Growth by Construction


Economic News

22 Jul 2010
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Faced with slowing economic growth, low commodity prices and an international financial crisis, the Malaysian government is resorting to fiscal stimulus measures to prevent further economic deterioration. It has launched a multi-billion dollar public-works programme to boost the economy.

Hot on the heels of last year's government spending package of $2bn announced in November 2008, the Second Finance Minister, Tan Sri Nor Mohamed Yakcop, announced a second RM7bn ($2bn) package last week. He said an investment fund of RM1.5bn has been set up to provide grants, preferential loans, and equity funding to the private sector to finance high-impact projects in strategic sectors, including the construction sector.

"We have the capacity to lend some more due to the fact that we have managed to reduce the budget deficit from 5.5% of GDP in 2000 to 3.2% in 2007," he was reported as saying.

Forbes magazine predicted that in 2009, the combination of a slower growth in development expenditure and strong revenue performance would allow the government to consolidate its finances, thereby bringing the government deficit to 3.6% of GDP from an initial forecast of 4.8% for 2008. However, it should be noted that this forecast was made in August 2008, when the economic outlook was somewhat more positive than it was at the beginning of 2009. Indeed, the government has just revised its 2009 GDP forecast from 4.8% to 3.6%, while other sources such as the Economist magazine have published more modest predictions, putting Malaysia's GDP at 1.5%.

Some sector representatives agree that government-led projects are likely to remain a major growth driver for the foreseeable future, as project finance becomes tighter. "Government projects will be the major catalyst in boosting the industry," Ng Sem Guan, an OSK research analyst, told the local press. However, he warned that it could take some months for the impact of the spending package to be felt by the industry.

Similarly, the current Ninth Malaysian Plan (9MP), which runs from 2006 to 2010, was implemented to serve as a lynchpin for the industry's revival, under which the government has allotted RM200bn ($63bn) for building works, with an additional RM20bn ($6.3bn) to be sourced through private finance initiatives (PFIs).

The Malaysian government expects pump-priming budget to boost Gross Domestic Product (GDP). Gerald Sundaraj, a manager at the Construction Industry Development Board, told OBG that RM1120bn is to be invested in "development corridors" - areas of the country that the authorities are keen to boost economically - to 2020.

For instance, the Iskandar Development Region, in the south of the peninsula near Johor Bharu, provides ample opportunities for construction. Initially, $13bn was invested for the development of the region, $11.3bn of which had already been divested by the end of 2008 as projects were well underway.

In a bid to attract international investors, particularly from Europe, Japan, Taiwan and the US, a project called Airport City or Aeropolis was launched. This centre is to include residential and air cargo divisions, a hi-tech park, private medical centres, international schools, and shopping malls.

Other notable projects in the region include the financial district of Medini Iskandar, the coastal highway to Nusajava City, the upgrade of the Skudai-Senai Highway and the Legoland amusement park.

However, not all is smooth sailing ahead. While the lion's share of the 9MP will go ahead, Prime Minister Abdullah Ahmad Badawi has announced that several projects will be reviewed due to costs and a shortfall in the funds available. Among the mega projects under re-evaluation are the $2.5bn high-speed train link between Kuala Lumpur and Singapore, expected to cut travelling time from 7 hours to 90 minutes, and the $1.35bn Penang Second Bridge, which is to connect the mainland to the island of Penang. This was evident for Penang authorities when UEM Construction announced the building costs for the Penang Second Bridge would jump from RM3bn ($861m) to RM4bn ($1.15bn) due to rising material prices. Meanwhile, the rail line to Singapore remains on hold.

However, Dato' Ridza Abdoh Hj. Salleh, Managing Director of UEM Builders, one of the partners building the bridge, claims that "the price of prime inputs has come down towards the end of 2008, [which] can be seen as an opportunity for further investment infrastructure."

As part of its stimulus package, the government has unveiled liberalising reforms designed to tackle costs and increase competition in the construction sector. This includes the abolition of import duty on cement and steel. Opinion is divided about whether this move will have a great impact. While OSK Research steel analyst Ng Sem Guan has said that the effect will be minimal, as local millers have an advantage over foreign players in logistics and transport costs, others predict that steel prices overall will fall as a result.

With grand plans stated in the Malaysia Vision 2020 to be "developed" by 2020, Malaysia appears to be on the right track. Dato' Ridza Abdoh Hj. Sallehtold OBG, "sometimes a crisis can be seen as an opportunity and eventually turn around the economy of the country."

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