UOB's Commentary on the Government’s plans to move Malaysia up the value chain

Commentary: How successful are the government’s plans to move Malaysia up the value chain and is this resulting in economic growth and resilience?

The Malaysian government made a commitment to transform the country into a high-income economy by the year 2020. Now at its midway point, Julia Goh, Economist at United Overseas Bank (Malaysia) Bhd (UOB Malaysia), analyses the success of this strategy and its impact on the country’s growth so far.

Q 1.) The government introduced a number of projects to jumpstart Malaysia’s potential growth, improve public service delivery and help the country achieve high-income economy status by 2020. Based on the country’s achievements so far, is Malaysia on track to become a high-income economy within the next five years?

Ms Goh: Malaysia’s achievements to date are commendable, especially when we evaluate its success against persistently slower global growth, volatile financial markets and a weaker Ringgit.

To track Malaysia’s progress so far, we look at the initiatives under the National Transformation Programme (NTP), a public sector reform programme launched in 2010 to propel Malaysia’s journey towards achieving developed nation status by 2020. Now at a significant mid-way point, the NTP has an overall achievement rate of over 100 per cent, suggesting Malaysia stands in good stead to achieve its objective by 2020.

Ms. Goh

According to the NTP 2015 annual report, key milestones have been achieved and proven by way of macroeconomic stability and a firmer Ringgit. Efforts to improve Malaysia’s resilience have also been acknowledged by international rating agencies, Standard & Poor’s and Moody’s, who reaffirmed the country’s A- and A3 ratings with a stable outlook, respectively.

Moving forward, however, maintaining such momentum will be challenging given the tougher operating environment both globally and within Malaysia. We believe further investments from the private sector will help boost the country’s economic growth. However, there is a need for the government to continue creating a conducive and competitive landscape where multinational corporations, government-linked companies, private enterprises, and new innovative startups can thrive together in building Malaysia’s future economy.

Q 2.) What are some of the key projects that will contribute to Malaysia’s growth and resilience?

Ms Goh: Some key infrastructure projects that will contribute to growth include the MRT Sungai Buloh-Serdang-Putrajaya Line (MRT2), the Light Rail Transit 3, the Pan Borneo Highway, the KL-Singapore High Speed Rail (HSR) project, and the Pengerang Integrated Petroleum Complex in Johor. A recent uptick in infrastructure projects and follow-through of capital spending should yield higher investment growth in the next few quarters.

Other notable achievements driving growth and resilience include the 30 per cent reported rise in Gross Domestic Product (GDP) from RM797.3 billion to RM1.13 trillion fuelled by higher private sector consumption and public investments, 37 per cent increase in Gross National Income (GNI) per capita to US$10,440 and the creation of more than 1.8 million jobs between 2010 and 2015.

Q 3.) Does Malaysia remain an attractive investment opportunity for foreign investors and which areas of the economy are attracting the most interest? 

Ms Goh: Foreign investors will look at a country’s historical growth and plans to catalyse future growth when considering it as an investment opportunity. According to the International Monetary Fund, the growth differential is the single most important driver of foreign capital inflows and investments. Much of the decline in emerging market investment inflows can be explained by the narrowing differential in growth prospects between emerging market and advanced economies. However, since 2011, Malaysia has experienced a positive growth differential, recording average growth of four per cent over and above G7 advanced nations.

Despite sustaining four quarters of slowing growth, the Malaysian economy continues to display an underlying resilience supported by its high labour force participation rate and positive employment growth. In addition, Malaysia’s favourable demographics, growing working age population, positive nominal wage growth, accommodative monetary policies, and government support measures are contributing to its appeal. Fiscal reform measures such as the introduction of the Goods and Services Tax (GST) and subsidy rationalisation have also helped to cap the fiscal deficit. The public debt has been stable at 54.5 per cent of GDP and government guaranteed debt at 15.4 per cent of GDP which puts consolidated government debt below 70 per cent. Emerging markets with lower public debt, tighter capital controls, and higher foreign exchange reserves tend to experience smaller swings in capital flows.

Q 4.) In your opinion, has Malaysia been successful at diversifying its economy and how will this impact the economy?

Ms Goh: Malaysia’s economy is well diversified with the services sector contributing 54 per cent, manufacturing 23 per cent, construction 4.4 per cent, mining and quarrying 8.9 per cent and agriculture 8.8 per cent of total GDP. Over 16 per cent of Malaysia’s exports are in commodity sectors while 80 per cent are in manufactured products. While manufacturing exports are largely concentrated in the electrical and electronics (E&E) segment, many E&E firms both multinational corporations (MNCs) and domestic enterprises have diversified from manufacturing traditional personal computers and parts into higher value-added segments.

One example is moving into cloud computing and increased involvement in the enterprise servers segments. Another significant development is Malaysia’s increasing involvement in the automotive and semiconductors industries. The ongoing E&E diversification puts Malaysia in a good position to capitalise on demand from advanced economies.

Greater economic diversification has also reduced Malaysia’s dependence on oil revenue with share of oil revenue projected to fall to 14.1 per cent in 2016 compared to 35.8 and 41.3 per cent in 2011 and 2009, respectively.

Q 5.) What is your economic outlook for the second half of 2016?

Ms Goh: We think the economy will recover gradually in the second half of 2016 as we begin to see the effects of mega infrastructure capital spending and the government’s growth stabilisation measures.

Key stabilisation measures include a three per cent cut in the Employee Provident Fund (EPF) contribution rate, a special RM2,000 tax relief for middle-income tax payers, an increase in minimum wages and civil servant wages, visa waiver for China tourists, as well as a one per cent corporate tax cut.

These measures could effectively boost nominal GDP by at least one per cent. As such, we continue to project GDP growth of 4.2 per cent this year, with an average of four per cent growth in the first half of 2016 and 4.4 per cent in the second half 2016. The Ringgit continues to show some volatility amid expectations for a US Federal Reserve rate hike in the coming months.

Nonetheless, the Ringgit is still the second best performing currency in the Asian region after the Japanese Yen. Our outlook for the Ringgit remains positive driven by recovering oil prices, the country’s sustained current account surplus and intact fiscal deficit targets.