Not Much Fun
Fund managers are hoping the government's new incentives will free up a highly restricted industry
By S. Jayasankaran/KUALA LUMPUR
Issue cover-dated March 1, 2001
KUALA LUMPUR'S ambition of becoming a regional financial centre was all but written off by foreign analysts after the government imposed capital controls in September 1998. But that ambition has remained intact and may be articulated in detail on February 22 when Finance Minister Daim Zainuddin unveils his capital-markets master plan. It will lay out long-term policies covering banking, insurance, stockbroking, the bond market and fund management. "I expect significant liberalization and deregulation of the financial sector although I think the approach will be gradual," says the head of a foreign brokerage in Kuala Lumpur.
In the wake of the Asian financial meltdown, there was a crisis of confidence in Malaysian institutions: Fearing that local banks might collapse, depositors moved their savings to foreign banks in Malaysia or out of the country altogether. The master plan aims to prevent future crises of confidence and to shore up local financial institutions.
The government has already mandated the consolidation of the banking, insurance and broking industries--but more is expected from Daim. Executives close to the Securities Commission, which supervises the capital markets, expect the minister to announce new incentives to boost the bond market. They also expect the fund-management business to be liberalized, with foreign brokers given direct access to the Kuala Lumpur Stock Exchange by January 2003. (Currently they have to serve clients via local brokers.)
In July 1995, former Finance Minister Anwar Ibrahim attempted the first package of incentives to entice international fund managers and regional finance companies based in Hong Kong to move to Kuala Lumpur ahead of the British colony's handover to China. There were few takers then, with the majority preferring Singapore.
REVIVING FOREIGN INTEREST
Daim's effort may have less to do with attracting foreigners than with making Malaysian capital markets stronger and more efficient. Still, to revive foreign interest, which has been almost absent from the KLSE since mid-2000, analysts are hoping he will place greater emphasis on transparency and corporate governance backed up by enforcement measures.
Local fund managers will welcome any help Daim can give. Malaysia has 34 fund-management companies managing about 52 billion ringgit ($13.7 billion), which accounts for less than 8% of the KLSE's capitalization, far below the 20%-40% norms in Singapore, Japan and the United States. State-backed unit trusts set up for Malays account for almost 80% of funds managed, leaving the private sector in the shade.
Moreover, local funds can invest only within Malaysia. Plans to allow local funds to invest globally were put on ice after capital controls were imposed. "We've always been way, way behind when it comes to offering freedom of choice," says a local banker. "As globalization takes root, these issues will become increasingly important."
The lack of choice has ironically helped local mutual funds--they, at least, offer returns ranging from 8% to 35%, compared with 3%-4% returns on bank deposits. "Between the returns on bank deposits and mutual funds, there isn't much competition," says Edmund Cheah, who heads the Kuala Lumpur Mutual Fund, the country's largest private manager with 2 billion ringgit. "But if you lifted controls you would probably see a large outflow, given the differential between U.S. rates and ours."
Freeing up funds from the state-controlled Employees Provident Fund would boost the fund-management business too. The EPF is the country's biggest pension plan with more than 150 billion ringgit in assets, but its investment policies are strictly circumscribed--for instance, only 20% of its funds can be put into equities. So some analysts are betting that Daim will boost the business by allowing the EPF to subcontract more work to external fund managers and to invest more of its money in the stockmarket.
Ultimately, however, Malaysia's ambition to be a regional financial hub will likely to go nowhere without the complete lifting of capital controls. "If you don't give Malaysians the choice of investing anywhere, why would anyone want to come here to set up shop?" asks the foreign broker.