Financial giant: Need to fine-tune NEP
Malaysiakini
Nov 10, 2006
Beh Lih Yi

Malaysia is “quickly dropping from the radar screens of global investors” and it must employ various measures to address this crisis, including the eventual dismantling of the New Economic Policy (NEP).

This dire warning is contained in a report published by Citigroup, a leading financial services company, which also described the Malaysian economy today as “a pale shadow of itself compared to 10 years ago.”

“Malaysia is quickly dropping off the radar screens of global investors. Whether measured in terms of FDI (foreign direct investment) draw, stock market capitalisation or trading volumes, Malaysia is slipping down the ladder,” read the report, released two weeks ago.

Among the measures proposed to arrest the slide, Citigroup said the NEP should be fine-tuned to minimise market distortions.

A ‘shelf-life’ timetable should be introduced to ensure that the “outdated legacy policy” is eventually dismantled, it added.

The NEP, a race-based affirmative action policy which favours the bumiputera, was introduced in 1970 to reduce the income disparity between the various ethnic groups.

Of late, there have been heated debates as to whether the policy has already achieved its aim. Latest official figures reveal that bumiputera corporate equity ownership on Bursa Malaysia exceeded the targeted 30 percent.

No longer pretty

The Citigroup report titled ‘Malaysia: Avoiding marginalisation and regaining investor confidence’ was published as a series under the topic ‘Asia Macro Views’.

The New York-based Citigroup runs businesses in over 100 countries and owns major brand names, including Citibank.

The financial giant said 10 years ago Malaysia was “sitting pretty and attracting large amounts of foreign capital.”

In 1995, Malaysia was placed sixth in a United Nations ranking in terms of global FDI destinations, with its stock market capitalisation the second largest in Asia (excluding Japan) after Hong Kong, the report said.

It added that at that time trading volumes were large while private investment was 36 percent of the Gross Domestic Product (GDP) and economic growth was running at above nine percent.

“The tall ambitions of becoming a regional financial hub, an IT hub (the Multimedia Super Corridor) and even an aviation and shipping hub looked achievable then and even threatened neighbouring states,” it said.

However, this has changed. Malaysia’s position on the UN’s FDI ranking slipped from fourth in 1990 to 62 last year, while its stock market capitalisation dropped from the second largest to sixth largest in Asia (excluding Japan).

“Even Indonesia - a traditional laggard - attracted more FDI in 2005,” the report noted.

Citigroup also pointed out that Malaysia’s trading value slipped to only two-fifths of the 1996 value while private investment collapsed to 12 percent of the GDP and remains sluggish.

“Singapore’s GDP, with less than one-fifth of Malaysia’s population, is now almost the same size. Grand ambitions have been scaled back, with government policies now being more guarded and reactive,” it lamented.

Snail’s pace

According to the report, the Kuala Lumpur Composite Index is still some 25 percent below its pre-Asian financial crisis high despite other Asian markets like Singapore, Indonesia and South Korea having already breached theirs.

This is despite that the index breached the 1,000 mark two days ago, the highest in six years. It touches 1,019.93 points today - the highest since July 30, 1997.

It said Malaysia’s economic situation was “not moving forward quickly enough” and the country is resisting the forces of globalisation at the same time.

“Barriers to trade, investment and people flows are being liberalised at a snail’s pace. The preservation of stability and incumbency looks far easier to manage than the uncertainties and competition unleashed from opening up,” it added.

In order to avoid marginalisation and win back investor confidence, the report said Malaysia must pursue a more progressive and not a guarded ‘ring-fencing’ strategy.
In relation to that, Citigroup pointed out that Malaysia’s foreign reserves estimated at about US$80 billion (RM304 billion) now is sufficiently large to weather any major storms.

Remove NEP

In recommending what could be done to arrest a further slide, the report said, among others, the NEP should be fine-tuned to help lift investor confidence and increase competitiveness.

“Accepting the NEP objectives, the debate should shift to how best to achieve the 30 percent bumiputera equity target with minimal market distortions and inefficiencies,” it said in reference to the debate over a report by local think-tank Asian Strategy and Leadership Institute (Asli).

The Asli report, which put the bumiputera equity ownership at about 45 percent has been dismissed by the government. However, a separate research done by Universiti Malaya also showed that the bumiputera equity ownership hit 33.7 percent in 1997. 

On Tuesday, Deputy Finance Minister Dr Awang Adek Hussin revealed in Parliament that the bumiputera share ownership on Bursa Malaysia reached 36.64 percent last year. 

Nevertheless, the government maintains that the NEP target has yet to be achieved.

The Citigroup report suggested direct government subsidies and preferential treatment in social services, such as education and healthcare as being more preferable compared to the NEP requirements which “distort the property, labour and stock markets."

“Price discounts are probably preferred over fixed quotas in terms of minimising deadweight losses.

“Even a race-based income tax system would be a more efficient substitute compared to the existing market-intrusive NEP requirements. Bumiputeras in such a scheme would face lower income tax rates, with the rewards being aligned with work effort,” the report proposed.

The report also called for a ‘shelf-life’ timetable that commits to the gradual relaxation of the NEP to be put in place. The government has announced that the NEP’s race-based measures will remain for another 15 years until 2020.

“An earlier deadline will also be seen as a commitment to the eventual dismantling of an outdated legacy policy and an acknowledgment of the new global reality,” Citigroup stressed.

Greater liberalisation

Apart from the NEP, the financial giant also called on the government to remove the last leg of capital controls, the non-tradability of the ringgit offshore.

It argued that the non-internationalisation of the ringgit policy continues to taint foreign investor views and hurt market interest and liquidity.

Another measure proposed is for greater liberalisation of the service sector.

“Foreign investment can probably increase in many areas, including financial services, transport and telecommunications, if limits are relaxed. The licencing regime remains complex and bureaucratic,” it noted.

Citigroup said competition in liberalisation will in itself increase pressure for reform and performance, including on government-linked companies.

“Protecting local champions such as autos and airlines has hurt consumers and raised business costs. It has also hurt relations with neighbouring countries and scaled back reciprocal gains,” it added.