Sunday, July 10, 2011

Malaysia Strategic Reform Initiatives (SRIs) / Economic Transformation Programme (ETP)

Over the week, the Government announced a raft of measures termed the Strategic Reform Initiatives (SRIs) to boost competitiveness and to sustain the New Economic Model (NEM) agenda.
The measures were revealed during the seventh Economic Transformation Programme (ETP) update session.
Performance Management and Delivery Unit (Pemandu) chief executive officer Datuk Seri Idris Jala says the SRIs are the enablers to ensure competitiveness just as the National Key Economic Areas (NKEAs) are the drivers to ensure focus.
He says it is now the time to focus on competitiveness now that the NKEAs are on-track to achieve their 2020 targets in terms of gross national income (GNI), investments and jobs.
Idris says the SRIs are the enablers to ensure competitiveness.
The announcement comes at a time when the public and investors alike will need some reassurance that the Government is still committed to the reforms that the country needs to sustain long-term growth.
It also comes at a time when some of the measures such as the reduction of subsidies, which enhances fiscal prudence, have stalled following the spike in food and energy prices earlier in the year.
Observers of the Malaysian economy believe that announcing the SRIs is the right move as doubts over the pace of reforms among investors may then be assuaged.
Maybank Investment Bank Bhd chief economist Suhaimi Ilias says in a report dated July 6 that although two years in the making since the setting up of the National Economic Advisory Council (NEAC), the SRI announcement goes a long way in providing greater level of clarity and certainty on Malaysia's commitment to reforms.
Inclusive and structured
Suhaimi: 'The government policy making process is now more inclusive and structured.'
Nothwithstanding the length of time taken to produce the SRIs, he says what is more important is the detailed documentation of the measures, targets, deliverables and milestones.
“In short, the government policy-making process is now more inclusive and structured, with clear deliverables and implementation/execution timeline,” Suhaimi says.
He adds that this represents a departure from the stereotype that has shaped perception about Malaysian policies in the past, that is, “long on announcements, short on deliveries”.
Meanwhile, AmResearch Sdn Bhd director of economic research Manokaran Mottain says in a report that there are no surprises in the recent ETP update but the SRI announcement is a move in the right direction, especially with a roadmap on key reforms needed to ensure the ETP's success to enable Malaysia to achieve a high-income nation status by 2020.
“We believe that with these reforms, the Government has put in place the right strategies and transformation measures, towards setting the trend-wise growth of an average 6% per annum for this decade,” he adds.
Manokaran: ‘The Government has put in place the right strategies and transformation measures.’
Manokaran says the key reforms will also ensure enhancement of the country's competitiveness, which will attract more foreign direct investments.
There are now six SRIs defined around reform areas for easier implementation versus the thematic grouping of eight SRIs identified by the NEAC during the launch of the NEM in March last year.
The SRIs identified to boost competitiveness are - public finance reform, the Government's role in business, human capital development, public service delivery, international standards and liberalisation, and bumiputra small-medium enterprises.
The six SRIs are based on 37 policy measures recommended by the NEAC from a total of 51 policy suggestions with the remaining measures now part of the NKEAs and National Key Result Areas (NKRA).
They are the result of six weeks of consultation held in six labs with 500 persons drawn from the public and private sectors who developed the programmes for the SRIs.
These labs generated 13 reports amounting to 3,000 pages containing recommendations and policy changes for the economy and the country's finances.
Idris says the labs detail in “three-feet level recommendations” the what, how and when to implement the policy changes.
Among the more important targets set, observers say the aim of creating RM13bil in fiscal space to be realised via revenue generation and cost savings over a period of five years when fully implemented is encouraging.
This will go hand-in-hand with Pemandu's recommendation that the Government bring the fiscal deficit down to 2.8% of gross domestic product (GDP) by 2015.
The members of the public finance reform lab focused on several key levers to improve the country's fiscal position improving tax administration, rationalising corporate tax incentives, transparent procurement, controlling expenditure, broad-based taxation and, accrual accounting.
They came out with 21 recommendations which may generate up to RM13bil in revenue and cost savings within the first two years of implementation.
“I think there'll be some measures on the deficit that will be reflected in the coming Budget,” Idris hints.
Manokaran says this will not be easy to achieve given the challenges in changing public perception over the need to implement the subsidy rationalistion programme while maintaining the image of a caring Government.
He says while all the SRIs hold equal importance, it is encouraging to see that public finance reform will be implemented especially since the debt crises engulfing developed countries puts a spotlight on national debt and deficit levels.
Suhaimi says underlining the commitment to reform is the fact that Prime Minister Datuk Seri Najib Tun Razak and senior cabinet ministers are taking ownership of the SRIs.
With Najib in charge of public finance reform and the Government's divestment plans together with Pemandu overseeing implementation, he says the proven implementation framework, reporting structure and communication under the Transformation Programme and ETP is automatically adopted and applied for SRIs to ensure and guarantee execution.
Sterling performance
There is no doubt that over an eight-month implementation period, the ETP has shown what Jala describes as a “sterling” performance. “We're well under way and need to keep the momentum going,” he says.
Idris points to the stock market's benchmark FBM KLCI performance, which have risen to all-time highs recently and higher consumer confidence as a mark of investor confidence in the nascent transformation of the economy.
“Something is happening in the economy, stock markets around the world have also risen but the point is how many have reached all-time high?” he asks.
Cahyad i: ‘For the near-term perspective, we’re less bullish.’
To-date, 65 of the 131 entry point projects identified under the NKEAs have taken off the ground resulting in RM170bil in committed investment, RM220bil in GNI up to 2020 and 362,396 jobs to be created.
GNI during the implementation period has achieved 13% of the 2020 target of RM1.7 trillion, while investments have reached 12% (from RM1.4 trillion) and jobs 11% (from 3.3 million) of their respective targets.
However, as external headwinds grow stronger, the country will have to rely more on domestic demand in the form of private consumption to support the economy as exports have slowed considerably since peaking earlier last year.
Exports have continued to slow down on a year-on-year comparison as the latest data from May showed with the exports-reliant electronics and electric industries impacted by slower demand from the United States.
Singapore-based Oversea-Chinese Banking Corp Ltd economist Gundy Cahyadi says in a press statement on the second-half's outlook that on the investment front, progress on the ETP is worthy to monitor and definitely put a positive twist on Malaysia's longer-term growth outlook.
Despite announcements on multi-billion ringgit projects in the oil and gas industry, he cautions that most of these projects tend to be still in the planning stage and that the amount of investment in the near-term is still likely to be limited.
“For the near-term perspective then, we're less bullish, especially noting that imports of capital goods have somewhat stalled at around the 6% to 9% year-on-year in the first-half, unlikely to lead private investment growth returning to the double-digit territory, which is essential for the Government's medium-term growth target,” Cahyadi says.
He adds that loan growth for working capital has continued to be lacklustre, presumably suggesting that most businesses still prefer to be cautious.
“Private investment growth is the key for Malaysia to build its momentum for the next five years or so, and without a stronger rebound in the second-half, we're unlikely to see GDP growth soaring above 6% year-on-year for 2011,” Cahyadi says.
Lee regards the SRIs announcement as another confidence booster
Confidence booster
CIMB Investment Bank Bhd head of economics Lee Heng Guie regards the SRI announcement as “another confidence booster”.
He picks the Government's strategy to have a diminishing role in business as the SRI to have the most immediate impact on the stock market.
“The Government appears to have a well-thought-out plan for the divestment of its holdings in listed companies. We view the divestment programme as timely as it will help improve liquidity and free float in the market at a time when the FBM KLCI is scaling new all-time highs on a daily basis,” Lee says.
He says the objectives for the divestment are not new and have been brought up by Najib on many occasions but this is the first time that the divestment plans have been laid out systematically.
The Government has identified 33 companies in which Government-linked investment companies such as Khazanah Nasional Bhd andPermodalan Nasional Bhd have stakes which will eventually be divested either through a listing, pare-down or outright sale.
Of these, five have been identified for stake pare-downs, seven for public-listing and 21 for outright sale.
For this year and next, 24 companies have been identified for the Government's divestment exercise but the deals will only go down only if the price is right.
Maximum value
According to Idris, the right price, as agreed by the CEOs of these companies with the Government, will depend on a like comparison with other assets transacted.
The right price may also be calculated based on net tangible assets or the future value.
“The principle is very clear, we've a minimum and maximum price, so we've to work within that band, we want to extract the maximum value that we can get from the assets and we don't want a fire sale,” Idris says.
Essentially, the Government has three objectives in rationalising its role in business to avoid crowding out the private sector, increase liquidity in the capital markets and improving the Government's fiscal position.
Idris reiterates that the Government will only be in business where private investors need co-investors such as in the corridor development projects.
Other compelling reasons for the Government to be involved are businesses which involves security/defence or food security, projects with long gestation period needing large capital or new technology and, national infrastructure projects such as the My Rapid Transit.

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