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Efforts To Raise Capital For Economic Transformation Need More Thought
Malaysia Perspective | 25 July 2011

By Yang Ming Wan

The economic transformation plan of the Malaysian Government is now in full swing. One of the most closely watched factor is the funds needed to keep the transformation process on track. The success of the transformation plan depends on the Government’s ability to raise capital from public and private sectors.

Direct investment funds is the most important link in pushing through the economic transformation plan. For this reason, there exists within the implementation of the economic transformation plan a component known as the Entry Point Projects (EPP).

Apart from ensuring that all investment projects are in line with the economic transformation, the EPP’s more important role is to attract direct investment capital that will propel our economy to grow at an annual average of 6% and realise the target of elevating Malaysia to the rank of a high-income country in 10 years’ time.

The challenge of finding hundreds of billions in funding every year
The economic transformation plan needs a total investment of up to US$ 444 billion, or RM 1,346.6 billion, in the 10-year period between 2010 to 2020, which means an average annual total investment of up to RM 134.7 billion. This huge investment amount goes into 133 EPPs and 60 business opportunities, of which 60% would come from the private sector, 32% from government-linked companies and the last 8% from the government.

As funds from both government-linked companies and the government are in the government’s control, the need to raise a total of RM 538.6 billion or RM 53.86 billion per year on average should not pose too much a problem. The bigger challenge, however, is securing the 60% funding from the private sector, which comes up to about RM 808 billion, or an annual average of RM 80.8 billion.

Capital outflow rate nearly three times as fast
Over the past 10 years, total investments from the private sector made up only about RM 535 billion. In order to achieve the new target, the total investment must be increased by more than 51%. This is a target that is neither hard nor easy to achieve: first, we have to come up with ways to promote Malaysia as a destination for foreign direct investment capital, followed by ensuring that there is no massive outflow of domestic funds.
According to the data released by the Bureau of Statistics end June, which showed Malaysia’s international investment ranking from 2001 to 2010, it would seem that retaining domestic capital is equally important as attracting foreign investments.

A report from the Bureau of Statistics showed that in the 10-year period between 2001 to 2010, direct investment capital flowing into Malaysia grew at an average of 10.5% yearly. This growth figure may look decent, but when viewed in context with the 30% average annual growth rate of domestic direct investment funds outflow, the trend becomes very worrying, for funds are flowing out of Malaysia at nearly three times as fast as they are coming in.
Looking at the alarmingly faster net outflow of capital, the Government cannot afford to cast its eyes only on the long-term economic transformation targets; it needs to make swift and immediate adjustments to the national economic policies to improve the domestic investment environment.

RM 300 billion in funds flowing both ways
Malaysia’s phenomenon of direct investment capital outflow only began increasing significantly in 2005. As of end last year, cumulative overseas investment has hit RM 298.4 billion, hot on the heels of our total cumulative foreign direct investment of RM 312.5 billion, with only RM 14.1 billion or 4.7% separating both figures. If the Government does not take decisive actions to review its policies and take remedial measures to improve our investment environment, Malaysia’s overseas investment will soon surge pass our total foreign investments.

Of course, some of these outflowing funds are healthy developments that present a positive contribution, such as the oil industry’s overseas investments in oil fields, as well as some industrial manufacturing companies setting up overseas sales offices. However, this does not mean the government can ignore the changes in the domestic investment environment, nor allow domestic funds to leave our shores for any negative reasons.

To ensure that we have sufficient capital to allow the economy to transform smoothly, it is imperative that the Government abolish all unfavourable policies, such as the 30% bumiputera share ownership quota system under the New Economic Policy. Together with a sound plan, we can turn this ship around and bring in more foreign investment while plugging the capital outflow gap.

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