Finance in Asia After GFC: Malaysia

 Mah-Hui LIM  Workshop on Financial Evolution, Regulatory Reform and Cooperation in Asia   May 17-18, 2013 Seoul National University 1

Domestic Financial Liberalization Measures        Credit controls and allocation Interest rate deregulation Entry Barriers –domestic & foreign Govt regulation & ownership Competition in finance Ease of financial innovation Diversification of financial services 2

Exeternal Financial Liberalization Measures    Free entry of foreign fin services Liberalization of capital flows Wider & deeper integration to regional and international financial markets 3

Brief History of Financial Libzn in malaysia    Prior to 1985 banks regulated but finance companies lax. 1985 fin crisis & recession > bailout and closing of finance cos 1990s -1997 – robust recovery & surge in capital inflows >AFC Again bail out, restructure, recapitalization & consolidation 4

Consolidation in Financial Industry   54 banks & fin cos merged into 9 banking groups 1986 –2011:  Tot no. banks from 38 > 24   Domestic banks 22 > 8 Foreign banks remain at 16  Insurance cos fr 63 > 36 5

Number of Financial Institutions in Malaysia  Source:Bank Negara, MSR, Mar2013 6

Financial Sector Master Plan 2001-2010 Financial Sector Blueprint 2011-2020     Objectives: Create more open, competitive, diversified, liberalized, efficient financial system Develop and deepen capital markets – bond, stock markets 1997-2010: Bond mkts doubled to 96% of GDP while banking assets declined fr 289% to 230% 7

Financial Structure in Malaysia

Percent of GDP

1997 2000 2010 2020 F Banking Assets Debt Securities Market 47 68 96 NA Stock Market Cap GDP RM billion 289 220 229 300 133 125 160 NA Total Financial Assets 469 413 485 600 282 356 795 NA 8

Financial Sector Growth     Sukuk (Islamic bonds) now 55% of debt securities market 2010 – cap mkts 46% of tot financing 2020 – target 52% Fin sector major driver – since 2001 grew at av 7.3% p.a. faster than GDP growth. Expected to grow btw 8 11%pa with total fin assets to reach 600% of GDP in 2020 9

Internationalization of Financial Sector    Reduce entry barriers to finance and create level playing field for foreign and domestic fin players Malaysian banks to expand overseas Deeper and wider integration with regional & int’l financial markets 10

Greater presence of foreign banks     Number of Islamic banks foreign owned rose fr 0 to 12 btw 1986-2011 2009 – up to 2 new Islamic bank and 2 new commercial bank licenses offered to foreign institutions and 3 new licenses offered in 2011 Equity participation of foreign interest raised to 70% for joint ventures Greater operational flexibility given 11

Internationalization of banks    Foreign banks account for 25% of total bank assets and deposits Foreign ownership of Msian government bonds reached 28% in 2012 (20% Indonesia; 7% Thailand) Msian banks overseas expansion 2002-2010. Overseas assets rose 73x fr RM3bn to RM240bn; pretax income fr -4.3% to 13.6% 12

Other Internationalization Efforts

  Expand use of local & regional currency payments, integrating settlement systems, common stds for cross border payments, harmonization of regulatory & supervisory, prudential stds Regional coopn to share info, surveillance, crisis prevention, liquidity crisis mgt, reg supervisory colleges & network 13

Capital Account Controls -1998       Ringgit pegged to US$ 1= 3.8

Offshore ringgit account and trading banned Moratorium on repatriation of proceeds fr sale of securities All off-shore ringgit repatriated home Foreign currency borrowing by residents ltd to RM5mm equivalent Rgt borrowing by NRs limited 14

Post 1998 – gradual liberalization of capital account    1999 10% exit levy to replace moratorium, this levy abolished in May 2000 Since then no controls on capital inflows and capital outflow Controls still on borrowing of ringgit by non residents & borrowing of foreign currency (FXC) by residents 15

Transactions Involving Non Residents (NRs)

 Ringgit Borrowing by NRs  In 2000-intraday credit to NR stockbrokers increased to RM200m and limit abolished in 2007    2001-NR companies cd borrow up to RM5m for use in real sector in Msia 2007- increased to RM10m By 2008 can borrow ANY amt for use in real sector WITHIN Msia 16

Ringgit borrowings by NRs

   2010- allowed international trade to be settled in ringgit on shore. Also banks can lend ANY amount of ringgit to NRs for trade financing But NRs still not allowed to borrow ringgit for financial speculation 2004 NR cos can issue ringgit bonds for ANY amt for onshore use or subject to outward invst rules if used offshore 17

Foreign Currency Borrowings by

Residents -control currency mismatch     Msia less affected during AFC because of limit to FXC borrowing of up to RM5 mm equivalent before AFC 2005 – this limit raised to RM50mm for resident group of cos & RM10mm for individuals 2007 – limit raised to RM100m fr banks equivalent for cos. Still applies today 2010- no limit if resident cos borrow FXC fr parent or related cos that are non resident and non-bank.

18

FXC borrowing by Residents   If residents have own FXC, no limit on outward direct investments If residents have domestic currency borrowing then can only borrow up to RM50m equivalent in FXC 19

Residents ODI (Outward Direct Investments)    1998- residents who invest overseas in excess RM10,000 equivalent required BN approval In 2007, residents outward invst of own money in excess of RM50mm equivalent abolished Residents can even borrow to invst in FXC up to RM100mm in FXC and RM50mm in ringgit equivalent 20

Outward Direct Invsts exceed Foreign Direct Invsts > 2007 50 000 40 000 30 000 20 000 10 000 0 -10 000 -20 000 -30 000 -40 000 -50 000 -60 000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Outward Direct Invst Inflow FDI 21

Internationalization of Ringgit       Ringgit is partially internationalized – can use ringgit for international trade (exporter can receive ringgit onshore) But access to ringgit is still limited No offshore ringgit trading No offshore ringgit account Non-resident banks no access to Rgt Travellers limited to take out or bring in up to RM30,000 22

Conclusions    Financial sector and capital account become more liberal after the AFC and this process is proceeding But restrictions apply to the accessibility of ringgit although it is now used for international trade settlement Emphasise principles & risks based regulations & dependence on prudential measures 23