Making Malaysia Trade and Investment

September 2016 - Malaysia Special Report, By Lim Chee Han and Negin Vaghefi

"There was an increase of about 35 percent in GDP in 2014 over 2010. The annual GDP growth rate averaged at approximately 5.4 percent from 2010-2014, indicating high and sustainable levels of growth. The Gross National Income (GNI) per capita was RM 34,945 in 2014, up about 25.6 percent from RM 27,819 in 2010. This data shows upwards-macroeconomic trends in Malaysia and improvements in its economy."

Malaysia is an upper-middle income country that has a newly industrialised market economy. Malaysia maintained its position in the top 20 of 61 global economies, according to World Competitiveness Yearbook (WCY) 2016. Among ASEAN countries, Malaysia remained in the top five economies, and is ranked the third largest economy in Southeast Asia, after Indonesia and Thailand. Its economic growth was inclusive, since Malaysia has successfully minimised income inequalities and substantially reduced high poverty rates over the past 30 years.

The 1986-1997 period was the golden age of Malaysia. From 1990 to 1996, the Gross Domestic Product (GDP) of Malaysia grew by an average of about 8.5 percent per year, which outperformed other ASEAN countries. Its GDP growth was predominantly attributed to its capital stock growth. Guided by the former Prime Minister Dr. Mahathir Mohamad’s Vision 2020 initiative, rapid and export-led growth led Malaysia to be widely known as one of the Tiger Cub Economies and newly industrialised countries in Southeast Asia.

After the 1997-1998 Asian Financial Crisis, Malaysia continued to achieve continuous growth rates, averaging 5.5 percent per year from 2000-2008. Malaysia was hit again by the Global Financial Crisis of 2008-2009; however, it recovered fast and achieved growth rates averaging about 5.7 percent since 2010. The country’s economy had little vulnerability to financial derivatives which emerged from sub-prime stocks, so the currency and capital markets were protected from any direct effects of the crisis.

In 2010, Prime Minister Najib Razak unveiled the New Economic Model (NEM) for Malaysia to become a high income country by 2020 while ensuring that growth is also sustainable and inclusive. The NEM contains a number of reforms to attain economic growth which is mainly driven by the private sector and is also crucial in moving the Malaysian economy to higher value-added economic activities. There was an increase of about 35 percent in GDP in 2014 over 2010. The annual GDP growth rate averaged at approximately 5.4 percent from 2010-2014, indicating high and sustainable levels of growth. The Gross National Income (GNI) per capita was RM 34,945 in 2014, up about 25.6 percent from RM 27,819 in 2010. This data shows upwards-macroeconomic trends in Malaysia and improvements in its economy. In 2014, Malaysia was classified as an emerging economy by the World Bank due to its rapid economic growth and a robust export sector.

Despite significant headwinds emerging from low oil prices, fluctuations in the global economy, normalisation of US monetary policy and fiscal consolidation in Malaysia, the Malaysian economy continued to grow in 2015. Malaysia achieved a GDP growth of 5 percent in 2015 and the growth is expected to moderate to a still-robust 4.4 percent in 2016. As oil is one of the Malaysian main exports, the collapse in crude oil prices since June 2014 has contributed to the decline of the Ringgit’s value. However, the Ringgit’s depreciation in 2015 increased Malaysia’s export competitiveness. It also helped to prop up the country’s main exports, which are electrical and electronic products. The currency depreciation has not led to high inflation. As reported by the Bank Negara Malaysia, the depreciation resulted in a 3 percent increase in CPI-Import in 2015; however, the overall impact on inflation was compensated by the fall in fuel prices. In addition, the large reduction of 32.2 percent in global commodity prices during the period also relieved inflationary pressure.

Since 2010, there has been a slow removal of government subsidies from important items such as food, fuel products and utilities. Coupled with the introduction of 6 percent Goods and Services (GST) tax in April 2015, the federal government has widened its revenue sources in order to have a bigger budget to spend on national programs. There have also been some policy adjustments that have influenced firm price setting behaviour, such as the minimum wage policy in 2013 and the market-based pricing mechanism for fuel products in 2014, which resulted insignificant flexibility of domestic prices. It could consequentially make firms more responsive to fluctuations in exchange rate and global prices.

Fortunately, Malaysia’s labour force has benefited from relatively young demographics. According to Labour Force Survey 2015, Malaysia has a labour force of 14.5 million, 67.9 percent of labour force participation rate, and a 3.1 percent unemployment rate. Median and average monthly salaries for Malaysian are RM 1,600 and RM 2,345 respectively. About 76 percent of the employed workforce is in the urban area and about 3.85 million or 27.4 percent have attained tertiary education. Currently, there is a 2.32 million strong employed workforce in the manufacturing sector.

To find out where the economic strength of Malaysia is derived from, it is important to look at its trade and investment profile. Malaysia has a diversified economy and has become a leading exporter of electrical appliances, electronic parts and components, palm oil, and natural gas. Over time, the economy of Malaysia has transformed from being a low income supplier of raw materials into a middle income emerging multi-sector market economy driven by exports of manufactured goods, specifically electronics and semiconductors, which account for a large share of export and GDP.

Trade in Malaysia

Since the Malacca Sultanate era in the 15th century Malaysia has a long history of being an international trading hub. Trade contributes considerably to the prosperity of Malaysia and the region, as Southeast Asia is strategically located for world trade. Trade size for a medium-small developing country such as Malaysia is considered large. In 2015, the total trade value for Malaysia was equivalent to 134.4 percent of GDP (Table 1).

The total volume of external trade for Malaysia has increased 138 percent over 15 years (or CAGR 5.98%), reaching RM1.47 trillion in 2015. Both exports and imports have steadily increased since 2001 (except in 2009) (Figure 1). In fact, Malaysia as an export-orientated country, registering yearly positive trade balance over the years.

In terms of trade openness, Malaysia is rated favourably as a country with above average score, by the International Chamber of Commerce in the Open Markets Index 2015 report (Table 2). According to the report, Malaysia has a fairly good trade policy, FDI openness and also trade-enabling infrastructure. These put Malaysia at the top of the league among middle income countries as a favourite trade and investment destination. Malaysia even beats South Korea, Japan and USA in terms of OMI ranking.

The government of Malaysia invests heavily in upgrading and modernising seaports and airports all over the country, also putting efforts in reducing or simplifying custom procedures to ensure efficient processing of goods trading at the point of entry. About 58.9 percent of all trades pass through seaports. Port Klang is the single major point of entry for Malaysia (close to a quarter of all trades), serving mainly the west coast of Peninsular Malaysia and especially the Greater Kuala Lumpur region. Bayan Lepas Airport in Penang is the second largest trade entry point, known for its prominent role of exporting Electronics & Electrical (E&E) products made in the Bayan Lepas Free Industrial Zone.

To date, Malaysia has signed 7 bilateral and 11 multilateral (6 with ASEAN) free trade agreements with multiple countries. This shows the commitment of Malaysia in promoting trade. For example, the Malaysia-India Comprehensive Economic Cooperation Agreement (MICECA) came into force on 1st July 2011, and subsequently trade volume was increased by 22 percent in 4 years. While it is not yet in force, the latest one is the Transpacific Partnership Agreement (TPPA) which would allow Malaysia to gain market access to 40 percent of the global GDP and an 800 million population.

Currently, Malaysia’s largest trade partner is China. About one-fifth of total imports come from China while it is also the second largest export destination country. Being geographical neighbours, Singapore, Thailand and Indonesia made it into the top 10 of Malaysia’s trade partners. India is the 7th largest export destination, and 12th in import. Malaysia gained a RM6.51 billion trade surplus with India in 2015. Malaysia also has trade partners such as the UAE, Saudi Arabia and Pakistan.

Although, the economy of Malaysia is gradually moving towards the services sector, Malaysia still has a very strong manufacturing base. Most-traded commodities for export are machinery and transport equipment, and other manufactured goods (Figure 3). Electrical machinery, apparatus and appliances (especially electronic integrated circuits) already make up about one quarter of all exports. Malaysia is also a net gas and petroleum exporter (mineral fuels, lubricants, etc.), while palm oil made up the majority of agricultural products (animal and vegetable oils and fats). Malaysia is a well-known rubber producer and hence a major, high standard rubber gloves global exporter.

For imports, Malaysia also needs significant quantities of input materials or components for value-adding manufactured products. Besides this, Malaysia is a net food importer. Of total imported goods from India in 2015, about 22 percent was for food. Most of the imported food products from India were meat, vegetables and rice.

Investment in Malaysia

According to UNCTAD, global FDI flows have attained the highest level since 2007, a hike of 36 percent to reach an estimated $1.7 trillion in 2015. Malaysia is recognised as one of the top host economies for FDI over 2014-2016.

Privatisation and liberalisation of many previously tightly-controlled economic sectors starting from the mid-80s created opportunities not only for local but also foreign investors. More often, trade and business incentives were offered via investor-friendly economic policies. In fact, FDI inflow into Malaysia in the early 90s has fuelled the economy and resulted in the prosperity of the golden age for Malaysia.

In 2015, Malaysia managed to attract RM 36.1 bn and RM 150.6 bn of FDI and DDI, respectively. Among the total direct investment, RM 74.7 bn investment in 680 approved projects went to the manufacturing sector (Table 3). The services sector in Malaysia is more appealing to investors; it attracts RM 108.2 bn investment in 4,150 approved projects (Table 4).

Electronics and Electrical Products is still by far the most favourite industry for foreign investors among all approved manufacturing projects; the industry attracted the highest number of foreign investment (RM8.2 bn) and created the most employment opportunities (22,599 jobs) in 2015. Almost half of the country’s new projects went to Johor, the southernmost state of Peninsular Malaysia which neighbours Singapore and has 2 major seaports and an airport.

For the services sector, Multimedia Super Corridor (MSC) status projects hold great promise. It created the second highest number of employment after traditional services in distributive trade (Table 5). Under the 11th Malaysia Plan, the Multimedia Development Corporation (MDeC) plays a greater role in spurring the IT and creative industry in Malaysia, while the Federal government plans to increase broadband coverage, upgrade and integrate digital infrastructure in Malaysia. Health services, hotel and tourism are investment categories to watch, as Malaysia poises to expand and become the new hub for the medical tourism industry.

Overall, despite uncertainties in the global economy, Malaysia remains as a preferred investment destination for both manufacturing and services sectors. In fact, it is the concerted efforts from various government ministries and agencies such as Ministry of International Trade and Industry (MITI), Malaysian Investment Development Authority (MIDA), Malaysia External Trade Development Corporation (MATRADE) and many state-level investment agencies that took Malaysia to the height where it is now. They are a welcoming face to investors and are also the responsible bodies for providing the best professional advice besides facilitating trade and investment.

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