Special Address by
YBhg Datin Zarinah Anwar
Deputy Chief Executive, Securities Commission

Malaysian Capital Market Summit
Asian Strategy & Leadership Institute (ASLI)
28 September 2004

The Role of the Capital Market
in Accelerating the Shift Towards
a Higher Value-Added Economy

Ladies and Gentlemen:

I would like to thank the organisers for inviting me here to deliver this special address. This is a timely occasion given the recent Budget 2005 speech that clearly outlined a key role for the Malaysian capital market in accelerating the shift towards a higher value-added economy.

My intention today is to provide a perspective on the opportunities being created for Malaysia by a changing international economic landscape, to examine the developmental strategies for the capital market and to discuss the critical mindset changes that are necessary for the Malaysian capital market to climb up the value-added ladder.

Unlocking the growth potential of the services sector

First, I would like to start by exploring the broader opportunities for economic growth that are opening up to Malaysia as changes take place in the global and regional landscape. Malaysia’s achievements today – as reflected by its transformation from a largely resource-based to a manufacturing economy – have come about from its ability to capitalise on global opportunities over the past two decades.

The World Bank recently ranked Malaysia as 3 rd among global exporting nations and 7 th among importing nations. Malaysia indeed has one of the most open economies in the world – our trade in goods is equivalent to 182.4% of nominal GDP, the 4 th highest in the world1.

These successes have come about as a result of the government’s foresight in leveraging on the country’s comparative advantages such as low costs, particularly of infrastructure, the strength of the labour force, an attractive business environment and high levels of global integration.

On hindsight, the timing was quite fortuitous in terms of exploiting the window of opportunity. It would be more difficult to replicate the past successes in the current environment as competition for foreign direct investment has intensified substantially. Apart from the likes of China and India, the former Eastern European countries and even developed countries now routinely offer substantial incentives to attract foreign direct investments.

The challenge facing Malaysia now is to move up the value-added ladder. In this respect, the key is to unlock the full potential of its services sector. This is already occurring in education and tourism. The Budget 2005 strategy has clearly outlined a central role for the capital market to assist in accelerating the shift to a value-added economy.

Regional growth opportunities for the Malaysian capital market

Ladies and gentlemen

It is important to be alert to developments on the horizon beyond our boundaries. As demonstrated in the past, Malaysia has the agility and the ability to adapt quickly to changing circumstances and to capitalise on opportunities in a timely and decisive fashion.

From a regional perspective, one of the more critical structural developments in driving Asian economic growth has been the rising importance of intra-regional trade. Trade between member countries makes up about a quarter of ASEAN’s total trade compared with 16% 15 years ago. CLSA Asia Pacific projects that intra-regional trade is expected to double every six years while trade with China could double every four years. This is a critical development in that it provides a new growth avenue for Asian countries, which would offset the risk of any slack in trade with conventional partners arising from their aging demographics.

In Asia, a rapidly expanding middle class, rising consumer wealth and sophistication, and the emergence of Asian conglomerates and brand names will create spin-off benefits for the services sectors. Arising from these trends, capital markets and their intermediaries will need to enhance their ability to re-cycle the capital or savings accumulated from the region’s export surpluses to meet the funding requirements of the region’s corporations who would be seeking to expand their operations in tandem with growth prospects.

The potential economic growth will therefore translate into exciting prospects ahead for the domestic capital markets in the region. Just taking the example of the two Asian giants, over an eight-year period the combined market capitalisation of the Shanghai and Shenzhen stock exchanges increased 12-fold from USD42 billion to USD513 billion. During that same period, the capitalisation of the Indian stock market doubled in size from USD263 billion to USD532 billion2.

While individual countries within ASEAN tend to be overshadowed by India and China, there are advantages of thinking of ASEAN as a combined market. ASEAN offers a population of 545 million people, surpassing that of North America, South America and the Middle East regions3. The size of ASEAN’s consumer market is estimated at US$330 billion, which is bigger than any other market in Asia except China4.

ASEAN is strong in the trade sector, which accounts for nearly 15% of global exports. However, this strength is not reflected in its capital markets, which only forms 1.6% of global market capitalization. This disproportionate representation reflects that capital markets within the region generally have not yet achieved their full potential and that combined efforts are required if this potential is to be realised. Currently, there is strong support for increasing collaboration between Asean capital markets to develop ASEAN as a more significant investment destination.

How these will translate into growth opportunities within a cross-border context is the next challenge to be addressed. Typically, strong growth rates within a region will be naturally followed by increased cross-border investments, M&A activities and collaboration. It is important that the cross-border collaboration be extended at the level of intermediaries and exchanges as well. For example, the more mature markets of Hong Kong and Singapore have tapped into China PLCs as a strategy to sustain listings and market capitalisation growth.

These developments and initiatives open up significant opportunities for the region’s capital market players but the window of opportunity will be narrow. Malaysia’s capital market players must leverage on the strengths of its economic position and infrastructure to access growth opportunities outside its borders quickly so as to establish vantage points on the value chain for regional capital market services.

Shifting into the value-added phase of capital market development

Ladies and gentlemen

It was in anticipation of these changes in the landscape that the Capital Market Masterplan (CMP) was developed. This 10-year blueprint, which was launched in February 2001, charted an orderly and managed transition with a vision that Malaysia would evolve into an internationally competitive capital market.

The first three years of the plan were focused on establishing a governance and regulatory framework which would ensure high levels of market integrity, build prudential standards and diversify market sources of financing to ensure system stability and resilience. Efforts were also directed into strengthening infrastructure and processes to ensure high levels of efficiency – all benchmarked against international standards. The foundation-building phase is complete.

The agenda for our current challenge is reflected in our focus on three priority areas: namely enhancing liquidity, value creation and global networks. These goals have a high value-added content. Their achievement requires fostering a conducive environment to facilitate a shifting of the engine of growth to the private sector.

The Budget 2005 strategy recognises the need to create the necessary momentum to manage a strategic shift in the development of the capital market. Foreign participation in the capital market will add diversity to our financial landscape, accelerate the introduction of new products and services, create opportunities for collaboration with local players to expand our reach in international markets.

It is also recognised that there is a need to attract human capital which is critical to strengthening our distribution and business networking capabilities as well as to ensure the transfer of skills to enable us to build our talent pool.

In shifting to the next phase of capital market development, the needs of an increasingly important stakeholder must be taken into account – that is the Malaysian investor. Malaysia ranks among those countries with a very high savings rate. In 2004, it is estimated that gross national savings (GNS) for the year is RM140 billion or a GNS ratio of 35.8%. The high savings rate on the back of sustained high economic growth has resulted in a strong build-up in the accumulated wealth of Malaysian individuals.

As at the end of 2003, total assets of the investment management industry, including the Employees Provident Fund (EPF) totalled RM430.7 billion – a rise of 37% from end-2000. This is additional to the RM180 billion of savings and fixed deposits held by individuals in the banking system. Given these significant assets, it is only fair that Malaysian investors should have access to high-quality investible products which are capable of generating attractive returns. Capital market intermediaries must continue to enhance and expand their range and quality of offerings to meet the expectations of Malaysian investors for world-class products and services.

Leveraging on our strengths

Malaysia currently operates from a position of strength. It is highly cost competitive and is regarded as the 3rd most attractive destination for offshore location and 7th for foreign direct investments. It has a sound regulatory framework which is regarded as among the best in Asia and compatible with international benchmarks. The capital market is highly developed and it is the leading stockmarket in ASEAN in terms of market capitalization of domestic companies and number of companies.

The bond market is among the largest in emerging markets; we have a rapidly growing fund management industry and an internationally-recognised Islamic capital market.

We need now to do much more and seek ways to expand our franchise beyond our borders, as this would multiply the value of the individual market segments substantially and that of the capital market overall. But this cannot be achieved working in isolation in a purely domestic environment. Success will come from working with international partners and developing cross-border collaboration; leveraging on our collective strengths to expand the share of the pie. For example, enhancing the value of Malaysia’s ICM requires the creation of a strong network connecting multiple players in different global centres. Within this, Malaysian Islamic capital market intermediaries must seek to build core competences either in deal origination, distribution and liquidity management capabilities in relation to ICM products.

Cultural aspects of managing the shift

The Prime Minister, YAB Dato’ Seri Abdullah Ahmad Badawi has said that:

The malaise affecting Malaysia that may well jeopardise our way forward is a case of having first world infrastructure and third world mentality “.

In making the next leap, the mindset change is acutely important in ensuring international competitiveness. Let me highlight two such areas of importance.

(1) Corporate Governance

Investigative audits and the SC’s surveillance and investigation efforts have shown that the losses suffered by PN4 companies were not caused by economic conditions, but largely by mismanagement, fraud, and other unethical practices. This underlines the need to foster a strong corporate governance culture because weaknesses in the ethos of corporate governance undermine confidence in the market, causing investors to flee. While the SC is stepping up its supervision and enforcement efforts, and enhancing capacity to ensure greater effectiveness in enforcement, it must be recognised that the burden for maintaining high standards of corporate governance cannot rest solely on the shoulders of the regulators. Eventually, we must rely on market mechanisms, and not the regulators, as the first line of defence.

Corporate governance must start in the boardroom. Corporate governance depends on ethics and integrity; in other words, self-discipline. When a company raises funds from the public, it has a duty to manage such funds diligently and honestly and directors and management must account for the manner in which funds entrusted to them have been utilised.

But while integrity and honesty is demanded of every level of the organisation, ultimately it is the CEO who must set the tone by role modelling and communicating the right values across the organisation. Against the background of the major corporate scandals in the USA in recent years, the Federal Reserve Chairman, Alan Greenspan, commented: ” I’ve become acutely aware of how crucial the issue of what the CEO believes and does is to governance.the fulcrum of governance is the chief executive officer .”

Clearly, o ne of the main challenges in the corporate governance agenda is effecting a change in the mindset of company directors and management, led by the CEO. For those who perceive the increased disclosures and responsibilities as merely adding costs to business, the task can appear burdensome. Fortunately there are also those who appreciate that a modern corporation is subject to high levels of public scrutiny and see these as tools for enhancing shareholder value and for building brand premiums for their companies as quality investments.

On the same score, it is important that investors play a role in exerting pressure on companies to link the objectives of their key business processes to the creation of long-term value. There are two aspects to this. Firstly, m arket discipline should provide economic incentives and disincentives for companies to conduct their business in a sound and efficient manner. Thus the market’s assessment of corporate performance would be reflected in stock prices, bond spreads and credit ratings.

Secondly, for markets to work their discipline, shareholders need to be active not passive. Institutional investors in particular have the ability, and indeed, the responsibility to bring management to task for failure to manage and govern properly. A mature and activist shareholding population is a powerful influence in ensuring appropriate corporate conduct.

(2) Performance-oriented culture

Ladies and Gentlemen

Let me now say a few words on a performance-oriented culture in the context of building a competitive market. The Prime Minister has intimated his desire to see Malaysia’s corporate stewards transformed into “professional managers with a strong focus on high performance and superior value creation”. This has been backed by policy initiatives to create a performance-based culture through the use of key performance indicators or KPIs, the introduction of performance-linked compensation and contracts for senior management of government-linked corporations (GLCs).

Such practices should be emulated by other public-listed companies. Value creation and superior performance should be embedded into their corporate culture. Companies should set stretched performance targets, benchmarked against the best in the business. This means zero tolerance for non-performance, be they of assets, product lines, or even management! Malaysian companies must embrace and live up to international expectations if we are to be globally competitive.

It is estimated that Malaysia’s average ROE since 1998 is 9.5%, compared to 20% for India, 13.5% for Singapore and 11% for Taiwan. 5Focusing on absolute performance alone is therefore inadequate as capital will migrate to where returns are highest. It is only when we measure ourselves against the world’s best, can the true value of our performance be determined. And only when we are able to match or exceed such performance can we induce investor confidence and elevate the reputation of Malaysian companies and the capital market.

The shift to a performance-based culture needs to be accompanied by greater emphasis on systemic development of human capital and talent management. This is true for the capital market which is essentially a knowledge business. It is necessary therefore to develop a hub of intellectual capital to promote innovation and drive the growth of the capital market.


Ladies and gentlemen

Ultimately it is the customers that will shape and determine the future of the capital market. In the case of Asia, it will be the rising wealth and sophistication of consumers that will create the opportunities for the future of regional capital markets and their intermediaries. But the bar for performance will be raised as consumers will settle only for the best. In this context, it is essential that efforts be intensified to enhance the preparedness of the Malaysian capital market to exploit these opportunities. Commitment, resilience and urgency are the pre-requisites for success.

Thank you.

Members of the Press may contact the Corporate Affairs Department at tel no.03-62048362 (Mariena Abdul Malek) / 03-62048372 (Fazidah Zakaria) / 03-62048164 (Karen Michele De Cruz) or fax no.: 03-62015078 or e-mail:cau@seccom.com.my.

1World Bank: World Development Indicators Database for 2002.

2Source: S&P Global Stock Markets Factbook 2003, World Federation of Exchanges, SEBI, BSE. Data as at end-2003.

3 CLSA Asia Pacific Markets : ASEAN Strategy, Tigers Bite Back: Why FDI will flow back to Southeast Asia, August 2004.

4 McKinsey estimate.

5 Source: Figures obtained from data sourced from Thomson Financial Datastream for the period 1998 – 2003.