With oil prices down by more than 50% since June, Malaysia’s commodity-driven economy is facing strong headwinds which has also seen the ringgit depreciating rapidly in recent months.
Malaysia is Asia’s largest net oil exporter with oil-related income accounting for at least one-third of government revenue. Hence the sustained drop in oil prices has forced the government to revise its 2015 budget, initially drawn up based on an oil price assumption of US$100 back in October.
Among the revisions were a widening of the fiscal deficit targeted at 3.2% of gross domestic product (GDP), from 3%, a GDP downgrade to 4.5-5.5% from 5-6% earlier; and a budget deficit of 3.9% of GDP from 3.5% previously.
Aside from the sharp drop in oil revenue, the depreciation of the ringgit – which has lost 10% of its value from November 2014 to January 2015 - could also jeopardise growth momentum in the long run as Malaysia seeks to move its economy up the value chain.
Maintaining investor confidence
Analysts have even raised the spectre of a sovereign rating downgrade in light of the ringgit’s woes, which has seen it perform the worst amongst Asian currencies over the last three months.
Amid this testing period, the government is particularly keen to maintain investor confidence, through policies that support its goal of turning Malaysia into a high-income nation by 2020 – as illustrated by its Economic Transformation Programme (ETP) launched in 2010.
In that regard, key infrastructure projects worth MYR48.5 billion (US$13.7 billion) remain unaffected by the revisions, and the government has introduced further incentives to boost private investment.
The introduction of a 6% goods and services tax (GST) planned for April will further enhance government revenue, as will the savings from the reduction of fuel subsidies.
However, consumer spending which accounts for 51% of GDP, is likely to weaken with the GST further fuelling inflationary pressures.
On the plus side, the country’s foreign exchange reserves remain strong, and its banking system has been lauded for its robustness.
Insurance fundamentals remain strong
The local insurance industry has increasingly become a significant contributor of economic growth, with total net premiums – from both conventional and takaful sectors – amounting to 4.9% of GDP in 2013.
The multi-year stress tests by the central bank - Bank Negara Malaysia (BNM) – continue to indicate sufficient earnings and capital buffers of financial institutions, including insurance companies, to withstand severe scenarios of portfolio flows and contraction in the domestic economy.
Insurance firms, on their part, continue to maintain strong capital adequacy with the industry’s capitalisation strengthening further in 2013 to reach an aggregate capital adequacy ratio (CAR) of 245.9% compared to 219.1% in 2012, BNM figures show.
Overall, the introduction of the RBC regime in 2009, followed by the Internal Capital Adequacy Assessment Process guidelines for insurers in 2012, have served to strengthen the capital buffers of insurance companies – which currently stands above the minimum regulatory requirement at US$7.4 billion.
Despite the uncertain economic outlook and consumer spending, there are several growth drivers that bode well for the local insurance industry. These include the low penetration rate, the government’s Economic Transformation Programme and higher incentives for retirement products.
The rising cost of healthcare and a growing awareness of financial planning have also led more people to consider insurance.
Malaysian companies are in a strong state financially, with the spate of M&A activities in recent years resulting in strongly-capitalised institutions and increased technical expertise.
Over the coming pages, we will look at the key trends in both the life and non-life sectors by speaking to the respective insurance associations, and also sample some of the insights and aspirations of some of the companies in the market. We will also be discussing the progress of liberalisation plans as envisioned by the regulator, Bank Negara Malaysia.