THE liberalisation of 27 sub-sectors in the services industry is positive for the market and foreign direct investors at large, said Kenanga Research.

It said that while this move might not have a significant impact given that under the current investment-friendly environment, as exceptions to the bumiputra shareholding quota rule are already practised, the move signified a change within the government on the bumiputra quota issue, which is a rerating catalyst for Malaysia.

The research house said it continued to overweight banking and construction sectors. Both sectors would gain from the various fiscal and monetary policies in place and further measures that are expected to be introduced.

“Liberalisation of bumiputra quota will result in more investment and hence indirectly require more banking services and also physical capital asset building,” it said.

Kenanga Research said the impact of the bumiputra quota liberalisation on economic growth is positive as it encourages more investment in the liberalised sub-sectors, especially by foreign direct investors.

The various sub-sectors were targeted as we lack of expertise in these areas, and foreign direct investment would spur growth and nurture local talents, it said.

It said the services sector accounted for 55% of GDP (47.6% from private sector) and 57% of total employment in the country.

With manufacturing/export sector contribution falling and workers getting laid off, the boost to the services sector should provide compensatory effect to shore up the economy and provide multiplier effect, Kenanga Research said.

“More importantly, it signals that the government stance has changed. This could be the tip of the iceberg to further liberalisation, especially doing away with the top up of bumiputra shareholding of existing listed companies upon undertaking any corporate exercise.

“This would be a rerating catalyst for the market as a whole,” it said.

Kenanga Research said in line with the Capital Masterplan, there were expectations that further deregulation in the financial sector could see relaxation of the foreign shareholding limit for financial institutions as well as the possibility of issuance of more foreign bank licences and Islamic bank licences.

“Public capital expenditure alone is not enough for pump- priming, especially when it is financed by increasingly higher ringgit government borrowings. The need for new infusion of funds is critical to ensure a non-inflationary environment.

“While the government could borrow from overseas, the tight liquidity conditions would mean higher interest rate, thereby reducing the economic contributory effect of the public capital expenditure,” it said.

This article appeared in The Edge Financial Daily, April 27, 2009.