Malaysia: Budgeting for private enterprise

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Malaysia's national oil and gas giant Petronas plans to launch two major Initial Public Offerings (IPOs) in November, Petronas Chemical and Malaysia Maritime and Heavy Engineering (MMHE), as part of a government initiative to transfer strategic assets to the private sector. The Petronas Chemical listing is set to become one of the biggest IPOs in Malaysian – and indeed South-east Asian – history.

The 2011 budget, announced on October 15, saw efforts to reinvigorate private investment, intensify human capital development, enhance quality of life and strengthen public service delivery. In effect it was a rallying call for the private sector aimed at keeping up the momentum in the government’s current shake up of the economy, as outlined in the five year Tenth Malaysia Plan (10MP) unveiled in 2010.

For Petronas, the focus has been on the sales. A term sheet obtained by Reuters new agency in late October showed the initial public offering will offer a maximum of 2.5 billion shares at a price range of 4.50 ($1.44)-5.20 ($1.68) ringgit per share. At the high end of 5.20 ringgit ($1.68), the IPO will raise $4.2bn.

Meanwhile, MMHE, a unit of Malaysia International Shipping Corporation (MISC) made a strong debut on the main market of Bursa Malaysia on Friday, opening at RM4.12 ($1.32), reported The Edge Malaysia. It later rose to surged to RM4.50 ($1.44), or 70 sen above its institutional offer price of RM3.80 ($1.22). The retail price was RM3.61 ($1.16).

Some 262m shares are on offer, though MISC has already agreed to sell 128m to the oil and gas engineering firm Technip for a total price of RM496.6m ($148.5m). Around RM2bn ($598m) could be raised and it is anticipated that a large slice of these proceeds have been earmarked for a number of projects.

Malaysian newspapers reported in early October that some RM798.8m ($238.8m) would go toward the company’s yard optimisation programme. This involves improving the capacities of existing yards in order to undertake marine conversions, while also enabling larger vessels to be worked on. Some RM110m ($39.9m) is also going to be spent to upgrade the company’s Kiyanli shipyard in Turkmenistan.

The Petronas Chemical IPO has been dubbed Malaysia’s largest, with the likely amount raised exceeding the Kuala Lumpur Bourse’s previous highest IPO, that of the telecoms company Maxis, which raised $3.23bn. The listing, which is due to take place in November, will also mark a remarkable year for Malaysia’s bourse, which was upgraded recently by the FTSE from secondary to advanced emerging (see Malaysia: Capital Progress, Oxford Business Group, October 4).

The IPOs are also good news for the government and its ambitious plans to restructure the economy more generally. Such goals were first outlined in the Government Transformation Plan and the New Economic Model, set out by Prime Minister Najib Razak earlier this year. These strategic outlooks were then followed by the nuts and bolts of the 10MP, which aims to boost competitiveness, with high-value-added industries taking a larger share of GDP and with the private sector more in the driving seat.

A more entrepreneurial culture is the aim, with a high tech, knowledge-based economy increasingly the basis of Malaysian business. This is seen as vital to moving the country to the next income level and escaping the “middle income trap”, which tends to lead to loss of competitiveness and foreign direct investment.

The 2011 budget has also given more clarity to the 10MP’s policies. In September, the government announced that it had identified some $444bn of private sector-led projects that could act as magnates to boost investment. FDI into Malaysia fell from $7.3bn in 2008 to $1.4bn in 2009, illustrating the need to regain lost ground, with the budget regarded a useful tool for this. The budget placed an emphasis on efforts to improve business conditions and spur sustained growth rather than on fiscal consolidation.

The government wishes to move fast on these targets so they will have a positive medium- to long-term impact on the fiscal deficit. In the short term, infrastructure projects outlined in the 10MP will likely keep government spending high. As the plan unfolds government spending is set to decline, particularly on operational costs. Subsidies have already been trimmed and are likely to be cut back further, while the introduction of a goods and services tax is also on the cards.

In tandem with this fiscal deficit trimming there will be a surge in private investment, the plan’s advocates argue, with the goal of becoming a high-income nation, requiring 5% to 6% annual GDP growth over the next decade. According to Prime Minister Najib Razak, this effort will require some RM2.2trn ($657.8bn) of new funds by 2020, with 92% of that expected to come from the private sector.

The budget is a clear attempt to send the right signals to entrepreneurs – that investing in Malaysia will bring good rewards, but much still rests on Prime Minister Najib’s shoulders.

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