Roaming Tiger on the Belt and Road: Is Malaysia the Victim of Politically Motivated Cyber-Attacks?

The unexpected and stunning election victory of veteran politician Mahathir Mohamad in Malaysia this May caught both the Malay elite and international observers off guard, throwing out what many decried as a corrupt long-standing governing class primarily concerned with enriching themselves, a running sore which culminated in the widely reported IMDB scandal which saw billions being stolen from the Malaysian national wealth fund by politicians and their friends.

US justice department investigations of the 1MDB scandal resulted in a breakdown in relations with Kuala Lumpur and Washington as the Malaysian government resented what it saw as unwarranted US intervention.

The Malaysians instead turned north to forge ties with Beijing, who famously make non-interference a cornerstone of their foreign policy. Already a major trade partner, Chinese firms were soon backing major infrastructure projects like the East coast rail line which will have the effect of deepening Chinese economic ties and further cementing political relations.

But the election of Malaysia’s new government threw a major spanner in the works, the new administration in Kuala Lumpur wasted little time in reviewing relations with China and soon suspended several major projects following allegations of bribery and concerns over pricing. Probes into the IMDB scandal were given new life (the previous government had blocked them) and the former Prime Minister Najib Razak was arrested. Low Taek Jho a financier implicated in the scandal remains on the run, allegedly in China.

The affected projects include the multi-billion dollar East Coast rail line which could have transported Chinese goods via Malaysia and a major pipeline project. These have significant commercial and geopolitical implications for China and represent a major pushback of its Belt and Initiative, it also left some wondering how China would react to such a rebuff.

In the last week, cybersecurity firm FireEye identified Malaysia as the target of cyber attacks originating from China as it allegedly sought to punish Malaysia for suspending its projects. The firm suggested that Chinese threat actors were targeting Malaysia through targeted malware in an effort to collect intelligence on infrastructure projects in the country.

If true these incidents highlight the possibility of China using cyber attacks through proxy groups such as Roaming Tiger and TEMP.periscope to target companies, infrastructure or nations that deviate from or backtrack on commercial or diplomatic promises, particularly those concerning its flagship Belt and Road initiative. Using proxies gives China the ability to distance themselves from attacks.

Russia has demonstrated the effective use of cyber warfare in recent years, the release of the Democratic Party emails has shown it can be low cost and highly effective. Compared to an invasion such as Crimea which provoked an international diplomatic and economic backlash.

FireEye identified that Roaming Tiger used malware to attack Western European Foreign ministries (via Toysnake), the Cambodian elections using Litrecola malware, other attacks have been made on Tibetan independence organisations.

There should also be a fear that these developments could be the tip of the iceberg, as Chinese backed threat actors develop their abilities and gain confidence they could go after ever more high profile targets.

A Sino-Malaysian summit this week highlighted strong ties between the two and the desire to increase already substantial trade, but delicately skirted around the issue of the suspended investments. Publicly China has been demonstrating a humble attitude to recent developments and there has not been an outburst of anti-Malaysian propaganda.

Both sides face major losses if the infrastructure projects are called off as preliminary work has already begun. It remains to be seen whether Prime Minister Mahathir has suspended the projects as a bargaining ploy to get a better deal on the projects from China, or perhaps for the Chinese to hand over fugitive Low Taek Jho and help bring a conclusion to the IMDB scandal or does he genuinely see the projects as an unnecessary drain on an overstretched national budget and is just allowing the Chinese to save face by not immediately cancelling the projects.

More broadly China’s use of cyber-attacks on other countries will be a trend worth watching, will Beijing target countries that resist China or attempt to interfere in national elections and how will nations hit by such attacks respond.

Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Malaysia: Why The New Coalition Government Has A Tough Road Ahead

Malaysia is undergoing a period of upheaval following the unprecedented electoral defeat of the ruling Barisan Nasional (BN) coalition and the subsequent release of opposition leader Anwar Ibrahim. Although these are promising steps to restoring public and investor confidence in Malaysia’s government, a number of challenges need to be navigated before democracy can be fully achieved.

Anwar Ibrahim’s released from prison is only the latest in a series of unprecedented political events in Malaysia. The leading member of the People’s Justice Party and a former leader of the country’s opposition movement, Mr. Anwar was met by crowds of supporters upon his release. He went on to declare that Malaysia was on the verge of a new ‘golden era…at a time when democracy is in retreat around the world’.

Malaysia electoral results.

Malaysia 2018 electoral results (Wikimedia).

Victory for democracy

Mr. Anwar was referring to last week’s shock election result, in which voters elected a new federal government for the first time since Malaysia gained its independence sixty-one years ago. The ruling Barisan Nasional coalition, dominated by the United Malays National Organisation (UMNO) party and led by Najib Razak since 2009, has been dogged by accusations of corruption in recent years. The electoral victory for the Pakatan Harapan opposition alliance has been hailed as a victory for democracy and the rule of law.

These events offer much to celebrate. Anwar Ibrahim’s release from serving an apparently politically motivated five year sentence for sodomy has led to speculation that he will assume leadership of the country’s new governing coalition in 1 – 2 years’ time. In the meantime, Mahathir Mohamed has been appointed Prime Minister. This will be the second time the ninety-two year old has been Prime Minister, following a twenty-two year period in office between 1981 and 2003.

Tough roads ahead

Despite this cause for celebration, the new coalition government has a tough road ahead. This will be the first transfer of power to occur in Malaysia since 1957. Prime Minister Mahathir will need to forge a stable pact between the Democratic Action Party, People’s Justice Party, National Trust Party and Malaysian United Indigenous Party – a diverse collection of centre-left parties that have worked together since 2015. Dr. Mahathir has promised that all parties will be fairly represented in government, something that could become a sticking point if not carried through.

Perhaps the biggest challenge will be the eventual transfer of leadership from Dr. Mahathir to Mr. Anwar. The two have had a tumultuous relationship in the past. Formerly Dr. Mahathir’s deputy and ally, Anwar was sacked in 1998 after the relationship soured, culminating in Anwar’s subsequent convictions and imprisonment for abuse of power and sodomy. Dr. Mahathir’s announcement that he would join the Harapan opposition coalition came as a surprise to many, with one condition being that he would secure Anwar Ibrahim a royal pardon for his conviction.

Many hope that the two politicians can reconcile any past differences and work together, although this may be hampered by a lack of clarity over exactly when Dr. Mahathir will transfer leadership to Mr. Anwar. What is clear from last week’s election result is that Malaysian citizens want to see transparency, accountability, and an end to corruption. There will be hope that Dr. Mahathir, known for his authoritarian leadership style in the past, can deliver this over the coming months and years.


These challenges have created uncertainty in Malaysia’s economy. Last week’s election results caused a dramatic slump in Malaysian stocks, with the Malaysian ringgit initially falling 2%, and a US listed exchange-traded fund dropping 6%. While this is likely to be a short-term reaction, much will depend on the new coalition’s economic plans. Foreign investors have been particularly spooked by the results, and sold US$375.6 million of stocks after markets opened this week.

In the words of Anwar Ibrahim, ‘one election does not a democracy make’. While there is much to be hopeful for in Malaysia’s future, there remains a hard road ahead to deliver what Malaysian citizens want. In the meantime, stability and progressive reforms are needed to restore public and investor confidence. All eyes will be on Mr. Mahathir as the newly elected Prime Minister to see whether he can deliver this.


Dr Laura Southgate is a Lecturer in Politics and International Relations at Aston University in Birmingham, United Kingdom. As originally appears

Terrorism Risks Rising In Malaysia As Islamic State Militants Return

With the demise of Islamic State in Iraq and Syria and the fall of Marawi in the Philippines, how will Malaysia handle the prospect of returning fighters?

Malaysia’s Deputy Home Minister Nur Jazlan Mohamed recently expressed concerns over the threat of returning militants from the Middle East and the Philippines. The fall of Marawi, following the deaths of the insurgency’s two most senior commanders, came days after the Syrian city of Raqqa was recaptured by a US-backed coalition of Arab and Kurdish fighters.

Several hundred Malaysians have travelled to the Islamic State since 2013. In a new development, around thirty joined forces with the pro-IS Maute group in Marawi earlier this year. This article examines Malaysia’s capacity to handle the return of some of its fighters. Although coordinated IS-led attacks remain unlikely, the government will take a tough stance in order to mitigate the threat of localised terror cells and ‘lone wolf’ violence.

Will Malaysia be targeted?

The almost simultaneous losses of Raqqa and Marawi, cities of similar size, will force IS to shift to more guerrilla-based tactics. Aside from significant loss of manpower, Raqqa’s loss will yield a mass of information about IS’ strategies and personnel. IS’ de facto capital, Raqqa had generated millions of dollars in oil revenues annually; consequently, funding for its Southeast Asian operatives will be drastically cut. There is always the possibility that wealthy Arab donors will re-inject ISIS with cash. According to one estimate, $40 million was raised this way over the past two years. If so, IS will be able to regroup, re-arm and re-strategise.

IS’ Malaysia operations suffered a heavy blow this year with the death of ‘Malaysia leader’ Muhammad Wanndy Mohamed Jedi, in Syria, at the hands of a drone strike. Wanndy was a commander of Khatibah Nusantara, the joint Indonesian-Malaysian wing of IS. He had threatened to ‘wreak havoc’ in Malaysia, despite frustrating his superiors for failing to do so. Bahrun Naim, the man behind the 2016 Jakarta attack, has allegedly taken Wanndy’s place, and will be looking to fulfil Wanndy’s failed mission objective. The time to attack is ripe, given Malaysia’s approaching elections, which will provide a useful government distraction.

After the death of Filipino Isnilon Hapilon, leader of the regional militant organisation Abu Sayyaf Group (ASG) and IS’ apparent ‘emir’ in Southeast Asia, several Malaysians had been rumoured to assume his title. They were Mohammad Amin Baco, Muhammad Joraimee Awang Raimee and Mahmud Ahmad. Baco and Raimee are skilled in bomb-making and experienced in combat, with Baco heading one of three IS Philippines divisions, Jund al-Tawhid. Meanwhile, Ahmad, a 38-year-old former Islamic Studies lecturer from Universiti Malaya, on Malaysia’s most-wanted list since 2014, adept at fundraising and well-connected, had acted as chief recruiter for the Marawi siege.

However, evidence suggests that chauvinist attitudes are likely to prevent these Malaysians from becoming regional leader. Instead, a Filipino is preferred for the post, with ASG cell leader Furuji Indama the most likely candidate. Indama led a bloody conflict with ASG last year in the Basilan jungle; the Philippines will likely continue to provide his primary battleground. Moreover, regional militant groups like the pro-IS Bangsamoro Islamic Freedom Fighters (BIFF) have generally been less successful infiltrating Malaysia. Militants have poor military capability and lack of support among local people in Sabah

A new generation

Regardless of whether Malaysia is an official ‘target’, returning fighters will inspire a new wave of young and impressionable recruits and provide the foundation for a new network of terror cells. Successful returnees will be battle-hardened, with military training and deep knowledge of IS’ tactical operations.

While the known militant groups in Malaysia are now defunct, pro-IS sleeper cells remain a threat, particularly in Sabah (although past reports have been unsubstantiated). Counterterrorism units will face challenges in locating these cells. Verifying their existence is problematic given the growing problem of distinguishing between actual accounts and ‘fake news’ on social media

Fighters who slip through the security net carry the latent threat of ‘lone wolf’ and suicide attacks. For security authorities, single figures are much harder to track, thus thwart. Admittedly, lone wolves are usually frustrated amateurs who have not been able to join up with their comrades in Iraq and Syria. But last year’s grenade attack in Kuala Lumpur, organised by Muhammad Wanndy, was also relatively minimal and poorly planned. Nevertheless, one successful attack in the capital or another tourist hotspot risks mass casualties.

Malaysia’s response

Malaysian security officials will not be complacent. Along with Indonesia and the Philippines, Malaysia is already making sustained efforts to increase border security in the porous Sulu region, Malaysia’s long-time Achilles heel. Other border areas need tightening, like the Sungai Golok which separates the southern Thailand province of Narathiwat from Kelantan, north Malaysia. In the past, this area has been exploited by pro-IS weapons-smuggling groups.

Generally, there is a strong likelihood that returning fighters will be caught and detained under relevant laws, as over 260 have been since 2013. The police’s special branch anti-terrorism unit closely tracks national terror suspects, and collaborates with other regional and global agencies. Safe in this knowledge, Malaysian fighters will not likely seek to return home in vast numbers. Most will stay on and continue to fight, or join other countries struggling with Islamic insurgencies like Myanmar or Thailand. Unlike Malaysia, many other places will also provide these fighters with refuge.

In July this year, thousands of undocumented migrant workers were arrested, in one of Malaysia’s biggest crackdowns in years. That month also witnessed ‘Operation Joker’, in which 400 terror suspects were arrested and their backgrounds checked against Special Branch’s Lookup database and Interpol’s Foreign Terrorist Fighter Database. More operations on this scale, across major towns and cities, are likely in the future. Despite Malaysia’s stringent enforcement of immigrant background checks, one key weak link is the use of sophisticated fake identity cards by terrorists.

Successful security efforts – so far

Although deemed excessive by opposition and human rights groups, thus far these efforts have prevented a major attack on Malaysian soil. Since April 2014, counterterrorism units have successfully disbanded the majority of Khatibah Nusantara’s Kuala Lumpur cell. Special Branch Counterterrorism Division Head, Ayob Khan Mydin Pitchay, is consequently wanted dead by IS central command; an important obstacle to a successful Malaysia attack.

Measures have been taken to starve the terrorists’ funding networks, through the closure of informal remittance channels, although risks from money laundering remain. More also needs to be done on social media, which continues to undermine central intelligence efforts. Although authorities have terminated a number of pro-IS websites, digital recruitment via Twitter and Whatsapp remains a large threat. Authorities the world over have faced resistance from Whatsapp in getting past its encrypted messaging service.

Despite IS’ limited success in Malaysia and the robust capabilities of national counterterrorism forces, the country remains vulnerable to an attack. Although it remains unlikely that IS will attack Malaysia in the near future, the threats from lone wolf attacks and digital recruitment will keep counterterrorism authorities busy. Overall, despite attracting criticism, Malaysia’s efforts have achieved their purpose. But the next 6-12 months will certainly test this theory.


Alexander Macleod is a doctoral researcher at Newcastle University with a focus on Southeast Asian politics and geography. Article as appears on Global Risk Insights:


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Bank Merger In Malaysia To Create Second Largest Islamic Lender; Five Other Banks To Watch

Acquisition of Asian Finance Bank to create second largest Malaysian bank

Malaysian lender Malaysia Building Society Berhad (1171.KL) could soon become a full-fledged bank. The lender recently laid out plans to acquire Asian Financial Bank (AFB) in a deal that would result in the merged entity becoming Malaysia’s second largest Islamic bank by assets. After the merger, Malaysia Building Society would have an asset base of $10.5 billion (44 billion ringgit) and operate 46 branches.

Malaysia Building society will buy the stake held by foreign shareholders – Qatar Islamic Bank, Financial Assets Bahrain, RUSD Investment Bank and Tadhamon International Islamic Bank – for $153 million (645 million ringgit). The company recently stated that it would pay $94 million (397 million ringgit) in cash and the remaining $59 million through the issuance of 225.5 million shares at 1.10 ringgit per share. The proposed merger will be completed by the first quarter of 2018.

In a note to investors, officials from Malaysia Building Society Berhad said, “The merged entity is expected to leverage on the strength of MBSB’s business and the banking license held by AFB is anticipated to provide a unique opportunity for the merged entity to emerge as a full-fledged Islamic banking franchise in Malaysia.” In the last few years, the company has been trying hard to get a banking license that would give it access to cheaper sources of funding. Moody’s said this merger would be “credit positive” for Malaysia Building Society and would lower its funding costs, thereby widening margins. Further, it would also broaden its revenue streams as the merger would enable the company to offer a wider range of products and services through Asian Finance Bank’s banking license. However, this merger would intensify competition in the Malaysian banking sector.

ETFs offering exposure to Malaysian banks

Foreign investors seeking exposure in Malaysia’s banking sector could invest in country focused ETFs that offer diversification through investment in a single US security.

The most popular ETF for U.S. investors is the iShares MSCI Malaysia ETF (EWM). The iShares MSCI Malaysia ETF (EWM) invests in 43 of the most liquid companies in Malaysia.

With assets under management of $448 million, the EWM ETF offers concentrated exposure to Malaysian companies. Financials is the top sector with 31% of assets, followed by utilities, industrials and telecommunication services with weightings of 14.8%, 14.5%, and 9.9% respectively. The ETF’s exposure to the financials sector has remained in the 30% to 32% range in the last five years. EWM’s top five holdings include 3 large banks – Public Bank, Malayan Bank, and CIMB Group Holdings. The fund is up 5.7% over the last one-year period, and year-to-date in 2017 it has gained 14.6%.

Largest banks in Malaysia

Year-to-date, the MSCI Malaysia Index has returned 5.9% while the Malaysian benchmark FTSE Bursa Malaysia KLCI Index has appreciated 6.2%. In comparison, the MSCI Malaysia Financials Index has soared 10.8%, outperforming broad based Malaysian stock market indices.

The largest Malaysian banks by assets are Malayan Bank, CIMB Group Holdings, Public Bank, RHB Bank and Hong Leong Financial. In 2016, these banks held assets worth $164 billion, $108 billion, $84.7 billion, $52.7 billion and $50.9 billion respectively.


Malayan Banking Berhad, commonly known as Maybank is Malaysia’s largest bank by market cap as well as assets.

It is also among the largest banks in Southeast Asia with assets of $164 billion in 2016. The company has a current market cap of $23.5 billion. Maybank’s Islamic banking arm, Maybank Islamic, is currently ranked as the top Islamic bank in Asia Pacific and fifth in the world in terms of assets.

The company has a widespread international network spanning across all ASEAN countries. The bank currently has 2,400 branches in nearly 20 countries of the world and employs 45,000 employees.

In 2016, Maybank generated revenues of $7.6 billion and net interest margins of 1.9%.

Maybank‘s shares trade on the Kuala Lumpur Stock Exchange, Bursa Malaysia with ticker 1155.KL and on US OTC Markets with ticker MLYBY. The bank’s Kuala Lumpur listed shares have surged 20.7% in 2017.


CIMB Group Holdings is Malaysia’s second-largest bank by assets and third largest by market capitalization. The company has a current market cap of $13.5 billion. The company is one of the largest Islamic banks in the world and the largest Asia Pacific (ex-Japan) based investment bank. CIMB also has a wide presence in retail banking with 1,080 branches across the Asia Pacific region.

Currently, the group’s businesses are spread across 18 countries across the globe, primarily in the ASEAN region as well as global financial centers like New York, London and Hong Kong. The bank’s geographical reach is aided by strategic partnerships in various countries. Its largest partners include Principal Financial Group, Bank of Tokyo-Mitsubishi UFJ, Standard Bank and Daewoo Securities.

In 2016, CIMB group generated revenues of $6 billion and net interest margins of 2.5%, highest among its peers.

CIMB’s shares trade on Bursa Malaysia with the ticker 1023.KL and on US OTC Markets with the ticker CIMDF. The bank’s Kuala Lumpur listed shares have surged 40.8% in 2017 so far, and have outperformed its banking peers as well as the Malaysian benchmark KLCI Index.

Public Bank Berhad

Public Bank Berhad is Malaysia’s third-largest bank by assets and the second largest by market cap. The bank offers financial services across the Asia Pacific region. The company has a current market cap of $18.8 billion.

Public Bank is more focused on its retail banking business even though it offers a complete suite of services ranging from personal banking, commercial banking, Islamic banking, investment banking, share broking, trustee services, nominee services, sale and management of unit trust funds, and general insurance products.

In 2016, Public Bank Berhad generated revenues of $4.62 billion and net interest margins of 2.0%.

Public Bank’s shares trade on the Bursa Malaysia with ticker 1295.KL. The bank’s shares have surged 6.8% in 2017 so far, and have underperformed its banking peers.

RHB Bank Berhad

RHB Bank Berhad is Malaysia’s fourth-largest bank by assets and the fifth largest by market cap. RHB Bank was incorporated in 1994 as DCB Holdings Berhad. The company, a subsidiary of RHB Capital (1066.KL), has been formed by three mergers with Kwong Yik Bank Berhad, Sime Bank Berhad and Bank Utama (Malaysia) Berhad in 1997, 1999 and 2003.

Currently, the bank has a network spanning 8 countries across Asia including Brunei, Cambodia, Indonesia, Hong Kong, Malaysia, Singapore, Thailand and Vietnam.

In 2016, RHB generated revenues of $ 2.6 billion and net interest margins of 1.7%.

RHB Bank’s shares trade on the Bursa Malaysia with ticker RHBC.KL. The bank’s shares have surged 4.9% in 2017 so far.

Hong Leong Bank

Hong Leong Bank, part of Hong Leong Group is the fifth-largest Malaysian bank by assets, and the fourth largest in terms of market cap. The company has a current market cap of $7.8 billion.

Based in Malaysia, Hong Leong Bank has a presence in Singapore, Hong Kong, Vietnam, Cambodia and China.

In 2016, Hong Leong generated revenues of $1.8 billion and net interest margins of 1.8%.

RHB Bank’s shares trade on the Bursa Malaysia with ticker 5819.KL. The bank’s shares have surged 21.8% in 2017 so far.


The MSCI Malaysia Financials index is currently trading at a PE of 12.8x and price to book ratio of 1.4x. In comparison, the MSCI Malaysia Index trades at 16.5 times its past 12 months earnings and a price to book ratio of 1.7x.

Investors see valuations of Malaysia bank stocks as lucrative.

Alliance Bank Berhad, AMMB Holdings, RHB Bank, Hong Leong Financial and Affin Holdings are currently trading at inexpensive valuations compared to their peers. They have price-to-book multiples of 0.6x, 0.8x, 0.9x, 1.1x and 1.1x respectively.

Meanwhile, Public Bank, Hong Leong Bank, Malayan Bank, and CIMB Holdings are currently expensive with price-to-book multiples of 2.2x, 1.4x and 1.3x respectively.

Malaysia’s 2018 Budget Proposal: Tax Incentives At The Forefront

On October 27, 2017, Malaysia’s Prime Minister Najib Abdul Razak tabled the country’s much anticipated 2018 budget. The new budget is in line with the government’s agenda to achieve Transformasi Nasional 2050 (TN50) or National Transformation 2050; TN50 is a 30 year-plan,first introduced in the budget 2017,that aims to make Malaysia one of the world’s top 20 countries by 2050.

Termed as a generous and people friendly budget, the proposed allocation for 2018 stands at RM280.25 billion (US$66.3 billion) – a rise of 7.5 percent from 2017. The Malaysian government has proposed several tax incentives for investors and venture capital firms in the 2018 budget. In this article, we look at the salient features of the budget and their implications for businesses.

Corporate tax and tax incentives

Capital allowance for ICT equipment and software

The budget pays attention to the upgrade of information and communication technology (ICT) equipment and communications systems, which is crucial for a strong digital infrastructure for businesses. Currently, expenditure incurred on the purchase of ICT equipment and software packages is eligible for the accelerated capital allowance (ACA), which effectively allows a full capital allowance claim in the year of acquisition. The budget 2018 proposes capital allowance claim at the rate of 20 percent initial allowance and 20 percent annual allowance on the following expenditure:

  • Expenditure incurred on the purchase of ICT equipment and computer software packages, with effect from the assessment year (AY) 2017; and
  • Development of customized software comprising of consultation fees, licensing fees and incidental fees related to software development. This proposal is effective from AY 2018.

Tax incentives for Malaysia’s capital market

To promote Malaysia’s capital market and make it internationally more competitive, the budget proposes a three-year exemption on stamp duty for exchange-traded funds (ETFs) and structured warrants (SW). It will be applicable on ETF and SW executed from January 1, 2018, to December 31, 2020.

Besides, the budget offers tax relief for venture capital companies equivalent to the amount of initial investment; tax deductions for angel investors in venture capital projects; income tax deductions for environmentally and socially responsible Islamic bond issuers; and income tax exemptions for fund managers of conventional socially responsible funds.

Implementation of Earning Stripping Rules

The budget proposes replacement of the thin capitalization rules by the Earning Stripping Rules (ESR), a new method introduced by the Organization for Economic Cooperation and Development (OECD). Under the ESR, the interest deduction on loans between related companies within the same group will be limited to a ratio to be determined by the Malaysian Inland Revenue Board (MIRB), ranging between 10 percent and 30 percent of the company’s profit before tax. The ESR rules will be effective from January 1, 2019.

Other tax incentives

The Principle Hub Incentive: To increase Malaysia’s competitiveness as a global operations center for multinational companies, the budget has extended the application period for principal hub tax incentive to December 31, 2020. The principal hub incentive was initially launched in 2015 to provide income tax exemptions for companies which set up global operation centers in Malaysia. Currently, this incentive is available for applications made to the Malaysian Investment Development Authority (MIDA) by April 30, 2018.

Extension of incentives for new four- and five-star hotels: To expand tourism, the budget has extended the tax incentive for investment in four- and five-star hotels for a further two years, while the tax incentive for tour operators has been extended to 2020. For medical tourism too, the investment tax allowance has been extended.

Personal income tax

To increase the disposable income of the middle-income group and to address the rising cost of living in Malaysia the budget proposes to cut individual income tax rates by two percentage points for those earning between RM 20,000 (US$4,730) to RM 70,000 (US$16,552) a year.

The five percent rate on income up to RM 35,000 (US$8,276) will be reduced to three percent; the 10 percent rate on income up to RM50,000 (US$11,823) will be lowered to eight percent, and the 16 percent rate on income up to RM70,000 will be cut to 14 percent.

Goods and services tax relief

In an attempt to lower the cost of business, the budget proposes an exemption from the goods and services tax (GST) on services provided by the local authorities beginning next year. The exemption will come into effect from April 1 or October 1, next year, as opted by the respective local governments. Local authorities will not, however, be exempted from GST on the acquisition of commercial buildings or land, petroleum, and on the importation of motor cars.

In addition to that, all reading materials, including magazines, comics, journals and periodical publications will be zero-rated from January 1, 2018. Further, there will be a total exemption from GST for handling services provided by operators at all ports in the country for the period between January 1, 2018, and December 31, 2020.

The GST appeal tribunal and customs appeal tribunal will be merged into a single customs appeal tribunal, to enable taxpayers to submit their appeals on both customs and GST matters from January 1, 2019.

Support for businesses

Fourth industrial revolution

For business communities, the budget focuses on building capacity and capability to ensure Malaysian corporates are well placed to ride the fourth industrial revolution.

In view of rapid technology development, the Malaysian government has taken several measures to help companies transform into industry 4 (the fourth industrial revolution) with an emphasis upon digital application, big data analytics, robotics and automation applications.

The government in its budget proposes that the ACA and an automation equipment allowance be provided on the first RM10 million (US$2.4 million) qualifying capital expenditure incurred in AY 2018 to AY 2020. This incentive would apply to applications received by the Malaysian Investment Development Authority (MIDA) from January 1, 2018, to December 31, 2020.

An increase in loans for small businesses

Realizing the significant contribution of the small and medium-sized enterprises (SMEs) in the nation’s growth and labor market, the Government has allocated RM200 million (US$47.3 million) for training programs, grants and soft loans for SMEs.

The budget proposes an allocation of about RM0.5 billion (US$118.2 million) into Tekun, a financial services agency that provides financing facilities for small enterprises, and RM200 million (US$47.3 million) into Amanah Ikhtiar Malaysia (AIM). The fund has benefited over 400,000 borrowers, of which the budget states to be majority women and good paymasters.

Other initiatives

Among other initiatives include a grant of RM245 million (US$58 million) under the domestic investment strategic fund, to upgrade smart manufacturing facilities. The Digital Free Trade Zone (DFTZ), first announced in Budget 2017, featured once again in Budget 2018. The initial phase of the DFTZ will enable 1,500 SMEs to participate in the economy, attract RM700 million (US$165.5 million) worth of investment and create 2,500 job opportunities. Additionally, the budget reduces the required minimum level of venture capital investment in a start-up business from 70 percent to 50 percent for the period 2018-2022.



Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Indonesian And Malaysian Palm Oil At A Crossroads

Europe’s war against palm oil has exposed an industry that is failing to evolve quickly enough. Nevertheless, contrary to enhancing industry standards, western pressure risks pushing Indonesia and Malaysia closer to less regulated markets.

Palm oil production in Indonesia and Malaysia has long been a controversial debate. Increasingly, focus is on the need for sustainable practice, driven by EU regulations and environmental activism. In April the European Parliament voted overwhelmingly in favour of phasing out the import of unsustainable palm oil into the EU by 2020. This action targets Indonesia and Malaysia, which produce nearly 90% of the world’s palm oil. The EU is their second-largest export market after India.

The resolution endorsed a single certification scheme for palm oil entering Europe’s market, noting that current voluntary schemes are ineffective and confusing. This includes the Indonesian Sustainable Palm Oil (ISPO) and Malaysian Sustainable Palm Oil (MSPO) initiatives, and the Roundtable on Sustainable Palm Oil (RSPO). RSPO represents the benchmark for corporate commitments to sustainability, albeit it has been criticisedfor overlooking environmental destruction and human rights violations.

Indonesia and Malaysia view Europe’s actions as discriminatory and are likely to stand by their own sustainability standards, which are already difficult to enforce. Whilst smallholders lack the financial and technical capacity, arguments for sustainability are constantly undermined by palm oil lobbyists – particularly in Indonesia. If the resolution translates into EU policy, it risks pushing Indonesia and Malaysia closer to less regulated markets.

Unfair treatment

Malaysia’s largest and Indonesia’s second-largest export commodity, palm oil is a sensitive issue affecting both countries’ economic well being. Palm oil exports earn both countries close to US $20bn annually. For them, oil palm is a ‘miracle crop’, producing approximately 10 times more fruit per hectare than other leading oilseed crops. Oil palms have longevity, with an average lifespan of 25 years. Whilst representing less than 5% of global land use for oil crop cultivation, they account for 33% of total oil production.

Western attacks on palm oil are routine, and Malaysian and Indonesian politicians usually become defensive, accusing the west of a ‘conspiracy’ against palm oil, reflected in unfair, arbitrary and hypocritical barriers to their export economies (considering the contribution of western agriculture to environmental damage).

Responding to a separate announcement by French Environment Minister Nicolas Hulot that France would seek to restrict the use of palm oil in manufacturing biofuels, Malaysian Palm Oil Board (MPOB) chairman Ahmad Hamzah said the move is discriminatory and risks bilateral trade relations. Hinting at an ulterior motive, the author of that article noted that Hulot’s view mirrored ‘that of French corporation Avril Group, Europe’s largest biodiesel producer’, which ‘uses French rapeseed as its main feedstock for biodiesel’. They added that Malaysia has 55% of land under forest cover, while France has just 37%.

Smallholder problems

Albeit reputed for their lack of transparency and vague criteria, the main problem concerning the ISPO and MSPO initiatives is the lack of financial capacity for smallholders to implement these standards. Of the 9 million people employed across Indonesia’s and Malaysia’s palm oil sectors, smallholders account for 35-40% of total land under cultivation and 33-35% of total output.

According to Pablo Pacheco, smallholders are alienated by this matrix of market regulations, ‘lack[ing] the technical capacity and/or resources to comply with’ them. ISPO and MSPO are thus neglected by a substantial proportion of plantations operating in those countries, and government officials fail to hold them accountable.

Although MSPO is set to be made mandatory by 2019, Malaysia will face difficulties in achieving this goal. First, there must be more support for smallholders, with technical assistance to meet sustainability objectives. Meanwhile, Pacheco acknowledges, ISPO is ‘yet to gain traction’, held back by a host of ‘political and legal barriers’. In particular, high costs for smallholders are constantly used by opposition politicians to argue against sustainability pledges made by the Indonesian government.

Political football

After 2015’s devastating haze and forest fires (caused by the large-scale drainage of carbon-rich peatland), President Joko ‘Jokowi’ Widodo pledged to introduce a moratorium on the development of primary forest and peatland.

Albeit potentially harming exports and investor confidence in the short term, this moratorium could help restructure the industry into becoming more efficient and sustainable. This makes sense given the slowdown in planting of new palms; particularly as Sumatra and Kalimantan are increasingly stripped of available land. Research showsthis moratorium could reduce deforestation by 28% and cut greenhouse gas emissions 16% by 2030 – all the while increasing palm oil supply ‘due to higher production originating from smallholders’.

Yet, palm oil regulation is a political football in Indonesia. Legislators in the House of Representatives, the body responsible for passing legislation, are opposing Jokowi’s plans with a new bill that protects the right to operate on peatland. It has the backing of the Indonesian Palm Oil Association (GAPKI), a powerful political lobby.

Supporters say it will protect Indonesia’s strategic interests and empower the poorer farmers. However, NGOs argue that it actually protects the large developers, and have criticised the bill as ‘a corporate effort to drain state finances’. The bill offers a variety of tax incentives to palm oil investors, which they argue are inappropriate considering the industry’s lack of improvement.

Environmental damage aside, Indonesia has done little to rid the industry of its worst practices. Increasingly frequent reports of land grabbing, child labour and harsh working conditions have deteriorated palm oil’s reputation, contributing to falling prices of the commodity globally.

What next?

Both countries have indicated they will send a delegation to Europe to lobby for the palm oil sector, whilst also threatening to involve the World Trade Organisation (WTO) if it becomes a ‘discriminatory’ EU directive.

Nevertheless, compliance with EU standards could help both countries to combat negative perceptions surrounding this industry. This could help global exports over the longer-term future. Realistically however, neither country will reform its entire palm oil industry just for continued access to that market – which is declining in significance.

According to Jarred de Haan, palm oil exports to the EU have fallen significantly since 2014. ‘A major factor…is the commitment by the Netherlands, which accounted for sixty per cent of Indonesian and Malaysian palm oil imports in 2012, to only use certified sustainable palm oil, causing imports from the two countries to halve between 2012 and 2016’.

With the EU unlikely to change its stance, the shortfall in European trade will be counterbalanced by India and, increasingly, China. China is the third-largest export market for palm oil, and India and China together account for approximately 33% of all exports. The EU now accounts for just 13%. In the future, difficulties in compliance with EU standards will encourage Indonesia and Malaysia to rely more strongly on exporting to less regulated markets.

Overall, a lack of will from both countries to embrace and enforce sustainable practices is the main barrier to improving the industry. Particularly Indonesia’s palm oil sector is driven by vested interests, which represent a substantial obstruction to sustainability efforts. Contrary to changing their attitudes, both countries are likely to view increased trade with China as the more appealing – albeit detrimental – solution.


Alexander Macleod is a doctoral researcher at Newcastle University with a focus on Southeast Asian politics and geography. Article as appears on Global Risk Insights:


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China’s Financial Support: Entangling Malaysia and Bangladesh in A Debt Trap?

China’s financial help to economically weaker nations, prior to and also under the Belt and Road Initiative, is beneficial for both it and the countries that have partaken in the program.

However, there remains a long-held source of concern: there are worries that countries getting financial assistance from China under the program are caught in a deepening debt trap.

Sri Lanka in a debt trap?

The new Sri Lankan government which took over in 2015 had wanted to reduce the dependence of the country on financing from China, unlike its predecessor; however, it has been unable to do so. The Hambantota stake sale is an unwelcome reminder to many of its reliance on the Asian major.

The island nation currently holds a total debt of $64 billion. Debt repayment is a drag on public finances with over 90% of government revenues directed towards it. According to The Independent Singapore, Sri Lanka owes China $8 billion out of the aforementioned overall debt.

The government witnessed massive protests from locals ahead of the Hambantota deal on possible military usage of the port as well the advantage the deal grants to it in the bunkering business. Further financial dependence on China was another concern.

Sri Lanka is not the only one which is feeling stifled due to the financial support from China.

Loans to Bangladesh

Bangladesh has been a big beneficiary of China’s One Belt, One Road (OBOR) initiative due to its strategic geographic location as it pertains to China’s energy imports.

During a visit by China’s President Xi Jinping in October 2016, companies representing the two countries had signed trade and investment deals amounting to $13.6 billion. Loan agreements to the tune of $20 billion were also reached. Since these deals were finalized in the presence of government leaders, Bangladesh had deemed them to be soft loans.

However, since then, China is pushing the country to convert these loans to commercial credit as it holds that there was no promise for implementation of these loans on a government-to-government basis. A conversion to commercial credit would make these loans very expensive, and has thus elicited a strong response from Bangladesh.

Malaysia is also worried

Opposition parties in Malaysia have been questioning the government’s dependence on Chinese financing.

According to data from the World Bank and Malaysia’s statistics department, between 2010 and 2016, state-owned Chinese firms constructed and invested $35.6 billion (152 billion ringgit) worth of infrastructure projects in Malaysia.

The Independent Singapore reported Nurul Izzah Anwar, vice president of the People’s Justice party and daughter of jailed Malaysian opposition leader Anwar Ibrahim, as saying “As a simple measure of magnitude, the 14 memorandums of understanding that Prime Minister Najib Abdul Razak signed with China last November stand grandly at 143.6 billion ringgit, equivalent to 55% of our 2017 federal budget.”

She further said “Deals concluded too soon increases the plausibility for exploitation, collusion and corruption. Be frantic for China’s good graces and greedy for its wealth, and we stand to lose leverage over Malaysia’s own needs and priorities.”

The image of a greedy financier which aims to increase its influence by the financial subjugation of economically weaker nations is not one which flatters China. And neither does flaunting its military might which aims to arm-twist its neighbors and close trading partners.

Let’s look at this aspect closely in the next article.

Corruption Allegations Take Center Stage In Malaysian Elections As Mahathir Mohamad Returns

The Malaysian general election campaigning season has been shaken up by the return of Mahathir Mohamad, a former prime minister who intends to challenge the party he once led. His return may be a key factor in uniting the opposition and reviving allegations of corruption against the current prime minister.

Political parties are mobilizing in preparation for general elections which must be held by August 2018. The main coalitions are Barisan Nasional, which has won every election since it was founded in 1973, and Pakatan Haraban, which has been steadily gaining vote share over the past decade. The election is significant because of two factors: the return of Mahathir Mohamad, a former prime minister who has joined the opposition coalition, and the 1MDB scandal which continues to dog the current prime minister Najib Razak. Together these two factors may be able to lead the opposition to an unprecedented victory.

A twisted web

Mahathir was Malaysia’s longest serving prime minister, serving 22 years between 1981 and 2003. Even after his retirement he remained a vocal critic of his successors. Now at age 92 he has come out of retirement to join the opposition coalition alongside the former deputy prime minister he had previously jailed, Anwar Ibrahim, with the aim of defeating the party he once led.

Anwar, the founder of the opposition party, is currently in jail on charges of sodomy similar to, but separate from, those leveled against him by Mahathir. Yet despite their troubled past Anwar has embraced Mahathir’s return to the fray. The reason is that Mahathir could be a unifying figure for the fragmented opposition coalition and an opportunity to win over previously inaccessible rural constituencies. After all, the opposition coalition is currently without a leader, since Anwar can hardly govern from jail and would require a full royal pardon to take part in the upcoming election.

The opposition’s situation has been bolstered by Najib’s association with the 1MDB scandal. American investigators have linked money taken from 1MDB, a government owned development firm, to Najib’s own accounts as well as those of his friends and associates. Najib has dismissed these allegations as politically motivated, though it is not clear what the ulterior motive would be. In 2015 it was unclear if Najib would survive the scandal, but having managed to retain his position as Prime Minister he will now have to face voters.

Corruption and the economy

This election could be a defining moment for Malaysian politics which have been plagued with corruption scandals for decades including the Felda Global Ventures scandal (2017), the 1MDB scandal (2015), the National Feedlot scandal (2012) and the Port Klang Free Trade Zone scandal (2008). Strikingly, no one has been held accountable for the Port Klang scandal or for the 1MDB scandal.

The most recent scandals, however, are occurring at a time when corruption is the mot du jour – from Brazil to Pakistan populations are becoming increasingly frustrated with systemic cronyism, corruption and inequality. The ability for information to be shared and spread online means that groups, and youth in particular, can be mobilized to hold their leaders accountable. In the past strong economic growth, limited information sharing capacity, and a weaker press may have suppressed Malaysian voter concerns about corruption. Better information sharing capacity combined with the opposition’s attempt to weaponize corruption allegations may turn the tide against entrenched groups.

A survey conducted by Transparency International found that 59% of Malaysians felt that corruption had increased in the past year and 62% felt that the government was doing a poor job of fighting corruption. The upcoming election may reveal how these sentiments translate into votes.

A long time coming

The current ruling coalition, Barisan Nasional, has never lost an election since it was founded in 1973 and Malaysia’s top position features an unbroken line of prime ministers from the UMNO, the coalition’s main party.

Their continued control, however, is no longer so certain. Barisan Nasional has gradually lost vote share over the past several elections. In 2004 they won a solid 63.8% of the vote and 51.4% in 2008. In 2013 they won only 47.4% of the popular vote but maintained control of parliament which led to accusations of gerrymandering.

A victory for Pakatan Haraban would be a sign of disillusionment with the status quo among voters. Perceptions of economic well being and representation, not just corruption, will define voter outlooks. If the Malaysian economy weakens voters may turn to Pakatan Haraban. Reforming entrenched interests and cracking down on corruption will continue to be a challenge regardless of who wins the election.



Peter Hays is an Analyst at Global Risk Insights. Article as appears on Global Risk Insights:

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Will 7-Eleven’s New Aggressive APAC Expansion Strategy Bear Fruit Or Will Local Competition Bite?

Expansion plans

Japanese (EWJ) convenience store chain 7-Eleven is expanding aggressively. The chain currently operates 62,000 stores in 18 countries across the globe through license and master franchise agreements.

7-Eleven recently laid out its strategy for expansion the US (SPY) and Asia (AAXJ). In the US, the company plans to grow its number of stores to 20,000 from the current 8,500. In Japan, the company plans to open nearly 1,000 new stores in the next one year, while in Vietnam (VNM) the country will open 1,000 stores in the next ten years. The company entered into a master franchisee with Seven System Vietnam to build stores across the country.

In the Philippines, 7-Eleven (EPHE) will open 412 new stores. 7-Eleven operates in Philippines under Philippine Seven Corp. (PSC) the company’s listed local franchise holder. In Thailand, CP All operates 7-Eleven 9,500 stores, the largest network after Japan.

Why focus on Asia?

Asia is a key area of focus for 7-Eleven’s growth. Of the company’s 62,000 stores across the globe, over 30,000 are located in Asia- ex-Japan. 7-Eleven expects to grow its APAC store count to 80,000 by 2020.

The ASEAN is the world’s third largest consumer market, just behind China and India. Nomura, the Japanese investment bank forecasts spending in the five largest ASEAN countries can grow by 50% by 2020. This equates to an annual spending growth of nearly 17%.

“I can tell you (Asia has) been quite attractive and a number of licensees are growing,” 7-Eleven spokesperson Margaret Chabris said. 7-Eleven’s President Kazuki Furuya also dismissed concerns about a slowdown in Japan’s retail sector. “If convenience stores continue to evolve, there will be chances (to grow),” he said.

In the US

7-Eleven is eyeing opportunities for aggressive growth in the United States as well. In May 2017, it acquired 79 convenience stores from CST Brands Inc. for $408 million. More recently, 7-Eleven acquired nearly 1000 gas stations and convenience stores from Sunoco (SXL) as part of its aggressive plan to expand its footprint in the United States. This acquisition will cost $3.3 billion and is expected to boost the company’s operating profits by 6%. One of the largest acquisitions by 7-eleven, this deal would boost the number of stores in the US and Canada to 9,815. By fiscal 2019, the company targets increase its store count in North America to 10,000

Rising threat of competition

Competition is heating up for 7-Eleven as it tests the water in new markets. In markets like Malaysia (EWM), Singapore (EWS), Thailand (THD), Philippines and Indonesia (EIDO), the company has marked its presence and occupies a large market share. However, in newer markets, the company faces growing threats from local players. In Vietnam, prior to 7-Eleven’s entry local real estate company Vingroup came to market with convenience stores named Vinmart+. Furthermore, rising competition from online-retailers like Amazon and Alibaba is threatening 7-Eleven’s market share in established countries.

Is 7-Eleven’s stock running out of gas?

7-Eleven is currently publicly listed in Japan, the Philippines, Thailand and Malaysia. Year to date, shares of the Japanese parent company Seven & I Holdings have gained 7% while its Malaysia counterpart, 7-Eleven Malaysia Holding Berhad have lost 4.9%.  In the Philippines, the company is operated by PSC All, while in Thailand it is run by CP All. Shares of the companies have returned 24% and -1.2% in 2017 so far.

Recently, CIMB Research re-iterated their “reduce” rating on 7-Eleven Malaysia Holding Berhad on expensive valuations and the company’s rights issue. “7-Eleven is currently trading at 37 times FY17F and 33x FY18F P/Es, which, in our view, seems rather excessive against its modest three-year EPS compounded average growth rate (CAGR) of 11.5%,” it said.

“We are negative on this as we estimate that the proposal will be dilutive to our FY18F EPS forecasts by c.15% (assuming full warrant conversion) due to the expansion of share base and the exercise price of the warrants is 32% below 7-Eleven’s theoretical ex-rights price of RM1.48, based on the announcement.”

What To Bet On If Malaysian Equities Manage to Turn The Corner On Recent Rally

Valuations are still enticing

Malaysia’s benchmark index-FTSE Bursa Malaysia KLCI equity index currently trades at a one year forward price to earnings (PE) ratio of 17x. In comparison, the MSCI Emerging Markets Index (EWM) trades at a PE of 15.3x while the MSCI Asia ex Japan Index (ASEA) trades at a PE of 15.2x. For a variety of reasons, Malaysian stock markets have room to rally even though their price to earnings multiple is slightly higher than their historical average.

“Valuations in general are not so demanding, for example, price to book value is still attractive although price to earnings is slightly above the long-term average. The situation is not so alarming,” said Danny Wong, CEO, Areca Capital. “We are still far away from a bubble although overdue for a retracement,” said Chris Eng, head of research, Etiqa Insurance and Takaful.

Stocks and sectors to bet on

Further, consolidation in the banking sector has led to analysts turning optimistic on growth in this sector. Overall experts are bullish on stocks in the consumer, tourism, technology and construction sectors.

To understand which sectors in Malaysia have performed best, we studied the portfolio of the KLCI Index. In 2017, the top three performing sectors in Malaysian equities have been:

1)        Lodging

2)        Diversified financial services

3)        Banks

In 2017 so far, these sectors have surged 25%, 22% and 18% respectively.

Among other sectors, analysts are betting on defensives and consumer stocks such as Tenaga Nasional Bhd, QL Resources Bhd and IHH Healthcare Bhd.

Affin Hwang Capital Research listed out fifteen stocks as their top picks in Malaysia’s equity markets. Their top picks for 2017 are AirAsia, Bumi Armada, CIMB holdings, Gamuda, Genting, Inari Amerton, Kepong, KPJ Healthcare, Maybank, Petra Energy, Public Bank, Ta Ann, Tenaga, UOA Development and WCT Holdings.

Malaysia Struggles To Win Foreign Money Even As Inflows Into Emerging Markets Hit 2006 Peaks

Foreign inflows

Foreign investors are still underrepresented in Malaysia’s (EWM) bond and equity markets. With foreign inflows into emerging markets at 2006 peaks and predicted to touch $970 billion this year, Malaysia has immense potential for growth. “Foreign ownership in Malaysia’s equity and bond markets is still relatively low compared to historical levels. Bursa Malaysia’s benchmark index is still 100 points below the record,” said Danny Wong, CEO, Areca Capital. In May 2017, foreign holdings in Malaysian debt securities rose to RM195 billion from RM185 billion in April, indicating foreign investors are turning towards Malaysia.

Lee Heng Guie of Socio Economic Research Centre recently expressed optimism on flows to emerging markets (ASEA). “The inflows into emerging markets are supported by better macro prospects, improved external balances and progress made in policy reforms,” he said. “Malaysia is no exception. It saw sustained net foreign buying of equities, attracted by positive macro and corporate earnings drivers such as still high gross domestic product growth, strong rebound in exports, ongoing and new infrastructure spending, potential upside in the ringgit and positive sentiment in global markets. “Expectations of the general election also spur interest in election plays and themes,” he continued.In the first quarter of 2017, investors plowed $78 million into the iShares MSCI Malaysia ETF (EWM) compared to the $674 million that went into the iShares MSCI Emerging Market ETF (EEM) (VWO). Malaysia is among the smallest recipient of foreign flows this year, and with a recovery in commodity prices coupled by a rebound in the Malaysian ringgit, analysts expect a turnaround.

Malaysian equity markets have witnessed inflows of RM9.8 billion in 2017 so far, offsetting the RM8.2 billion outflows in 2016. However, bond markets are yet to turnaround as investors have redeemed RM27.5 billion from debt markets since November 2016 to March 2017. In May 2017, investors have put RM6.2 billion into sovereign debt signaling that the worst may be over for Malaysian debt markets.

However, analysts warn of political and global risks that could still impact investments into Malaysia. “Risk averse investors would tend to seek safe haven assets such as US treasuries and shy away from risky assets in EMs including Malaysia, if there are risks that threaten to derail global growth and destabilise capital flows,” said Lee Heng Guie. “These fund managers are realistic enough not to direct a significant portion of inflows here, realising that this market cannot absorb such a sum.”

Malaysia’s Outlook Turns Brighter, But Concerns That Linger Are Beyond The Market’s Control


Performance of stock markets

Malaysian stock markets are turning around. As commodity prices recover and risks of a global slowdown and trade wars wane, many believe Malaysia (EWM) has immense potential for growth.

Malaysia’s stock market has rebounded in 2017 after underperforming in 2016. Malaysia’s benchmark index the FTSE Bursa Malaysia KLCI equity index touched two year highs on June 5 as consolidation in the banking sector has led to a rally in shares prices of financial stocks. YTD, the KLCI Index has gained 9% as fears of a trade war with China have eased and commodity prices stabilized.

Affin Hwang Capital Research is bullish on Malaysian equities and has a target of 1813 for the KLCI Index by end of 2017. Affin Hwang believes Malaysia’s macro fundamentals are favorable for a rally as the country’s GDP is growing at a steady pace and the Malaysian ringgit continues to recover. “We believe that things will improve further as we move deeper into 2017,” the firm said.

Fears of western protectionism are diminishing

Risks of a trade war between US and China have waned and investors now have a clearer picture on Fed’s stance on monetary policy. U.S. interest rates hikes typically have negative implications for investments in emerging markets, as investors tend to redirect their funds toward dollar denominated assets that offer competitive yields and are generally less risky. China is Malaysia’s biggest export partner and any slowdown in China has a direct impact on Malaysian trade.

Hung Tran, executive managing director of IIF recently told Reuters, “Looking back at the first five months of the year, it is clear that near-term threats of trade conflict have subsided significantly.”

“All the threats of naming China as currency manipulators, the increase in tariffs, abandonment of Nafta did not come to pass,” he continued. “Assuming ongoing improvement in global and EM growth and a gradual, well-communicated path of Fed tightening through 2018, we are now a bit more optimistic on EM capital flows,” added Tran.

“Malaysia is no exception. It saw sustained net foreign buying of equities, attracted by positive macro and corporate earnings drivers such as still high gross domestic product growth, strong rebound in exports, ongoing and new infrastructure spending, potential upside in the ringgit and positive sentiment in global markets.” Lee Heng Guie, executive director of Socio Economic Research Centre also expects the upcoming election to spur investments in the country.

Macro fundamentals are favorable

Malaysia’s economic indicators display signs of a recovery. Its first quarter GDP beat expectations and grew by 5.6% year over year and 1.8% on a seasonally adjusted basis. This is the highest rate of growth in two years, and the Central Bank of Malaysia attributes it to higher domestic demand and expectations of growth in exports.

Several brokerage houses upgraded their forecasts for 2017 after the outstanding performance. HLIB Research now expects the Malaysian economy to grow by 4.9% higher than its previous estimate of 4.5%, while AllianceDBS Research upgraded GDP growth estimates to 4.8%, from 4.4% previously. Standard Chartered Bank also raised its forecast for Malaysia’s GDP growth to 4.6% from 4.1%. Analysts base their optimism on recovery in domestic and export sectors and growth in private investments in the country.

Additionally, private sector demand grew 8.2% year over year in the first quarter, as higher investments brightened the outlook for the economy. Further, economists expect the country’s inflation to cool down from 5.1% in March 2017 to 3-4% by the end of the year.

Word of caution

But the picture is not all rosy for Malaysia (ASEA). Foreign investors in the country need to be wary of the spillover effects of political, regulatory, and geopolitical risks of developed economies on the region. Further, in case Trump advances any further on his protectionist policies, export oriented emerging market economies (EEM) (VWO) like Malaysia would be hit hardest.

Fund managers will likely balance out their exposure between emerging markets and developed markets to hedge against such risks. “However, this flow process may be brought to a halt before it runs its course. Like during the 1997 Asian financial crisis, some funds will have recognized that it is time to pull out,” said Pong Teng Siew, head of research, Inter-Pacific Securities.

Furthermore, issues related to the Malaysia 1MDB scandal continue to worry investors. 1MDB is Malaysia’s sovereign fund. Recently, the United States filed complaints to recover about $540 million it says was stolen from the fund, and with investigations still underway, there may be more to come.