Khazanah Megatrends Forum
Y.Bhg Tan Sri Md Nor Yusof, Board Member of Khazanah Nasional,
Y.Bhg Tan Sri Azman Mokhtar, Managing Director of Khazanah Nasional,
Distinguished speakers and chairpersons,
Tan Sri – Tan Sri, Datuk Datuk,
Members of the media,
Ladies and gentlemen,
Assalamualaikum and a very good morning,
- First of all, let me congratulate Khazanah for organizing the Khazanah Megatrends Forum. I understand that this is part of Khazanah and its associate companies strategy setting and business planning process. The Megatrends Forum is also part of the effort to build knowledge communities, similar to other Khazanah knowledge events such as the Khazanah Global Lectures (KGL). Such efforts are increasingly necessary as Malaysian companies, like Malaysia herself, extend their footprint regionally and globally.
- The forum this year is expected to be especially interesting with the unfolding global financial crisis that will likely have a wide ranging impact at several levels including on how business is done.
- There is consensus on what triggered the financial crisis. What was purportedly started by the sub-prime US mortgages have translated into major upheavals in the global credit and capital markets. Who would have predicted the demise of major investment banks and the problems faced by financial giants such as AIG?
- Some have argued that the whole global financial architecture, “the system”, is under threat, yet others predict, rather more optimistically, the end of the disconnect between the financial world and the real economy.
- It is therefore vital that we have a framework to understand what has happened and what it means to the global economy, to the region and to Malaysia in particular. While there may be a consensus on what triggered this, there are a lot more divergent views in terms of assessing the extent and scope of its impact.
- I hope the deliberations and exchange during this timely forum will serve the companies represented here well in their strategic planning for next year. The gathering of senior executives of Malaysian companies and global thought leaders at this Forum make it an ideal platform to devise this framework I alluded to earlier./li>
- Such a deliberation and improved understanding of the global economy would also be helpful to the government, as governments too need to respond appropriately to the gyrations of the financial and capital markets and safeguard national economic security. In particular, the government is mindful of what the consequences of the financial crisis in the West shall be on the real economy here in Malaysia.
Ladies and gentlemen,
- I cannot help but notice the parallels of what is happening today in the West to what happened in the 1997-1998 Asian financial crisis. Ten years ago, it was the East Asian economies, including Malaysia, that underwent a financial crisis which resulted in a severe credit crunch that choked the economy.
- Today, we are witnessing a similar phenomena happening in the West. The government feels vindicated that most of the measures presently adopted to address the present crisis in the US and Europe are similar to the ones we had to implement ten years ago. Ironically, they were unrelenting in lecturing and hectoring for us to adhere to their advice that they have now unfortunately failed to live up to their own high standard of lending and regulatory functions that they had expected of us.
- One consequence of our implementation of financial reforms undertaken back in 1998 is that the financial sector today is much more resilient. There is now improved governance framework, sufficient capital adequacy in the banks, low levels of non-performing loans (NPLs) (2.5% using a three-month classification) and there is ample liquidity in the system. Most of all, our financial institutions are not exposed to the collateralized debt securities derived from the sub-prime mortgages. Further, 90% of total assets of banks and insurance companies are Ringgit denominated assets.
- From a Malaysian perspective, the challenges before us today are different from the ones we faced ten years ago. Yes, our stock market is affected by the sentiments in other markets, but I would like to stress that we are not in a financial crisis, and certainly we should not talk ourselves into one.
- However, while we are confident of the resilience of our financial sector, we are mindful that the financial turmoil in markets elsewhere will bear consequences on the real economies there as well as globally. As a result, the Malaysian real economy will inevitably be negatively impacted. From the government’s perspective, managing the impact on the real economy is our top priority, while we continue to ensure the integrity of our financial system.
Ladies and gentlemen,
- The global economic slowdown will have an impact on demand for discretionary consumption which forms a portion of our exports. Slower growth will also result (and we are beginning to see this) in a slower demand for commodities, and we are already seeing the softening of commodity prices including crude oil prices. The decline in palm oil and rubber prices will affect both the bottom line of our plantation companies and the income of small holders. Quite clearly, the tradable sectors of the economy will be negatively affected.
- Therefore, the drivers for sustained economic growth will have to come from domestic private investments and continued robust domestic consumption.
- On its part, the government will continue to facilitate private investments which should be the main thrust of economic activities. The country’s healthy current account surpluses suggest that we have the resources to finance a much higher level of private investments. The challenge is for a more efficient intermediation process channeling these funds to new businesses, preferably in sectors that are knowledge-based and ones that improve our national productivity.
- We are also confident that domestic consumption will remain robust and continue to contribute meaningfully to overall growth. Some have pointed to the dangers of household indebtedness, but in aggregate, total household financial assets are at more than two times total debts. So, the scope for continued growth, albeit at a slower pace, is still there. Consumer confidence, as in investor confidence, should not be unduly affected and we should also stop trying to convince ourselves that we are in a crisis.
- The scope for expanding public expenditures is however limited. Moreover, such expenditures will be prioritized towards enhancing the social safety net and developing longer term national capacity.
Ladies and gentlemen,
- We have projected GDP growth of 5.4% for 2009. However, in the light of the worsening external developments, the growth forecast for 2009 will be reviewed downwards. Details of the review and the Government’s policy response will be tabled during the Budget winding-up speech in Parliament on November 4th.
- Nevertheless, to ensure that the economy remains resilient, the Government has and will undertake several pre-emptive measures which includes:
- Re-prioritizing projects in favor of those which can be implemented expeditiously and with high multiplier effects. This may include postponement of some lumpy projects with little economic multiplier effect. But I would like to underscore the government’s position that the planned expenditure for 2009 will continue and there will be no cut-back in its overall expenditure. This position has been agreed by the Exco of the National Economic Council, chaired by the Prime Minister.
- The Malaysian stock market has many fundamentally strong companies. In the current environment, many companies are trading at attractive valuations. This creates opportunities for value investing by investors with long-term horizons and able to ride through market cycles. Warren Buffet in his statement last week said “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful”. In 2003, the government established Valuecap Sdn Bhd to invest in companies which were undervalued. Valuecap Sdn Bhd has been able to achieve an excellent track record and has also played a critical role in launching Malaysia’s first Islamic Exchange Traded Fund (ETF). Given the current opportunities for value investing, I would like to announce that the government will provide and additional funds of RM5 billion to double the size of Valuecap Sdn Bhd to RM10bn.
- Supported by high levels of capitalization and ample liquidity, the banking sector is well-positioned to continue to undertake lending activities to support the requirements of the domestic economy. As a pre-emptive measure, Bank Negara has recently announced the guarantee of all deposit up to December 2010 and access to Bank Negara Malaysia’s liquidity facility will be extended to insurance companies and takaful operators regulated and supervised by Bank Negara.
- Financing by the banking sector has continued to expand at an annual rate of 10.5% as at end-September 2008. Within the business sector, greater focus has for several years been accorded to the small and medium enterprises. Outstanding SME financing now amount to RM122.9 billion, with new financing approved to SMEs increasing by 8% in the first nine months of 2008. To date, financing to SMEs account for more than 40% of total financing channeled to the business sector.
- Financial institutions have also introduced new initiatives to strengthen their interface with SME customers and enhance the range of financial products and services offered to the SME industry.
- SMEs also have access to the special funds provided by Bank Negara Malaysia, of which two funds were recently introduced, namely, the RM1.2 billion SME Assistance and Modernization Facilities.
- SMEs having difficulties to access financing can obtain guarantee facilities at the Credit Guarantee Corporation. At end-September 2008, the outstanding financing guaranteed by CGC this year amounted to RM10.3 billion.
- Bank Negara has also established the Small Debt Resolution Scheme where viable SMEs can seek assistance to restructure their loans, including obtaining additional financing.
- Initiatives have also been taken to provide financial advisory services to SMEs, via SME Corporation Malaysia, which serves as the central point of information and reference for SMEs; Bank Negara Malaysia which established the Laman Informasi Nasihat dan Khidmat or BNM-LINK, and BNM-TELELINK, which is a dedicated Contact Centre for SMEs, and financial institutions which have their SME desks to assist the borrowers in their financing needs, including advising them on their business activities.
Ladies and gentlemen,
- Part of the government policy response to manage the global and financial crisis is to ensure that our country’s global competitiveness in attracting foreign and domestic investment is in-tact. In this regard the government has agreed to announce two important reviews to our existing policy. Firstly, the liberalization of the service sector, which is the main contributor to Malaysia’s Gross Domestic Product almost in the region of 45%. The specific sector will be detailed out and this will be base on MITI’s proposal to the cabinet soon. The government hopes that through liberalization, Malaysia can attract more investments and generate more employment within the country. Secondly, the FIC guidelines will be reviewed to make it more attractive for foreign investors particularly in the property and commercial sectors. Both of these proposals have been discussed at the National Economic Council Exco meeting, chaired by the Prime Minister.
Ladies and gentlemen,
- Even if we consider the financial turmoil an external shock which necessitates short term responses and measures, this must not come at the expense of the long-term developmental imperatives of the nation.
- The future economic growth and prosperity of the country will depend on the competitiveness of Malaysia as an investment destination. This depends critically on several factors.
- The government is committed to a stable and consistent policy framework, and we will continue to be pragmatic in facing challenges while focusing on the long term objective of national economic prosperity and security in this challenging world.
- But leadership and the imperatives of leadership extends beyond the political sphere. Surely, the competitiveness of firms depend on their leadership and the underlying culture. The ability to maneuver around short term shocks and to endure challenges depends on the balance between the past and present; culture as formed by legacy and the foresight of present leadership.
- I am encouraged that these very same themes are represented in the various sessions of the Forum over the next two days and I look forward to the conclusions arrived. Let me wish you the best and I once again congratulate Khazanah for organizing this Megatrends Forum.