MALAYSIA THINKS BIGGER
Tun Razak Exchange the next hub
Malaysian planners have a fascination with megaprojects. Several government pet projects — the elegant Petronas Twin Towers, Kuala Lumpur International Airport, Kuala Lumpur Tower and the sprawling administrative capital in Putrajaya — showcase the country’s ambition and wealth.
Now the government is preparing to construct a huge international financial district in Kuala Lumpur — the Tun Razak Exchange (TRX) — to transform Malaysia into a vibrant financial and business hub in the region.
Sprawling over 70 acres, about three kilometres from the Petronas Towers, TRX is a high-profile real estate project intended to woo foreign capital into the country, as Southeast Asia’s third-largest economy pushes its financial sector agenda to become a high-income economy by 2020.
TRX is named after Malaysia’s Prime Minister Najib Razak’s late father, who was the country’s second premier in the 1970s.
Malaysia is not alone in the race. Tough competition is expected from prominent financial hubs — both regional and international — Dubai international Financial Centre, Singapore’s Marina Financial District, Hong Kong’s International Financial Centre and the Seoul Financial Centre in South Korea — just to name a few.
Having branded itself as a strong global Islamic financial centre, Malaysia is now eyeing a slice of the fast-growing pie of the highly competitive financial markets, already dominated by powerful regional players from Singapore to Japan.
However, observes say Kuala Lumpur has strategic advantages to catapult Malaysia into the already crowded industry and offer a wide range of expertise — from corporate bonds, shariah-compliant financial products and insurance to banking services.
“The TRX will be a very important positive step forward for the future development of the financial services sector in Kuala Lumpur,” Rajiv Biswas, Asia-Pacific chief economist of IHS, a global market information and analytics company, told Asia Focus via email from Singapore.
“By creating a world-class modern infrastructure, with advanced connectivity, TRX will help establish a new financial services district that will accelerate the growth of Kuala Lumpur’s financial service cluster.”
Like its rivals, TRX is set to be an ultra-modern township — an integrated development with 25 buildings, including office towers, hotels, residential blocks and shopping malls — to be developed over 15 years. The first phase is targeted for completion in 2017.
TRX is being developed by 1MDB, the state’s strategic development company, and its gross development value is estimated at US$8 billion.
For now, macroeconomic fundamentals seem to back Malaysia’s aspirations. Its foreign-exchange reserves stood at $111.2 billion as of Jan 15, according to the central bank, behind only Singapore and Thailand.
In 2013, Malaysia set a record in foreign direct investment with $12 billion, making it seventh highest recipient in Asia. Its overall fund management industry (including shariah) was $176 billion as of Sept 30, 2014.
Malaysia has emerged as a dominant player in the global sukuk (Islamic bond) market too, with $24 billion or about 67% of total issuance in the third quarter 2014, the Malaysia International Islamic Financial Centre reported.
Besides, Malaysian banks are rated among the top five in Asia Pacific and second in Asean, according to Moody’s Investors Service, while its capital market grew by 10.5% to 2.7 trillion ringgit ($755 billion or 24.64 trillion baht) in 2013 —indicators vital for a financial centre’s growth.
According to the IHS forecast, Malaysia would be a developed nation by 2020 with an estimated per capita income of $15,000, joining the ranks of world’s advanced economies.
The country has established its global reputation as the world’s leading Islamic financial services hub, and growth of Maybank (Malayan Banking Berhad) and CIMB Group as international banks with regional footprints across Asean would bolster Malaysia’s position as a leading Asian financial centre, added Mr Biswas.
“Among the key competitive advantages of Malaysia are low country risk and political stability, a stable macroeconomic environment, a strong financial regulatory framework and a well-established legal system based on English law,” he said.
“Having English as its main international language is also a competitive advantage. In comparison, Tokyo and Seoul are very limited in their ability to compete as international financial centres due to their lack of English speaking skills, and hardly any global investors can speak Korean or Japanese.”
He said Malaysia had lost its competitiveness in low wage industries due to rising living standards and it was vital to develop new industries, such as financial services as new economic growth drivers.
Dr Yeah Kim Leng, dean of the Business School at Malaysia University of Science and Technology, said TRX could capitalise on the country’s mature corporate bond market, rated third in Asia after Japan and South Korea.
“Malaysia can take advantage of its deep corporate bond market. It can assist in financing long term infrastructure projects, issuance of 20 to 30 years period,” he said.
“The cost of doing business is also cheaper in Malaysia. If it can provide world-class infrastructure and services at lower cost, this can attract global players.”
There could be a downside to Malaysia’s ambition, however. Federal government debts touched nearly $160 billion as of June 2014, and the weakening ringgit, losing nearly 11% against the US dollar over the last six months, plus dwindling oil revenue as crude oil prices dipped to $57 per barrel, are worrying.
However, experts say these are just temporary blips on the economic radar.
The strategic vision by both the Malaysian government and the central bank to establish Malaysia as a leading Asian financial centre was a long-term strategy, said Mr Biswas.
“This vision has been in the process of implementation over the last decade, and considerable progress has been made in making Malaysia a competitive Asian financial centre. Therefore short-term fluctuations in the oil price and the ringgit should not become deterrents to pursuing this long-term strategy,” he said.
“Indeed, the weak oil price highlights the importance of diversifying the Malaysian economy further, to reduce the overall dependence of Malaysia on commodities.”
According to Dr Yeah, Malaysia’s challenge would be in attracting reputed institutions and house them in one central location.
“The key challenge is to bring a corporate anchor institution to establish their operations here (in TRX) and bring together other global players. It can also position itself as a [hub] and spoke for the Asean Economic Community,” he added.