Bank Islam Malaysia Bhd chief economist Firdaos Rosli.
PETALING JAYA: With moderating gross domestic product (GDP) and trade numbers, Malaysia needs to attract more investments to bolster economic growth, say economists.
Centre for Market Education chief executive officer Carmelo Ferlito believes that sustainable growth needs to be driven by private investments and savings, rather than consumption and government spending.
“Consumption and government spending, instead, drive private and public debt and inflation,” he told StarBiz.
Earlier this year, the World Bank said Malaysia needed to shift from being a consumption-driven economy and attract more investments to spur economic growth.
Looking at Malaysia’s first quarter (1Q23) GDP numbers, Ferlito believes that Malaysia is still not on track to move away from being a consumption-driven economy.
“The 1Q23 data showed an overall growth of 5.6%, but private consumption grew by 5.7% and government investment by 5.9% while private investment fell behind at 4.7%.”
He noted that private investments represented 15.3% of GDP.
“Private and government investments together in Malaysia declined to more or less 20% of GDP, while in Indonesia, they collectively represent around 30% of GDP.”
Bank Islam Malaysia Bhd chief economist Firdaos Rosli, meanwhile, believes that it is still too early to assess whether Malaysia’s 1Q23 performance is a sign of the country’s ability to attract more investments in the future.
“For context, net foreign direct investment (FDI) inflow to GDP was higher after the global financial crisis (2010: 3.5%; 2011: 4.03%), but it tapers down thereafter.
“Similarly, the same ratio appears higher in 2011 (3.11%) and in 2022 (4.09%), suggesting the tendency for FDI to come in more strongly following an economic crisis.”
Firdaos believes that this is partly because of base effects and the slower post-crisis recovery in neighbouring countries.
“As such, it may appear that FDI inflow has been encouraging in the past two years or so.
“The real test is when the regional economy reaches a stable state and I think we can make a better assessment when the time comes.”
Additionally, he said the notion that Malaysia needed to shift from being a consumption-driven economy to an investment-led one, is not new.
“Many analysts have raised the issue of Malaysia’s premature de-industrialisation because of the declining share of net exports to GDP.”
Firdaos said other key metrics such as trade-to-GDP, the share of manufacturing-related employment and manufacturing value-added-to-GDP appear to decline since the Asian Financial Crisis (AFC).
“Much of this is attributed to the inability of Malaysia to actively participate in the global supply chain more than other regional countries such as Thailand, Vietnam and Indonesia.”
Last week, Prime Minister Datuk Seri Anwar Ibrahim said the government is committed to improving and strengthening Malaysia’s economic and investment landscape in order to retain and expand both FDI and domestic direct investment.
He said the National Investment Council (MPN) had agreed to improve the ecosystem of the country’s Investment Promotion Agency (IPA) by implementing an initiative, which, among others, will streamline the functions and roles of the economic regions with regard to investments.
“The governance of IPA is an important factor for investors to make their investment decision in Malaysia,” Anwar said in a statement after chairing MPN’s first meeting following its announcement in Budget 2023 on Feb 24.
Ferlito said one way to attract investments into the country is to simplify bank procedures for foreign entities.
“Domestically, actions should be taken to support aggregation between small and medium enterprises, so as to spur investments by promoting economies of scale.”
Firdaos said the government could also adopt more investor-friendly policies such as tax and non-tax incentives and trade facilitation.
“Investors need policy certainty and clarity, yet we do not seem to have a clear viewpoint on them.
“Unless Malaysia pursues another round of export-substitution policy, or a localisation policy by making local players to be globally competitive, I think Malaysia’s investment prospects can only trend sideways in the future.”
Firdaos said some would argue that political stability would be the way to go.
“I tend to differ from this notion because the political stability-economic prosperity relationship is unclear, primarily because the definition of political stability in itself is vague.
“It was much simpler to attract investments in the pre-AFC era, not only because the great-power competition was less intense, but also because our neighbouring countries appeared to be more aggressive in attracting investments than Malaysia, post-AFC.”
Firdaos said the government needs to re-align Malaysia back into the global supply chain.
“It may sound cliche and straightforward but it involves a wholesale of reforms from the perspective of labour, environment, intellectual properties and tax regime, to name a few.”
Ferlito noted that other countries within the region have been ramping up their approach in attracting FDIs.
“However, in general, as an investment-led economy, I would say that there are some structural problems.
“We have an abundance of raw materials on one side and subsidies on the other; and that becomes an obstacle toward entrepreneurship.”
Meanwhile, Malaysia’s exports shrank at an accelerated pace last month amid softer global demand due to the heightened economic uncertainty worldwide.
According to the Statistics Department, the country’s shipments declined 17.4% year-on-year (y-o-y) to RM105.4bil in April 2023, as compared to a decline of only 1.4% y-o-y in March 2023.
In tandem with the weaker exports performance, Malaysia’s imports fell 11.1% y-o-y to RM92.6bil in April as compared to a decline of 1.8% y-o-y in the preceding month.
Overall, Malaysia’s total trade for April 2023 contracted 14.5% y-o-y to RM198bil and trade surplus declined 45.3% y-o-y to RM12.85bil.
It was nevertheless the 36th consecutive month of trade surplus for the country since May 2020, the Statistics Department noted.
Based on Malaysia’s trade performance so far, MIDF Research forecasts the country’s exports and imports to fall by 3.4% and 1.9%, respectively, this year.
“While China’s recovery can be a boost to international trade activity this year, we view weak global demand (particularly for manufactured goods) in addition to limited upward pressures on prices.
“Thus, the high base would translate into slower external trade performance this year. In fact, we expect lower commodity prices will continue to affect resource-based exports in the next few months.”
MIDF Research said the trade outlook could weaken further if global inflation remains high; if central banks continue to tighten monetary policy and geopolitical risks deteriorate.
“Despite the weakness in external trade, we expect Malaysia’s economic expansion will remain positive, driven by sustained growth in domestic demand in view of the positive outlook for consumer spending and job market.”
