October 15, 2015 12:00 am JST

Malaysian banking boss says TPP deal needs further scrutiny

SAM NUSSEY, Nikkei staff writer

LONDON -- The head of Malaysia's second-largest banking group said the terms of the Trans-Pacific Partnership trade deal need to be examined further before they can be said to be in the national interest. "We need to be careful that joining the TPP will give Malaysia and Malaysians the benefit of the reforms," Nazir Razak, chairman of CIMB Group Holdings, said in an interview with the Nikkei Asian Review.

      Nazir was in London to receive the Asia House Business Leaders Award. He was chosen for his success in transforming CIMB Group from a small investment bank into one of Southeast Asia's largest lenders, the bank's charity work and its prominent role in Islamic finance, in which CIMB has a 15% share of the global market.

Striking a balance

The agreement on the TPP, a sweeping accord that would cover nearly 40% of the global economy, was reached in early October after five years of negotiations. However, it must first be approved by the national legislatures of the governments involved. Although Nazir describes himself as a "free marketeer" by nature, he said such a deal must take into account the local circumstances in Southeast Asia. The region is home to a large number of government-affiliated companies, and they could face harder times if the TPP is enacted. While markets would be opened up to global competition, local players might find themselves forced to adhere to onerous domestic regulations, the executive said.

    Last year Nazir, the younger brother of Malaysian Prime Minister Najib Razak, became chairman of CIMB Group after 15 years as the chief executive of the investment bank and later the group. During his tenure at CIMB, the company has expanded across Southeast Asia. In August, the bank received approval to operate in Vietnam, which would give it a presence in nine of the 10 member countries of the Association of Southeast Asian Nations. 

     While the TPP is the largest trade deal in over 20 years, it is not the only initiative looking to transform trade in Southeast Asia. The ASEAN Economic Community is due to launch at the end of the year and aims to speed the flow of goods, services, skilled labor and investment across the bloc's borders. It will include countries that are not part of the TPP, such as Thailand and Indonesia.

     The AEC deal was signed in Singapore in 2007. While describing ASEAN integration as "progress" and "a positive step in the right direction," Nazir said he is "frustrated" with the speed of change. Trade within the region has grown slowly, with intra-ASEAN trade as a proportion of total trade growing from 19% in the early 1990s to around 24% today.

     While tariff barriers have dropped, "there's not been a huge lift" because nontariff barriers continue to hold trade back, Nazir said. Progress has been held back by "the realities of integration," which requires "balancing domestic interests with nationalism."

     In Malaysia's case, there has been "a fairly unique confluence of economic and political pressures on the country this year," he said. Tumbling commodity prices have hit Malaysian exporters hard, and investors' money has been leaving the region ahead of a potential rate hike in the U.S. Allegations of misconduct at state investment fund 1Malaysia Development Berhad have compounded the difficulties, putting Nazir's brother under considerable pressure.

     "[The fund issue] is something that needs to be addressed," said Nazir. "It's obviously unhealthy to have so much negative publicity."

The China factor

Malaysia's ability to attract foreign investment relies on the country being seen as a partner that it is easy to do business with, he said. "Malaysia is a small market, and we really have to make a strong case to attract investments," Nazir said. "We have to get back to talking the same lingo to investors as we have done in the past."

     The biggest headwind for ASEAN economies is the slowdown in China, said Nazir. Falling demand in the world's second-largest economy has contributed to the collapse in commodity prices. Last month Chinese manufacturing contracted at the sharpest rate in six and a half years, according to figures from U.K. financial data company Markit.

     Securities exchanges around the world were spooked by the market volatility in China, with the key bourses in Indonesia, Thailand and Singapore all recording falls of 10% or more. Governments have scrambled to come up with measures to support their faltering economies. Indonesia said it will offer cheap loans to companies in strategic industries. Thailand has approved a stimulus package worth over 130 billion baht ($3.65 billion) that includes cheap loans for small and midsize companies and credit guarantees to encourage banks to lend to them.

     A 9% fall in stock prices has seen the Malaysian government launch a plan to pump 20 billion ringgit ($4.83 billion) into undervalued stocks via an investment vehicle called ValueCap. The ringgit has been the worst-performing Asian currency this year and, while it has recovered some ground, is still down more than 15% from January.

     As policymakers try to wean China off investment-led growth and more toward domestic, service-based consumption, there could be new opportunities for some ASEAN countries, said Nazir. "Different countries will experience it (the slowdown in China) differently," he said. "You could argue that the north ASEAN countries, such as Cambodia and Vietnam, will actually be a beneficiary as China reconfigures its economy." On the other hand, he said, Malaysia and other countries that manufacture higher-end products and ship them to China are seeing some production move to China itself.

Different this time

CIMB Group sees potential in Vietnam, the executive said. "While everyone was having a party, Vietnam was very much quietly reorganizing, restructuring, cleaning up the banks." The country is gradually selling off stakes in state-owned companies such as Vietnam Dairy Products, or Vinamilk, Vietnam's largest dairy producer, and telecommunications conglomerate FPT.

     U.S. think tank Peterson Institute for International Economics has said Vietnam will gain the most from the TPP deal. Cheaper access to other countries' markets and a less competitive China are likely to boost Vietnamese exports. State Bank of Vietnam, the central bank, has devalued the country's currency, the dong, three times this year.

     Nazir said he does not think the mounting pressures in the region will lead to a replay of the 1997-98 Asian financial crisis, when the Thai government burned through billions of dollars' worth of foreign currency reserves trying to defend its currency before succumbing to pressure from short-sellers. A series of shocks and hot money fleeing the region saw Thailand's stock market plunge 75%, capital controls imposed in Malaysia and Indonesia's president fall from power.

     "This time around, currencies have adjusted," said Nazir. "The fall in the [Malaysian] currency is painful but we didn't waste a lot of money trying to defend the currency, and the banking systems are very different."

Necessary adjustments

CIMB Group has taken a hit from the slowdown in its main markets. Earlier this month, credit rating agency Moody's Investors Service said the creditworthiness of CIMB Bank, a part of CIMB Group, was weakening. Moody's also said that in the company's two largest markets, Malaysia and Thailand, loan growth could slow to the single digits this year, and that the number of nonperforming loans in Thailand is rising.

     After years of expansion, including the purchase of most of the Asian assets of Royal Bank of Scotland, CIMB Group has been cutting costs to cope with consecutive quarterly profit declines. Nazir said such adjustments were necessary because "we constructed a cost base for a very different environment."

     In July, the bank announced plans to cut more than 3,500 jobs. Malaysia's fourth-largest bank, RHB Capital, is offering voluntary severance packages to permanent employees. Despite such streamlining, Nazir insisted that the bank has not lost its regional ambitions. "The worst thing you can do with a long-term strategy is adjust it based on short-term dynamics."

Asia300

CIMB Group Holdings Bhd.

Malaysia

Market(Ticker): KLS(1023)
Sector:
Industry:
Finance
Regional Banks
Market cap(USD): 13,466.3M
Shares: 9,052.11M
Asia300

Vietnam Dairy Products Corp.

Vietnam

Market(Ticker): STC(VNM)
Sector:
Industry:
Consumer Non-Durables
Food: Meat/Fish/Dairy
Market cap(USD): 9,706.48M
Shares: 1,451.34M
Asia300

FPT Corp.

Vietnam

Market(Ticker): STC(FPT)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 983.40M
Shares: 530.88M
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