism in the bank management ▪ The number of banks was restricted ▪Capital structure and branch network of the existing domestic banks were gradually strengthened ▪Credit Guarantee Corporation (CGC) was set up ▪ to help finance the SMEs ▪ National Savings Bank (Bank Simpanan Nasional) to mobilise small savings ▪Kuala Lumpur Commodity Exchange (KLCE) was established ▪well-diversified financial system ▪ foreign exchange market commodity exchange 1980S - GREAT CHALLENGES IN THE FINANCIAL SYSTEM ▪Severe global recession of 1985 and 1986 ▪BNM: ▪ Ensured adequate monetary growth ▪ Sufficient liquidity ▪ Managed the exchange rate of the ringgit ▪Expansionary monetary policy ▪Financial institutions: ▪ manipulated savings interest rates ▪ attract capital inflow ▪ stimulate private investments ▪First Islamic banking system in 1983 ▪ Bank Islam Malaysia Berhad  1990S - COMPLETE DEREGULATION OF THE INTEREST RATE REGIME 1978 - flexible interest rate regime ▪ determine own interest rates ▪ minimum lending rate ▪ asymmetrical interest rate information to the borrowers November 1983 - Base Lending Rate (BLR) ▪ required banks to peg lending rates 1 February 1991 ▪ BLR started to free itself from the administrative control of BNM  1 November 1995 ▪ framework of BLR computation was revised and further liberalised 1 September 1998 ▪ computation of BLR based on 3-month intervention rate ▪ administrative margin: 2.5% 2.25% ▪ greater flexibility for banking institutions March 2014 (effective 2 January 2015) ▪ Base Rate will replace the existing BLR ▪ more transparent ▪ easily identify financial institutions offering the best rates for loans ▪ a form of cost-plus pricing ▪Securities Commission (SC) - 1 March 1993 ▪ responsible for the regulation and development of the banking and money market ▪Islamic interbank money market - 3 January 1994 ▪Labuan was established as an International Offshore Financial Centre (IOFC) - October 1990 ▪ enhance broader contribution of the financial sector to economic growth THE E-PAYMENT (ELECTRONIC PAYMENT) SYSTEMS ▪Payment system: any system or arrangement for the transfer, clearing or settlement of funds or securities – Central Bank of Malaysia Act 2009 ▪E-payment: ▪ more expedient ▪ more secure ▪ more cost-effective ▪ Cost saving  Accelerating the country's migration to electronic payments (e-payments) to quicken the pace for the country to realise the resulting cost savings and benefits has become a part of the Bank's agenda to increase the efficiency of the nation's payment systems. To underscore the importance of e-payments and to drive this agenda forward, the Bank has released its Financial Sector Blueprint 2011-2020, which charts the future direction of the financial system. Electronicpayments for greater economic efficiency is one of the nine focus areas under the Blueprint to drive Malaysia's transition to a high-value-added, high-income economy with adequate safeguards to preserve financial stability. MOBILE BANKING SERVICES ▪delivery channel for initiating and executing online financial transactions ▪convenience to make payments for purchases of goods and services ▪conduct local and foreign remittances ▪However; ▪banking and payment transactions not high ▪mobile banking and factors influencing its usage have produced mixed results MONETARY POLICY IN MALAYSIA ▪maintain price stability ▪ensure low unemployment level ▪strong sustainable growth ▪Mid-1970s – double-digit inflation (17%) ▪contractionary monetary policy ▪monetary targeting ▪ BNM focused on M1 - M3 ▪ liberalisation of the financial market ▪1985 – recession ▪expansionary monetary policy ▪depreciation of ringgit ▪interest rate targeting ▪central bank controls nominal short-term interest rate, and monitors various indicators ▪BNM 3-month intervention rate (official policy rate) ▪1997 Asian financial crisis ▪monetary policy has been tightened progressively ▪ interest rate policy ▪ prudential measures ▪ quantitative restrictions ▪26 April 2004 – Overnight Policy Rate (OPR) has been officially the indicator of the monetary policy stance ▪2005 – stronger growth and job creation ▪Exchange rate flexibility ▪interest rate cuts ▪OPR kept unchanged at 3% ▪to support economic growth ▪The ringgit was allowed to depreciate – influencing inflation and the cost of living ▪implementation of GST - expected inflation will edge upward ▪need for tightening monetary policy ▪curb demand-induced core inflation ▪inflation targeting framework and raising OPR Other monetary policy tools ▪liquidity ratios ▪ percentage of the liabilities based on the banking institutions ▪ operations similar to the statutory reserve requirement ▪direct borrowing/lending in the interbank money market ▪ lack of issuance of government securities ▪selective credit controls and moral suasion ▪ regulating the credit direction ▪ Example: ▪ lending guidelines more supportive of SMEs and stronger viability of the projects ▪ credit limit to speculation activity ▪ more stringent guidelines for hire-purchase on motor vehicles and credit card operations ▪ more inflexible credit limit for financial property purchase for investment purposes ▪ new housing regulation has been stipulated under the Housing Development (Control and Licensing) Act 1989 FINANCIAL SECTOR MASTERPLAN (FSMP) 2001 ▪to revamp the financial sector following the Asian Financial Crisis in 1997 ▪charts the future direction for the financial system over the next 10 years and outlines strategies ▪create an efficient, progressive and comprehensive Islamic financial system ▪ offered licenses to foreign players ▪ foreign equity participation increased from 49% to 70% ▪help position Malaysia as the centre for Islamic banking  The objective of the FSMP is, therefore, ‘to develop a more resilient, competitive and dynamic financial system with best practices, that supports and contributes positively to the growth of the economy throughout the economic cycle and has a core of strong and forward-looking domestic financial institutions that are more technology-driven and ready to face the challenges of liberalisation and globalisation’. ▪ The development of domestic institutions that form the core of an efficient, effective and stable financial sector is an important part of this process. It is envisaged that Malaysia’s real economy will continue to expand significantly during the decade, becoming more internationally integrated and more dynamic (with more high-tech services, with greater reliance on small and medium-sized industries [SMIs] and with increasingly rapid rate of innovation), and with more differentiated and demanding consumers. To serve this dynamic economy efficiently and effectively, and to ensure that domestic institutions will have a leading role within it, the financial sector, particularly its domestic institutions will need to be more focused, efficient and innovative The regulatory framework within which the financial industry operates will be based on a supervised market approach. Theregulations will allow product innovations and market activism, while being strongly supervised by standards and prudential requirements. The financial landscape at the end of the 10-year period will consist of a more diversified range of ‘brick and mortar’ financial service providers, from large one-stop financial centres to niche providers, of specialist services - competing with ‘virtual’ providers across most product areas. In addition, the capital market will have a relatively more important role in the allocation of resources and risks. Key Challenges that Need to be Addressed: The need for domestic institutions to improve their efficiency and effectiveness to be at par with the best international players; and The need to ensure that performance gaps do not widen, as technology continues to drive global trends in financial services. In order to compete in the new environment, financial institutions in leading markets are leveraging on new technology, as well as: Becoming increasingly global and specialised; Using new organisation structures and more aggressive compensation models; Relying much more on alliances and third party relationships; and Investing more in technology. Recommendations to Achieve Objectives: Develop the best domestic institutions by: Building the capabilities of domestic institutions; and Increasing the incentives for domestic institutions to drive performance. Maintain stability of the financial system through an efficient infrastructure, more resilient institutions as well as strong prudential regulations and supervision; Meet the socioeconomic objectives of Malaysia that will result in the least possible distortion and minimise the burden on the institutions; and Promote a more market-driven consumer protection infrastructure. Approach to Implementation: The change programme will be implemented over the next 8-10 years in three phases, subject to achieving specified milestones and safeguards. The first phase is on building the domestic capacity, the second phase in which domestic competition increases and the third phase in which the pace for the integration with the international market is increased. FINANCIAL SECTOR BLUEPRINT (FSBP) 2011-2020 ▪to evolve the financial sector ▪to meet growing financial needs of emerging Asia ▪emphasis on regional integration ▪to cement Malaysia’s leadership in Islamic finance and further develop Malaysia as an international Islamic financial centre ▪Malaysian financial institutions ▪enlarge regional footprint ▪diversify sources of income ▪tap region’s growth prospects ▪leading regional players  Recognising the increasingly complex linkages, both between the various components of the financial system and the greater international connectivity and regional financial integration, the Blueprint moves away from the sector-based approach of the previous Financial Sector Masterplan (FSMP). The Blueprint adopts an integrated approach where recommendations are based on shared outcomes applicable to various sub-sectors within the financial sector.  Beyond domestic borders, the Blueprint envisions greater participation by the Malaysian financial sector in facilitating regional financial flows, especially in supporting regional trade and investment, regional financial integration, as well as the internationalisation of Islamic finance. The formulation of the Blueprint also draws important lessons from the recent global financial crisis where financial stability is an important prerequisite in ensuring orderly and sustainable development of the financial sector and the economy as a whole.  There are nine focus areas under the Blueprint to further advance financial sector development to drive Malaysia's transition to a high-value-added, high-income economy with adequate safeguards to preserve financial stability: Effective intermediation for a high value-added and high- income economy. Developing deep and dynamic financial markets. Financial inclusion for greater shared prosperity. Strengthening regional and international financial integration. Internationalisation of Islamic finance. Regulatory and supervisory regime to safeguard the stability of the financial system. Electronic payments for greater economic efficiency Empowering consumers; and Talent development to support a more dynamic financial sector. FINANCIAL SECTOR BLUEPRINT (FSBP) 2022-2026 This Blueprint sets out the Bank's development priorities for the financial sector over the next five years, anchored on efforts to foster market dynamism and support sustainable development objectives, with a continued focus on its monetary and financial stability mandates. MALAYSIAN FINANCIAL SYSTEM Banking system ▪ Central Bank ▪ Commercial banks ▪ Islamic banks ▪ Investment banks ▪ Insurance companies ▪ Takaful operators ▪ Reinsurers & retakaful ▪ Development financial institutions ▪ Money services businesses ▪ Principal dealers ▪ E-money issuers Downturnin 1998 adversely affected the performance of the Malaysian banking system. OFFSHORE BANKING ▪1 April 2003 removed the restriction on foreign- controlled companies ▪ more than RM50 million require approval from BNM ▪foreign investors receive preferential tax treatment: ▪ offshore banking activities ▪ trust and fund management ▪ offshore insurance and offshore insurance-related businesses ▪ offshore investment holding business. RESTRUCTURING OF BANKING SECTOR ▪Merger – the combination of two or more firms to form a new legal entity ▪Malaysia was ‘overbanked’ ▪ inefficient use of resources ▪ duplication of infrastructure in the same locality ▪affected by the currency crisis and financial crisis ▪ A comprehensive restructuring plan was implemented during the second half of 1998 ▪ consolidation of the banking system to resolve weaker bank institutions DANAHARTA, DANAMODAL AND CDRC ▪Insolvent and liquidity problems ▪ insufficient collateral lending to the property sector ▪ reckless exposure to share-based lending ▪ growing levels of Non-Performance Loans (NPLs) ▪absorption of NPLs by Danaharta ▪ maintaining the integrity of public savings ▪ sustaining the stability of the financial system functions ▪Government did not close down the problem banks (IMF prescription) ▪ social costs in terms of dislocation of resources were high ▪Before the mergers, high NPLs threatened the stability ▪Ten banking institutions were to have received the injection of RM6.2 billion from Danaharta ▪Danamodal was established ▪ to address capital erosion ▪ recapitalise the weak banking institutions ▪CDRC was set up ▪ served as a platform for voluntary debt restructuring ▪Domestic financial institutions underwent restructuring, consolidation and rationalisation. ▪Having greater economies of scale, there was increased investment in technology ▪accumulated strong capital and loan loss buffers ▪BNM accelerated the mergers and consolidation of the finance firms merging ▪access to a greater volume of customer base ▪reduces customers’ search costs via branding ▪ enhances economies of promotion ▪ another significant source of scale ▪ scope economies ▪minimise the cost of merging ▪ work on the incentive mechanism MERGING ▪small banking institutions can hardly survive ▪rationalize businesses towards greater efficiency ▪higher productivity of the banking operation ▪increasing pressure from WTO ▪ to open up the market ▪ remove barrier entry for foreign banks ▪increases financial performance ▪financial benefits through lending ability ▪tax benefits ▪capital base enlarges ▪create shareholder value - increase market share and revenue Merger Requirements ▪BNM listed requirements: ▪ asset base of at least RM25 billion ▪ minimum shareholder fund of RM2 billion ▪on-site examinations at least once a year ▪ detect potential areas of vulnerabilities Other Requirements ▪Protection of the Public ▪ decision-makers – to accept or reject a takeover offer ▪ ensure the interests of shareholders were protected ▪ ensure directors acted in the best interest of the company ▪ provide timely and adequate information ▪Licensing Requirement ▪ Securities Commission Act 1993 ▪ Companies Act 1965 ▪ ensure the integrity of the financial institutions ▪ ensuring relevant technical skills and know-how to manage the financial services sectors Other Requirements ▪Prevention of Monopoly and Anti-Trust Practices ▪ charge higher prices ▪ carry out unfair practices ▪ integrity and transparency of the financial system ▪Ensuring Equality of Treatment of Shareholders ▪ The Malaysian Code on Takeovers and Mergers 1998 ▪ Information on takeovers is to be released in a particular content and time frame ▪ prevent manipulation of market price ▪ prevent volatility in the face of a takeover offer Bank Mergers ▪specific proposal for the bank merger programme ▪MOU was signed among the six anchor banks ▪Objections: ▪ number and composition of the banking groups ▪ time frame ▪giving the flexibility to form own merger groups ▪ due to certain ethnic problems Impact of Bank Mergers ▪Initially - difficulties in finding appropriate partners ▪ ensure minimal disruption ▪ internal conflicts ▪ difficulty to integrate culture ▪high costs to integrate IT systems ▪same level of achievement ▪unemployment problem ▪ eliminating overlapping operations - inefficiency ▪ cost reduction - reduce human resources ▪ unemployment rate has increased from 3.3% in 2000 to 3.7% in 2001 THE BASEL ACCORD ▪ development of new hedging instruments ▪ increased use of credit risk transfer mechanisms ▪ provide capital for operational risk ▪ more integrated risk management framework Basel Accords (I, II, III) introduced international banking regulations to enhance stability: Basel I: Focused on capital adequacy. Basel II: Emphasized risk management. Basel III: Strengthened global liquidity rules after the 2008 crisis. These frameworks ensure resilience in Malaysia’s banking sector Basel IV: stricter credit risk standards, better operational risk measurement, and an output floor to limit internal risk model inconsistencies BASEL I ▪ is a set of international banking regulations established by the Basel Committee on Banking Supervision (BCBS). ▪ It prescribes minimum capital requirements for financial institutions, with the goal of minimizing credit risk. ▪ Under Basel I, banks that operate internationally were required to maintain at least a minimum amount of capital (8%) based on their risk-weighted assets. ▪ Basel I is the first of three sets of regulations known individually as Basel I, II, and III, and collectively as the Basel Accords. BASEL II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by their operations. The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The name for the accords is derived from Basel, Switzerland, where the committee that maintains the accords meets. Capital adequacy regulation. Encourage capacity building. Enhancing risk management. Four Key Principles for Basel II 1) to accommodate capacity-building efforts strong emphasis on enhancement of risk management framework 2) to allow flexible time frame for capacity building measures 3) to emphasise on strong business justification instead of the mandatory regulation of the adoption of internal rating-based approach 4) enhance supervisory methodology to assess internal models advanced risk management systems ▪1st pillar: ▪provide minimum capital measurement framework ▪align with actual different degrees of underlying risk ▪2nd pillar: ▪focuses on strengthening the supervisory process ▪ ensure prudent lending ▪ well diversification portfolio investment ▪ assure manageable concentration risks and market risks ▪3rd pillar: ▪specifies minimum disclosure requirements ▪ enhance market discipline Two-phased Approach for Basel II ▪First phase – January 2008 ▪ all banks are to adopt the standardised approach ▪ BNM may allow to remain with current accord ▪ require a submission of business case justification and a blueprint for implementation ▪Second phase – January 2010 ▪ adopt the FIRB approach ▪ required to submit to BNM parallel calculation of capital adequacy BASEL III ▪to strengthen global capital and liquidity rules ▪ result of Global Financial Crisis ▪minimum capital requirements will be raised ▪required to hold a capital conservation buffer BASEL IV Implementation of Basel IV was originally intended to start on 1 January 2022, with a phasing in of the output floor to 1 January 2027. Basel IV refers to the finalisation of the Basel III reform package which had taken more than a decade to develop and was split into two pieces – the final amendments elements being agreed by the Basel Committee in December 2017. Basel IV included new standards for credit risk and operational risk and a credit valuation adjustment. It also introduced an output floor, revisions to the definition of the leverage ratio and the application of the leverage ratio to global systemically important banks. A revised market risk framework had already been largely finalised in January 2016. FINANCIAL, LIBERALISATION AND REGIONALISATION ▪liberalisation of the financial system: the trend on the reduction of direct government intervention in the economy ▪fostering financial liberalisation - can increase the long- run economic growth rate ▪Financial liberalisation:- ▪ removing the banks’ interest rate ceilings ▪ reducing the reserve requirements and entry barrier ▪ reducing government interference in credit allocation ▪remarkable increasing financial fragility ▪April 2009: Najib Razak announced liberalisation plan for financial sector (2009-2012) ▪ issuance of up to two new Islamic banking licenses ▪ up to two commercial banking licenses ▪ up to two new family takaful licenses in 2009 ▪ up to three new commercial banking licenses in 2011 ▪Priority ▪ specialised expertise to address the gaps in the Malaysian financial sector ▪ spur development of targeted economic sectors ▪ to reinforce Malaysia’s position as an international Islamic financial hub ▪Flexibility: ▪ increase in foreign equity limit from 49% to 70% ▪ domestic commercial banks remain at 30% ▪actively participated in business opportunities in the regional markets ▪actively pursued initiatives - to enlarge regional footprint ▪Malaysian financial institutions emerged as leading regional players ▪2008 - local banks spread aggressively regionally ▪ higher growth potential ▪ existing low banking penetration rate, and higher net interest margins in some countries  Fundamentally, financial sector development is about overcoming “costs” incurred in the financial system. Thisprocess of reducing the costs of acquiring information, enforcing contracts, and making transactions resulted in the emergence of financial contracts, markets, and intermediaries.  Different types and combinations of information, enforcement, and transaction costs in conjunction with different legal, regulatory, and tax systems have motivated distinct financial contracts, markets, and intermediaries across countries and throughout history. Financial sector development thus occurs when financial instruments, markets, and intermediaries ease the effects of information, enforcement, and transactions costs and therefore do a correspondingly better job at providing the key functions of the financial sector in the economy. IMPORTANCE OF FINANCIAL DEVELOPMENT A large body of evidence suggests that financial sector development plays a huge role in economic development. It promotes economic growth through capital accumulation and technological progress by increasing the savings rate, mobilising and pooling savings, producing information about investment, facilitating and encouraging the inflows of foreign capital, as well as optimising the allocation of capital.  Countries with better-developed financial systems tend to grow faster over long periods of time, and a large body of evidence suggests that this effect is causal: financial development is not simply an outcome of economic growth, and it contributes to this growth. Additionally, it reduces poverty and inequality by broadening access to finance to the poor and vulnerable groups, facilitating risk management by reducing their vulnerability to shocks, and increasing investment and productivity that result in higher income generation.  Financialsector development can help with the growth of small and medium sized enterprises (SMEs) by providing them with access to finance. SMEs are typically labor intensive and create more jobs than do large firms. Financial sector development goes beyond just having financial intermediaries and infrastructures in place. It entails having robust policies for regulation and supervision of all the important entities… The financial crisis has illustrated the potentially disastrous consequences of weak financial sector policies for financial development and their impact on the economic outcomes. Thecrisis has challenged conventional thinking in financial sector policies and has led to much debate on how best to achieve sustainable development. Measurement of financial development In practice, it is difficult to measure financial development as it is a vast concept and has several dimensions. Empirical work done so far is usually based on standard quantitative indicators available for a long time series for a broad range of countries. For instance, ratio of financial institutions’ assets to GDP, ratio of liquid liabilities to GDP, and ratio of deposits to GDP. This framework identifies four sets of proxy variables characterizing a well-functioning financial system: financial depth, access, efficiency, and stability. These four dimensions are then measured for the two major components in the financial sector, namely the financial institutions and financial markets. FOREIGN DIRECT INVESTMENT  Foreign direct investment, FDI refers to investment in which a firm in one country directly controls or owns a subsidiary in another country Foreign direct investment (FDI) occurs when an entity from the home country acquires the controlling interest of another host country, and operates and manages that entity and its assets as part of the multinational business of the investing entity If a foreign company invests in at least 10% of the stock in a subsidiary, the two firms are typically classified as a multinational corporation. 10% or more of ownership in stock is deemed to be sufficient for direct control of business operations.  Greenfield FDI is when a company builds a new production facility abroad. Greenfield FDI has tended to be more stable, while cross-border mergers and acquisitions tend to occur in surges. Brownfield FDI (or cross-border mergers and acquisitions) is when a domestic firm buys a controlling stake in a foreign firm. According to the Malaysian Ministry of International Trade and Industry ("MITI"), Foreign Direct Investments, FDIs are "investment in the form of financial instruments namely equity and investment fund shares (including reinvestment of earnings) and debt instruments (inter-company loans, trade credit, advances, etc) by foreign direct investors in direct investment enterprises in Malaysia." Circular Flow of Income FDI net inflows are the value of inward direct investment made by non-resident investors in the reporting economy, including reinvested earnings and intra- company loans, net of repatriation of capital and repayment of loans. ROLES AND IMPORTANCE OF FOREIGN DIRECT INVESTMENTS Employment creation. Economic growth. Transfer of technologies and skills. Infrastructure upgrade. Assurance of export markets and foreign exchange gains. Factors that Attract FDI Build well-developed infrastructure. Ensure a large market size and lower production costs. Maintain an educated and skilled workforce. Ensure lower and stable exchange rates in the host country. Implement supportive government foreign investment policies and incentives, economic policies and political environment. ▪ Three reasons investors prefer to operate directly: ▪ International capital flow reduces risks. ▪ Global integration of capital markets. ▪ The global capital mobility limits the government’s tendency to pursue bad practices. ▪ Economic factor is an important determinant for the location of FDI ▪ Availability of location-bound resources. ▪ The size of markets for goods and services. ▪ Factors related to cost advantages in production. PHASES OF FDI IN MALAYSIA 1. FDI in the Early-Development Phase. 2. FDI in the Import-Substitution Phase. 3. FDI in the Export-Oriented Phase: the Pre-Financial Crisis. 4. FDI in the MSC Development Phase: the Post Financial Crisis. FDI in the Early-Development Phase British colonial government (before independence) Investing heavily in the agricultural sector to provide raw materials 70% of all FDIs in Malaya were held by British corporations and agencies. After independence in the early 1960s Tin mining and rubber plantation sectors. Price of rubber and tin in the international market declined. Population growth rate was much higher. Change strategy towards a ‘laissez faire’ approach with several restrictions imposed on foreign capital. FDI in the Import-Substitution Phase First, Second and Third Malaysia Plan (1966-1980). Import Substitution Industrialisation (ISI) strategy. NEP became the underlying policy for the country’s socio-economic planning. Constrained business activities ISI strategy was successful in attracting FDIs. Government’s laissez-faire attitude. Beneficiaries of the ISI policy were mainly British firms Small domestic market (13 million) would be a constraint. Problem of skewed distribution of income. ISIs were based on imported raw materials or imported intermediate products. A low ratio of value-added to gross output. Poor linkage effects with the rest of the economy. FDI in the Export-Oriented Phase: the Pre-Financial Crisis Declaration of the Investment Incentive Act 1968. ISI strategy → export promotion strategies. Racial riots in 1969. Insufficient employment opportunities. Slowdown in domestic demand in 1992. Export-oriented strategies improved except for the electronics and electrical (E&E) industry. Partly explains the decline in the manufacturing sector. Encourage reinvestments and new investments. Diversifying the infrastructure and utilities sectors. Malaysia remains an attractive investment hub. Singapore, Japan, US, Switzerland, Taiwan and South Korea FDI in the MSC Development Phase: the Post Financial Crisis Multimedia Super Corridor (MSC). Centre for FDI. Aim to accelerate Malaysia’s entry into the IT age. Bills of guarantees were formed to enhance MSC. companies located in the MSC given MSC-Status. 10-year Pioneer Status Tax Holiday. 100% Investment Tax Allowance. Tax exemption. Importations of multimedia and training equipment were duty-free. Free to borrow funds globally. Unrestricted employment of local and foreign knowledge workers.  FDI INFLOW Malaysia’s high GDP growth rate before the Measures to improve financial crisis in 1997 (an average of 8% per competitiveness: annum). Expansion of operations. The increase in FDI inflow through: Rationalisation of production Creating a proper environment; activities. Political stability; Access to natural resources. Transparent financial practices; Protection for investments; Educated and trained workforce; Availability of resources; Low wages; Accessible new and large markets; and Commitment of the Malaysian government BENEFITS AND PITFALLS OF FDI Benefits: Fill in the gap between domestic saving and investment. Foreign exchange reserves increase. In