It gives me great pleasure to participate in this annual event, and to be given the opportunity to share my thoughts on what it takes to generate sustainable growth in the Malaysian capital market. The topic is a significant one at this juncture, for a reassessment of the issues involved to ensure that our strategy is consistent with the needs of the country, and in tune with global investor sentiment.
2002 has seen tentative growth in the capital market
Ladies and Gentlemen,
1. The improved economic outlook and recent progress in corporate restructuring has lifted the Malaysian capital market this year. The Kuala Lumpur Composite Index (KLCI) has risen and has remained relatively resilient amid sharp declines in global markets. We've seen two large IPOs being brought to market, quite successfully, in the past month. The ringgit bond market has continued to grow. Although issuance was slow in the first half of the year, several large issues in the pipeline promise to bring issuance to the record levels seen in 2001. Foreign investment appears to be gradually returning, accompanied by more positive comments in the foreign press about Malaysia.
2. All these signs of resumed growth are very encouraging. The question is, what do we do to ensure that growth is sustainable over the long-term?
We need to be competitive
3. In order to attract the necessary order-flows crucial for further development, we need to be competitive, to maintain an edge over other markets. As market participants, all of you know that we have to lower costs, increase productivity and move up the quality curve in terms of products and services in order to compete. To attract investors and thus lower funding costs for companies, we need deeper and broader markets. We need strong and effective market intermediaries. We need an efficient trading environment with competitive costs.
4. All this is set out in the Capital Market Master Plan. Released in February 2001, the implementation progress is well on track. Out of the total 152 recommendations in the Master Plan, 18, or 12% of the total, have been implemented, while another 26, or 17% of the total, are under various stages of implementation.
We need to increase market liquidity via cross-border alliances
Ladies and Gentlemen,
5. It is increasingly clear that efficiency is not sufficient to attract quality issuers and investors. Issuers and investors are placing a growing premium on liquidity. Companies raising funds seek liquid markets, which attract investors and lower the cost of borrowing. This is why technology companies worldwide aspire to be listed on Nasdaq. Investors in turn seek liquid markets, because in rapidly changing conditions, the ability to move in and out of markets at minimal cost is critical.
6. Capital markets thrive on breadth and depth, and the broadest and deepest markets are those that transcend national boundaries. That is why exchanges in Europe and elsewhere are consolidating. That is why derivatives exchanges around the world are forming strategic alliances. We must also forge these links quickly and position ourselves to collaborate with other players before we get left behind in the liquidity game.
Confidence is crucial for any sustainable growth
7. Efficiency and liquidity are important competitive advantages, but the foundation for growth is confidence in our markets. Confidence that, as an investor, we will be treated fairly, costs will be low, and our investments will be safe. Confidence that, as an issuer, costs of issuing will be competitive.
Regulatory discipline
8. One channel to keeping confidence is to maintain a pro-business environment built on economic and political stability, an efficient legal system, comprehensive and up-to-date market infrastructure and fiscal discipline.
9. Confidence is also built on the presence of an adequate regulatory framework, supported by proper enforcement of rules. Rules that require greater transparency, including good accounting standards, as well as reliable and timely statistical and reporting processes, enhance the quality of governance. Transparency ensures that performance is benchmarked against objectives, so that those who are entrusted with economic power are held accountable for their responsibilities. Surveillance and enforcement of rules must be strengthened as we move towards disclosure-based regulation, in order to deter the provision of inaccurate information.
10. It is also important that policymakers drive reforms where necessary. The recent progress in corporate and financial restructuring have done much to restore confidence and invite the return of international investors, but much more needs to be done to ensure a continuation of these trends.
Market discipline
11. Policymakers and regulators need to ensure that the economy and regulatory framework support our objectives of investor protection and capital market development. But a good economic story and strong regulatory framework are not sufficient to maintain confidence. What other factors are needed to boost confidence?
12. Investors need to be assured that market discipline is able to work effectively in enforcing the interests of shareholders. Market discipline imposes incentives on companies to conduct their businesses in a sound and efficient manner. In well-functioning markets, the market's assessment of corporate performance is reflected in stock prices, bond spreads and credit ratings, and corporations that fail the test could find difficulty in raising new capital.
13. Price signals and credit ratings are just one aspect of market discipline, and must be supported by active shareholder activism. In particular, institutional investors have the ability and the responsibility to bring management to task if the company is not being run properly. In a truly efficient market, companies are kept in line by the constant threat of takeovers or the replacement of management.
14. We need to increase the avenues through which shareholder activism can be exercised. The recent setting up of the Minority Shareholders Watchdog Group (MSWG) is a step in the right direction, and should encourage more active and vocal stands on corporate governance issues, but much more needs to be done to encourage institutional participation approaching the levels seen in the US and Europe.
Self-discipline
15. Corporate governance, so crucial in raising confidence in our capital markets, also depends on self-discipline. If corporate managers deliver profits because they align their interests with those of their shareholders, then we have good corporate governance. But if these managers believe that their interests come first, then all the elaborate rules and regulation, and greater disclosure, will not prevent minority interests being sidelined, as the case of the current crisis in corporate America shows. And, ladies and gentlemen, we have all seen the result of the ensuing loss of confidence on US markets.
16. Self-discipline is not required just of corporates, but of market intermediaries as well. Intermediaries such as auditors and financial advisors must be responsible and act in the interests of investor protection. When intermediaries also succumb to temptation and lose their independence, the system of checks and balances crumbles. Chairman of the US Federal Reserve, Alan Greenspan, in his recent testimony to the US Senate Banking Committee, summed up the reasons for the recent spate of accounting irregularities in the US quite well when he attributed it to "an infectious greed" that has "gripped much of the business community".
17. It is imperative, therefore, that corporates, intermediaries and other market participants act responsibly and ethically in preserving the interests of the investor. We must keep in mind that what we do is not independent of the market. Greater shareholder value recognition will not only bolster investor confidence, but will also lead to a more competitive culture that attracts investors and therefore increases liquidity.
Conclusion
Ladies and Gentlemen,
18. To recap, there is no doubt that we are moving towards a market-based financial system. While we have a Capital Market Master Plan that encapsulates our strategy and tactics for developing the Malaysian capital market, ultimately, sustainable growth is up to you, the stakeholders of the market.
19. Sustainable growth of the capital market is not possible unless supported by a facilitative economic and political environment. The recent progress in corporate and financial restructuring are commendable and have done much to restore confidence in the capital market, particularly among international investors, but the momentum must increase. Rules and regulations must be effectively and impartially enforced, otherwise the rules and we the regulators, the enforcers of the rules, will lose our credibility. Corporates must have self-discipline and make shareholder value a key management goal, otherwise the best-crafted rules and regulations can still be skirted, as the cases of Enron, WorldCom, Qwest Communications, Tyco and Xerox demonstrate. Financial intermediaries must be responsible, performing their audits and dispensing financial advice with the interests of investor protection in mind.
20. Ladies and Gentlemen, fellow stakeholders in the market, let's play our part to strengthen and grow the Malaysian capital market. This is a task that will be well-rewarded by a stronger and more effective financial system that will promote longer-term economic success.
