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Reviving domestic investments

Reviving domestic investments

27 Jan 2021

While economic conditions in Malaysia may have recovered from the lows of 2020, business sentiment has remained weak despite the billions of ringgit injected by the government to resuscitate the economy.

The resurgence of Covid-19 cases has, to a large extent, stymied plans by businesses to expand operations and to increase capital investments, due to fears of a total lockdown to combat the deadly virus.

An estimate by the Statistics Department showed that the country’s gross fixed capital formation, which is an indicator of domestic investment performance, has contracted sharply by 15.4% in 2020 following a decline of 2.1% in 2019.

According to RAM Ratings’ Business Confidence Index released on Dec 7,2020, business sentiment domestically will remain bleak for the next three months, with cashflow being a key concern among many businesses.

The reluctance of businesses to invest may hamper Malaysia’s economic recovery.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid expected domestic investment growth to be flattish this year, considering the soft business environment.

“Perhaps to some degree, uncertainty over political dynamics could also contribute to a lacklustre investment scenario, ” he told StarBiz.

However, on the bright side, he said Malaysia’s valuable natural resources, competent labour force, decent infrastructure and a peaceful society would continue to be conducive for investments.

To encourage businesses to invest, Mohd Afzanizam believed the government must continuously relook into investment-related incentives to ensure they remain relevant and suit the needs of industry players.

In addition, the red tape involving multiple government agencies administering investment matters must be minimised so that investors will not be frustrated by bureaucracy.“It’s a question of efficiency and being able to deliver favourable outcomes to the investors’ application for investment, ” he said.

Meanwhile, OCBC Bank economist Wellian Wiranto said tax incentives and other support measures from the government would help to encourage businesses to invest.

However, he pointed out that businesses would undertake new investments even without government incentives, provided the investments are worthwhile in their risk-return consideration.

“Our baseline expectation assumes some recovery in domestic investment activities in 2021 compared with 2020, that would help Malaysia achieve a respectable, but not a roaring, gross domestic product (GDP) growth rate of 5.7%.

“However, for the level of investment to return to 2019 level or beyond, it would require an upside risk scenario such as a faster-than-expected flattening of the pandemic curve, a successful rollout of the vaccination programme, and a lasting resolution of the ongoing climate of political uncertainties.

“In short, a lot of stars have to be aligned for us to see a V-shaped recovery in business investment activities, ” he said in a reply to StarBiz.

Echoing a similar view, MIDF Research economist Mazlina Abdul Rahman said domestic investment activities may not return to levels seen in 2019 or earlier, considering that there are still several downside risks to the economy.

“There could be delay and hiccups in the rollout of vaccines and an enormous spike in Covid-19 cases in the country could worsen the outlook.

“If we look at Malaysia’s capital and intermediate goods imports, they remained largely suppressed with double-digit contraction in latest November 2020’s data, suggesting that businesses are still pessimistic about the future demand for their products, hence are more cautious on any business investment decisions, ” she said.

Despite the soft domestic investment outlook, Mazlina, however, pointed out that business expansion and startups could be more prevalent in sectors that have benefitted from the pandemic such as e-commerce and pharmaceuticals.

Looking ahead, she expected the current low interest rate, which makes borrowings cheaper, to be supportive for new domestic investments, along with tax-related measures.

“The government could target areas or sectors we have an advantage comparatively with other countries and encourage new investments in those segments.

“It can then be easier to market local products internationally besides for domestic use.

“However, in the current situation, these measures may not be a strong drive for overall new investments amid still weak demand conditions on the ground, ” she added.

Source: The Star