Sunway University professor of economics Yeah Kim Leng
PETALING JAYA: Foreign direct investment (FDI), which saw a strong growth in the first nine months of this year, could face speed bumps in 2023 that may reduce inflows into the country as foreign investors withhold their spending.
On top of the looming recessionary risk, economists agree the tighter global monetary and financial conditions, coupled with the uncertainties following the Russia-Ukraine war, could affect FDI flows into Malaysia.
Sunway University professor of economics Yeah Kim Leng told StarBiz that with the rapid deceleration of the world economy, FDI flows into Malaysia is expected to decline in 2023 amid rising global recession risk and tighter monetary and financial conditions.
He said rising global risk aversion and risk-off sentiments would likely cause foreign investors to delay or postpone both greenfield and brownfield investment projects.
Yeah said global capital flows, both portfolio and direct investments, typically dip during a global downturn.
“The decline in inward FDI into Malaysia was particularly seen during the Covid-19 global recession in 2020, when the annual FDI inflow fell by 59% to RM13.3bil but rose 263% to RM48.1bil in 2021 in tandem with the strong global recovery.
“The FDI inflow has remained strong in the first three quarters of this year, rising 82% to RM54bil,” Yeah added.
However, he said the decline in the FDI flows expected in 2023 is unlikely to mirror the sharp fall experienced during the global recession in 2020.
The anticipated inflow next year is also not expected to exceed the flow for this year due to further policy tightening needed to combat high inflation and uncertainties over food and fuel supplies amid the continuing Russia-Ukraine war, he noted.
He said factors that would mitigate against a repeat of the 2020 FDI slump include the continuation of multinational companies’ diversification of production bases and the diversion of trade and investment to Asean countries as a shield against the risks of the continuing US-China economic rivalry and potential decoupling.
“Another tailwind for Malaysia could arise from the positive re-rating of growth and investment prospects following the formation of the unity government and its emphasis on reinvigorating the economy and attracting quality foreign investment,“ Yeah said.
Malaysian Institute of Economic Research head of research Shankaran Nambiar.
Malaysian Institute of Economic Research head of research Shankaran Nambiar agrees that the FDI numbers in 2023 may not be as robust as they were this year.
But on a brighter note, he said investors who have a longer view would still want to invest and might find it a good time to strike a hard bargain.
The country attracted almost RM194bil of approved investments in the first nine months of 2022 (9M22), with a quarter of the investments coming from China.
Of the RM193.7bil approved investments, FDIs remained the major contributor at 67.5% or RM130.7bil (US$28.1bil). Meanwhile, domestic direct investments contributed 32.5% or RM63bil.
This represents a 15% increase compared to the FDIs approved in the same period in 2021.
In 9M22, China dominated foreign investments totalling RM49.2bil, followed by the United States (RM16.9bil), the Netherlands (RM16.5bil), Germany (RM9.2bil) and Singapore (RM8.7bil).
The approved investments for 9M22 were in the services, manufacturing and primary sectors. This involved 2,786 projects and is expected to create 98,414 job opportunities.
Meanwhile, taking a bullish stance, UOB Global Economics and Markets Research said it has tweaked its 2022 full-year investment approval projection higher to RM225bil (from RM200bil previously).
This is after taking into account the better-than-expected performance of committed investments in the first nine months, recent newsflow and the proposed investments within the Malaysian Investment Development Authority’s pipeline.
For 2023, the research house expects investment approvals to hold up its momentum to reach RM228bil, underpinned by positive catalysts.
These include the ratification of Regional Comprehensive Economic Partnership and Comprehensive and Progressive Agreement for Trans-Pacific Partnership, expected policy continuity from the new unity government and the ongoing implementation of various economic blueprints.
Yeah said electronics, electric vehicles, renewable energy and other green growth industries as well as environmental, social and governance-related projects are expected to attract higher FDIs in the coming years.
He said this is in line with global investment trends and domestic policies targeting high-value and quality investments that are needed to sustain the country’s transformation into a high-income and industrialised economy.
Yeah said Malaysia’s developed transport and logistics infrastructures, adequate utilities, facilities and supporting services have placed the country in an advantageous position to attract quality FDIs.
He said a binding constraint, however, is the shortage of skilled labour, which could be addressed by relaxing the conditions for recruiting skilled foreign personnel and providing incentives to attract Malaysian talents working overseas.
Currently, Malaysia is far behind Singapore, Indonesia and Vietnam in terms of attracting FDIs while Thailand and the Philippines are fast catching up.
To attract FDIs, Nambiar said Malaysia has to raise its chin above the crowd. This means making the investment climate more appealing than its Asean competitors.
It also means doing better than Singapore, Vietnam and Indonesia and not only in terms of offering cheap labour, he noted.
“The kind of fiscal incentives that Malaysia used to give are a thing if the past.
“We have to offer an abundant supply of skilled talent, bureaucratic procedures have to be reduced, there has to be a shift to digital processes and there has to be more transparency.
“Matters like environmental protection, human rights and labour issues will become increasingly important. So we have to be more sensitive to them,” Nambiar added.
Yeah said the new unity government would need to focus on strengthening political stability and pursuing the various institutional and structural reforms that enhance public trust, good governance and efficient administration, prudent public financial management and overall economic efficiency.
He said such reforms are necessary not only to strengthen the country’s resilience but also to foster investor confidence that will boost domestic and foreign investments.
Newly-minted International Trade and Industry Minister Tengku Datuk Seri Zafrul Abdul Aziz, in a recent interview with StarBizWeek, said it is more critical to ensure the FDI inflows that are coming in could generate real value to Malaysia’s economy and benefit the people.
Tengku Zafrul said he would revisit the list of sectors under the National Investment Aspiration to ensure those are the right sectors for the future.
In an earlier statement, he revealed that his ministry would propose the creation of a special investment fund under the new Budget 2023.
The statement highlighted several industries as focus areas. These include electronics and electrical, aerospace, chemical and petrochemical, nanotechnology, health-tech, medical devices and smart manufacturing.
