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Allens Arthur Robinson

Focus: South East Asia – July 2001

In this issue: We look at Malaysia's new foreign investment reforms, Singapore's new business regulation and the Philippines Power Bill. 

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Malaysia - Foreign Investment Reforms
Malaysia's New Vision

In April, Malaysian Prime Minister Mahathir unveiled Malaysia's third long term socio-economic plan, the "New Vision Policy" (NVP). The NVP supports the objective of previous plans in the 1970s and 1980s, to place 30 per cent of the country's wealth in the hands of the ethnic Malay community, the Bumiputra. The government initially introduced affirmative action policies to benefit the Bumiputra following racial riots in 1969. In the United Malays National Organisation annual meeting in June, Mahathir warned his party that any change in government would lead to an end to the special privileges enjoyed by the Bumiputra.

Following clashes between Indians and Malays in Kuala Lumpur in March 2001, the government for the first time has set a 3 per cent target for Indian equity ownership. Indians presently make up 7.4 per cent of the Malaysian population but own only 1.5 per cent of the equity holdings.

The government predicts an average economic growth rate of 7.5 per cent per annum and a doubling of per capita income over the next ten years, and so insists that the affirmative action policies in place for the Bumiputra and Indian population will not be at the expense of Chinese interests (the other major Malaysian ethnic group).

The Bumiputra policy was initially planned for a twenty year period, but will now be in place for at least forty years. The failure to reach the 30 per cent target of Bumiputra equity holdings is due partly to the Asian economic crisis which saw foreigners boost their equity holdings at the expense of the Bumiputra.

The plan also aims to restrict foreign ownership to 30 per cent to allow Malaysia to become "resilient and competitive" and be able to survive increasing globalisation and the reduction of trade barriers in the next ten years.

The principles of the plan are:

  • Creating an information technology-led "knowledge" economy. The Government will place great emphasis on educating workers and tripling the number of IT industry employees over the next ten years. It intends to meet the supply of IT employees partly by attracting Malaysian IT professionals working abroad back to Malaysia.
  • Privatisations. The government intends to sell government owned enterprises to boost Bumiputra corporate ownership, stipulating that Bumiputra take at least 30 per cent of the privatised projects, and Bumiputra are awarded at least 30 per cent of contract works for major privatised projects.
  • Education. The government is expected to continue to push Bumiputra into tertiary and higher education so that their representation in all professions will reflect the population distribution (which is projected to be 68.3 per cent Bumiputra by 2010).
Financial reforms

The Malaysian Government has also unveiled a 10-year plan for Malaysia's finance industry which aims to strengthen the domestic banking sector and delay any increase in foreign participation in the banking industry for another seven years. The plan sets out a three-phased agenda to prepare Malaysian companies for an open market:

  • Strengthen Malaysia's insurance, banking, venture capital and Islamic banking industries;
  • Ease restrictions on foreign commercial banks currently operating in Malaysia (currently 25 per cent of the market). Foreign banks will be allowed to set up shared ATM networks with local banks in three to four years time; and
  • Reconsider introducing new foreign competition after seven years.

The reaction from foreign bankers has generally been that they would prefer a more rapid pace of deregulation. Analysts have cast doubts on whether the plan will be fully implemented.

Malaysia's banking sector is undergoing other reforms to increase its competitiveness, including government mandated consolidation where the number of banks and finance companies will be reduced to ten each, and merchant banks to nine. Merchant banks will also be required to merge with stock broking operations to create investment banks.

Capital Markets

In a bid to boost the stock market, the Government has released a capital markets plan which calls for the liberation of securities trading rules and recommends that the Malaysian stock market be opened to greater foreign participation by 2003 (to comply with the World Trade Organisation pact to open financial markets).

The Kuala Lumpur Stock Exchange will be merged with the Malaysian Exchange of Securities Dealing and Automated Quotation (MESDAQ) and the single national exchange is proposed to be listed by 2003. The single exchange will combine futures, commodities and equities trading.

Foreign companies will be permitted to list on the Exchange by 2003 and, as an exception to the 30 per cent foreign ownership rule, unit trust-management companies and futures-broking firms will be allowed majority foreign ownership (currently foreigners can only own 49 per cent of a Malaysian securities company, 30 per cent of a bank and 51 per cent of an insurance concern).

Manufacturing policy

Malaysia's liberal foreign ownership policy in manufacturing has been extended by three years. The policy was introduced in mid-1998 to boost foreign direct investment in manufacturing in the midst of the Asian economic crisis, and allows full foreign ownership in all manufacturing sectors, except for seven sub-sectors where Malaysia is deemed to have sufficient expertise (including paper, and plastic packaging and printing). The policy was only intended to apply until December 2000, but it has been extended to December 2003.

The policy supersedes the previous one which provided for a graduated scale of foreign ownership based on the amount of exports, with 100 per cent foreign ownership allowed only if 80 per cent or more of a company's products were exported.

Property Reforms

To boost the property market, foreigners are now allowed to own residential and commercial properties in existing or yet-to-be-launched projects costing more than RM250,000 (US$60,000) without the need to set up a company with Malaysian equity partners.

In addition, stamp duty will be waived for all property transactions until the end of 2001 (previously stamp duty ranged between 1 per cent and 3 per cent of property value).

There are various other property rules which have been amended in favour of foreign investors - please contact Steve Clifford or Adam Lunn to find out how the changes may affect you.

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Indonesia
IBRA's Sale of Assets

The International Monetary Fund (IMF) continues to encourage the Indonesian Bank Restructuring Agency (IBRA) to dispose of the assets which it acquired from the failed banks in order to finance Indonesia's huge foreign debt.

IBRA, a unit of the Indonesian Finance Ministry, is charged with restructuring and recovering Rp27 trillion worth of non-performing loans transferred from ailing and closed banks during the 1998 financial crisis. In addition, IBRA has received hundreds of trillions of rupiah worth of fixed assets of which it is gradually disposing.

IBRA has nationalised four large private banks, and helped to recapitalise seven private banks. The Indonesian Parliament, after much delay, voted to allow the sale of stakes in BCA and Bank Niaga. The sales are likely to be through a combination of initial public offerings and strategic sales.

IBRA's asset sale program has been delayed by political processes in Indonesia. The Parliament's reluctance to approve sales by IBRA citing poor market conditions due to political and economic instability as the reason, has been opposed by the IMF on the grounds that delay would damage market confidence and place downward pressure on asset prices. The IMF has withheld a USD$400 million loan to Indonesia to support its view.

Update on Regional Autonomy

Minister of Home Affairs and Regional Autonomy, Surjadi Soedirdja, has announced gradual implementation of regional autonomy over at least six years. Critics have complained that business uncertainty requires swifter implementation.

In light of the decrease in mining exploration spending since the Asian financial crisis, Minister of Energy and Mineral Resources, Purnomo Yusgiantoro, is keen to enact a new Mining Law. However, although a draft of the Mining Law has been prepared, it is thought that the draft will not go before Parliament this year due to the impeachment proceedings against President Abudurrahman Wahid. In addition, the draft laws on oil, gas and electricity are likely to be deliberated first.

Additional uncertainty is presented by the prospect of Vice President Megawati Sukarnoputri becoming the next president. She has publicly questioned the consistency of the regional autonomy laws with the constitutional requirement for a unitary state.

Timor Gap Treaty

Negotiations are currently being carried out in Australia between the United Nations Transitional Administration in East Timor (UNTAET) and the Australian government in relation to a new treaty regulating petroleum exploration and development in the Timor Gap. By agreement with UNTAET and Australia in February 2000, the terms of the Timor Gap Treaty entered into between Indonesia and Australia in 1989, are in force until East Timor gains formal independence sometime later this year. Elections for a Constituent Assembly in East Timor have been scheduled for 30 August 2001.

The main issue in negotiations is how the revenue arising from production royalties in the Timor Gap will be divided between Australia and East Timor. Under the terms of the 1989 Timor Gap Treaty, Australia and Indonesia shared equally in revenue from an area in the Timor Sea called the 'Zone of Cooperation'. However UNTAET is seeking increased revenue under the new treaty more in accordance with a 90/10 split. Other issues such as ownership of processing plants and the employment and training of East Timorese are also being considered.

The parties are expected to reach agreement sometime in the 'mid-year' due in part to deadlines imposed by the oil and gas industry.

Employment Law

Earlier this year the Indonesian Government issued two Ministerial Decrees which provided that employers would pay an amount of 'compensation' to employees who had resigned, retired or been dismissed instead of paying them severance payments and other entitlements due to them upon the termination of their employment. Following labour riots in major industrial centres in Java, these Decrees have been postponed and the original law, Minister of Labour Decree Number 150/2000, reinstated.

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New legal and regulatory requirements

Singapore
New Singapore Business Federation

Later this year, Singapore companies with a paid-up share capital of more than S$499,999 and foreign companies registered in Singapore with authorised share capital of more than S$499,999 must become members of the new Singapore Business Federation (SBF). Compulsory annual subscriptions will depend on a company's paid-up capital. Business associations and smaller companies may elect to join the SBF.

The SBF will be governed by a 20 seat council and it is expected that 5 seats will be reserved for foreign chambers of commerce.

The SBF will focus on macro issues. It aims to represent the Singapore business community in the international arena, and improve coordination within the corporate sector, especially in light of the Free Trade Agreements which Singapore is negotiating with several countries, including Australia and USA (see Focus On South East Asia Issue 1).

Singapore's 2001 Budget

The Singapore 2001 budget has been welcomed by Singaporean companies and foreign investors alike. Corporate tax rate has decreased by 1 per cent to 24.5 per cent. To further encourage private enterprise, there are tax breaks for employee stock options gains, and a cut in property tax from 12 per cent to 10 per cent. Aimed at retaining local talent and attract foreign professionals, the personal income tax rate was cut 2-5 per cent in all brackets.

The budget, which is projected to be in surplus by almost S$4.5 billion, appears favourable for growth and investment in 2001.

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Indonesia
New Jakarta Futures Exchange

The Jakarta Futures Exchange (JFX) began trading in December 2000. The exchange is already trading in palm olein and robusta coffee futures. It is also licensed to trade in plywood, coco, pepper and rubber futures, but it has not yet implemented these contracts. The JFX has set up a clearing house and a market surveillance division to enforce its rules.

So far the exchange has been sluggish and its future success is thought to lie in financial futures, rather than commodities futures.

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Philippines
Philippines Passes Power Bill

After six years of wrangling, the Philippines Senate has ratified the Power Bill. The Bill calls for the division and sale of the state run National Power Corp (NPC) which supplies the majority of electricity to the Philippines. It is expected that the sale will occur in the second half of 2002.

The Bill aims to reduce NPC's debt, making it more attractive to prospective buyers. Critics claim that consumers will be lumbered with NPC's US$6 billion debt via increased taxes, and that the privatisation could lead to power cuts as occurred in California. Others fear foreign domination of a strategic sector.

Proponents cite the prospect of cheaper electricity in the Philippines (which currently has some of the most expensive electricity rates in Asia). The Bill is expected to result in increased power production, and promote investment in the power sector and general industry.

As a result of the passage of the Bill, the Asian Development Bank and other donors will release nearly US$1 billion in loans.

For further information, please contact:

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