Sarawak’s wealth of vast natural resources has historically steered the state’s economy towards the easily-monetised extractive industries such as oil and gas production, and timber harvesting, followed later by large agricultural plantations specialising primarily in palm oil production. While these sectors continue to dominate Sarawak’s economic DNA, significant improvements in transportation and utility infrastructure are now giving rise to an era of economic diversification led by new heavy industries.
While early investments are primarily being made in energy-intense sectors such as basic metal refining and production, the application of more value-added services focused on the state’s renewable resources has already yielded two large food processing plants and is expected to lead to further development in related fields such as timber and other wood-based manufacturing, advanced ceramics, biotechnology and aquaculture, as well as further downstream applications for the palm oil and larger agriculture sector. Along with its well-known oil, gas and timber resources, Sarawak also possesses substantial quantities of other valuable potential inputs such as silica sand (used in manufacturing a wide array of products), high-quality kaolinitic and ball clay (used in ceramics), and coal.
SLICING UP THE PIE: Sarawak’s economy grew by 4.2% in 2013, just under the 4.7% national GDP growth for the year but much stronger than the 1.5% growth experienced the previous year, according to data from the Department of Statistics Malaysia (DOSM). The state compares quite favourably to its peers in terms of per capita GDP at RM41,115 ($12,507), up from RM40,396 ($12,288) in 2012 and RM30,081 ($9150) in 2009.
Sarawak also ranked as the third most affluent state in all of Malaysia, following only Kuala Lumpur ( including Putrajaya) at RM79,848 ($24,289) per capita and Labuan with RM43,848 ($13,338) per capita, and well above the national average of RM32,984 ($10,033).
Led by its thriving hydrocarbons sector, Sarawak’s largest contributor to the national economy was mining and quarrying, which encompasses oil and gas activity. In 2013, Sarawak accounted for 25.3% of the country’s mining and quarrying GDP. Although favourable momentum in the energy sector strengthened overall economic growth in 2013, weaker oil prices at the end of 2014 and into 2015 could result in a smaller contribution from the sector.
Due to timber, fisheries and palm oil businesses, Sarawak’s second-largest contribution to the national economy was in the agriculture sector, for which the state accounted for 15.2% of all output, placing it behind only Johor (15.6%) and neighbouring Sabah (16.8%). Sarawak also contributed 10.3% of the country’s manufacturing output (ranking 5th), 7.8% of the construction sector (ranking 4th) and 6.4% of the services sector (ranking 3rd, behind Selangor and Kuala Lumpur, which together totalled more than half of all services nationally).
As evidenced by Sarawak’s good showing across a variety of subsectors, its economy is already among the most diversified in the country, even before the impending wave of industrial projects begins to contribute. In 2012 the services sector was the largest economic contributor to state GDP at 36.8%, followed by manufacturing with 27%, mining and quarrying at 21.1%, agriculture at 11.6% and construction at 3.2%, according to DOSM statistics. No other state tallied double-digit contributions from four separate sectors at the time, while the relatively low contribution of the construction sector has since been turned around due to the recent building boom.
BIG PICTURE: These trends reflect the larger economic development of Malaysia as a whole, which continues to grow and modernise at a rapid pace in line with the goals laid out in the government’s Economic Transformation Plan (ETP) and 10th Malaysia Plan 2011-15 (10MP). Sarawak also boasts major contributions to a number of the ETPs National Key Economic Areas (NKEAs), including the oil, gas and energy sector, via its offshore hydrocarbons operations and developing hydropower initiatives, as well as the palm oil and rubber industries, in which Sarawak is a major producer. The state also holds great potential in other NKEAs that have thus far remained largely underdeveloped, such as the tourism industry, communications content, infrastructure and the agriculture sector.
Now in its 10th manifestation, the five-year Malaysia Plan also focuses on targeted growth areas of the economy, which are now experiencing rapid expansion in Sarawak. A key tenant of the 10MP is achieving high-income nation status, which is being carried out through efforts such as specialisation and productivity-led growth as personified in the rise of the Sarawak Corridor of Renewable Energy (SCORE).
FUELLING THE ECONOMY: Sarawak’s importance to Malaysia as a whole is derived in no small part from its substantial hydrocarbons reserves, which, along with Sabah’s, are responsible for providing both energy to supply the domestic market and for the export market. Although an increasing amount of this energy is being diverted towards use within the country as Malaysia’s energy intensity continues to climb (95% of crude oil was exported in 1992 compared to only 55% by 2012), energy exports remain a crucial component in the country’s balance of trade.
Petroleum products and related material exports from Sarawak totalled RM95.56bn ($29.07bn) in 2013, up from RM82.12bn ($24.98bn) the previous year and accounting for 17.3% of all exports, according to DOSM data. Natural gas shipments also brought in another RM61.14bn ($18.6bn) and RM64.17bn ($19.52bn) in 2012 and 2013, respectively, contributing a further 8.9% of total exports.
As of 2013 Sarawak held reserves of 1.59bn barrels of oil and condensates, or 27.2% of the national total, according to National Energy Commission data. But with oil production in decline, Sarawak’s greatest value lies in its vast stocks of natural gas, which are being tapped at an increasing pace. The state contained 50.12trn standard cubic feet of gas (tscf) in 2013, significantly more than all of Peninsular Malaysia’s 34.974 tscf and Sabah’s 13.218 tscf.
Aggressive exploration and development efforts in Sarawak by national oil giant Petronas and participating international oil companies such as Shell are ensuring that the sector continues to play a key role in the broader economy in spite of the recent softening of global oil prices.
THE TAXMAN: One of the key changes in the administration of the national economy that will also have an impact on businesses in Sarawak is the passage of a new goods and services tax (GST) announced in October 2013 and scheduled to be implemented starting on April 1, 2015. The new 6% consumption tax will replace the current sales and service taxes, which are set at 10% and 6%, respectively.
Although the new tax regime has been criticised by government opposition members who claim that the tax is regressive and will cause more money to flow out of the country, the government has countered that the GST is employed widely across Asia and will provide a more effective and transparent means of collecting revenue while remaining competitive against regional rivals.
The Malaysian GST also contains a number of exemption provisions designed to ease the financial burden on targeted demographics. These are divided into two categories: zero-rated supplies, which are taxable goods and services that are subject to a zero rate, but on which businesses can claim input tax credits when producing these supplies; and exempt supplies, which are non-taxable supplies that are not subject to GST when supplied to the consumer, and thus GST paid on inputs by businesses cannot be claimed as tax credit.
Some GST-exempt categories include: fruits (whether local or imported), bread, coffee powder, tea dust and cocoa powder ; various types of noodles ; many medicines; reading materials such as children's colouring books, exercise and reference books, text books, dictionaries, newspapers and religious books ; the first 300 units of electricity consumption ; and retail sales of RON95 petrol, diesel and liquefied petroleum gas. Many services are also exempt within the financial, health care, transportation, education and funeral sectors.
This represents a change in that businesses basically act as agents to collect the tax on behalf of the government under the consumption tax system. One major concern when the burden of tax collection shifts to businesses – particularly for small and medium-sized enterprises (SMEs) – is that the operators are not unduly burdened with high compliance costs. Businesses will now play the role of tax collector since ultimately the GST will be collected at the time of sales and remitted to the government after setting off the correct amount of input tax credit. These procedures will, in turn, require strict adherence to new rules relating to the timing of charging and remitting GST and invoicing requirements.
To prepare businesses for the changeover, numerous road shows and other educational and assistance programmes have been deployed. The 2015 national budget included a number of provisions to address the issue, including a training grant of RM100m ($30.42m) allocated to businesses for their employees to attend GST courses; RM150m ($45.63m) in financial assistance to SMEs for the purchase of accounting software; accelerated capital allowance on the purchase of ICT equipment and software; and additional tax deductions for expenses incurred for training in accounting and ICT relating to the GST.
TRICKLE DOWN ECONOMICS: Coupled with the implementation of the GST is the restructuring of the individual income tax, whereby the chargeable income subject to the maximum rate will be increased from RM100,000 ($30,420) to RM400,000 ($121,680). Other 2015 tax provisions reduce individual income tax rates between 1% and 3%, which will effectively exempt 300,000 individual taxpayers from income tax, as well as exempting tax payers with families and incomes of less than RM4000 ($1216) per month from income tax. The previous maximum tax rate of 26% will be reduced to 24-25%, depending on the income bracket.
Corporations will also receive a break to the tune of a 1% reduction in corporate income tax from 25% to 24% starting in 2016. SMEs with paid-up capital of up to RM2.5m ($760,500) will also see their tax rates reduced in 2016 from 20% to 19% for chargeable income of up to RM500,000 ($152,100) and from 25% to 24% for additional income. In 2015 cooperative income tax will also be reduced by 1% for chargeable income exceeding RM250,000 ($76,050) – previous rates ranged from 22-25% – and 2% for companies earning RM150,001 ($45,630) to RM250,000, dropping from 20% to 18%.
INFLATION: Sarawak’s year-on-year (y-o-y) headline inflation, as measured by the percentage change in the consumer price index (CPI), remained modest at 2.3% as of November 2014, up slightly from the 1.9% recorded for the 2013 calendar year, according to DOSM data. This compared slightly more favourably to the national average, which increased at a y-o-y rate of 3% through November 2014.
The main contributors to inflation in Sarawak were alcoholic beverages and tobacco, which increased 8.4%, followed by health care (up 7.4%) and transport (up 5.6%). Other contributors were restaurants and hotels, which increased 2.3%, along with a 2% increase in food and non-alcoholic beverage prices, and 1.7% inflation for housing, water, electricity, gas and other fuels, while clothing/footwear and communication displayed deflation rates of -0.9% each.
Sarawak fared better than the national inflation rate in most categories except transport and health care. As in 2013 the national inflation increase was attributed to a rise in the index for alcoholic beverages and tobacco at a 10.5% clip; transport by 5%; restaurants and hotels (up 4.3%); housing, water, electricity, gas and other fuels (3.5%); health care (3.4%), and food and non-alcoholic beverages by 2.9%. These six groups of goods and services contributed 96.6% to the increase in the CPI for the month of November in 2014.
The implementation of the GST in April 2015 should have some effect on inflation rates, with some groups being affected more than others, although the exact outcome remains to be determined. Of the 944 goods and services contained in the CPI list of goods, the prices of 532 items, or 56%, are projected by the government to decline by as much as 4.1%, according to the 2015 National Budget. These are generally everyday household consumables ranging from medicine and baby diapers to electrical appliances and food. Countering these estimated declines, another 354 goods and services are expected to experience some price increase not exceeding 5.8%.
EMPLOYMENT: Sarawak’s relatively small population, large geographical area and diversified economy are providing a plethora of job opportunities for the state’s 2.62m inhabitants – so many, in fact, that finding enough workers to fill newly created positions is beginning to be a major concern for businesses. The government’s successful push to attract investment into the country has created a shortfall of qualified labour across the board for a variety of reasons. While interest in white-collar jobs remains strong among Sarawakians, applicants are much fewer and further between for blue-collar jobs, which many perceive as less prestigious.
Vocational and technical workers required for both the established oil and gas industry as well as factory workers for the new industrial plants cropping up due to SCORE have become a scarce and valuable commodity as more projects come on-line. Due to this shortage, among other factors, Sarawak’s unemployment rate has historically remained above the national average and sat at 4.5% in 2012 compared to 3.1% nationally, according to the latest figures available from the Sarawak State Planning Unit.
Service and sales workers represented the largest single employment group in the state with 260,100 workers, or 21.7% of Sarawak’s 1.2m employees, in the third quarter of 2014, according to DOSM data. Skilled agricultural, forestry and fishery ranked a close second with 209,900 workers, or 17.5%, followed by elementary (low or unskilled) occupations with 171,000 workers (14.3%). Other significant labour groups include craft and related trades workers with 163,200 employees (13.6%), 95,800 clerical support employees (8%), 91,300 workers in both the technicians and associate professionals, plant and machine operators, and assemblers categories (7.6% each) and another 77,400 professionals (6.5%).
The Workforce Development Unit (WDU) within the Chief Minister's Department estimates some 2500 direct permanent jobs have been created as of September 2014 from SCORE investments. Of these, 70-80% have gone to local Sarawakians. In addition to direct employment, indirect jobs added as a result are estimated at a ratio of 1:4, meaning that total direct and indirect jobs created could be as high as 10,000. When completed, the 11 major companies committed to SCORE are expected to generate a total of 8711 direct jobs and up to 40,000 total jobs, not including the construction sector. While employment in the construction industry will remain strong in the coming years, the impact on the local job market will be diminished again due to a lack of mid-level technical skills, resulting in roughly half of this labour pool being filled by foreign workers.
"The biggest challenge is that while we are now able to produce sufficient graduates to meet the demand at the degree level, the gap between supply and demand of a technically trained, skilled workforce at diploma and certificate levels is quite large," Abdul Rahman Deen, director of the WDU, told OBG. "We really need to ensure these institutions are filled in order to meet future employment demands." SHORTAGES: According to a 2010 Sarawak state study, the greatest demand from the private sector is for students certified in mechanised and manufacturing professions, including electrical and mechanical engineers, safety officers and fabricators, as well as for service workers and unskilled agricultural workers for plantation work. As of late 2014 Sarawak had around 90,000 skilled and semiskilled workers in the state, significantly behind the projected demand of 161,000 workers needed in 2015. In spite of a new dedicated unit within the WDU created in 2012 to focus on providing a workforce for SCORE, this shortfall is not expected to be closed in the near future, with the current capacity in state institutions at around 20,000 per year. This means that at least initially many of these positions will need to be filled by foreign workers.
While the government is dedicating resources to expand the capacity of training institutions, another problem comes down to filling the seats. In 2012 approximately three-quarters of available spaces were filled, according to the WDU (due primarily to the inability of many prospective students to pay school fees), although this figure increased to 83% in 2013 after education and promotional efforts were launched by the WDU.
OUTLOOK: Sarawak looks set to remain heavily dependent on traditional resource extraction activities in the short term, but generous financial incentives and substantial investments in infrastructure appear to have generated considerable international interest from a range of industries. The bevy of large new industrial projects scheduled to come on stream in the coming years will hasten the diversification of the state’s economy, creating more permanent jobs while also developing more value-added industries to hedge against fluctuating global demand for resource exports in the energy and agriculture sectors. Although tumbling energy prices will likely eat into short-term profits, the hydrocarbons sector will continue to be a major contributor to the economy for at least the next two decades.
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