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Higher FDI expected

Higher FDI expected

29 Jan 2024

As Asean countries stand to chart stronger economic growth this year compared to some of their developed peers, Malaysia as a member of the Asean bloc is in a favourable position to attract more foreign direct investment (FDI).

Economic experts expect the country to see improvements in FDI and to an extent compete with some of its regional peers in the FDI space.

According to world investment statistics compiled by the United Nations Conference on Trade and Development (UNCTAD), Malaysia’s FDI inflow in 2020 amounted to US$3.2bil or 2.6% of the total FDI inflow to Asean countries.

It climbed to US$12.2bil in 2021 and US$16.9bil in 2022, raising its share of Asean’s total to 5.7% and 7.6% respectively. Malaysia’s ranking in FDI size among the 10 Asean countries also rose incrementally from sixth placing in 2020 to fifth in 2021 and fourth in 2022.

Economics professor at Sunway University Yeah Kim Leng told StarBiz Malaysia has not fared too badly in attracting FDI but it has been overtaken consistently by Indonesia and Vietnam in recent years.

He said the size of FDI relative to gross domestic product (GDP) is a better measure to compare the ability to attract FDI across countries. Based on this measure, the country’s FDI in 2022 amounted to 4.2% of GDP and placed it in fourth position behind Vietnam (4.4%), Cambodia (12.4%) and Singapore (32.3%).

He said as one of the two upper middle-income Asean countries, Malaysia’s 4% to 5% annual real GDP growth projected for this year is better than its income peer, Thailand, as well as high-income Singapore and Brunei.

“Countries that have reached a high income level as defined by the World Bank find it hard to sustain growth above 2% to 3% per annum.

“Unsurprisingly, the rest of Asean member countries which are in the lower middle-income category are growing at 5% to 7% per annum, as the growth rate is faster with a smaller income base.

“Malaysia is on the cusp of joining the high-income nations within the next two to three years.

“Barring another major global setback, the country’s ability to maintain trend-level growth is assured by the new administration’s focus on strengthening governance and undertaking the necessary fiscal reforms and structural upgrading to unleash new sources of growth emanating from greening and digitalising the economy,” Yeah noted.

Juwai IQI global chief economist Shan Saeed said in terms of FDI, competition is getting tough in the Asean region. He said there are five major countries which are competing for FDI in the region, namely, Malaysia, Indonesia, Vietnam, Thailand, and the Philippines.

“We expect FDI to move into various countries according to the strength and productive labour force. For example, in Malaysia, we expect FDI inflows into the manufacturing, electrical and electronics, real estate, technology and eCommerce sectors.

“For Indonesia, the company expects inflows into mining, technology, electric vehicles and services.

“Vietnam is anticipated to attract FDI into manufacturing, real estate and technology, while Thailand into manufacturing, technology, financial services and real estate. FDI into the Philippines will be in services, manufacturing and real estate.

“Having said that, Malaysia will be able to compete with other neighbouring countries because of its productive labour force, stable rules and regulation, and above all its strategic geography.

“When it comes to global FDI, Malaysia remains germane for many players in the region for long-term investments,” he noted.

To further spur FDI into Malaysia, Shan said maintaining macroeconomic stability, enhancing the skills of the labour force, leveraging technology, maintaining economic policy consistency and achieving growth stability were vital.

AmBank Group chief economist Firdaos Rosli said from the perspective of portfolio investments, Malaysia would likely benefit from the flow of foreign capital coming into emerging markets amid the anticipation of rate cuts by the Federal Reserve (Fed) and other major central banks in 2024.

However, he said it may come in lower than anticipated if the major central banks’ higher-for-longer interest rates narrative were to persist beyond the first half of this year. As it stands, in 2024, he expects a higher foreign inflow into Malaysian equities but slower into the bond market than in 2023.

“In terms of approved manufacturing and services investments, generally, the approved investment numbers will remain healthy in 2024.

“With the New Industrial Master Plan 2030 (NIMP 2030) announced last year, I assume that the Malaysian Investment Development Authority (Mida) and other relevant investment authorities will ramp up their promotional activities to encourage more FDI into Malaysia.

“It all boils down to the time frame these approved investments turn into realised investments in the coming months and quarters.

“This outlook is contingent upon various factors and not from government approvals alone,” he said.

In terms of Malaysia’s FDI versus its Asean neighbours for this year, Firdaos thinks Malaysia would still be trailing behind other more “attractive” investment destinations such as Singapore, Indonesia, Vietnam and the Philippines. The entire trade and investment ecosystem needs a holistic review, i.e. beyond NIMP 2030 alone, should Malaysia aim to edge up versus its neighbours.

To strengthen or attract more FDIs into the country, he said the government should further mainstream the said plans into policies.

“Investors may need to understand how these plans would impact their existing and future investments concerning the overall cost of doing business. Furthermore, it is still too early to conclude whether the plans could strategically position Malaysia’s investment attractiveness higher than its peers,” Firdaos said.

Meanwhile, Asean economist at HSBC Yun Liu said Malaysia has been topping Asean as one of the main beneficiaries of consistent and quality FDI inflows, especially in the tech manufacturing space. This would provide hopes for the local trade sector to emerge stronger when the trade tide turns, she noted.

Tax incentives, FDI-friendly policies, free trade agreements, ease of doing business, and labour cost effectiveness would further spur FDI inflows into Malaysia, she said.

“A better trade prospect along with resilient domestic demand will drive Malaysia’s growth in 2024. While a turn in the global electronics cycle has not translated into the country’s external sector yet, Malaysia is poised to be a main beneficiary, albeit even slightly delayed than regional peers, she said.

At the same time, Liu expects all Asean countries to see accelerating growth in 2024, with Malaysia expected to come in the middle of the pack. “Our 2024 growth forecasts is Vietnam at 6%, Philippines (5.3%), Indonesia (5.2%), Malaysia (4.5%), Thailand (3.8%), and Singapore (2.4%),” she said.

Juwai’s Shan said he is upbeat of Malaysia’s FDI as the nation’s growth model would be driven by two major variables in the GDP equation: consumption and investment.

He said Malaysia is one the key players when it comes to manufacturing. Many global players want to leverage its strategic geography, educated, and productive labor force. Moreover, trade and commerce would bolster the GDP outlook at the macro level.

“We at Juwai IQI expect trade volumes to stay higher in the range of 10% to 15% in 2024. Tourism has become an economic tool to buttress the local businesses and keep the consumption pattern moving for the economy. This bodes well for FDI inflows,” Shan said.

AmBank’s Firdaos said he is optimistic on the Asean region. In terms of GDP growth, he expects the region to fare better in 2024 compared to the prior year and higher than global and advanced economies. He said the gradual recovery in global trade would lend support to Asean’s growth.

“The International Monetary Fund’s (IMF) October projections expect Asean to grow at 4.2% in 2023 versus 4.5% in 2024, whereas the Asian Development Bank (ADB) believes that the region’s growth is coming in at 4.3% and 4.7%, respectively. The Philippines, Vietnam and Indonesia will likely lead the region’s fastest-growing economies in 2024, while other economies are expected to fare better this year amid a gradual recovery in global trade and a healthy labour market.

“I expect Malaysia to experience some “rebound” this year as semiconductor exports recover in time. Ambank is pencilling Malaysia’s growth to come in at 4.5%, with the overnight policy rate (OPR) remaining static at 3%, but downside risks remain amid an inflationary outlook.

“The government’s planned subsidy rationalisation is still hazy because the magnitude of the eventual floating of RON95 to inflation remains largely unknown. As such, we are looking at inflation ranging from 2.5%-3.5%, but if price pressures intensify, it may come in around the mid-to-high side of the said range,” Firdaos said.

Source: The Star