Luncheon Address


YBhg Datuk Ranjit Ajit Singh
Managing Director, Securities Commission Malaysia

at the

The 14th Malaysian Capital Market Summit 2009

Reinvigorating the Capital Market – The Way Forward

3 December 2009

Renaissance Hotel, Kuala Lumpur

Distinguished guests, ladies and gentlemen


A very good afternoon. I am pleased and honored to be here this afternoon and I thank ASLI for inviting me to present this special luncheon address. I must commend ASLI for putting together what looks to be an excellent lineup of speakers and participants at this annual capital market conference which is now in its 14th year. The relevance of this year’s conference takes on added significance against the backdrop of where we have been over the past 18 months and where we stand today, gazing out across the horizon on what lies ahead.


We have just seen the worst financial crisis in 70 years and although there is considerable consensus that the worst is over there are still varying views on the trajectory of recovery. And as we have seen with events in Dubai over the past week, the repercussions of the GFC continue to be felt, underscoring the points being made by the IMF recently that “the risk of an adverse feedback loop between the real and financial sectors still remains within the system”.


However, capital markets in Asia including ours have demonstrated a much greater degree of resilience and have remained relatively unscathed. Asian share of global capital markets continues to expand, making up about 31% as of 2009, from 21% in 2003. Equity markets in Asia have gained more than 30% since the end of 2008, representing a stronger comeback than the mature economies, and one that reflects stronger underlying GDP growth.


The question that I have been tasked to address is what needs to be done to reinvigorate the capital market, and what is the way forward?


This question is particularly interesting for a developing nation like ours, as we aim to strike the balance between developing the markets and avoiding the buildup of excesses that we have seen happen even in some developed markets.


For emerging markets like ours, as we aim towards achieving developed status by 2020, much thought needs to be put into developing our capital markets going forward and to keep in mind the merits of financial deepening. Well developed capital markets play a critical role in financing economic activity and for capital formation. Capital markets also have a key role in facilitating risk transfers. Our efforts in Malaysia guided by strategic plans like the CMP and other strategic initiatives have focused on achieving the objective of developing a broad based and deep capital market underpinned by a sound and robust regulatory and market infrastructure.

Developments in reinvigorating the Capital Market


In assessing where our capital market stands today we must be careful not to view it purely from a stock market angle which unfortunately has been a tendency among some commentators. Over the course of the past decade, we have been able to develop a broad based capital market that has become an important player within the regional and in some segments global landscape. We have an internationally benchmarked regulatory infrastructure that has been assessed to be highly compliant with international standards. Our investor protection framework has been rated consistently by the World Bank as being among the top four in the world. And we have made significant strides in developing the corporate governance framework across many different segments. Our bond markets have grown significantly over the past ten years and we now have the third largest bond market in Asia after Japan and Korea on a GDP adjusted basis. We have the largest unit trust industry in ASEAN and a fund management industry that’s been the fastest growing segment of our capital market over the past few years. We have in place a derivatives market with a strong global niche in palm oil futures.


We have established an increasingly international profile to our markets. We have actively driven regional integration efforts, including having in place cross-border mutual recognition arrangements with regional financial centers. Our trading infrastructure for equity and bond markets is based on world class technology solutions and includes features such as direct market access and market making.


Our market intermediaries have also developed strong competitive business models that have played a key part in the growth of the domestic capital markets and some among them have established strong regional presence. They are also operating with strong balance sheets and much higher standards of risk management and compliance as evidenced by their resilience during the global financial crisis.


We have become an important source of fund raising for both domestic and international institutions and firms. World Bank, ADB, IFC among others have raised funds through our bond markets and we have seen foreign companies seek both primary and secondary listings on our exchange.


We have attracted significant foreign direct investments into our capital markets. Over the course of the last few years some of the world’s leading investment banks, brokers and fund managers have established operations in Malaysia. They have contributed towards the growth and development of the domestic capital market, been a source of employment and training for Malaysians and worked with both regulators and local institutions in bringing some of their familiarity with products and markets onshore.


And of course as we are all aware, we have developed a globally recognized and broad based Islamic financial system with leading Islamic banks, fund managers, world’s largest number of Islamic funds and sukuk issuances.


Assessing across a range of market characteristics the FTSE index classification team has placed Malaysia on watch to upgrade into an advanced emerging market. In a survey conducted by the City of London in March 2009 in its Global Financial Centres index, Kuala Lumpur is ranked higher then Bangkok, Mumbai and Beijing.


All this has been driven by the combined efforts of strong government support, sequenced de-regulation and liberalization efforts and key macro and micro financial system reforms. It has also been enhanced by the stability of the market relative to other financial market centres.

Challenges that lie ahead and future efforts


However, we do have some major challenges ahead. The competitive landscape around us continues to intensify. We have seen the growth in markets like China, India and Korea impact our weighting in global equity benchmark indices. We have to work a lot harder in attracting portfolio investment flows given the investment choices available to investors in the high growth markets. Therefore targeted and consistent marketing and promotion efforts are going to be critical including having more reverse investment road shows. Our companies must be able to deliver strong and sustainable performance that will justify the valuation premiums that Malaysia still seems to show.


We also need to further deepen liquidity in some segments of the capital market. Trading velocity in the stock and derivatives markets still remain relatively low and efforts are being made by Bursa Malaysia towards looking at ways in which there will be higher trading levels on the exchange. This also includes ways in which we can attract greater retail participation into our markets, particularly new investors that not have been trading in the market for a long time or are new entrants.


As is evident, our efforts are focused at developing the buy side. In doing so developing the fund management industry is going to be a critical dimension. Through efforts made over the last few years, we have moved through a series of policy changes towards developing what has been described by the recent Cerulli report as “one of the more exciting mutual fund marketplace for fund managers” and “a more attractive marketplace for fund managers”. Easing restrictions on foreign investment limits to 50 per cent for conventional and 100 per cent for Islamic fund managers has acted as an important catalyst for product development and offering of greater investment choices for investors. Efforts at widening distribution channels to include institutional agents, financial planners as well as on-line fund supermarkets have enhanced customer reach and contributed to the overall growth within the industry.


The liberalization initiatives announced including the recent measures announced by the Prime Minister in June this year has had a strong response with major international names applying to set-up operations in Malaysia. The initiatives at developing the Islamic fund management business in particular have had strong interest. Leading global names have established their global Islamic fund management hubs in Malaysia. The government’s tax and other incentives have led to 10 Islamic fund management companies being approved by the SC to operate in Malaysia.


We will have to continue to enhance the quality of listed companies on the exchange. On August 3, 2009 the new Unified Board and the ACE Market were launched marking an important milestone for the development of the equity fund-raising market in Malaysia. This new structure is designed to make Bursa Malaysia a more attractive listing venue and to enhance competitiveness and efficiency in the Malaysian capital market by streamlining rules and processes in order to provide greater certainty, shorter time-to-market and lower regulatory costs. The enhanced framework also facilitates foreign listings by assimilating the requirements for domestic and foreign companies. The listings of the first three foreign companies in Malaysia and growing pipeline of foreign applications illustrates the attractiveness of the market as a listing destination. In addition, Bursa Malaysia has taken on a more active role as the frontline regulator for secondary equity fund-raisings, also aimed at increasing efficiency of the market.


The development of the equity market has also been accompanied by the transformation of the bond market. Growing demand for long term financing requirements by the private sector has led to the rapid development of the debt securities and sukuk market.


A few factors will be important in boosting the bond market in the near future. We have already begun to see signs of the economy picking up from recent Government stimulus policies. As a result, growing companies that are in need to raise funds will increasingly look to the bond market for funding. Investors have also proven to be enthusiastic for the relative safety of bonds that offer equity-like returns.


The strength of the domestic market also provides a strong foundatiomn to explore new growth opportunities through internationalization. The facilitative tax environment -where corporate and sukuk issuances approved by the SC are exempted from withholding provides a conducive environment to attract foreign issuance, listing an d investments. We have already seen stromng interest in foreign investments in Malaysian bonds to RM 48 billion at end September 09 from RM 11.6 billion in 2004.


Part of growth in the bond markets to date has been spurred by the growing interest in sukuk, an area of Malaysia’s competitive advantage, being the largest issuer with 62% of world’s outstanding sukuk having originated in Malaysia. We can further leverage our position in Islamic finance and expect further growth in the sukuk market with the enhancement of regulatory framework governing issuance of foreign currency sukuk, attractive tax incentives for investors, and the approval of new Islamic fund management companies to strengthen the position of the Islamic Capital Markets.


As we focus on the development efforts for the capital market we are mindful of the need to continue to maintain a strong regulatory framework with proper oversight of the market place. There are some important lesson arising out of the global financial crisis that have shown some areas for greater vigilance and strengthening.


Ladies and gentlemen,


Let me conclude by saying in developing and regulating our capital market we are constantly having to balance several sometimes conflicting and competing demands. However, in our efforts we believe engagement and feedback from all stakeholders in our markets are critical and an open and transparent process of policy formulation imperative. That’s why you see the SC coming out with consultation drafts and engaging widely. We believe our collective efforts will lead us to achieving our desired goal of a fully developed capital market. There is still much room for improvement and growth, and we believe conferences, such as these can provide the platform for debates and interactions that will catalyse new ideas and spur us to achieve new heights.


Thank you for your kind attention.