As a leading force in regional integration and the promotion of the ASEAN trading block, Malaysia has managed to consolidate its position as the principle gateway to South-east Asia. Though smaller in terms of market size than its neighbours, it has consistently punched above its weight in attracting foreign direct investment (FDI) dollars, with trade accounting for more than 100% of its entire economy. Despite external headwinds in 2015 and the beginning of 2016, Malaysia has managed to grow its overall trade volumes in local currency by 1.2%, reaching a total of RM1.5trn ($371.3bn), equivalent to 127% of GDP. This compares to 351% in Singapore, 132% in Thailand, 61% in the Philippines and 48% in Indonesia. Singapore and Thailand, as statistics suggest, are Malaysia’s key rivals in the region for FDI as well as trade flows; though recently competition is being replaced by closer cooperation and increased exchange of capital.
FDI Performance
Historically Malaysia has been able to attract around 10% of all FDI destined for South-east Asia, with Indonesia and Singapore capturing the largest volume. These days, competition for investors is intensifying as the Philippines, Vietnam, Thailand and more recently Myanmar are providing attractive high-return prospects. On a risk-reward adjusted basis, Malaysia is able to compete thanks to substantial investments in infrastructure, government services and a more sophisticated business environment that is more in line with international standards.
The World Banks’ 2016 “Doing Business” report ranks Malaysia 18th globally compared to China ranked 84th and Indonesia’s 109th position. Its strongest characteristic is its protection of minority investors (4th), which contrasts greatly with trading across borders (49th), which is the country’s weakest component. Malaysia continues to be regarded as a relatively easy place to start a new business, with simple procedures in registration, obtaining property and access to power and local credit. Its 44th ranking in enforcement of contracts is stronger than its neighbours, though it lags behind Asia’s top performers Singapore, Hong Kong and South Korea.
Tough Year For Investors
While the trade sector managed to weather the storm that hit commodity prices, FDI flows were under immense pressure in 2015. Total volume of FDI declined by 44% to $8.7bn – a multi-year low for the country. The main culprit was a sudden freeze in upstream exploration as well as oil and gas services, with national energy champion Petronas putting most of its multi-billion dollar capital expenditure programme on hold until further notice. An exodus of foreign oil and gas executives resulted in a weaker property market, especially in the high-end condo segment in Kuala Lumpur (KL).
This in turn resulted in a slowdown in delivery of an otherwise dynamic real estate pipeline. Investment in real estate declined by 85% in 2015, which may be a blessing in disguise given that the market is prone to overheating and asset bubbles. Investment in the manufacturing sector continued apace, according to the Malaysia Industrial Development Agency (MIDA).
The manufacturing sector attracted a total of $22bn of FDI in 2015, accounting for 61% of total volume. A significant share of new FDI dollars went into establishing new manufacturing facilities for solar panels, automotive components and semiconductors. On the whole, manufacturing was also underperforming, attracting some 45% less in investments compared to 2014.
US investors took the lead in expressing confidence in Malaysia’s medium- and longer-term potential investing $97m compared to $39m a year earlier. According to MIDA, most of these inflows went into expansion of capacity computer hardware manufacturing facilities.
Meanwhile, Japan took a back seat, reducing its contribution to Malaysia’s FDI from a stellar $3.1bn in 2014 to just $93m the following year. Much of this discrepancy is reflected in previous big ticket investment in infrastructure projects that required one-off heavy machinery for digging underground tunnels in KL as part of the mass rapid transit (MRT) project. In 2016 FDI volumes are likely to remain subdued according to MIDA, as investors will likely wait for oil price recovery and clarity in China before returning in force.
The most promising areas for greenfield FDI are in the regional corridors, with Sarawak’s Corridor of Renewable Energy tipped to attract draw players in metal processing sectors that are attracted to the low-cost hydropower offered by the state. The UK is expected to increase its share of FDI on the back of several high-level visits by the UK Prime Minister David Cameron. Following years of capital spent on physical infrastructure and equipment, investors are interested in health, education, financial services and advanced technology.
The launch of new initiatives such as the Newton-Ungku Fund with the participation of the Malaysian Industry Government Group for High Technology (MIGHT) promises to spur new joint ventures between Malaysian and UK small and medium-sized enterprises in the field of innovation. At the same time Chinese manufacturers are expected to continue setting up their regional headquarters in Malaysia to serve the South-east Asian market as well as Europe and the US.
The Trans-Pacific Partnership agreement (TPP) is also likely to become a positive catalyst for investors from North America looking for a stable foothold in the ASEAN region.
Rebalancing Flows
Following the global debt crisis in 2008 Malaysia has been looking to Asia and more specifically to South-east Asia to attract new trade and investment opportunities. Its chairmanship of ASEAN in 2015 was a milestone in achieving its regional aspirations to become a leading trade and investment destination (see analysis).
Given its central location, advanced infrastructure, strong manufacturing traditions and liberal trade environment, Malaysia has been an attractive destination for multinationals for several decades. Its relatively small population and market saturation have been offset by high income growth, government expenditure, relative stability and openness to investors.
Trade Numbers
A shift from an advanced market focus to Asian trade and investment partners explains Malaysia’s strong performance during recent cyclical downturns. The year 2015 proved to be a case in point. The first half saw declines of 3.1%, according to trade statistics, with many fearing negative growth and trade deficits for the year. However, it was the country’s increasingly close relationship with China – its single biggest trading partner – as well as ASEAN that helped to save the day, and boost foreign trade numbers.
Trade between Malaysia and China increased by RM23bn ($5.7bn), while ASEAN trade expanded by RM12.3bn ($3bn), sustaining overall growth of 6.8% in the second half of 2015 according to official statistics. Malaysia was able to end the year with a higher surplus of RM94.2bn ($23.3bn), which represents 14.3% growth on 2014. It was also the 18th year in a row that Malaysia posted a trade surplus.
Export Drivers
Contrary to market perceptions, Malaysia is not a major oil and commodities exporter, with these items representing just 20% of total value of goods sent abroad. Though a decline in oil and palm oil prices had a negative impact on trade flows, the country’s resilience can be explained by its trade-oriented manufacturing base. For instance, in 2015 it was the 6.5% growth in manufactured goods that helped to offset the lower demand in commodities. Additional growth momentum came from the country’s diverse set of trading partners. Key growth areas included, the 14.4% rise in shipments to the US, which totalled RM9.3bn ($2.3bn), a 10% increase in sales to China and an 8.4% increase in exports to the EU. There was also higher uptake in Malaysian goods in ASEAN, with a 2.8% rise in partners countries Thailand, Vietnam and the Philippines. At the same time African sales revenue increased by 5.9% in 2015, according to official numbers.
The numbers paint an encouraging picture for the Malaysian export base being far more diversified and resilient than markets were willing to recognise. A nearly 20% adjustment in the Malaysian ringgit helped to boost exports of goods that have high local content such as rubber industries, which were the main winners during the latest cycle.
Malaysian exporters have clearly been anticipating external demand weaknesses, having diversified in terms of geographical reach as well as product mix. The directional trend is increasing exposure to emerging markets and relying less on the advanced economies of the US and Europe, which are experiencing a prolonged cycle in demand deficit.
Regional Links
With advanced economies still experiencing a structural decline because of high debt and social liabilities, the focus remains on creating sustainable regional supply chains connecting South-east Asia with the large economies of China, India, Japan and Korea.
Despite criticisms that ASEAN is falling short of its lofty aspirations, the policy drive has had a notable impact on Malaysia’s trade and investment relationships in South-east Asia. As a net capital exporter and investor in its own right, the country has made significant inroads in neighbouring Indonesia, Thailand, the Philippines and most recently Myanmar. This growth in cooperation points to ASEAN’s success in meeting some of its goals.
Malaysian companies are most active in sectors such as banking, telecoms, palm oil, energy, construction and manufacturing. The push for integration within ASEAN is bearing fruit, with bottom-line numbers confirming that ASEAN is now Malaysia’s leading trading partner and export destination.
For instance, in 2015 trade with ASEAN accounted for RM401.2bn ($99.3bn), equivalent to 35% of Malaysia’s GDP. This represents 27.4% of the country’s total trade and a 3.2% year-on-year increase on 2014. Gradual but significant expansion in this area confirms the view that ASEAN members are now trading as opposed to competing with each other, which was the economic model of the 1980s and 1990s.
Good Neighbours
In its latest report on the country’s external trade Malaysia External Trade Development Corporation (MATRADE) stated “Growing trading activities [within ASEAN] were propelled by more inter-company linkages, cross-border investments and outsourcing activities within the region.” The fastest-growing regional market in 2015 in terms of absolute value was Thailand, which expanded its trade with Malaysia by RM4.2bn ($1bn) representing an overall increase of 10.5%. In terms of percentage rate Vietnam was a star performer, with a 21.3% increase, adding RM3bn ($742.6m) to overall trade volumes. The Philippines, ASEAN’s fastest-growing economy, added RM1.1bn ($272.3m) to Malaysian trading activity in 2015.
The ASEAN region’s top frontier market, Myanmar, helped to boost trade by 16.4%. Although the base remains low – with only RM430m ($106.4m) in 2015, although this figure is low when compared to its ASEAN neighbours – Myanmar offers bright prospects in a number of key sectors for Malaysian companies, notably, banking, plantations, construction, retail and energy.
In terms of absolute value Singapore remains Malaysia’s top export destination within the region, accounting for as much as 49.5% of total sales within ASEAN. The two economies share a highly integrated supply chain, with Malaysia supplying a number of intermediary and finished products in E&E, machinery, crude oil, and optical and scientific equipment. Crude petroleum, E&E, chemicals and machinery are also top exports to Thailand, Vietnam and the Philippines, underscoring the fact that, in contrast to advanced economies, ASEAN is in fact becoming an integral supply chain driven by multinational and governmental cooperation.
One Malaysian sector that has yet to emerge as a value driver for Malaysian exports is automotive. Relatively high protection for local manufacturers has made the country less competitive in attracting investment and trade flows in the segment, with Thailand and Indonesia establishing themselves as the regional powerhouses.
In their defence, Malaysian authorities argue that every ASEAN country protects some of its most vulnerable sectors – in Thailand it is the banking sector, in Indonesia it is mining and minerals, and in the Philippines it is agriculture. Compared to the EU ASEAN members still trade relatively little with each other. Intra-regional trade within ASEAN accounts for just 30% of total value compared to 70% outside the region. This compares to nearly 80% intra-regional trade within the EU.
Top Trading Partner
While its immediate neighbours in South-east Asia have helped to create a sustainable trade and investment model for Malaysia, its largest trading partner for several years in a row remains Asia’s growth engine, China.
With nearly 30% of the population ethnically Chinese, Malaysia has historically maintained close business, investment and trade ties with China. The relationship dates back to before China entered its unprecedented period of high growth. At a bilateral government-to-government level, Malaysia was one of the first countries to recognise the enormous potential in engaging with the Beijing authorities. The move has been handsomely rewarded. Today China counts as Malaysia’s largest trading partner for the seventh year consecutive year. In 2015 this bilateral trade relationship helped to pull Malaysian exports out of slump territory, as they expanded by 11.1% which translated into RM230bn ($56.9bn) of additional sales. In contrast to other countries in the region that supply mainly commodities or finished products, Malaysia plays an important role as a supplier of intermediary industrial products that are less sensitive to downward demand cycles. That explains double digit export expansion in an economic environment where most emerging markets saw a drastic decline in their exports to China.
According to recent statistics from MATRADE, the increase in 2015 was driven primarily by a 10% expansion in exports of manufactured goods, which amounted to RM82.2bn ($20.3bn) and accounted for 81% of all Malaysian exports to China. A decline in oil prices, as well as in the Malaysian ringgit, also helped to boost exports of petroleum products, metals, chemicals and scientific equipment.
The latest trend underscores the fact Malaysian exporters can likely gain market share at times when the environment is challenging for most players. Malaysia’s advantage is that it is also ready to reciprocate. China is Malaysia’s biggest source of imports, accounting for 18.9% of total imports in 2015, equivalent to RM129.3bn ($32bn), or 11% of GDP. Apparel, clothing accessories, machinery and transport equipment were amongst the main imports from China in 2015.
Europe
Though Europe remains mired in a slow growth recovery, Malaysia has been actively advancing its high value exports especially in agribusiness, E&E, rubber gloves and appliances. Historically Europe used to be a major importer of palm-based products. However, a strong resistance on health grounds and competition from the sunflower and soya bean sectors has created a more challenging environment for top Malaysian palm oil producing companies Sime Derby, IOI and Wilmar International.
These days the government is eager to promote new high value agribusiness products, with particular focus on halal, soft drinks, seafood and exotic fruits – value chains where Malaysia can capture the entire process from raw materials to packaged goods. This trend towards a more diverse economic model will help stabilise its trade with the EU and provide further avenues for growth.
Overall trade with EU increased by 3.1% in 2015, helped by the weaker ringgit exchange rate against the euro, with the total reaching RM148bn ($36.6bn), according to MATRADE. Exports picked up by 8.3%, adding an additional RM6.1bn ($1.5bn), with total value recorded at RM78.9bn ($19.5bn), equivalent to 7% of GDP. The Netherlands, which hosts a number of Malaysian palm oil companies, is the top EU market for Malaysia in terms of numbers followed by Germany, the UK, France and Belgium.
The biggest increase in exports in 2015 was registered in Spain, which saw a 30.4% rise, albeit from a low base. The UK was the fastest-growing large export market, posting an overall 17.6% rise in 2015. Crucial markets Germany and France expanded by 10% and 11%, respectively.
Although EU export numbers look solid, the structural weakness is that most of the additional growth came from legacy sectors, with parts and accessories for office machineries and data processing equipment accounting for a large share of the increase. While Malaysia enjoys a trade surplus with Europe, the challenge for new sectors is to comply with Europe’s stringent product regulations, which create additional costs for manufacturers in sectors such as food processing.
Compliance and harmonisation of standards is expected to increase as Malaysia draws closer to completing its EU-FTA treaty as well as the TPP. The latter includes a number of provisions that are similar to the EU market access requirements.
US Recovery At Last
Ongoing negotiations with the US over the TPP coupled with the recent economic recovery in the US have kept Malaysian exporters excited about the prospects of selling their products in the world’s largest consumer market. Gone are the days of low-cost manufacturing exports to the US that fuelled the dramatic rise of China. Malaysian businesses see a number of niches particularly in E&E, rubber, data processing, home appliances and potentially business process outsourcing services.
A number of US companies are considering Malaysia as a centre for the ASEAN region, and this would feed back into the trade and export loop. The data in 2015 showed performance was decent. Overall exports expanded by 14.4% reaching a total of RM73.6bn ($18.2bn) just slightly lower than the whole of the EU and 30% lower than China. Appreciation of the US dollar and stronger demand helped to boost Malaysian products. In terms of the product portfolio, 94.8% was concentrated in manufactured goods, highlighting potential in services and agribusiness. The hope is that following the TPP Malaysia will expand its market access breaking into new high-value-added sectors.
Counting On Abenomics
Though Japan has long been seen as the “sick man of Asia”, it remains an important and trusted investment and trade partner for Malaysia. Unlike the European or US markets, Japan is part and parcel of ongoing expansion in Asian supply chains that spans across Southeast Asia. An experiment in easy monetary policy and fiscal reform known as “Abenomics” helped to fuel expectations of an imminent consumption and demand boom. Instead Japanese multinationals were the main beneficiaries, exporting capital to ASEAN, including Malaysia, expanding their reach. This has created a number of new opportunities for Malaysian companies in food, construction, ICT and the traditional energy and manufacturing sectors.
With Japanese banks comfortably embedded in the financial system, the attraction is that trade finance is readily available and affordable. The structure of trade exports of mining goods, including petroleum, stood at 43.3% in 2015 even after 27.3% drop in value due to drastic decline in liquefied natural gas and oil prices. A sudden decline in hydrocarbons was compensated for by a healthy increase in the exports of manufactured goods, which increased by 9% in 2015, reaching a total value of RM38.6bn ($9.6bn). These included traditional staples such as E&E, metals, optical, scientific equipment and rubber products.
In contrast to Europe and the US, Malaysia has been more successful in exporting its new growth industries to Japan namely food processing. Seafood, exotic fruits, beverages and meat products have all been well accepted by Japanese consumers, and have been benefiting from Japan’s policy of monetary stimulus and easier terms of trade.
Frontier Markets
Malaysia’s undeniable strength in the face of the challenging environment has been in finding new trade and investment opportunities in high risk markets, known popularly as “frontiers”. With strong diplomatic and government-to-government relations, local companies have been expanding their reach in Africa and Latin America.
The most promising outlook for exports is perceived to be in the African continent, where Malaysian companies are exploring opportunities in plantations, construction, energy and mining. In 2015 trade statistics showed exports to Africa increasing by 5.9%, reaching a total of RM20.6bn ($5.1bn), representing a small but growing share of 2.6%. South Africa, Nigeria, Egypt, Angola, Kenya and Benin are currently regarded as top destinations, with Ghana and Togo also on the radar of Malaysian businesses. Beyond Africa, the country has recently identified new potential in complimentary markets of Mexico, Canada , Chile and Turkey. All four countries are seen to be strategic growth areas, representing average increase per annum of between 20.1% and 54.5%.
Outlook
Malaysia is enjoying uninterrupted momentum in attracting investment and trade flows destined for South-east Asia. As a leading trading nation it has the necessary infrastructure and determination to compete and partner with its ASEAN neighbours to create a more sustainable growth model. Though the focus of 11th Malaysia Plan has been on reducing external vulnerabilities, as an open and trade-oriented economy Malaysia needs exports to expand at a healthy high single-digit rate. Overall expectation for 2016 and 2017 should see further improvements in exports destined for China, the US and Europe. The TPP is expected to be a catalyst for new growth sectors, especially food processing, ICT, medical and high technology. As an established hub with a ready availability of capital, skills and supportive government policy, Malaysia is also expected to hold its own in attracting a high share of FDI dollars even as frontier focus remains on its ASEAN neighbours Indonesia, Myanmar and the Philippines. An improvement in political stability and further liberalisation of protected industries could add momentum to advance the country’s aspirations of reaching advanced economy status by 2020.
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