Sample of assignment: Impacts of ETP and Vision 2020 on Bond Market

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List of figures

 

Figure 1 The 4 pillars of the national transformation in Malaysia……………………………. 3

Figure 2 National Key Economic Areas (NKEAs) in the ETP……………………………….. 8

Figure 3 The key Kuala Lumpur International Financial District (KLIFD) Focus…… 11


 

Content page

List of figures………………………………………………………………………………………………….. 1

1.     Introduction of Vision 2020 and Economic Transformation Program (ETP)……… 3

2.     Influences on debt issuers…………………………………………………………………………… 4

2.1       Reduction of issuer costs………………………………………………………………….. 4

2.2       Diversified fund resource…………………………………………………………………. 4

3.     Influences on investors………………………………………………………………………………. 5

3.1       Possible shrink of market value of the existing bonds…………………………… 5

3.2       Enhanced investor confidence…………………………………………………………… 7

3.3       Freeing captive holding of Malaysian government securities…………………. 7

3.4       Focus on the investment opportunities in the key industries………………….. 8

4.     Influences on market intermediaries…………………………………………………………….. 9

4.1       More business opportunities for bond market intermediaries…………………. 9

4.2       Increased competition among the market intermediaries…………………….. 10

4.3       Shift of focus on Islamic finance……………………………………………………… 10

4.4       Location strategy in the trend of centralization of back office…………….. 11

Reference……………………………………………………………………………………………………… 13

Appendix 1.0 Transformation of financial services…………………………………………….. 16


 

Impacts of ETP and Vision 2020 on Bond Market

 

1.        Introduction of Vision 2020 and Economic Transformation Program (ETP)

 

Figure 1 The 4 pillars of the national transformation in Malaysia

Source: Rsmi.com.my 2010

 

The Economic Transformation Programme (ETP) is a comprehensive effort that will transform Malaysia into a high-income nation by 2020 (Pemandu.gov.my 2010). Malaysia targets to raise GNI per capita from about USD6, 700 or RM23, 700 in 2009 to more than USD15, 000 or RM48, 000 in 2020, propelling the nation to a high-income economy (1mdb.com.my 2010). To achieve this overall goal, it will request the Malaysia economic to maintain an average 6 percent growth in term of the GNI (gross national income). And this Economic Transformation Programme (ETP) together with three other major plans, 1 Malaysia vision, Government Transformation Programme (GTP) and the 10th Malaysia Plan form up the 2020 vision for the Malaysia economy and political status. And in the division of the Economic Transformation Program (ETP), 131 entry point projects (EPPs) and 60 business opportunities in 12 major National Key Economic Areas (NKEAs)have been planned by the government and relative departments to begin the program and an approximately RM 211 billion will be required to fund the overall market needs by 2020 (Pemandu.gov.my 2011). And also the government claimed that 92 percent of the needed funding would be from the private sector, in other words about RM 194.12 billion will be from the capital market, this means a number of impacts will be on the capital market especially on the bond market.

 

2.        Influences on debt issuers

 

2.1    Reduction of issuer costs

 

As we know, with the economy grows the demand for credit grows too because companies need to borrow additional capital to fund their business expansion (Crescenzi & El-Erian 2010). One key task of the government would be to reduce the cost of the issuers so that the bond market could attract a wider range of investors in a global scale to accelerate the credit growth. To achieve this target, in term of the financial service within the Vision 2020 and Economic Transformation Program (ETP) the government has targeted at revitalizing the capital markets, deepening and broadening the bond markets by creating an integrated payments ecosystem and improving the electronic trading systems (ETS). The setup of the integrated payments ecosystem and improvement in the electronic trading systems (ETS) could have a potentially significant market impact by improving the transparency, liquidity and efficiency of the bond market (OECD 2001, p.187). And all these positive impacts all together will help deepening and broadening the bond markets and result in a surge in the transaction volumes that will in return reduce the issuer costs as well as the dealer-spreads costs.

 

2.2    Diversified fund resource

 

According to Pemandu, in order to achieve the ambitious goals set by the Economic Transformation Programme such as increasing the Malaysia’s Gross National Income (GNI) to US$523 billion by 2020, an approximately RM 211 billion will be required to fund the overall market needs by 2020 (Pemandu.gov.my 2011). And also the government claimed that 92 percent of the needed funding would be from the private sector, in other words about RM 194.12 billion will be from the capital market and it is obvious that the raise of this large amount of fund could not easily done by the domestic investors only and the inflow of the international capital is apparently welcome by the market and the government. And according to Kim (2003), bond markets reply on the disclosure of financial information to function effectively. And for individual bond issuers, the public disclosure requirements that the issuers must comply with as well as requirements specifying accounting standards and independent audits of financial statements are necessary and also important for the individual bond issuers to attract attention and preference from the individual and institutional investors. And with the anticipating large inflow of foreign investments, it is of significant importance for the issuers to disclose and prepare for the accounting standards and independent audits of financial statements in accordance with the practices in the international bond markets to attract these international funds and investments.

 

3.        Influences on investors

 

3.1    Possible shrink of market value of the existing bonds

 

As we know the par value of a bond is the principal or the face value at maturity. And the amount of the money that the investors would get back at the maturity date will usually be stated by the obligor or the borrowing entity (Crescenzi & El-Erian 2010). Though for those who have a bond and hold it to maturity market volatility is not relevant the principal and interest are given based on a pre-determined schedule, the case for those who buy in or sell out the bonds in ahead of maturity will be affected by the market volatility in term of the fluctuation of the market value of the bond. According to Lasser (2004, p.519), the trade price or the market value of a bond fluctuates in response to changes in interest rates and business conditions such as the future prospects of the issuing companies and the maturity period of the bond. Usually the most influential change among the changes happens in the interest rates. And it is known to use that the bond prices and the changes in the interest rates are inversely related (Mayo 2008, p.539). For example, if the current interest rate increases over the interest rate of the existing bond, the market value of the existing bond will shrink because the new bonds will carry coupons reflecting current rates making the existing bond which carries the old and lower coupon less attractive (Dym 2010, p.89). And there is reason to believe that the interest rate in the future will rise with the implementation of the Vision 2020 and Economic Transformation Program (ETP). Classical economic theories suggest that if economic growth increases, higher interest rates expected under most circumstances (Madura 2007, p.638). With the Malaysian government’s ambitious plan to turn Malaysia into a high income economy by the year of 2020 which comes along with the carrying out of a number of Entry Point Projects (EPPs), National Key Economic Activities (NKEA) and other business activities initiated by the government, the government would have to adopt expansive monetary and fiscal policy to stimulate the investment itself as an example to other investors though 92% of the total investments will originate from private sector, this is because the monetary authority can not finance indefinitely a rapid expansion of the total demand without incurring an acceleration of inflation and expected inflation comes with interest rate increase (Bosworth 1984, p.191). In conclusion, the expected interest rate growth that comes along with inflation in a fast growing economy will tend to cause shrink of market value of the existing bonds because people prefer new bonds that will carry coupons reflecting new interest rates making the existing bond which carries the old and lower coupon less attractive.

 

 

3.2    Enhanced investor confidence

 

The release of the Vision 2020 and Economic Transformation Program (ETP) by the government is very likely to stimulate the short term bond investment from the local market and international individual and intuitional investors with the hope that the market is going to be prosperous and thus bring profits to the early investments, but in a long term’s perspective, only plans and blueprints are not enough the make the investors feel safe and secured. But it is the gradual economic and political achievement in term of transformation in the expected direction during the unfolding of the vision and the program that will truly enhance the investor confidence. The evident could be found in the following facts and news. In the first year of the implementation of the Vision 2020 and Economic Transformation Program (ETP) the Malaysian economy grew 7.2 percent in 2010, outperforming the official expectation of 6 percent and reversing the contraction of 1.7 percent in 2009 (Xinhuanet.com 2011). Also according to Najib, the investment from Entry Point Projects of the Economic Transformation Programme (ETP) is expected to generate about RM76 billion in 2011 (Pemandu.gov.my 2011). And what is more 30 per cent of 5,835 companies in an investigation had expressed that they are planning to invest a total of about RM50.6 billion this year. These gradual achievements in the economic performance have shown that the Malaysia economy is moving smoothly and even little faster in the right direction along its well plan and it is hopefully these facts and the well-designed plans and visions will enhance the domestic and international investors’ confidence in the Malaysia bond market.

 

3.3    Freeing captive holding of Malaysian government securities

 

One policy direction in the bond market within the Vision 2020 and Economic Transformation Program (ETP) is to encourage institutional investors to participate in the securities lending activities based on the established Web based Institutional Securities Custodian Program which enables the central bank to borrows securities. And increasing efforts based on the program is said to be able to further freeing the captive holding of Malaysian government securities and provide more free alternatives for the institutional investors with the aims to boost the overall liquidity in the bond market (Sophastienphong, Mu & Saporito 2008, p.19).

 

3.4    Focus on the investment opportunities in the key industries

 

Figure 2 National Key Economic Areas (NKEAs) in the ETP

Source: Rsmi.com.my 2010

 

Acting as an initial catalyst towards the economic transformation and setting the general direction for the Economic Transformation Program (ETP), 131 Entry Point Projects (EPPs) had been designed and about to be implemented in 12 National Key Economic Areas (NKEAs) and at the same time provide a total 60 Business Opportunities to market as shown in the figure above. Basically these 12 National Key Economic Areas (NKEAs) will attract the a great proportion of the foreign investments which means that the investors should focus on these industries because it would be welcome and getting attention from the international funds in particularly in the key industries such as the Oil, Gas & Energy, Agriculture, Electronics & Electrical industries that are the policy focuses in term of the number of Entry Point Projects (EPPs) and Business Opportunities (BOs). And what is more, the investors should also closely monitor the changes in policy and direction during the implementation of the Vision 2020 and Economic Transformation Program (ETP).

 

4.        Influences on market intermediaries

 

There is a variety of intermediaries that may get involved before a bond gets from the issuer to the investors, the market intermediaries include dealers, commercial banks and fund management, rating agencies and so on.

 

4.1    More business opportunities for bond market intermediaries

 

The expected fast growth of the capital market and with the government’s future focus on the development of the institutional underpinnings for the bond market will provide more business opportunities for the booming of the credit rating agencies, efficient clearance and settlement systems, bond insurance and the development of the strong networks of intermediaries that will facilitate the primary and the secondary trading of bonds (Dalla 1995). As stated in the GTP & ETP Annual Report 2010 (English version), the overall target of the Economic Transformation Program (ETP) would be set forth an ambitious 10 year economic roadmap to propel Malaysia’s economy into high income economy. And targeting the high income society, there would be an accelerated growth of the private pensions industries, wealth management and asset management industries and the development of these industries will provide a large number of business opportunities to for the bond market intermediaries. Also because of the fact that the revenue and profit generation are normally related to the trade volume of the bonds, with the expected rapid growth of the capital market size, bond market intermediaries could anticipated in the growth of their business and profit making during the carrying out of the Vision 2020 and Economic Transformation Program (ETP) and other future direction directions that facilitate the capital inflow and free bond market.

 

4.2    Increased competition among the market intermediaries

 

Though it is claimed and widely agreed that the competition in the bond market between the market intermediaries improves the liquidity and overall efficiency of various kinds of market transactions (The World Bank 2001, p.233). This could also be understood easily because only when there are sufficient number of dealers that can compete for the order flow the transaction costs could be lowered and also bring incentives for the dealers to bring down the prices of the services they provide that charged on the investors and issuers. With the unfolding of the Vision 2020, Economic Transformation Program (ETP) and relative policies and design of the financial service market in Malaysia, as mentioned above the trading volume would increase dramatically due to the great capital need of the business entities to power their expansion and business upgrading and transformation to move up value added chain, and when the trade volume of bonds increases to a sufficient level, it would attract and support competing market intermediaries in the bond market. But in the perspective of the market intermediaries, because of the nature of competition and the potential conflicts with the policy goals of the central bank, the increased competition among the market intermediaries may lead to problems such as unequal competition and bribe taking and other irregularities behaviors.

 

4.3    Shift of focus on Islamic finance

 

One of the key strategies that the company adopts to improve the economy is through building up the Malaysia economy as a hub for Islamic financial services which is achievable based on the fact that Malaysia has been one of the leading banking and capital markets as well as a takaful industry in the world (Derdak & Grant 2005). With this strategic decision and direction, it is necessary for the bond market intermediaries to closely monitor the implementation of the policy and future policy changes and prepare to shift the focus to the Islamic individual and institutional investors within the trend of strengthening the Islamic finance.

 

4.4    Location strategy in the trend of centralization of back office

 

Figure 3 The key Kuala Lumpur International Financial District (KLIFD) Focus

Source: 1mdb.com.my 2010

 

The Kuala Lumpur International Financial District (KLIFD) is a key enabler to strengthen the position of Kuala Lumpur as the global financial city of choice. Within the detailed master plan of the KLIFD plan, about 30 hectare land used for development in the Imbi area facing the Jalan Tun Razak is targeting at bringing together leading financial institutions and top global companies to create a catalytic pool of world-class players (Malaysiandigest.com 2011). And within this trend of centralization of back office for the local and global leading financial institutions, bond market intermediaries should make their own location strategy to get close to these leading financial institutions that could be the possible large institutional investors and also the access to the financial service provided by them could hopefully increase the bond market intermediaries’ business effectiveness and efficiency. And also the location in the Kuala Lumpur International Financial District (KLIFD) could be able to play the role to increase the popularity of the individual marketing intermediary beside the agglomeration effect.

 

 

Reference

 

Bosworth, B. 1984, Tax incentives and economic growth. Washington, D. C.: The Brookings Institution, p.191

 

Crescenzi, A. & El-Erian, M. 2010, The Strategic Bond Investor: Strategies and Tools to Unlock the Power of the Bond Market. New York: McGraw-Hill Companies, Inc.

 

Dalla, I. 1995, The emerging Asian bond market. Washington, D. C.: The international bank for reconstruction.

 

Derdak, T. & Grant, T. 2005, International directory of company histories, Volume 72, United States: St. James Press

 

Dym, S. 2010, The Complete Practitioner’s Guide to the Bond Market. New York: McGraw-Hill Companies, Inc. p.89

 

Kim, Y. H. 2003, Local government finance and bond markets, Manila, Philippines: Asian Development Bank.

 

Lasser, J. K. 2004, J.K. Lasser’s Your Income Tax 2005: For Preparing Your 2004 Tax Return, San Francisco: John Wiley & Sons. p.519

 

Mayo, H. B. 2008, Investments: an introduction, 9th edition, Mason, OH: South-Western Cengage Learning. p.539

 

Madura, J. 2007, Introduction to business. Mason, OH: Thomson Higher Education. 4th ed, p.638

 

Malaysiandigest.com 2011, KL International Financial District Master Plan to be Ready 1Q 2012, Last edited on 4 AUG, 2011, Link: http://www.malaysiandigest.com/component/content/article/38-health/28533-kl-international-financial-district-master-plan-to-be-ready-1q-2012.html

 

OECD 2001, Bond Market Development in Asia, Paris Cedex: OECD Publications Service, p.187

 

Pemandu.gov.my 2011, Malaysia confident of hitting RM83 billion investment target, view on 15th Aug 2011, Link: http://etp.pemandu.gov.my/News_-%E2%97%[email protected]_confident_of_hitting_RM83_billion_investment_target.aspx

 

Pemandu.gov.my 2010, Propelling Malaysia Towards Becoming A High-income Developed Nation, view on 15th Aug 2011, Link: http://etp.pemandu.gov.my/[email protected]_of_ETP.aspx

 

Pemandu.gov.my 2011, Overview of ETP, view on 15th Aug 2011, Link: http://etp.pemandu.gov.my/[email protected]_of_ETP.aspx

 

Rsmi.com.my 2010, Excerpts of the government transformation programme (GTP) & economic transformation programme (ETP): key thrusts to power the nation towards 2020) viewed on 15 Aug 2011, link: http://www.rsmi.com.my/WebLITE/Applications/productcatalog/uploaded/Docs/Government%20Transformation%20Programme%20&%20Economic%20Transformation%20Programme%20Article%205.10.10.pdf

 

Sophastienphong, K., Mu, Y. & Saporito, C. 2008, South Asian bond markets: developing long-term finance for growth, Washington, D. C.: The international bank for reconstruction and development, p.19

 

The World Bank 2001, Developing government bond markets: a handbook, Washington, D. C.: The international bank for reconstruction and development / The world Bank, p.233

 

Xinhuanet.com 2011, Malaysia’s GDP in 2010 grows 7.2%, view on 15th Aug 2011, Link: http://news.xinhuanet.com/english2010/business/2011-02/18/c_13739048.htm

 

1mdb.com.my 2010, KLIFD in Economic Transformation Programme, accessed on 15th Aug 2011, Link: http://www.1mdb.com.my/klifd1/klifd-economic-transformation-programme

Appendix 1.0 Transformation of financial services

Source: Rsmi.com.my 2010, Excerpts of the government transformation programme (GTP) & economic transformation programme (ETP): key thrusts to power the nation towards 2020)

 

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