INTERNATIONAL CONFERENCE OF DEBT SECURITIES : THE EMERGING FUNDING AND INVESTMENT OPTIONS IN THE MALAYSIAN CAPITAL MARKET - JULY 20, 1992

We are all encouraged that the Malaysian economy is holding up well in the face of sporadic and hesitant recovery in the world economy. There is much resilience and sustaining power in our economy today - much more than some people are willing to acknowledge. Domestic demand, particularly on consumption, has slowed down considerably, and savings, therefore, should rise. There is also evidence of a shift towards more capital intensive and high technology investments. This will give the economy a breather to ease itself out of the present tightness in the labour market.

Even the strong surge in imports in recent years has begun to show signs of moderating. Growth in imports for the first four months of this year declined sharply to 4 per cent, compared with 37 per cent during the same period in 1991. Growth in our exports, which remained subdued in the first two months, recovered strongly to 15 per cent in March and 19 per cent in April. If this trend continues, we would once again see a comfortable surplus in the merchandise account of the balance of payments, and would hopefully lead to a significant reduction in the current account deficit by the end of this year. These developments support the view, which we have always maintained, that the problem is only cyclical and transient in nature, if bold measures are undertaken. In this regard, we have taken steps to upgrade our reinsurance capabilities, expand shipping services and exercise prudence in spending on import items.

In view of the latest economic developments, there is every reason to believe that the economy will continue to perform well for the rest of 1992. A growth rate in the region of 8.5 per cent to 8.7 per cent as forecast earlier is very much within reach. As for inflation, we are confident of containing the increase in the Consumer Price Index (CPI) at 4.5 per cent. Even then, the rise in CPI was largely on account of food prices, associated with the seasonal drop in the supplies of fish, fruits and vegetables. Indeed, if we include the increase in food prices, the underlying rate of inflation in May was only 3.7 per cent. This was certainly in line with the fact that the imported source of inflation in Malaysia continued to remain low, if not negative.

The changes in the world of international finance since the mid-1980s have been swift and sweeping. We can see that the entire financial industry is rushing on fast gear into the future. The debt crisis of the 1980s, the dramatic contraction in sovereign syndicated lending, the securitization of almost every cash flow and the increasing globalization of the securities markets, have all worked to reshape the world of international finance. We in Malaysia must respond to these changes.

Since the late 1980s, we have witnessed the proliferation of new financial instruments, and the blurring of the distinction in the activities of banks and non-banks. The mushrooming of new instruments was prompted by intense competition, where more and more corporate financial players rely less and less on traditional banking relationships. Bankers were obliged to scratch and scramble for businesses with escalating ferocity. The financial institutions in Malaysia cannot be less innovative if we are to keep pace with global developments. We too must be prepared to expend the time and energy to devise new financial instruments to meet our specific needs. But there is no place for mere gimmicks. Our enthusiasm for innovations must always be balanced by prudential considerations.

The traditional institutional boundaries between commercial banking, investment banking and securities trading, is breaking down. The framework is no longer tidy. The trend is for markets to be opened up and instruments and techniques to become immediately available to different types of users. It is particularly important for the banks in Malaysia to respond adequately. The price they may have to pay would be heavy if they do not take the process of securitization seriously. Unless our banks face squarely the challenges posed by securitization, they may end up merely performing the function of clearing cheques!

One of the measures that the Government has implemented to give a push to the domestic corporate bonds market was the creation of Rating Agency Malaysia Berhad or RAM in 1990, as Malaysia's first credit rating agency. Other countries aspiring for developed nation status, such as Taiwan, Indonesia and Thailand, are currently contemplating the creation of similar organizations within their own financial systems. When the market for private debt securities is growing within the financial system, as in the current situation in Malaysia, the establishment of a credit rating agency is imperative.

Our commitment to maintain a credible credit rating agency for the private debt securities market cannot be overemphasized. In this context, let me assure you that we respect RAM's need to be an independent entity, unconstrained by any ties with either the players in the market or the regulatory authorities.

The growth of Malaysia as a leading capital market in the region will be given further boost by the establishment of the Securities Commission before the end of this year. This Commission will assume supervisory responsibility for the capital market, both for regulating primary issues and for the surveillance of secondary trading of securities. It would act as a one-stop agency for processing the applications for securities transactions, which are now subject to multiple-agency approvals. More importantly, the Commission will be also be responsible to spearhead the modernization and orderly growth and development of the Malaysian capital market.

The establishment of the Securities Commission will be by a new Act of Parliament which will be the umbrella legislation to existing laws. As the Commission will assume the functions of existing regulatory bodies, existing Acts, principally the Securities Industry Act 1983 and the Companies Act 1965 will be amended accordingly. The Commission will also be overseeing the financial futures market upon the establishment of the Kuala Lumpur Option and Futures Exchange (KLOFFE). We are now preparing the necessary legislation to be presented to the Cabinet before they are tabled in Parliament.

Hopefully, the establishment of the Securities Commission will bring about a significant change in the culture of investors in this country. In the past, Malaysian investors appear to be grouped in two extremities. On the one hand, we have the speculators who are willing to take every risk for `a quick kill'. On the other hand, we also have the risk-averse Malaysian investors and fund managers who cling to Government securities well above the stipulated mandatory requirements, and holding them to maturity. They prefer to avoid risks rather than manage risks, sacrificing opportunities for higher returns in the process. We need to move to the middle ground. There is no doubt that the investment policies of institutional investors need to be reviewed and portfolio management skills developed, sharpened and upgraded.

Given the securitization process, whereby credits would be increasingly channeled through the securities market in the form of tradable papers, there is a need to develop adequate trading skills to effectively deal with the wide range of financial instruments in the secondary markets. This is still lacking in the country. Malaysia will need to train and nurture a crop of professional financiers and market makers, equipped with a high degree of skills, business acumen and professionalism in exploring new opportunities, to chart the course of the financial markets in the years ahead.

In conclusion, I would like to reiterate our firm commitment to the continued development of the capital market and specifically to the emergence of the private debt securities market. Due to the vast capital requirements needed, Malaysian corporations, during the years ahead, will need to tap investors' resources by way of bond issues, in addition to the traditional routes of bank financing and equity financing.

On that note, ladies and gentlemen, I would like now to officially declare the conference open.

Thank you