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Finance in Asia After GFC: Malaysia
Mah-Hui LIM
Workshop on Financial Evolution, Regulatory Reform and Cooperation
in Asia May 17-18, 2013
Seoul National University
1
Domestic Financial Liberalization Measures
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Credit controls and allocation Interest rate deregulation Entry Barriers –domestic & foreign Govt regulation & ownership Competition in finance Ease of financial innovation Diversification of financial services
Exeternal Financial Liberalization Measures
Free entry of foreign fin services Liberalization of capital flows Wider & deeper integration to
regional and international financial markets
3
Brief History of Financial Libzn in malaysia
Prior to 1985 banks regulated but finance companies lax. 1985 fin crisis & recession > bailout and closing of finance cos
1990s -1997 – robust recovery & surge in capital inflows >AFC
Again bail out, restructure, recapitalization & consolidation
4
Consolidation in Financial Industry
54 banks & fin cos merged into 9 banking groups
1986 –2011: Tot no. banks from 38 > 24 Domestic banks 22 > 8 Foreign banks remain at 16 Insurance cos fr 63 > 36
5
Number of Financial Institutions in Malaysia
Source:Bank Negara, MSR, Mar20136
Financial Sector Master Plan 2001-2010Financial Sector Blueprint 2011-2020
Objectives: Create more open, competitive,
diversified, liberalized, efficient financial system
Develop and deepen capital markets – bond, stock markets
1997-2010: Bond mkts doubled to 96% of GDP while banking assets declined fr 289% to 230%
7
Financial Structure in Malaysia
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Percent of GDP 1997 2000 2010 2020 FBanking Assets 289 220 229 300Debt Securities Market 47 68 96 NAStock Market Cap 133 125 160 NATotal Financial Assets 469 413 485 600GDP RM billion 282 356 795 NA
Financial Sector Growth
Sukuk (Islamic bonds) now 55% of debt securities market
2010 – cap mkts 46% of tot financing 2020 – target 52% Fin sector major driver – since 2001
grew at av 7.3% p.a. faster than GDP growth. Expected to grow btw 8-11%pa with total fin assets to reach 600% of GDP in 2020
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Internationalization of Financial Sector
Reduce entry barriers to finance and create level playing field for foreign and domestic fin players
Malaysian banks to expand overseas Deeper and wider integration with
regional & int’l financial markets
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Greater presence of foreign banks
Number of Islamic banks foreign owned rose fr 0 to 12 btw 1986-2011
2009 – up to 2 new Islamic bank and 2 new commercial bank licenses offered to foreign institutions and 3 new licenses offered in 2011
Equity participation of foreign interest raised to 70% for joint ventures
Greater operational flexibility given11
Internationalization of banks
Foreign banks account for 25% of total bank assets and deposits
Foreign ownership of Msian government bonds reached 28% in 2012 (20% Indonesia; 7% Thailand)
Msian banks overseas expansion 2002-2010. Overseas assets rose 73x fr RM3bn to RM240bn; pretax income fr -4.3% to 13.6%
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Other Internationalization Efforts
Expand use of local & regional currency payments, integrating settlement systems, common stds for cross border payments, harmonization of regulatory & supervisory, prudential stds
Regional coopn to share info, surveillance, crisis prevention, liquidity crisis mgt, reg supervisory colleges & network
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Capital Account Controls -1998
Ringgit pegged to US$ 1= 3.8 Offshore ringgit account and trading
banned Moratorium on repatriation of proceeds
fr sale of securities All off-shore ringgit repatriated home Foreign currency borrowing by residents
ltd to RM5mm equivalent Rgt borrowing by NRs limited
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Post 1998 – gradual liberalization of capital account
1999 10% exit levy to replace moratorium, this levy abolished in May 2000
Since then no controls on capital inflows and capital outflow
Controls still on borrowing of ringgit by non residents & borrowing of foreign currency (FXC) by residents
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Transactions Involving Non-Residents (NRs)
Ringgit Borrowing by NRs In 2000-intraday credit to NR
stockbrokers increased to RM200m and limit abolished in 2007
2001-NR companies cd borrow up to RM5m for use in real sector in Msia
2007- increased to RM10m By 2008 can borrow ANY amt for use in
real sector WITHIN Msia
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Ringgit borrowings by NRs
2010- allowed international trade to be settled in ringgit on shore. Also banks can lend ANY amount of ringgit to NRs for trade financing
But NRs still not allowed to borrow ringgit for financial speculation
2004 NR cos can issue ringgit bonds for ANY amt for onshore use or subject to outward invst rules if used offshore
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Foreign Currency Borrowings by Residents -control currency mismatch
Msia less affected during AFC because of limit to FXC borrowing of up to RM5 mm equivalent before AFC
2005 – this limit raised to RM50mm for resident group of cos & RM10mm for individuals
2007 – limit raised to RM100m fr banks equivalent for cos. Still applies today
2010- no limit if resident cos borrow FXC fr parent or related cos that are non resident and non-bank.
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FXC borrowing by Residents
If residents have own FXC, no limit on outward direct investments
If residents have domestic currency borrowing then can only borrow up to RM50m equivalent in FXC
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Residents ODI (Outward Direct Investments)
1998- residents who invest overseas in excess RM10,000 equivalent required BN approval
In 2007, residents outward invst of own money in excess of RM50mm equivalent abolished
Residents can even borrow to invst in FXC up to RM100mm in FXC and RM50mm in ringgit equivalent
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Outward Direct Invsts exceed Foreign Direct Invsts > 2007
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Internationalization of Ringgit
Ringgit is partially internationalized – can use ringgit for international trade (exporter can receive ringgit onshore)
But access to ringgit is still limited No offshore ringgit trading No offshore ringgit account Non-resident banks no access to Rgt Travellers limited to take out or bring in
up to RM30,00022
Conclusions
Financial sector and capital account become more liberal after the AFC and this process is proceeding
But restrictions apply to the accessibility of ringgit although it is now used for international trade settlement
Emphasise principles & risks based regulations & dependence on prudential measures
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