FDI in M'sia fell RM6bil in 2017; to remain moderate

Stronger ringgit: Lee says the ringgit could end on a stronger note by the end of the year in anticipation of a change in monetary policies

PETALING JAYA: Foreign direct investment (FDI) into Malaysia is expected to remain moderate this year and 2019, in line with global trade tensions and as foreign investors assess the impact of potential policy reforms under the new federal government.

If trade tensions continue to escalate, however, investor sentiment is expected to become increasingly cautious, according to economists.

FDI into Malaysia fell 12.7% or RM6bil last year to RM41bil from the record RM47bil achieved in 2016.

According to data from the Statistics Department, direct investment abroad (DIA) for the year also fell 25% year-on-year to RM24.9bil from RM33.2bil in the previous year.

Socio-Economic Research Centre executive director Lee Heng Guie told StarBiz that the decline in FDI inflows into Malaysia last year was in tandem with global FDI flows, which fell 23% in 2017 to US$1.4 trillion from US$1.9 trillion in 2016.

He said this reflected largely moderate global growth, policy uncertainty in some advanced economies and geopolitical tensions.

On the decline in outward investment abroad, he said this was due to domestic companies being more cautious about the global economic environment amid the negative spillover of higher US interest rates and tight global liquidity conditions.

In 2017, FDI was mostly channelled into the services sector, particularly in real estate, financial and insurance/takaful as well as information and communications activities.

The second-biggest recipient was the mining and quarrying sector, followed by the manufacturing sector.

Asia accounted for the largest amount of FDI into Malaysia with a share of 63.5%, followed by Europe and Africa.

Within Asia, Hong Kong remained the largest investor country, while China overtook Singapore as the second-largest contributor.

FDI into Malaysia has been on an uptrend since 2001, with the exception of 2009 due to the global financial crisis. It hit a high in 2016 with a value of RM47bil, mainly contributed by the Asian region, and in the services sector.

Investment abroad, on the other hand, was channelled mainly into the services, mining and quarrying, and manufacturing sectors.

Asia was the top destination for Malaysia’s DIA flows, contributing half the investment at RM13.7bil, followed by the Americas and Europe.

Moving forward, Lee said prospects for FDI flows into Malaysia in 2018 and 2019 are expected to remain moderate.

“Foreign investors are expected to assess what the likely implications would be from the new government’s promise of a reform agenda to make Malaysia a truly competitive nation.

“Externally, the escalation and broadening of trade tensions could negatively affect global investment patterns,” he noted.

Over the medium term, he said the execution of investment-friendly policies and delivery of economic and institutional reforms are expected to retain existing foreign investment and attract new investors into Malaysia.

“The government needs to maintain a competitive tax structure and cost of doing business regime, accompanied by transparent and liberal investment policies and guidelines,” he said.

Data on the drop in FDI and DIA for 2017 comes a day after the International Trade and Industry Ministry stated that the Malaysian Investment Development Authority had a total of 402 projects with a proposed investment of RM75bil as at May 2018.

The ministry said FDI was at RM45.7bil, accounting for 60.9% of the total, while the rest were domestic investments.

UOB Kay Hian Malaysia Research economist Julia Goh said investor sentiment is expected to turn more cautious should trade tensions and investment protectionism escalate.

“Although domestic conditions have been favourable, we think the uncertain external outlook in the second half may overshadow domestic matters.

“Risks on the horizon, including the worsening US-China trade conflict, higher US interest rates and tighter liquidity conditions in emerging markets, are likely to weigh on investment decisions,” she said.

However, she noted that the air of optimism surrounding improving transparency and governance post-14th general election remains a long-term positive for Malaysia’s business environment.