PETALING JAYA: With Germany in recession and China no longer a low cost producer, investors are looking for new opportunities and analysts seem to think Asia’s medium-term prospects look promising.
Nomura Securities, in a recent report, stated Asia is well on its way to regaining its weight in the global economy on the basis of its population.
The research house noted that faster growth should attract more capital inflows, lift business confidence, and drive domestic investment.
With China having lost its low-cost comparative advantage, along with geopolitical headwinds, has set the stage for economies in South-East Asia and India to bloom, it added.
Nomura chief economist (Asia ex-Japan) Sonal Varma said Malaysia is likely to continue to benefit from supply chain relocations over the medium-term.
“Our analysis suggests it has already started to benefit from electronics, with its share in world exports of electronics rising from 2.6% of world total in 2015 to 3% in 2021. Our foreign direct investment (FDI) attractiveness scorecard, which ranks economies based on market size, growth potential and investment climate, ranks Malaysia in the top five,” she told StarBiz.
While the country’s exports basket is diversified, Varma expects the export downturn underway to continue in the near term, due to electronics, which accounts for around 38% of Malaysia’s total exports.
She added fiscal consolidation backed by revenue raising measures and subsidy reforms, increased infrastructure investment and reforms to the labour market can help boost the country’s medium-term growth.
“We project real gross domestic product growth of 4.5% year-on-year for Malaysia over 2024 to 2028.
“Malaysia’s electronics exports had held up well for most part of 2022, defying the global tech downturn, but we believe that was temporarily boosted by new capacity built as part of the diversifying production base.
“Additionally we expect further moderation in liquified natural gas and crude oil exports this year, reflecting price effects,” she says.
The electrical and electronics (E&E) sector makes up the country’s largest exports. In 2022, local E&E exports were RM593bil which accounted for 37% of total exports and contributed to 78% of Malaysia’s external trade surplus.
Malaysia Semiconductor Industry Association president Datuk Seri Wong Siew Hai said while China may no longer have the “low-wage” comparative advantage, the Chinese economy still has a huge electronic manufacturing base.
“The tag “Factory to the World” still applies to China. So far, Malaysia has been successful in attracting E&E investments totalling up to RM192.9bil in the past three years (2020 to 2022) (2020: RM15.6bil, 2021: RM148bil and 2022: RM29.3bil).
In order to keep pace and to maintain Malaysia’s positioning in the global semiconductor supply-chain, the country must target E&E exports of RM1.2 trillion by 2030,” he said.
Wong said it is crucial for Putrajaya to continue to reduce the cost of doing business and strengthen the ease of conducting business, to boost FDI inflows.
“Malaysia has benefited from the China’s + 1 strategy with volume being moved out from China to Malaysia.
“Malaysia must attract more semiconductor companies, both manufacturing and services to its shores. This will indirectly reduce Malaysia’s reliance on China,” he told Starbiz.
Meanwhile, Universiti Tunku Abdul Rahman economics professor Wong Chin Yoong said the country’s manufacturing capabilities and fundamentals are intact.
He adds that for Malaysia to gain a breakthrough from the “middle-income” trap, it needs to become the best adopter of general purpose technology (GPT).
“Malaysia was ranked 24th in the “economic complexity trade” category in the Economic Complexity Index, in 2021. This shows the country possesses a matured manufacturing base.
“As such, the government should focus on broadening and deepening the existing structure of the industrial sector by hastening the adoption of GPT.
“This will increase the productivity of businesses and spur the country’s export growth,” he said.
UOB senior economist Julia Goh said the unveiling of the revised New Industrial Master Plan 2030 in the third quarter this year will set the tone for the country’s industrial development, by outlining new growth opportunities, improving ease of doing business, and attracting high-quality digital investments.
“This will help the country become Asia’s investment gateway. Malaysia has to continue strengthening its infrastructure, ensuring continuity of pro-business and pro-growth policies, fair and effective legal systems, improving government transparency, expanding the skilled labor force, and ensuring a stable domestic financial system,” she said.
In order for the country to boost its trade performance, Centre for Market Education chief executive officer Dr Carmelo Ferlito said it needs to remedy several weak points which include service restrictions, logistic and regional trade agreements.
“Malaysia should push more on regional agreements (starting with Asean countries), improve its logistic regulation and push for reducing service restrictions, in particular on labour, where more should be done for an Asean-level liberalisation. This would spur regional cooperation.
“I think over the years red tape for investors increased, in particular with a more complicated labour regulation and less friendly banking legislation.
“Easy procedures, availability of labour and access to financial institutions are the most important points we should work on to attract FDIs,” he explained.
Ferlito adds the country should pursue a higher diversification (in terms of exports markets) within Asean before moving regionally toward big potential markets such as Bangladesh.
“If we look at the local manufacturing, agriculture, and mining sectors, we see a prevalence of three items with regard to Malaysia’s exports.
“I believe that much more could be done in terms of a diversification of the agriculture sector if more liberalisation was introduced, together with the removal of price controls. This would allow current players to consolidate and scale up for more effective production,” he said.
