The Role of Emerging Capital Markets in Meeting Financing Needs: The Malaysian Case, Honolulu, Hawaii, 19 March 1994
After the prolonged global recession in the early 1980's many economies in the Asia-Pacific Region rebounded strongly not only to recover lost grounds, but more importantly to record substantial improvements in virtually all aspects of economic development. For some of them, the current phase of economic expansion could well be the longest and most rapid ever experienced on a sustained basis. Along the way, a few member countries around the table managed to move up to the category of NIEs, while some others are not far behind. The most common element which cuts across these countries is perhaps the liberalisation process they have been going through, both in the real side of the economy as well as in the financial sector. And central to the financial reform has been the effort to develop capital markets to complement increasingly deregulated banking systems in the region.
Indeed, the rapid developments of the emerging capital markets in the region are already well documented in the background paper circulated to us for this meeting. As evident from the paper, the development of capital markets in the East Asian countries, in particular, has been impressive. What used to be small and sleepy capital markets in these countries, are currently wide awake with full of excitements, and often times, even more active than some of the more established markets in the industrialised countries. New levels of confidence and interests of foreign investors in the emerging markets have been established, and these are clearly evident by the massive capital flows to these countries in recent years, looking for avenues and opportunities to be present in the fastest growing region in the world today. At the same time, the increasing role of the private sector in the economies of thse countries, helped to expand the base of domestic investors resorting to capital market for an alternative source of investment funds. Moreover, the scope for participation in the capital market has been enhanced by the privatisation programmes of the Governments, which in many cases, include the development of massive infrastructure projects. Such big projects require large financing requirements on a long term basis, which can be met effectively by the capital market. This time, however, more and more capital needs to be raised by the private sector to finance large projects on a privatised basis, instead of being raised by the Government through the issue of government securities. Naturally, the role of the private bond market becomes more important.
During the same period, the number of companies listed on the Exchange has almost doubled, and the volume of turnover rose by almost 100 times, making KLSE the largest bourse in the ASEAN region. Although somewhat late and less rapid, the developments in the long term Private Debt Securities (PDS) market has been encouraging and steadily rising as well. The amount of funds inflows, sustained and strong growth in the domestic economy over the last 8 years, as well as determined efforts by the Government to broaden and deepen the capital market as a reliable source of long term capital. Among the important measures were: the establishment of the Securities Commission to oversee the orderly and systematic development of the capital market; incorporation of the first credit rating agency in the country; introduction of the principal dealers system; liberalisation of the Employees Provident Fund Act; establishment of the National Mortgage Corporation; introduction of scripless trading systems; and incorporation of the Futures Industry Act to provide the underlying framework for trading in options and financial futures. This has encouraged the development of new and innovative capital market instruments in the mobilization and intermediation of savings in the economy.
Given the sheer size of private investment outlays to be financed over the Sixth Malaysia Plan period (1991-95) and until the year 2020, the financing burden will increasingly fall on the capital market to complement the banking system in meeting the mounting needs of the provate sector. The private sector is expected not only to tap funds from the market to meet corporate expansion plans, but more than before, to finance their capital expansion programmes and new ventures. In addition, massive fundings are also required for the Government's privatisation programme and mega- infrastructure projects.
At the same time, the challenge for the capital market is to gear itself to provide effective alternative avenues of investment to absorb the large excess investible funds of the institutional investors, especially the Employees Provident Fund (EPF). With the continued rightsizing of Government securities is not expected to increase significantly to satisfy statutory requirements to invest a stipulated portion of their funds in Government securities. The development of the capital market is, therefore, critical to tap the investible funds of the EPF and other institutions, consistent with the rising level of income and savings in the country and to channel these funds to meet the investment needs of a rapidly expanding economy.
The various key measures highlighted above were implemented to develop the capital market into a reliable source of financing to support increased private sector initiatives and the massive privatisation programme which has been well in place in Malaysia. It is also in line with the need to mobilise increased private savings to be channelled for productive investments as well as the financing needs of the private sector. Perhaps it is telling to note that for the first time in 1992, the total amount of fund raised in the capital market surpassed total credit extended by the entire banking system. Such a turnaround was not sustained in 1993, although the share of the funds raised through the capital market has nevertheless remained relatively high. This has been seen as a new challenge to the banking industry to improve its efficiency in the face of rising competition offerred by the emerging capital market. This process should contribute to lower investment costs in the economy, and allow the growth momentum to assume even greater vigour in the future.