What is the scope of Ernst & Young’s operations in Malaysia?
RASHID: In Malaysia, we are a professional services firm. We have four service offerings: audit, tax, advisory and transaction advisory, so we are not just an audit and tax firm, as most people think we are. In the other parts of our services, we focus on the economic changes happening in Malaysia right now. We are very proud to be involved in a number of the key government-related initiatives in Malaysia. One is Iskandar, located at the southern end of the peninsula, a huge green field that Malaysia is looking to develop into a bustling economic zone. We have been involved in various parts of the project from the beginning, in terms of managing certain implementation efforts, tax advisory, and also assurance and other services. Secondly, we are very involved in talent management; it’s one of the biggest issues in the country right now. The government set up Talent Corporation and we have been involved in advising and formulating their road map, as well as assisting in program management. Third, which I think is the key one worth mentioning, is the Economic Transformation Programme. We had a conference that we arranged with the government agency called PEMANDU (Performance Management and Delivery Unit), which runs the Economic Transformation Programme, or ETP. We brought our clients in front of the CEO Minister who runs PEMANDU. The whole theme of the event was around decoding the DNA of the ETP, or bringing ideas to fruition, and basically helping bring together the government agencies and the private sector to see how both can work together better in achieving the ETP’s goals for the country.
What are the best opportunities for FDI in Malaysia today? What are Malaysia’s most important National Key Economic Areas (NKEAs) at present?
RASHID: That’s a very difficult question actually because it really depends on which sector of the twelve NKEAs you are most involved in. So any foreign organization coming into the country should look to the twelve NKEAs, which include agriculture, communication and oil and gas. These are the areas where FDI will be most useful, because there are infrastructure and framework around facilitating investments into those twelve key areas. PEMANDU, other than promoting those twelve NKEAs, is also looking at strategic reform initiatives to improve government machinery and facilitate investments.
Malaysia ranks very highly on the World Bank’s Ease of Doing Business Report at number 18 overall – a major improvement over 23rd in 2011. However, it ranks lower in several categories including dealing with construction permits, registering property, resolving insolvency, getting electricity, and starting a business. What needs to be done to improve these areas specifically?
RASHID: The key areas, or the improvements required, relate to government service and civil service. It shows that those are the areas most in need of improvement, and it relates very much to the Six Strategic Reform Initiatives that have been identified as part of the Government Transformation Programme. I think that if I were to categorize this broadly, one would be improving the culture of excellence within the government service, and making sure that we always provide excellent service to the people and to businesses. There needs to be continuous improvement in the collaboration between the private and the public sectors, and that is something the ETP is focused on as well; the government being the facilitator, and the private sector coming in with investments. Also I think technology could be leveraged much better. It is a journey and it is going to be quite a while before we achieve that, but we have started, and the most important thing to me is the government is aware. In any transformation, self-awareness is important.
According to the World Economic Forum’s Global Competitiveness Report, as it moves toward becoming more innovation-driven, Malaysia will need to improve its performance in education and technological readiness. In the latter dimension, the country places a low 44th, with room for improvement in technological adoption by both businesses and the population at large. How can business improve technological readiness? In what ways does this deficiency create opportunity?
RASHID: The economic report highlighted two of those areas, education and technological readiness, but when I had a look at what “technological readiness” meant in terms of the report, it was coverage in use of high-speed broadband. Malaysia is, comparatively within the Southeast Asia region, a pretty large country and diverse in the way that it is located. There is the peninsula and also part of the Borneo Island. So if the report measures technological readiness in terms of the reach of high-speed broadband and the use of Internet, I think it will take us quite a bit of time to reach a high level. I think the other question is education, which is one area that most will agree we must focus our efforts on improving the most. Traditionally, the country has invested substantially in education, until around 1997 or 1998 when the Asian financial crisis began. For example, I am one of those people who benefitted from that investment. I am one of the government scholars who were given the opportunity to pursue tertiary and professional education. This is one of the investments the government and private institutions need to make, as this is an area that the country is lacking if we want to move into an innovation-driven economy. Most of the corporate captains in Malaysia, some of whom are my peers, have benefitted from these policies in the past. If we had continued that push around 1997 and 1998, then we probably would have been able to bring the next generation forward. We need to continue to produce talent in this country, and nurture the right skills in the right people to move toward this innovation-driven economy, so that there is a higher appreciation of the need for technological readiness in this country.
PwC Malaysia recently stated that, “Traditionally, we look at bank consolidation, but now modern bankers are looking at game-changing strategies, whereby acquiring or collaborating with companies that can complement their business.” How are these strategies different or more modern than typical M&A activity? What game changers are expected in the near future?
RASHID: Compared to many years ago, when Malaysia was a hot market for equities, it has slowed down for various reasons. If you look at the financial services sector specifically, we just produced a publication called “Global Banking Outlook 2012-2013,” and personally I am very interested in it. The survey’s findings captured important ingredients that are coming out of the economy in both the Western world and the Eastern world. M&A may not be the answer for everything anymore because capital is no longer cheap, and regulatory capital requirements are stricter. So banks will be looking for different ways of finding revenue. Wealth management is a growing sector in the East and West; it is becoming a booming industry in Malaysia. Additionally, banks are not looking at partnerships with financial service industries. They are also looking at partnerships with others such as telecommunication companies, and other different sources for generating revenue. The changing of the game is no longer about mergers and acquisitions, but partnering with non-traditional players in the financial services industry; partly driven by regulatory changes, partly driven by scarcity in capital, and partly driven by the needs of shareholders. After the global financial crisis, there was a phenomenon called “de-globalization,” especially among the larger global banks. They are leaving the East because they fear their returns will not be met, and this is creating opportunities for regional banks to take their places. Malaysian banks are moving into the region because they can see now that space has been created.
Ernst & Young thinks that Malaysia will hit somewhere between 4-5%, and that a lot of it will be driven by private, domestic demand in the country. There will be challenges in the global economy, especially in the Eurozone as there are a lot of uncertainties around that area. Malaysia is a much more export-oriented country now than before, so we rely on the export market. If we cannot sustain that, and the export market is also very uncertain, then we will get into a bit of a problem.
What major taxation and/or compliance requirements should foreign investors be aware of before entering the Malaysian market?
RASHID: Post-Malaysian independence, I think our tax regime is very structured; we have an established framework governed by rules of law. There are no issues about informality in terms of tax regime and foreign investment coming in. It is very much in line in terms of international standards anyway, so I don’t see any problems in terms of compliance for investors. We also have a lot of tax incentives for foreign investors, provided either by industries or geographic regions. That is how FDI was encouraged into the country over the last ten or fifteen years; through tax holidays for certain industries, the electronic industry, for example. Toward the latter part of recent years, we have moved into what is called “economic corridors” and one of the incentives given is certain tax holidays for investors by region. There are also government agencies that are dedicated to promoting incoming investments. One of the NKEAs, called Invest KL, promotes foreign corporations setting up business services within the country. Ernst & Young is very much involved with this. We are producing survey publications around Invest KL to help foreign investors, and we are hoping to work with them to introduce certain tax incentives very specific to promoting business services set up in the area of greater Kuala Lumpur.
What is your general economic outlook for Malaysia? Which indicators are showing the most positive trends and which remain the greatest challenges?
RASHID: I think we were used to growing at 8% or more in the 1990s; 2011 was around 4% or 5%, and our estimated growth for 2012 is around 4%. Ernst & Young produces a report called Rapid Growth Markets Forecast, and one of the countries we always look at is Malaysia. Ernst & Young thinks that Malaysia will hit somewhere between 4-5%, and that a lot of it will be driven by private, domestic demand in the country. There will be challenges in the global economy, especially in the Eurozone as there are a lot of uncertainties around that area. Malaysia is a much more export-oriented country now than before, so we rely on the export market. If we cannot sustain that, and the export market is also very uncertain, then we will get into a bit of a problem. I think that medium to long-term, you will probably be looking at international issues, like the Eurozone and the US market and so on, and whatever happens there will decide where we are going. The other issue is talent retention. Brain drain is an issue and nobody can deny that Malaysia is losing a lot of talent, but we are doing a lot to promote retention and to make sure that young talent is present to aid the innovation-driven economy. So, medium to long term, those two are probably the key challenges. In the shorter term, we are in a politically uncertain phase, or “election overhang”, and a lot of decisions now are being deferred or delayed until it is clear when the election is going to happen and whether there will be a new government in the country. I think that does have an impact over the shorter term, and from now until March 2013, the latest election date, I wouldn’t be surprised if there were certain foreign organizations and institutions looking at the country who say, “Let’s wait until the results of the next general election before we decide what we want to do next,” because they may be impacted differently by the new government’s public policies.