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New Straits Times
21-07-2025
- Business
- New Straits Times
Easing foreign equity caps may boost FDI but raises sovereignty risks, say economists
KUALA LUMPUR: Easing foreign equity limits in strategic sectors may unlock fresh foreign direct investment (FDI) inflows into Malaysia but also pose structural and sovereignty-related risks, economists said. Malaysia has gradually liberalised its foreign equity rules including allowing up to 100 per cent ownership in the manufacturing sector since 2009. The country, however, still imposes significant limits in sectors like telecoms, finance, insurance, agriculture, property and healthcare. Investment, Trade and Industry Ministry last week reportedly said it was in talks with regulators and key industries about relaxing foreign ownership limits as part of efforts to reduce the 25 per cent US tariff on Malaysian goods. UCSI University Malaysia associate professor in finance and research fellow at Centre for Market Education Dr Liew Chee Yoong said the economic and structural impacts would likely be multifaceted. Liew said relaxing equity limits in Malaysia could potentially boost FDI inflows by 15-25 per cent in selected sectors, offering much-needed capital for infrastructure upgrades and technological progress. "This could facilitate valuable knowledge transfer, particularly in areas like 5G deployment, financial technology and cloud infrastructure," he told Business Times. Greater competition from foreign players could spur innovation and may lead to more competitive pricing for consumers, he added. "Strengthening linkages with global corporations might also bolster Malaysia's position within international supply chains," he said. Liew said the push for Malaysia to ease the caps is driven by a combination of interrelated factors. "Primarily, the US seeks enhanced market access for its corporations, particularly large financial institutions, telecommunications providers and technology firms, enabling them to gain controlling stakes and greater operational influence within Malaysia's developing economy. "This push also aims to secure competitive parity for US companies against regional rivals, such as Singaporean or Chinese firms, which may operate under different frameworks or have established significant regional headquarters." He added that these kinds of requests are frequently used as bargaining tools in broader trade talks, such as under the Indo-Pacific Economic Framework, to gain certain advantages. From a geopolitical standpoint, strengthening economic ties through investment is a strategic move to offset China's growing influence in the region, he said. Balancing growth and sovereignty Liew said one of the main advantages from the possible relaxation is the substantial inflow of foreign capital, which plays a crucial role in enhancing national infrastructure and supporting the growth of high-value industries. He added that gaining access to advanced technologies and international best practices could boost productivity and competitiveness, create jobs in higher-value sectors, and deepen economic ties with key partners such as the US. "However, these advantages are counterbalanced by substantial risks. Foremost is the erosion of control over strategic national assets and key industries, raising sovereignty concerns. "Domestic firms, particularly small and medium enterprises and Bumiputera-owned companies, face the risk of marginalisation or acquisition," he added. Liew said the disruption to long-standing socio-economic policies designed to ensure equitable wealth distribution could have significant political and social repercussions. "Furthermore, substantial profit outflows from foreign-controlled entities could negatively impact Malaysia's foreign exchange reserves and current account stability over time," he added. Putra Business School associate professor Dr Ahmed Razman Abdul Latiff said Malaysia imposes equity restrictions to promote greater local participation in industries and to ensure that wealth distribution benefits local investors and, ultimately, the broader population. "Lifting up such restrictions is still doable as long as the initial objectives are maintained or strengthened. "Maybe no longer through equity participation but perhaps with higher technology transfer such as technical know-how and co-sharing of intellectual properties rights," he added. Razman said this approach helps accelerate innovation within local industries and enables the development of competitive homegrown products, which in turn supports the long-term sustainability of local businesses. Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said opening up Malaysia's economic sectors to foreign investors must be done thoughtfully to safeguard local interests. "At the same time, we would also want our local companies to be able to compete effectively and be able to penetrate the overseas market," he said. Current landscape of foreign equity in Malaysia Afzanizam said as of June 2025, foreign ownership in Malaysian equities stood at 19 per cent, down from the historical peak of 25.1 per cent recorded in June 2013. This comes despite the market's appealing valuation, with the FTSE Bursa Malaysia KLCI trading at a price-to-earnings ratio of around 14 times, compared to the historical average of 17 times. "Among the criticisms is the liquidity of the stocks as the large companies, especially the government linked companies are being held by domestic institutions such as the government linked investment companies. "This has led to the amount of available stocks to invest is not economically viable for the foreign institution to invest from the liquidity stand point," Afzanizam told Business Times. Meanwhile, Liew said many service industries in Malaysia still face strict foreign ownership limits. For example, the telecommunications sector generally allows up to 49 per cent foreign ownership, while commercial banks are subject to a lower cap of 30 per cent. Investment and Islamic banking are typically limited to 49 per cent as well. "The insurance sector allows up to 70 per cent foreign ownership. Further limitations apply to agriculture and property, such as thresholds between 30 per cent and 50 per cent for agricultural land. "Crucially, the long-standing Bumiputera policy, mandating a 30 per cent equity share for Bumiputera interests, continues to influence ownership structures across various sectors," he shared. Key industries likely under review Afzanizam said Tengku Zafrul may have been referring to key sectors such as telecommunications and banking, given their significant role in Malaysia's economy. Sharing a similar view, Liew noted that the telecommunications sector is currently subject to a 49 per cent foreign ownership cap, which impacts major companies like Maxis Bhd and Axiata Group Bhd. He added that banking restrictions are even more pronounced, with commercial banking limited to 30 per cent foreign ownership and investment banking to 49 per cent. "Other sectors likely under discussion include professional services such as legal, accounting, and engineering firms, which often face limits between 30 per cent and 49 per cent; private healthcare, capped at 30 per cent; and potentially defence-related industries or critical transport infrastructure like ports and airports, deemed vital for national security and sovereignty," Liew said.
The Star
20-07-2025
- Business
- The Star
Banks on strong footing
PETALING JAYA: The Malaysian banking sector, a bellwether of the economy, faces indirect pressures from mounting global uncertainties induced by the harsh US tariff policies and rising geopolitical tensions. These headwinds could impact supply chains and lower demand for some industries, potentially resulting in elevated credit risks for banks. Despite these challenges, the sector, according to banking experts, is still on a strong footing, thanks to its strong capital position, stringent risk governance and the country's proactive move of forming trade partnerships and broadening its export markets. All these bodes well for the banking sector going forward. OCBC Bank (M) Bhd chief risk officer Priya Ranjan Sharma told StarBiz the banking sector continues to face headwinds this year, driven by persistent geopolitical tensions and the possibility of 25% reciprocal tariffs imposed by the United States. The tariffs would take effect on Aug 1. 'These developments, particularly the strained trade relations between China, the United States, and its regional partners, pose risks to supply chain stability and investor sentiment. Given the importance of United States as a trading partner to Malaysia, the tariffs may impact export volumes and revenues, placing pressure on the broader economy. 'Malaysia's strategic role in the China+1 supply chain diversification offers some resilience. 'The government is actively working to diversify export markets and stimulate domestic investment and consumption to cushion the impact. 'Structural reforms and increased public infrastructure spending are expected to support growth, though at a more moderate pace, with gross domestic product projections revised downwards,' he said. Despite these challenges, Ranjan Sharma said Malaysia's banking sector remains fundamentally sound. Banks are well-capitalised and maintain diversified portfolios which helps limit systemic risk and ensures continued financial stability in the face of external pressures, he noted. UCSI University Malaysia associate professor of finance and Centre for Market Education research fellow Liew Chee Yoong UCSI University Malaysia associate professor of finance and Centre for Market Education research fellow Liew Chee Yoong said the local banking sector is expected to face moderate indirect pressures this year from elevated US tariffs and geopolitical tensions, though systemic resilience should prevent severe disruption. He said while recent US reciprocal tariffs (targeting solar cells and semiconductors) have limited direct impact on core banking activities, secondary effects could materialise through supply chain friction and reduced business confidence. Liew said export-oriented industries, particularly electronics and commodities may experience weakened demand, potentially elevating credit risks for banks' corporate portfolios. 'Concurrently, escalating South China Sea tensions and US-China tech decoupling could disrupt regional trade flows and investment. 'Nevertheless, the banking sector's robust capital adequacy level with common equity tier-1 capital ratios of about 15%, stringent risk governance, and Malaysia's diversified trade partnerships should mitigate material deterioration. 'Banks remain well-positioned to absorb shocks, though vigilance toward trade finance non-performing loans and working capital stress in vulnerable sectors is warranted,' he said. In terms of loan growth for this year, Ranjan Sharma expects loan growth to remain resilient. Growth drivers such as ongoing infrastructure developments and strategic investment initiatives like the Johor-Singapore Special Economic Zone could help support demand, he said. On the consumer side, he said loan growth is projected to stay steady, underpinned by stable employment conditions and consistent income levels. Liew said loan growth is projected to moderate to between 4% and 5% this year, down from 5.5% last year, with business loans emerging as the primary engine of growth. He said net interest margins (NIMs) are anticipated to stabilise or edge marginally higher by 0.5 basis points (bps) this year after compression last year, contingent on deposit competition easing and monetary policy adjustments. 'However, a potential 25bps overnight policy rate (OPR) cut in the later part of the year could reintroduce NIM volatility, initially compressing yields on variable-rate loans before lower funding costs provide offsetting relief. 'Strategic repricing of loans and proactive liquidity management will be critical for banks to defend margins. 'Overall, NIM trends will remain range-bound, lacking significant upward momentum but avoiding steep deterioration,' Liew noted. A bank's NIM is a key profitability indicator that reflects the difference between the interest income a bank earns from loans and the interest it pays on deposits. A wider NIM indicates higher earnings for banks. Ranjan Sharma said NIM across the banking sector is expected to experience some compression following the recent cut in the OPR. He said additional pressure may arise from heightened competition for deposits as institutions seek to maintain funding stability. Furthermore, slower global trade, driven by escalating tariffs and geopolitical tensions, could weigh on sector performance, he noted. In particular, he said higher US reciprocal tariffs may dampen loan growth in export-oriented industries, adding to the cautious outlook. Bank Negara lowered the OPR by 25bps to 2.75% on July 9, describing the decision as a pre-emptive move to secure economic growth. On profitability, Liew said: 'The Malaysian banking sector's profitability in 2025 is projected to remain resilient, with return on equity stabilising at 10% to 11%, marginally below 2024 levels but reflective of disciplined adaptation to external headwinds. 'This stability will be anchored by three synergistic pillars: diversified revenue streams, operational efficiency, and prudent risk management. 'Non-interest income particularly from wealth management (amplified by the EPF Account 3 rollout), digital transaction fees, and capital market activities will counterbalance potential NIM compression.' RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching said the OPR rate cut will transmit fairly quickly into the real economy, easing household and business finance expenditures. This may limit the rise of impaired loans within marginal segments in the near term, she said. 'That said, asset quality remains sound and is not a major concern, with the banking system's gross impaired loan ratio expected to come in at 1.50% as of the end of this year (end-May: 1.45%). 'Considering uncertainties on the horizon, the banking system will likely experience moderating loan growth this year relative to last year. The five months annualised loan growth for this year stood at 3.5%, compared with 5.5% last year. 'Banks are likely to see only a mild impact on their NIM from the OPR cut. The average NIM of eight selected local banks clocked in at 2.06% and 2.04% in last year and 1Q25, respectively,' Wong said. Based on RAM's past discussions with banks, she said most indicated that a 25bps cut typically results in a full-year NIM contraction of about 2bps to 3bps. Wong said the earlier reduction in the Statutory Reserve Requirement from 2% to 1% in May is expected to offer a slight cushion to margins by releasing some funds for redeployment into higher-yielding assets.
The Sun
20-07-2025
- Business
- The Sun
Market forces, not mandates, will decide JS-SEZ's future: CME CEO
PETALING JAYA: The long-term success of the Johor–Singapore Special Economic Zone (JS-SEZ) will depend on how well it aligns with real market demand and supports entrepreneurial innovation, according to Centre for Market Education CEO Dr Carmelo Ferlito. While tax incentives and strategic planning play a role, he cautioned that lasting economic development can only be driven by deeper, structural forces. 'Incentives go in the right direction,' Ferlito said, referring to the JS-SEZ's 5% corporate tax rate and 15% personal income tax rate for knowledge workers. 'But ultimately, the economic structure needs to be strong on its own, not just a will-o'-the-wisp.' Jointly developed by Malaysia and Singapore, the SEZ aims to attract high-value investments and create between 20,000 and 100,000 skilled jobs over the next decade. But Ferlito argued that real job creation must come from entrepreneurial experimentation, not government forecasts. 'It's not about the talent base, which Malaysia already has in abundance. It's about what the market needs,' he said. 'Sustainable employment arises as a response to market signals, not planning. What the market demands can't be predicted – it's discovered through bottom-up entrepreneurial activity.' On the fiscal front, while the SEZ offers aggressive tax breaks to attract investment, Ferlito warned against creating an isolated enclave that strays from national tax coherence. 'A tax system needs to be simple and fair to be effective,' he said. 'A special economic zone cannot function in isolation. For long-term sustainability, the broader tax environment must remain consistent nationwide.' He was also critical of government attempts to steer investment into specific sectors, saying such industrial planning risks distorting the economy. 'Yes,' he replied when asked if there's a risk of inefficiency. 'Investments should be driven by market signals, not government wish lists.' Ferlito further warned against artificially inflating wages through subsidies or interventions, noting that true income growth must come from productivity and competition. 'Avoid intervention,' he advised. 'Let productivity lead.' Reflecting on previous initiatives such as Iskandar Malaysia and the Sijori Growth Triangle, Ferlito said the JS-SEZ appears more coherent and better structured, but stressed that success still depends on the broader business environment. 'It does look better designed and more organically structured,' he said. 'But as I've mentioned, an SEZ cannot succeed in isolation. It needs to be supported by ease of doing business across the country.' On the potential role of Singaporean firms in the SEZ –particularly in areas such as research and development, technology transfer and workforce development – Ferlito reiterated his core principle: let the market lead. 'Let the market decide that,' he said. 'Economic order is an emergent order.' As Malaysia seeks to integrate its economy across borders to future-proof its economy, Ferlito's message is clear: it is the market – not mandates – that must determine the path forward.
The Star
29-06-2025
- Business
- The Star
Experts urge SST delay to ease transition pains
PETALING JAYA: With the expanded Sales and Service Tax (SST) set to take effect tomorrow, economists are calling for a postponement to ensure a smooth transition for businesses and the public amid ongoing adjustments. While there is a need for a clear and stable implementation process for all parties to come on board, they said the government must also manage its spending effectively, facilitating reforms aimed at easing the cost of living. Tunku Abdul Rahman University of Management and Technology Centre for Business and Policy Research chairman Assoc Prof Dr Foo Lee Peng said delaying the expanded SST's implementation would allow both businesses and consumers to adjust their finances. 'A delay on the implementation date to January 2026 could provide greater policy clarity and administrative readiness, especially if aligned with the Budget 2026 announcement in October. 'This would give stakeholders time to adjust systems, pricing and contractual obligations, while ensuring a more consistent rollout. 'This could help businesses better navigate the combined pressures of SST expansion and the compulsory EPF contributions in October for foreign workers, potentially minimising inflationary pressure,' she said. To help manage deferred revenue collection if SST is delayed, Foo said the government could manage this by adjusting its fiscal strategies or enhancing other revenue streams until next year. Economist Carmelo Ferlito said the current planned SST rollout could cause more issues than it solves, especially due to several last-minute announced exemptions. 'A good tax framework needs to be simple and easily understood, but when it is complicated and full of exemptions to navigate, it will likely only add problems rather than act as a solution. 'It seems that what is going on with SST is just adding confusion and therefore compromising its efficiency and creating loopholes that people may be able to exploit,' said Ferlito, who is also Centre for Market Education chief executive officer. He said the government should introduce controls and limitations on its own spending if it wants to ease the cost of living for the people. 'Taxes do not create inflation. Government spending does,' he added. Meanwhile, Sunway University economist Prof Dr Yeah Kim Leng said implementing the expanded SST would likely result in slightly higher prices for consumers and businesses. 'With the planned SST implementation exempting most basic items and essential services, the rise in living costs for low and middle-income families should be capped. 'This means the consumer price index should only see a slight uptick, especially with inflation hovering at 1.9%, unemployment remaining low at 3.1% and growth outlook expected to be moderate,' he said. He added that implementing SST this year would provide the government with a better financial position ahead of a recent global environment fraught with elevated uncertainties. He said an early SST implementation would likely help to reduce the revenue-expenditure gap for this year, increasing the likelihood of the government achieving its 3.8% fiscal deficit target. 'A lower deficit will also result in reduced borrowings, thereby keeping the government's total debts and debt servicing burden in check. 'This improves national fiscal performance, which will then boost investor confidence and shore up the ringgit. 'We must remember that a gradual pace of tax adjustment would always be preferable to a sharp or crisis-driven tax hike,' he added.
The Star
26-05-2025
- Business
- The Star
Removing barriers will hasten integration, say experts
PETALING JAYA: Asean countries must tackle persistent regulatory and financial barriers that continue to hinder regional economic integration, say experts. Economist Geoffrey Williams said there are still many trade barriers among Asean countries, especially for small and medium enterprises (SMEs). 'Asean needs to establish a framework to identify regulatory barriers across all areas. 'This process should systematically remove or harmonise regulations at the lowest cost,' he said when contacted. Williams said there are still many constraints on simple issues, such as setting up businesses, bank accounts, and even payment transfers. 'Harmonising regulations on payment transfers, reducing transaction costs and building common platforms for e-payments is essential,' he said. Asean countries still vary greatly in economic development, political systems, and economic self-interests. This variance, he said, is holding back closer integration. 'Tourism provides a good model because private-sector-driven business models make travel, accommodation and currency exchange easy. 'So integration is not impossible if it is market-driven, but it is proving difficult if it is government-driven,' he explained. He said Asean can follow a market-driven integration model using technology platforms and e-commerce which avoids brick-and-mortar business models and moves online. 'An Asean-wide digital nomad visa would be a good idea and would be attractive for the region as a whole while reducing competition between countries. 'Another Asean-wide entrepreneur visa would also be helpful in reducing costs, especially for the non-Asean business community. 'This would allow foreign investors to move easily around the 10 member states,' he argued. Centre for Market Education chief executive officer Carmelo Ferlito said going cashless can become a burden if a person needs to have a different app in each country. 'I travel often to Indonesia, and I struggled with their cashless system, which must be linked to a local bank. 'So I think having more integration is good, but in reality, it is better to increase options rather than reducing them,' said the economist. At a special media briefing on May 21, Prime Minister Datuk Seri Anwar Ibrahim outlined a strategic vision for Asean's next phase of growth. Under Malaysia's Asean chairmanship this year, he emphasized stronger economic integration, trade expansion, and cross-border energy connectivity as key pillars.
