This article first appeared in The Edge Financial Daily on October 21, 2019

KUALA LUMPUR: Budget 2020 was admittedly tabled in a market environment of still-uncertain external headwinds and rising risks of a global recession. With that, the budget focuses on supporting domestic demand with forward-looking steps for structural reforms, including digitalisation, labour market policies, entrepreneurship, as well as small- and medium-sized enterprises (SMEs) and institutional reforms. These reforms are aimed at addressing weaker links in the economy and potentially have far-reaching impacts on society, if implemented well.

Future-proofing Malaysia’s digital economy

The digital economy is not only strongly emphasised, but also requires the nurturing and management of an ecosystem. This includes not just infrastructure needs and an emphasis on private-public collaborations including financing through matching and co-investment schemes, but also building digital skills and human capital for the future of work. In the financial services regulatory space, Bank Negara Malaysia and the Securities Commission Malaysia have continuously rolled out financial innovation initiatives to support digitalisation.

The Institute for Capital Market Research Malaysia’s (ICMR) report on the asset management industry, launched recently, highlights digitalisation will be a key game changer for the industry, and that it should be embraced holistically. The government promoting e-wallets will increase the market penetration of digital financial products, paving the way for more inclusive savings schemes such as micro-investing which the ICMR highlighted it would make capital markets more accessible for more investors.

Empowering human capital development

Human capital development is given much-needed prominence. Budget 2020’s initiatives addressed structural issues such as high youth unemployment, overdependency on foreign labour and the need to increase women’s participation. The budget also focused on building skills for the future in terms of professional certifications for the Fourth Industrial Revolution as well as technical and vocational education and training.

Malaysia@Work, a unique market-friendly solution, could be a positive tipping point in labour market policies, where an effective implementation results in a disposable household income increase and minimising overdependence on foreign unskilled workers. Emulating the government’s strong focus on human capital development and aligned with ICMR’s earlier projects’ findings on the dearth of talent in capital markets, industry players also need to view human capital development from a long-term perspective while future-proofing the type of talent needed for an evolving market.

Nurturing the entrepreneurial ecosystem

In addition, entrepreneurship is greatly emphasised and recognised as a strong transformational force in society. ICMR’s report on the venture capital industry, while focusing on supply-side financing, highlights the need for strong demand-side considerations and to catalyse greater private sector involvement through a fund-of-funds mechanism and market access programmes.

The government’s RM10 million allocation to the Malaysian Global Innovation and Creativity Centre to support social enterprises, and a RM10 million for My Co-investment specifically for social enterprises to raise funds via a peer-to-peer platform, could be structured through a fund-of-funds mechanism.

This mechanism can involve differentiated funds aligned with other policy goals for the government, such as environmental sustainability, bumiputera and social enterprise funds. If these funds are structured for sufficient scale — much needed especially in the global start-up ecosystem — and on a matching basis, allowing it to flexibly balance between public interest and profits, these funds can provide a catalytic financing structure for local and foreign venture capital and private equity players.

In turn, these players can bring capital and expertise to finance and nurture the entrepreneurial ecosystem, allowing beneficiaries to benefit from competition as a driver of growth and innovation, as well as leverage the “network effects” of knowledge transfer and technology-diffusion and the start-up partnership models.

The government’s customised investment incentive packages to attract Fortune 500 companies and global unicorns will further lure investments, with spillover effects to SMEs and start-ups.

This may enhance SMEs and start-ups’ market access by providing them with marquee clients and assist in overcoming any potential development challenges, which the ICMR highlighted in its report as a critical success factor to catalyse the growth of these companies and supporting ecosystems. Also, any incentives or assistance programmes should be accompanied by efforts to establish a centralised information gateway to assist in data collection, research for policy formulation and industry profiling.

Harnessing Malaysia’s Islamic finance industry’s full potential

Recognising Malaysia has a comparative advantage in Islamic finance and efforts have been taken to enhance Malaysia’s leading position, it is indeed timely that the government established the Special Committee on Islamic Finance to formulate the Islamic economic blueprint with all relevant agencies. This ensures an effective coordination of the initiatives involved, so the outcome will be greater than the sum of parts.

However, given the initiatives’ complexity and interconnectedness, a seamless sharing of information across all parties involved is imperative to ensure an alignment and efficient execution. In addition, the ministry of international trade and industry’s emphasis on giving additional focus on post-approval investment monitoring and realisation is an extremely valuable evaluation mechanism which can be extended to other budget programmes.

This allows for constant ongoing experimentation, review and refining, as well as provide feedback loops to facilitate the recalibration of efforts by various parties, particularly important as the implementation of initiatives is a multi-year commitment and allows navigation in an ever-changing market environment.

Integrating SDGs into government policies

Budget 2020 has more mentions of sustainable development goals (SDGs) with RM10 million allocated for a joint Government-United Nations SDG fund to co-finance SDG initiatives, RM5 million for civil society engagement to address SDGs at the local level, as well as doubling the Sustainable Development Financing Fund under Bank Pembangunan to RM2 billion.

As part of an ongoing ICMR working paper, we note that 23 countries are working towards integrating SDGs into their national budgets by conducting a qualitative report on budgetary contribution or mapping the national budget against SDGs.

For instance, in Finland, each ministry is required to provide information on how sustainable development would reflect in its sectoral policies. In Norway, each ministry is responsible for one or more SDGs and with the need to include its proposed activities for the planned year.

To support the 2030 Agenda, Malaysia’s commitment towards SDGs can be further enhanced if it is reflected holistically in the primary political and economic expression of the government’s policy.

Contributed by the Institute for Capital Market Research Malaysia