Malaysia is a stable high-growth, advanced emerging market with a diversified and strong economic base. It has a highly developed capital market with an equity market valued at approximately RM1.8 trillion (approximately US$ 430 billion) and a fixed income market of approximately RM1.25 trillion (approximately US$300 billion) at the first half of 2017, giving a total capital market size of RM3.09 trillion (approximately US$740 billion). Shariah compliant instruments accounted for RM1.86 trillion or 60% of the Malaysian Capital Market. Malaysia’s Islamic fund management industry is the largest in terms of number of funds and they are the second largest in size globally.
Securities Commission Malaysia (SC) estimates the size of the capital market to increase to RM4.5 trillion by 2020 in their Capital Market Masterplan 2 (CMP2) with the Islamic Capital Market (ICM) to increase to RM 2.9 trillion from the current RM 1.86 trillion. According to the CMP2, additional analyses indicates further increase in the Malaysian capital market that will be guided by structural reforms and high impact investment projects under the existing National Economic Model (NEM) and Economic Transformation Programme (ETP) as well as initiatives under the newly introduced National Transformation 50 better known as N50.
Source: Capital Market Masterplan 2, 2011-2020 Securities Commission Malaysia
Malaysia is regarded as an advanced emerging market and is typically among the top five markets in Asia represented on the MSCI Asia Pacific Index and the top market in ASEAN for fundraising in the secondary market with a figure of RM 11.8 billion in 2016. Malaysia also has the third largest bond market relative to GDP in Asia after Japan and South Korea.
Malaysia has a long history of economic and political stability, enjoying high growth and enjoys investment grade sovereign debt ratings among international rating agencies. The government is committed to free market policies and sees international linkages as an important part of overall economic and social development. The economy has diversified from the traditional dependence on commodities and is now strongly rooted in services, driven increasingly by strong domestic demand.
It has always honoured its debt obligations, has strong financials, high domestic liquidity of funds, relatively low foreign borrowings and has never accepted financial aid from international organisations such as the International Monetary Fund (IMF). Malaysia has successfully pulled out of many financial crises through implementation of remedial policies and other relevant efforts.
Since independence in 1957, Malaysia has maintained an open policy towards both foreign direct and portfolio investors. While the country does not impose currency restrictions, Malaysian Central Bank, Bank Negara Malaysia’s (BNM) foreign exchange administration policy and rules restricts the offshore trading of the ringgit in any form, whether as a non-deliverable forward (NDF) traded out of offshore financial centres or as a futures, options and other derivative contracts on exchanges outside of Malaysia.
On top of that, the tax regime is liberal with no capital gains tax on portfolio investments and exemption of withholding tax on some categories of earnings.
A strong system of governance is in place for capital markets with specific legislation aimed at providing investor protection and assuring continuity of policies, rules and regulations. SC, Malaysia’s capital markets regulator is considered globally to be among the most progressive regulatory bodies and has ensured that regulation is in line with practices that are levelled as global standards, both in terms of regulation and promoting the development of an orderly and investor-friendly capital market. In March 2017, the International Organisation of Securities Commissions (IOSCO) launched its first ever Asia Pacific Hub in Malaysia situated in SC’s headquarters in Kuala Lumpur. This step is aimed to further develop the region’s capital markets and strengthen regulatory capabilities.
Malaysia lies within the high-growth ASEAN market with many of its companies geographically diversified across other ASEAN countries. As ASEAN economic integration increases, there will be more opportunities for Malaysian companies and the capital market to play a part across the ASEAN region.
The combination of Malaysia’s stability and the high growth within ASEAN offers unique opportunities for investors in the Malaysian capital markets. A diverse and complete ecosystem of financial intermediaries that is able to provide access to these opportunities, both for issuers and investors.
Disclaimer: Quoted figures was valued at RM4.19 = US$ 1.00 on 19th September 2017
High-Growth, Stable Economy
From a strong dependence on two commodities – rubber and tin – at the time of independence in 1957, the Malaysian economy has diversified into manufacturing through import substitution and export-oriented industries. For these, the government provided generous incentives to encourage foreign direct investments (FDI) which remain until today.
A stable political environment has provided for policy continuity and a pragmatic approach of encouraging foreign investments and plugging Malaysia into the international market. This is in line with consistent policies with strong focus on exports led to high growth over many decades, making Malaysia one of the so-called ‘tiger economies’ of the 1990s.
Source: Bank Negara Malaysia, World Bank, International Monetary Fund, Department of Statistics of Malaysia
Note: Malaysia GDP (RM billion) and all GDP growth rates at constant 2010 prices
While the Asian Financial Crisis of 1997/98 ushered in an era of currency instability and lower growth, Malaysia weathered the crisis and became among the first countries to recover from it and record respectable, albeit lower growth. Malaysia still continues to show strong growth relative to other advancing or maturing emerging markets.
Today, the economy is highly diversified with manufacturing accounting for 23% of GDP, but services have become the mainstay of the economy, accounting for 54%. Recently, consumer demand has become the new driving force, providing some amount of insulation from the vagaries of the international economy.
Source: Department of Statistics, Malaysia
Note: Exclude import duties
Malaysia’s sovereign debt rating, according to the major rating agencies, continues to be investment grade. Its debt and financial ratios are generally respectable and strong domestic liquidity ensures that the dependence on foreign debt financing is not excessive.
Malaysia’s sovereign debt ratings
Source: Department of Statistics, Malaysia
Malaysia’s banking system is strong and stable, and is closely supervised by BNM. Since the Asian Financial Crisis of 1998, concerted efforts were made to develop the bond market in order to reduce bank dependence on corporate borrowings and hence achieve greater stability of the banking system in times of crisis.
There are no capital and exchange restrictions in Malaysia. Global investors are free to buy, sell and hedge ringgit and ringgit-denominated securities onshore through licensed intermediaries. Malaysia's liberalised foreign exchange administration rules enhance Malaysia's competitiveness and business efficiency, while promoting financial and economic stability.
The liberal foreign exchange regime enables greater trade in foreign currencies. With regard to bond issuances and sukuk (Islamic bonds), it enables foreign entities to raise ringgit and foreign currency-denominated funds from Malaysia. International issuers can issue multi-currency sukuk and bonds, and have the flexibility to swap domestic currency funding into other currencies.
Liberal Tax Regime
The absence of capital gains tax and exemption of withholding tax on some forms of income contribute to the openness of the capital markets and their attractiveness.
There is no interest accruing to any resident or non-resident individual, unit trust and listed closed-end fund from bonds or securities issued or guaranteed by the Government of Malaysia; debentures, other than convertible loan stock, approved by SC; and Bon Simpanan Malaysia issued by BNM.
There is also no withholding tax on coupon/interest income derived by non-resident companies from: ringgit-denominated Islamic securities and debentures, other than convertible loan stocks, approved by SC; and securities issued by the Government of Malaysia or BNM.
Fiscal Incentives and Facilitative Environment
To promote Malaysia as an international Islamic financial centre, the government has implemented measures such as tax exemptions, tax neutrality provisions and other incentives across the various Islamic finance market segments. One of the examples of tax neutrality is where Islamic finance transactions are treated similarly to conventional financing transaction for tax purposes. In addition, sale or lease of any assets that is performed strictly to meet Shariah requirements would be ignored for tax purposes.
Malaysia's facilitative environment encompasses a sound infrastructure platform, consisting of the Electronic Trading Platform (ETP) and the Real-time Electronic Transfer of Funds and Securities (RENTAS) system to ensure transparency and liquidity for the trading of bonds. There is an active secondary market which enables greater trading activity and attracts more investors including foreign-owned corporations. Further, Malaysia provides a facilitative framework for sukuk issuance, both for local and international issuers seeking to raise funds through ringgit and non-ringgit sukuk issuances.
Strong Regulatory and Governance Framework
The Malaysian capital market has a sound regulatory system aimed at creating a level playing field , providing sufficient protection for all participants and ensuring continuity of policies, laws, rules and regulations so that participants have regulatory certainty but at the same time have the space to come up with new structures and innovation to facilitate legitimate fundraising. The authorities recognise the fine balance between regulation needed to protect parties and yet facilitate growth and development.
Malaysia's regulatory framework has been acknowledged by the IMF and World Bank to be highly compliant with international standards. The main capital market regulator, SC, believes that the successful development of a strong and credible corporate governance environment is premised on a dynamic synthesis of the effort of both the regulators and the market. Each must fully discharge its respective roles and responsibilities as an integral player of the corporate governance ecosystem that holds the market forces in balance.
The Shariah Advisory Council (SAC) of SC advises on matters pertaining to the Islamic capital market. Members consisting of prominent Shariah scholars, jurists and market practitioners are qualified individuals who can present Shariah opinions and have vast experience in banking, finance, economics, law and application of Shariah, particularly in the areas of Islamic economics and finance.
The Capital Market Services Act 2007 (CMSA) defines the parameters for permitted capital market activities in Malaysia, while reinforcing the protection framework and promoting international best practices among financial institutions. These and other such regulatory guidelines have been instrumental in providing industry consistency and clarity for the capital market in Malaysia.
SC introduced the first Capital Market Masterplan (CMP1) in efforts to guide the development of the Malaysian capital market for the period of 2001 to 2010. Since 2000, the growth of the Malaysian capital market had expanded tremendously from RM 718 billion to RM 3.09 trillion in the first half of 2017. This growth was achieved through rapid industry expansion and strong regulatory oversight that underpinned investor confidence in the Malaysian capital market.
*CMP1 - Capital Market Masterplan, 2001-2010
Source: Capital Market Masterplan 2, 2011-2020
Securities Commission Malaysia
The Capital Market Masterplan was further revised as CMP2 and introduced new aims and methods that are set for the years of 2011-2020. However, the market is still adjusting to the long-term consequences of the global financial crisis in 2007-2008. Therefore with CMP2, there is a need to strengthen the positioning of the capital market to meet challenges from the changing global landscape and to support the national economic transformation process. In tandem with the changing intermediation landscape, CMP2 outlines governance strategies to ensure robust regulatory oversight and active stakeholder participation to enhance confidence in the integrity and soundness of Malaysia’s capital market.
In addition, Malaysia's regulatory guidelines have also set benchmarks for other countries to further develop their own capital markets.
The 10 members of the Association of Southeast Asian Nations (ASEAN) accounted for 629 million people in 2015, the third largest in the world after China and India. With an average annual real growth rate of 5.3% between 2007 and 2015, they had a combined GDP of US$2.4 trillion in 2015, the sixth largest in the world and the third largest in Asia.
ASEAN attracted US$121 billion in FDI in 2015, of which 62.1% were in the services sector with 7% of total global FDI and intra-ASEAN constituting the largest share of inflows. Trade in ASEAN stood at US$2.3 trillion which grew by US$ 700 billion between 2007 and 2015 and intra-ASEAN trade accounted for the fourth largest share of total global trade after China, USA and Germany. Also, intra-ASEAN trade comprised the largest share of ASEAN’s total trade by partner in 2015.
ASEAN is characterised by solid growth, low manufacturing costs and a rising middle class. Demographics play a key role in ASEAN's economic growth prospects. The rising spending power of ASEAN countries and the strengthening of demand in their domestic markets have huge growth potential.
The expected high growth in ASEAN relative to other world markets will underpin the growth of Malaysia’s own capital market.
Malaysian companies are already diversified into key growth markets within ASEAN while the Malaysian capital market, with its diversity of products in conventional or Islamic products, is well placed to provide the right platform for ASEAN companies wishing to finance their growth plans and to open the doors to investors who want to pursue opportunities within ASEAN.
For more statistics on ASEAN, click here
Malaysia’s economic structure and its positioning within ASEAN means its capital markets offer unique propositions to investors.
In the equity market, there are large companies that are significantly diversified within key high-growth ASEAN economies, in addition to having a strong presence within the Malaysian market which provides their core earnings. In 2016, Malaysia saw 11 initial public offerings (IPOs) both in their Main Market and ACE market listings. (1) Main market – an ideal platform for established companies to raise funds and (2) ACE market – designed for start-ups and new companies looking to push for more capital by listing their companies public.
The Malaysian market itself is characterised by high disposable income, strong consumer demand and rapidly increasing per capita income, leading to a growing desire for a range of consumable goods and services in sectors such as banking, telecommunications and consumer goods amongst others.
A revamp of the banking system since the 1997/98 financial crisis has led to enhanced quality earnings from the banking sector while limited entrants into the sector results in greater attractiveness of existing players.
On the fixed income side, Malaysian corporates have become major issuers of bonds – both conventional and Islamic – in addition to the government. Much of Malaysian infrastructure such as independent power production, telecommunications and roads are financed by the well-developed bond market.
Meantime, Shariah compliant products account for approximately 60% of the total market size of RM3.09 trillion (first half of 2017) with the equity and fixed income markets accounting for RM1.84 and RM 1.25 trillion respectively. This is a clear indication that the Malaysian capital market is an ideal one especially in Islamic instruments.
Malaysia continues to be the global leader in the sukuk market with majority share of the market worldwide and the largest Islamic assets under management (AUM) in the world, accounting for 32% globally.
Diverse Financial Intermediaries
Malaysia's diversity in terms of market intermediaries consists a complete ecosystem of conventional banks, investment banks, local and foreign Islamic banks, brokers and fund managers who engage in a number of activities ranging from underwriting complex financial transactions to advising on sophisticated transaction structures.
Most of these intermediaries have participated in Malaysia's many notable bond issuances. They possess a proven track record and in-depth experience. Capitalising on the inherent strengths of Malaysia's intermediaries enables issuers to benefit from a smoother issuance process while reducing costs. The reputation of these intermediaries adds further credibility to the issuance.
Malaysia's market intermediaries are also internationally recognised for their innovative capability in structuring sukuk or Islamic bonds. This is attributed to their expert use of various Islamic principles or a combination of principles to produce truly customised sukuk offerings.