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http://www.asiaweek.com/asiaweek/daily/ foc/0,8773,173271,00.html

Asiaweek

Webfiles: At Last - Some Reasons for Malaysians to Smile

Financial deregulation could be good news for everyone

By ARJUNA RANAWANA

Friday, August 31, 2001

The future looks bright for Malaysia's fund managers and those running unit trusts. "It's a sunrise industry for sure," says Edward Ong of G.K. Goh Securities in Kuala Lumpur. Reasons for the optimism include planned deregulation of the finance industry, changes in savings patterns and more favorable demographics. But improvements will not happen all by themselves. They will depend largely on the economy improving and the government having the political will to do what it knows has to be done.

The main engine of change will be the government's plan to open up the financial services industry. This is expected to end the government's dominance over funds -- government funds control 66.6% of the net asset value of the unit-trust industry, for instance. The Financial Sector Master Plan, unveiled earlier in the year, foresees gradual deregulation of the industry over the next 10 years, starting this year. Malaysians will be given the option of changing their savings funds from compulsory schemes managed by the government to higher-yielding unit trusts. When similar deregulation took place in the U.S. and U.K. in the early 1980s, there was a 25% jump in the growth of funds within a decade. Under the proposed deregulation, the Employees' Provident Fund (EPF) is expected to place some 67% of its funds with external fund managers. This will be another boost to the industry.

The 37 Malaysian companies managing unit trusts are set to grow the fastest, say managers. But they feel that these funds could start growing even before the deregulation takes place. Yeoh Keat Seng, CEO of fifth-ranked, by size, Commercetrust, expects the funds under management in the nearly 140 unit trusts in Malaysia to grow to $65 billion by 2010, from a current base of $11.3 billion. This looks steep, but Yeoh points to several factors that he says will make it possible.

The current low base is an important factor. Unit Trust penetration is low in Malaysia -- just over 5% of GDP. Countries like India have a penetration of nearly 90%. Yeoh predicts that unit trusts will become a core product when retirement planning is considered. He believes that professionals wanting to save for specific purposes, such as educational expenses for a child or the purchase of a house, will switch to unit trusts. He hopes that Malaysians will change their saving habits as well. Many of them now keep their money in fixed deposits, but he wants to persuade them that these deposits lose value when adjustments are made for inflation. Another factor: Malaysia's population is young -- about three-quarters are under the age of 40 - and there will be lots of productive people entering the job market to make contributions to the economy and use savings instruments.

However, some things will have to fall into place before Yeoh's predictions come true. The first will be that the economy and the capital markets recover quickly. Apart from that, there is considerable skepticism among industry players about the government's enthusiasm for deregulation. If the government relinquishes control over state-managed pension funds, it will lose a vital instrument through which it influences the economy and the stock market. Large funds such as the government servants' Pension Fund and the EPF have in the past been accused of coming to the aid of failing companies with connections to the government. Market sources also say these funds have been used to sometimes drive up the Kuala Lumpur stock market. As a result of this use of funds, dividends paid by the EPF have fallen. If deregulation means a chunk of this money will be managed by outside fund managers, then politically linked decisions cannot be made.

However, with a wind of change blowing through Malaysia Inc. these days, and with the appointment of younger professional managers and stronger pledges to observe better corporate governance practices, the deregulation may actually take place. Then Malaysians will then have a better range of options to choose from for their savings. And that can't be bad.