PETALING JAYA: Despite the challenging business and investment landscape, the country’s gross fixed capital formation (GFCF), which is the second-largest component of gross domestic product (GDP), is expected to stage a recovery this year.
However, the resurgence of the Covid-19 and political uncertainty could affect investment sentiment, which, in turn, may impact the performance of GFCF.
Economists are cautiously optimistic that GFCF would see a positive growth this year.
GFCF measures the net increase in fixed capital. This includes spending on land improvements; plant, machinery and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings.
According to the Department of Statistics, GFCF, with a 20.9% share to the total economy, contracted 14.5% to RM281.1bil (constant prices) last year as compared to 2019.
The contraction was mainly due to the pandemic which affected the investment of fixed assets for all economic activities. The decline in 2020 was the biggest contraction recorded since the 1998 Asian Financial Crisis in which GFCF declined 43%.
The declining GFCF was also experienced by major economies and regional countries including Singapore, Thailand and Indonesia.
RAM Rating Services Bhd senior economist Woon Khai Jhek said GFCF is expected to pick up this year.
This is in view of the nascent recovery in economic activity amid transitory setbacks along with clearer prospects in the midst of the rapid vaccine rollout, which should help buoy investment sentiment this year,
He said the impact from the widespread disruption and stop-work order of construction activity, which had significantly weighed on GFCF last year, is also not expected to be as prominent this year.
“GFCF for structure – which largely reflects construction-related works – took a steep dive last year as the tight movement control order (MCO) restrictions significantly hindered public infrastructure and property construction works.
“As more worksites become compliant with government regulations while operational efficiency under strict standard operating procedures (SOPs) improves, this will alleviate the pressures exerted on overall GFCF this year,” Woon he told StarBiz.GFCF showed some promising signs of recovery in the first quarter (Q1) of 2021 as it contracted at a much slower pace of 3.3%, after declining by 11.8% in the fourth quarter of 2020.
Total investment approved also reached a high of RM80.5bil in Q1 of 2021, almost double the quarterly average registered in 2020, suggesting that investment intentions remain relatively healthy.
RAM expects GFCF to recover to a positive growth of 5.1% in 2021, after the sharp contraction of 14.5% in 2020.
Nonetheless, he said the high growth in 2021 is an optically-driven one as the low-base effects from 2020 propped up the rate of growth for 2021.
Woon said overall GFCF in 2021 is projected to remain below 2019’s level as the nation continues to cope with the economic fallout of the pandemic.
As to any expectations of speed bumps that could affect the growth of fixed capital formation this year, he opined that the recovery path for GFCF is expected to be uneven given the marked tightening of economic and social restrictions under MCO 3.0 in May and the lockdown under Phase 1 of the National Recovery Plan (NRP) since June.
“The tougher restrictions are expected to substantially weigh on capacity building activities while also significantly constraining contribution from construction-related works in June-July 2021.
“Nonetheless, we believe that the downward pressure exerted by the recent tightening will still be less severe than the effects of MCO 1.0 last year.
“This is given that firms are more accustomed to the restrictions and SOPs while near-term business outlook is also clearer with the NRP and rapid vaccination rollout,” Woon added.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said there is likelihood for higher GFCF this year.
“Lower interest rates, better access to finance and prospects for economic recovery could be the main driver for higher GFCF.
“While the Covid-19 would continue to affect the way we do business, improving the country’s competitiveness level and capacity building is also key for sustainable economic growth post pandemic.
“With or without Covid-19, the business landscape will continue to be very challenging due to intense competition, the proliferation of technology which can be disruptive and the lower barrier to entry even for the regulated business such as financial institutions,” he said.
So in that sense, he said the private sector would remain steadfast in ensuring their business survival by upping their capital expenditure (capex) which is the way to go to secure better operational efficiencies and higher profitability.
Afzanizam is hopeful that the acceleration in vaccination would facilitate the recovery process and the economy would be allowed to be reopened in stages.
He reiterated that businesses may have to make a critical decision on their capex rollout.
“If they are too risk averse, they might lose their market share, efficiencies and simply will be late in their game. So they have to weigh the risks, the pessimism and the opportunity in a smart way,” he noted.
Citing a cautionary tone, OCBC Bank economist Wellian Wiranto said there is still very little visibility on the investment outlook at this point due to the double whammy presented by the Covid-19 resurgence and the unsettled political environment.
He does not expect any sharp acceleration but more of a tentative step towards normalisation of GFCF.
“Without a clearer path towards a sustainable stabilisation in both the pandemic and political situations, businesses are probably finding it hard to justify major expansion plans, even if financing costs have remained relatively low.
“Some sectors such as the hot electrical and electronics manufacturing sector may see some firmer investment commitment. However, in terms of contributing to GFCF growth, the private sector would likely still be in the driver’s seat on a relative basis.
“Given the limited fiscal space that is further stretched because of the various stimulus packages, it remains hard for the government to step in with major development outlays in the near term,” Wellian said.
As for the sectors that would spur the growth of GFCF this year, RAM’s Woon said the services sector is expected to remain the key driver to GFCF growth for the year.
He said the sector is historically the largest contributor to GFCF, accounting for more than 60% of overall GFCF, given its broad coverage across a multitude of sectors.
Some of the biggest economic activities that fall under services include real estate, government services and transportation.
“As property construction, public infrastructure work and big-ticket railway projects resume, GFCF contribution should also recover accordingly.
“In particular, the contribution from the ongoing big-ticket infrastructure project is likely to be more certain as work resumes this year, with potentially more to come once the 12th Malaysia Plan is rolled out,” he said.
Meanwhile, Afzanizam believes the manufacturing and services related sector would be the primary drivers.
“We have seen sectors such as semiconductor, automotive, ports, aviation, food & beverage, retail, rubber glove and power have come up with their capex plan for the current financial year.
“In Q1 of 2021, we already saw the private investment growing positively by 1.3% and perhaps, the public sector would follow suit in the remainder of the year,” he added.