Emerging markets’ troubled start to 2014 was largely expected. Amid political unrest, terrorism and mounting doubts over China’s continued economic growth, an unhappy new year was widely predicted. Even so, the severity of the turmoil surprised many.
Malaysia has since featured among the doom-mongers’ principal targets. The cost of living is rising as subsidies are cut. Household debt and property prices are on the up. China and the US are two of its largest trading partners. Some analysts have prophesied that its bubble will burst alongside China’s.
Yet the Malaysian government has big plans. It recently unveiled an audacious scheme to transform the capital, Kuala Lumpur, into a financial centre in an attempt to raise the country’s profile and encourage international trade.
Covering 70 acres and featuring 11 new buildings with 25 or more floors, the proposed Tun Razak Exchange (TRX) has already been dubbed ‘Asia’s Canary Wharf’. If the Malaysian government is to be believed, this intrepid upstart will compete with existing regional financial superpowers such as Singapore and Hong Kong and might one day even be mentioned in the same breath as the likes of London and New York.
The critical question for investors, of course, is whether the idea is commendably ambitious or completely unrealistic. Is it genuinely possible that TRX could become a dedicated international financial hub that promotes Kuala Lumpur – and, by extension, Malaysia – as a new nucleus of economic growth? Could it really create the critical mass needed to boost productivity and make Malaysia a high-income economy by 2020, as the government suggests?
The Global Financial Centres Index offers a stark illustration of the scale of the task. Although still in the Asian top 10, Kuala Lumpur fell in the most recent rankings and is now placed 22nd worldwide. London and New York lead the pack by a country mile. Singapore and Hong Kong, TRX’s intended immediate competitors, are third and fourth.
One option for Malaysia would be to adopt a more niche approach and build on its established strength in the rapidly expanding Islamic financial marketplace. Demand for Islamic financial services is increasing both regionally and globally, and Malaysia is well placed to take advantage of this shift. According to the country’s Central Bank, Malaysia’s Islamic banking assets currently stand at $168.4bn (£101.2bn). This accounts for a quarter of the Malaysian banking system, which in turn accounts for more than 10 per cent of the world’s total Islamic banking assets.
The country’s Islamic financial sector is also characterised by a robust and shariah-compliant regulatory climate and has a solid sukuk (Islamic bond) market – more than 60 per cent of the global total.
Yet this may not be sufficient. To have any hope of succeeding, Malaysia will also need to address the significant issues associated with the supply of human capital.
The effectiveness of any international financial centre, after all, is underpinned by the quality of its people and business environment, its ability to access international markets, its infrastructure and its general competitiveness. Malaysia may be able to tick some of these boxes, but others will present sizeable obstacles.