Post COVID global conditions have included supply chain disruptions, inflationary pressure, conflict and political instability. This has led to a consensus from the International Monetary Fund (IMF) and the World Bank that these conditions will result in a low to negative growth in most parts of the world in 2023.
However, such global downturns are not evenly felt across all countries and Malaysia currently has cause to be cautiously optimistic. As part of the GJC insights series we explore seven key areas to watch when considering opportunities in Malaysia.
(1) The resilience of the Malaysian economy
The Malaysian central bank, IMF and World Bank are all forecasting economic growth between 4% and 5% in 2023 and for Malaysia to largely avoid a recession. This is contrasted to global growth estimates of between 2-3 %.
Revenue projections for the Malaysian government are favorable as a result of new initiatives such as an increase in tax on luxury goods and higher income groups. While further depreciation of the Ringgit may increase some components of the cost of living this will likely be offset overall by increasing Malaysian export earnings.
Confidence in the Malaysian economy has been further reflected by its BBB+ sovereign credit rating that the rating agencies attribute to strong governance, rule of law, respect for rights, regulatory positions, and political stability.
(2) The leadership of Prime Minister Anwar Ibrahim and political stability
Malaysia's Prime Minister and Minister of Finance Anwar Ibrahim was ushered into power in 2022. This was after an election that saw a contest of coalition parties and fears a stable government could not be formed. While Anwar acquired the necessary vote of confidence, the reality that no one Malaysian political party could any longer hold a parliamentary majority is now evident.
Analysts have commended Anwars subsequent efforts to establish a unity government and strengthen his administration. This has included the appointment of Ministers from opposition parties in key positions and the inherited benefit of the recent party hopping rules.
This stability, will be crucial for attracting foreign investment and supporting economic growth. The question is whether this political stability can be adequately maintained and not become too much of a distraction from sound long term planning and new initiatives. Key focuses will be the ability to find consensus, political inclusiveness, and the continued fight against corruption.
(3) Malaysia's ability to contain inflation
Inflation continues to be of concern within Malaysia with inflation rising to around 4.2 % in 2022. Inflationary pressure has not been evenly spread and it has been particularly acute with regard to food staples such as chicken and vegetables. Consumer price inflation in Malaysia stood at around 4 % in late 2022.
The Malaysian government has used different policy instruments to contain inflation such as Bantuan Keluarga Malaysia. Such initiatives have contributed to a budget deficit of around RM21.1 which amounted to around 70% of debt to GDP in late 2022.
It is expected that the central bank will raise the overnight policy rate (OPR) further in 2023 to relieve inflationary pressures. These fiscal and monetary policies used to fight inflation are undoubtedly necessary, however will contribute to a slightly weaker short term economic outlook for the country. Again, compared to global averages inflationary levels in Malaysia are quite reasonable.
(4) Foreign Direct Investment (FDI) into Malaysia
Malaysia continues to attract strong levels of foreign direct investment. This includes from the US, Germany, China, Brunei, Singapore and a number of other regional players. For example, the Malaysia Investment Development Authority (MIDA) reported that in 2022, Germany accounted for investment of RM 8.9 Billion, Brunei RM 5.1 Billion, and the US around RM 3.9 Billion.
The relationship with Singapore has been recently strengthened with new bilateral agreements focused on the three key aspects including: The digital economy; data protection; and the green economy. These agreements have resulted in an immediate proposed investment of around 4 Billion by Singapore. The green economy was a notable focus with the intention to support both countries accelerate use of electric vehicles and build the necessary related infrastructure.
Chinese investment in Malaysia continues through Belt and Road Initiatives (BRI) and other initiatives. This includes a focus in the digital economy and transport infrastructure with Malaysia possibly securing ongoing Chinese investment of approximately RM 170 Billion.
Malaysia’s relationship with other regional countries such as Indonesia and Brunei have also been positive for inward investment. Areas of focus have included the digital economy, agriculture, migratory policy, and oil and gas. Political initiatives such as the Indo Pacific Economic Framework are also expected to facilitate further foreign investment and support the ease with which foreign companies can do business in Malaysia.
(5) Investment in growth industries
There are a number of key sectors likely to continue shaping the Malaysian economy through 2023 and the coming years. Historically important commodities areas such as rubber and palm oil appear on a good footing. Natural rubber production increased 8.9 per cent to 30,556 tonnes in late 2022 according to the Department of Statistics Malaysia (DOSM). Malaysia’s export of palm oil, which accounts for nearly 19% of global trade benefited from the increase in crude palm oil prices to around RM 8,000 per tonne.
The manufacturing sector in Malaysia is anticipated to grow at around 4.9% over the coming years. The semi-conductor industry in Malaysia is a specific reason for optimism due to its (lifetime) estimated value of around RM 100 Billion to the economy. US company Intel is expected to make an investment in semi-conductor packaging plant of around $US 7 Billion in Penang, Malaysia as part of its ongoing growth. Japanese company Rohm and German company Infineon are also respectively notable investing US $215 million and US $2 Billion in Malaysia.
The data centre market in Malaysia is also growing and is expected to reach around RM 2 Billion by 2027 as hyperscale cloud providers build infrastructure in Malaysia for the South East Asian region. This includes Microsoft, Google, AWS all of which form part of the wider Malaysian government target of RM 70 Billion digital infrastructure investment by 2025.
(6) Improved transport connections
In cooperation with Singapore, plans have commenced to build a new high speed rail connection between Singapore and Kuala Lumpur and the Johor-Singapore Rapid Transport System (RTS) link. The RM 1.98 Billion project that is due to be completed by 2026 and will provide a four-km connection to transport 10,000 commuters per hour in each direction.
The Malaysian government has also indicated it is willing to reconsider 2013 plans to build a 350-km fast train between Kuala Lumpur and Singapore. The plan that was originally costed at around RM 68 Billion would reduce the trip to around 90 minutes.
Another significant rail project is the East Coast Rail Link (ECRL) project commenced in 2023. The ECRL rail network will bridge the East and West Coast of Peninsular Malaysia by connecting Kota Bharu to Port Klang in Selangor. Malaysia is progressing the project in partnership with China’s BRI to build the 648 km ECRL with an estimated RM 44 Billion investment.
(7) Focus on digital
Malaysia is aiming for its digital economy to grow to around 25% of the overall economy by 2027. There is good ground to be optimistic about this target based upon the high ongoing levels of investment in digital infrastructure by global firms and emerging digital talent in Malaysia.
As with much of the world, COVID-19 highlighted the necessity for Malaysian companies to digitalize and specifically to improve their digital platforms and utilise digital payment systems. A recent World Bank survey noted that only 54 % of small Malaysian firms were investing in digital platforms following COVID versus 80 % of medium-large firms. This under-investment and lower levels of digital skills may hold back some parts of the economy particularly where there is dependence on cash payments.
Overall however, Malaysia is well placed across the digital economy in contrast to regional and global counterparts with high government/public awareness of the challenges and appetite for improvement.
Conclusion
Overall, Malaysia appears well placed to make good economic progress through 2023 and the forthcoming years. This is through a combination of the unique composition and resilience of the Malaysian economy, the direction of the government, and the strong confidence and investment in Malaysia by a number of international institutions, both public and private. This bodes well for Malaysia to accelerate its momentum to build a connected, sustainable, and inclusive digital society.
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Last updated: May 2023
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