Friday 29 Mar 2024
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It seems that legacy issues between Singapore and Malaysia, which were once thought to be insurmountable, can be resolved amicably in the foreseeable future without hampering their commitment to foster closer working relations. The Pedra Branca dispute was resolved in 2008, while the water supply issue is no longer a major bone of contention as Singapore finds alternative supplies. Both countries’ foreign ministries are also currently working in a positive manner to resolve the railway land dispute and the stalemate of the Points of Agreement 1990.

Clearly, both governments see the need to work closer together for a win-win situation especially during the current global recession which has badly affected both economies. The Singapore government is expecting gross domestic product (GDP) contraction of 4% to 6% this year, while the Malaysian government is forecasting a contraction of 4% to 5%. This is largely due to their open economies which are highly dependent on manufacturing exports and trade.

Today, the manufacturing sector contributes 20% to 30% to Singapore’s and Malaysia’s GDP. However the need to move away from this dependence is clear in view of recent rising competitiveness from China, India, Vietnam and Indonesia. This is particularly true for Singapore as a city-state that focuses on the services sector, and manufacturing activities becomes too expensive.

For example, the manufacturing sector in Hong Kong contributed 22% of GDP in 1980, but has fallen to 3% today as almost all its manufacturing activity has been moved to Guangdong. Arguably Singapore should adopt a similar strategy, moving its manufacturing activities to Iskandar Malaysia in Johor. Coupled with Malaysia’s delicate social-economic balancing act, it only makes sense for both countries to work together to create a larger investment destination hub.

This should attract more foreign investments into their services sector to take their GDP/per capita to a higher level. Singapore and Malaysia should realise that they have to complement each other in this regard, and not compete.

We can view the impact of improving cross straits relations from many angles as this will affect Singapore and Malaysia at multiple levels. The initial steps have been taken by both governments when then Prime Minister Datuk Seri (now Tun) Abdullah Ahmad Badawi met with his counterparts, former Singapore Prime Minister Goh Chok Tong and current Singapore Prime Minister Lee Hsien Loong, in 2004-05. The relationship was further deepened with Prime Minister Datuk Seri Najib Razak’s recent meetings with Lee Hsien Loong and Minister Mentor Lee Kuan Yew. We hear that this has led to greater and more frequent ministerial and civil service co-ordination and collaboration. Both sides are working towards better working relations, easing bureaucracy and resolving long-standing legacy issues. In our view, this will lead towards greater cross-border flows of investments, trade and labour.

With the right signal from the country leaders, we believe the business fraternity will soon follow and take advantage of new business opportunities.

Improved bilateral relations would typically lead to attractive tax incentives, issuance of new licences, removal of trade barriers in the form of taxes and/or quotas.

Increasing economic activity will eventually filter down to the general public too. More frequent human capital flow across borders should develop, including secondments and migrations. This will not be limited to merely Singaporeans and Malaysians, as we also foresee the foreign expatriate and working communities to expand. This will, in turn, create greater demand for good and services by the consumer to spur more economic activity.

The point to stress here is the multiplier effect. Once the seed is sowed by the leaders in power, increased corporate/SME investment and trade will follow, and coupled with consumption from the masses, will feed on each other to create a virtuous cycle for both neighbours to prosper.

G-to-G: The leaders
With better government-to-government (G-to-G) relations, Iskandar Malaysia will be the key region which both countries will focus their attention on, in our view. Notwithstanding Najib’s promotion of Iskandar Malaysia to Singapore, the region’s close proximity to Singapore, with good infrastructure connectivity today, are also key advantages for its future development.

Iskandar Malaysia is a development spearheaded by sovereign wealth fund Khazanah Nasional. Khazanah assumed responsibility for this development when it rescued the defunct Renong group over a decade ago during the Asian financial crisis. It has been instrumental in getting the support of the federal and state governments, as well as the Johor royals. Although Khazanah is only directly involved in Nusajaya (or Zone B) via its two subsidiaries UEM Land and Iskandar Investment Bhd (IIB), it has been tasked to develop the entire Iskandar Malaysia (comprising Zones A-E) which is three times the size of Singapore.

This was probably a compromise between the federal government whose interest is represented via Khazanah, and the state government and royals. Land matters in Malaysia remains under the privy of the state and thus its support for any federal government initiatives is required. The state government was clearly concerned that the development of Nusajaya would be at the expense of capital city Johor Baru and the compromise was to placate the state politicians and royals.

Nonetheless, having the support from all stakeholders has almost certainly given Khazanah the credibility in getting Kuwait Finance House, Legoland, Newcastle University, Columbia Asia, Premium Outlets, Mubadala-Aldar Properties and Millenium to invest in Iskandar Malaysia. Khazanah is still in talks with Disney to have a theme park there too. Like the development of KLCC and KL Sentral, Iskandar Malaysia will also need at least 10 years to fully mature. Despite the current economic downturn setting them back by almost a year, Khazanah believes the tipping point for Iskandar Malaysia will be in 2012.

By then, Legoland, Newcastle University, Columbia Asia and Premium Outlets should be operational, and there should be sufficient critical mass in terms of infrastructure, economic activity and masses to ensure Iskandar Malaysia’s longer term success. Given Singapore’s close proximity and its continuous efforts to re-invent itself to drive growth for this city-state, its participation in Iskandar Malaysia will be a win-win situation for both countries, in our view.

Over and above its existing five main pillars for development, namely, electrical and electronics, petrochemicals and oleochemicals, food and agro processing, logistics, and tourism, Iskandar Malaysia has added four new pillars for development.

These are health services, educational services, financial services and creative industries. We do not believe Iskandar Malaysia’s growth strategy to focus on services sectors which are similar to Singapore’s, was a sheer coincidence. We believe these are well thought out plans which support our thesis that Singapore and Malaysia will be working very closely together, going forward, to build a destination hub to attract foreign investments.

By 2025, the population of Iskandar Malaysia is expected to increase by 30% to three million, with a large portion of this coming from Singaporeans choosing to live across the straits, given its lower cost of living. In the event that Singaporeans account for all of the additional 700,000 population in Iskandar Malaysia, this merely translates into 11% of its population in 2025. Given escalating property prices in Singapore, Iskandar Malaysia is also an attractive alternative when they retire, sell their Singapore apartments and for a third or less of that price buy something nicer and larger across the Causeway. Thus, they will still be living near friends and family who might still be in Singapore and able to monetise the value of their Singapore property.

At the moment, there is an insignificant amount of Singaporeans living in Iskandar other than the occasional weekender with a second home across the Causeway. However, this trend should accelerate once both governments improve infrastructure connectivity with a third bridge and/or mass rapid transit (MRT) links, and smoother immigration processes. Once the MRT line from Singapore into Johor Baru or Nusajaya is completed, and both governments implement the use of smart cards at the immigration checkpoints, these will be the crucial links which will transform this development. On the back of improving bilateral relations, we are hopeful that details of the MRT line can be firmed up within the next two years and become a reality within the next five to 10 years. As the idea for a third bridge is fairly new, the development of this will likely take longer.

We hear of Singaporean property companies showing interest in buying large plots of land in Iskandar Malaysia for longer term development, similar to master plans proposed by the Middle Eastern investors. Unfortunately, no deal has been sealed to-date as, on the one hand, we hear that the Malaysia is asking for sky high prices, while on the other hand, Singapore’s noncommitment on a development timeline for the land has been the biggest stumbling block.

In our view, if Malaysia wants to get Singaporean developers involved in order to kick- start Singaporean property investments across the border, it makes sense for Khazanah to allow at least one fairly large development to be sold at attractive terms and conditions. The advantage for a loss leader strategy is this will likely lead to subsequent investments and developments from other Singaporean or foreign companies too.

From a business standpoint, we foresee increasing transfer of manufacturing activities from Singapore into Iskandar Malaysia, in particular, the Southern Industrial and Logistics Clusters (SiLC) in Nusajaya. Singapore is also promoting medical tourism and education services to drive its longer term growth, and this will be complemented by the Medical Park and Educity in Nusajaya.

On the tourism front, Singapore will be launching its two integrated resorts in 2010, and plans to bring in Legoland and potentially Disney in Nusajaya’s International Destination Resort will create a bigger tourist attraction in the region. With development of Port of Tanjung Pelepas (PTP) on the western coast of Iskandar Malaysia, Johor Port and Tanjung Langsat Port on the eastern coast, coupled with Port of Singapore Authority (PSA) International Pte Ltd and Changi Airport in Singapore, this will create a greater transport and logistics hub.

There has been minimal public sector cross-border investments in recent times. As G-to-G relations improve, we believe cross border strategic investment activities as seen in the 2004-05 period, will resume. The recent quiet period could be partially explained by Temasek’s misadventures in Western financials, while current uncertainty surrounding succession plans since the departure of CEO designate Chip Goodyear could also have distracted their investment strategy. Given Goodyear’s background in mining, many were expecting Temasek to shift their investment strategy from the financial and telecommunications into resources. This strategy would have been ideal for Malaysia as an investment destination given that it is a resource rich country, producing crude oil, gas, palm oil, rubber and timber. Nonetheless, with the new CEO coming in, Temasek will likely re-think its investment strategy and greater focus, going forward, on a region closer to home where they should have competitive informational advantage. We realise that its investment in Shin Corp in Thailand during Thaksin’s administration not only was a major embarrassment but also led to financial loss. This might lead Temasek to greater investment in non-public markets, that is, strategic private equity stakes, and probably steering away from companies that are politically linked.

On Malaysian shores, we understand sovereign wealth fund Khazanah Nasional chose to consolidate their investment strategy in 2008, post aggressive regional acquisitions in Indonesia, India, China, Pakistan and Thailand in previous years. As Khazanah has been the driving force behind Iskandar Malaysia, the close working relationship with the Singapore government can lead to investment opportunities elsewhere. As various sovereign wealth funds from China, Singapore, South Korea, Abu Dhabi and Kuwait have recently signed agreements to form investment partnerships with each other, it is foreseeable that Khazanah and Temasek may undertake this strategy too. Leveraging on each other’s strengths, both can work together when seeking out overseas investment opportunities ahead.

Khazanah has made progress on this front, signing an investment partnership with Korea Investment Corp in June. The last angle we want to discuss on the improving G-to-G relations is on the possibility of the re-unification of Singapore and Malaysia ahead. In a speech in 1996, Lee Kuan Yew sparked off a debate about the possibility of Singapore becoming part of Malaysia again, as it was during 1963-65. However, he felt it would be difficult to achieve that for a very long time, as a precondition for such a re-merger would be for meritocracy to prevail. This led to a widely debated topic in Malaysia, where Malaysian officials were annoyed at being portrayed as the ‘bogeyman’ during Singapore’s election campaign. In other words, they felt that Lee was highlighting Singapore’s success story which has been based on meritocracy, a strategy somewhat different from its neighbour in the past three decades.

Nonetheless, Lee did write in his book, From Third World to First, that a younger generation of leaders will soon be in charge in both countries. They will be free of the personal traumas of the past and they can make a fresh start at a practical, working relationship.

In our view, a reunification is highly unlikely as both countries have clearly been able to live separate lives since their separation in 1965. Each has also charted vastly different paths and strategies for development over the past four decades. Although their paths are set to cross again in the future, we do not believe a remarriage of convenience would be a necessary nor right recipe for success.

C-to-C: The opportunists
As the government lays the initial groundwork, corporates and SMEs will certainly take advantage of new business opportunities. Warmer cross-border corporate-to-corporate (C-to-C) relations since the Badawi administration has resulted in increased Malaysian FDIs into Singapore, rising from S$5 billion (RM12 billion) in 2004 to S$12.3 billion in 2007. Malaysia’s private sector has been investing in Singapore with notable deals from YTL Corp Bhd, Genting Bhd, IOI Corp Bhd and Carlsberg Malaysia.

The YTL group has been consistently pursing power assets in Singapore. After two failed bids for Tuas Power and Senoko Power, YTL Power successfully acquired a 100% stake in the second largest IPP in Singapore, namely, PowerSeraya for S$3.6 billion in 2008. As for parent company, YTL Corp, it was awarded the tender for en bloc purchase of Westwood Apartments in Orchard Boulevard for S$435 million.

The Genting group is pouring some S$6.6 billion into one of the integrated resorts in Singapore. In phase 1, capex of S$5.4 billion will be utilised to build its casino, hotels and Universal theme park, and this will be one of the most expensive casions ever built in the world. Resorts World in Sentosa island is slated to be launched in end-2009 or early 2010.

IOI Properties Bhd is venturing into property development in Singapore. Together with its joint venture partner, Ho Bee Investment, they paid S$1.1 billion for a 5.3 acre land in prestigious Sentosa Cove area.

Carlsberg Malaysia is also spreading its wings across the border. It recently purchased Carlsberg Singapore for RM370 million from its Denmark-based parent Carlsberg Breweries AS. Although we question if this deal was driven by the fact that Carlsberg Malaysia recently lost out on Carlsberg Singapore’s manufacturing contract, this was dismissed by management which believes that the acquisition makes strategic and financial sense.

With the exception of the Carlsberg deal, there have been suggestions that these private investments from prominent family-owned Malaysian groups are driven by their lack of confidence in Malaysia’s longer term prospects and thus moving some funds for offshore investments. There may be some truth in this as private investments from prominent Singaporean companies in Malaysia have been somewhat lacking in recent years, other than Capitaland Singapore  which has been pouring funds into property-related investments since 2004, and Parkway Holdings’ purchase of a 40% stake in Pantai Holdings Bhd.

We believe Singapore will likely continue to focus on services sub-sectors like biomedical science, offshore private banking, trading, tourism and integrated resorts, transport and logistics, medical tourism and education to drive its longer term growth.

However, the current economic downturn has thrown up some questions on this long term strategy and the government, via the Economic Strategies Committee, is currently reviewing it. It is too early to tell what the committee will propose but this is clearly all part of Singapore’s continuous efforts to re-invent itself.

In the case of Malaysia, Najib had, in June, announced a slew of liberalisation measures for foreign ownership in Malaysian property and equity markets. His administration is also reviewing all visa applications for the financial services and capital market industries. This is a big step in dismantling the NEP, which has long held back FDIs. He also laid out Malaysia’s longer term target to achieve 70% GDP contribution from the services sector by 2020, from 54% currently. In line with that, he announced that 27 services sub-sectors will no longer be required to meet the 30% bumiputra equity ownership. In other words, firms operating in these 27 sub-sectors can be 100% foreign owned.

Notwithstanding the joint focus on the services sector, Malaysia can still offer significant competitive edge for manufacturers from Singapore. Although manufacturing wages in Malaysia is not extremely attractive but at US$290 (RM980) per month, it is still one third of Singapore’s rate at US$1,027. Coupled with the fact that Singapore’s low-end industrial land cost is 20 times more expensive than Iskandar Malaysia, it would make economic sense for Singapore to move more of its manufacturing facilities across the border, freeing up more space for higher value-added services.

On the other hand, Singapore companies can share its technical know-how, experience from its highly trained workforce as well as business best practices with Malaysian companies. With GDP/per capita more than three times that of Malaysia’s, Singapore’s workforce clearly generates greater productivity and higher value products vis-à-vis its neighbour. In the two key sectors, namely, manufacturing and services, Singapore’s GDP/per employee is five to six times higher than Malaysia’s. This is achieved in spite of lack of natural resources and hinterland. With a highly qualified workforce and a system which strives on meritocracy, Singapore companies can offer its know-how, knowledge and best practices to its Malaysian counterparts.

In 2007, Singapore FDIs in Malaysia was S$21.2 billion and this has more than doubled from S$8.9 billion in 1997. However as a percentage of Singapore’s total investments abroad, Malaysia has been losing out in recent years. In the late 1990s, Malaysia attracted 11.8% of Singapore’s investments abroad.

However, by 2007, this figure had fallen to 7.1%. Therefore if Malaysia is able to reverse this trend, this will not only create more employment opportunities for Malaysians but also create more economic activity and lift income levels.

Lastly, we also foresee increasing trading activity between the two countries, as well as with their own respective trading partners. An expanded transport and logistics hub will be created in the Singapore-Iskandar Malaysia region, with air traffic supported by Changi, and sea traffic serviced by Port of Tanjung Pelepas and PSA International. However there remain trading items which are under a “sensitive list”, including peculiar items like chewing gun and bubble gum which are prohibited in Singapore for safety and social reasons. In Malaysia, imported vehicles are slapped with large import duties as the government continues to promote the two national car projects, namely, Proton and Perodua.

P-to-P: The masses
On the back of deeper G-to-G relations, and expanded economic activity at the C-to-C level, the people-to-people (P-to-P) relation will also be enhanced.

Four decades later, both countries are now trying to re-create a more “seamless border” which will not only raise daily/regular cross -border travelling but will also encompass secondments and migration. Social and cultural divides can be strengthened with student exchange programmes, joint production of TV programmes, and circulation of local newspapers across the border. Since the racial riots in Malaysia in 1969, newspapers published from one side of the Causeway cannot be imported and sold on the other side.

Although there were suggestions to lift this ban in 2005, the ban is still imposed till today.

Therefore, at the P-to-P level, we foresee a greater domestic consumption story ahead. This will lift demand for property, as well as demand for services like banking, retail, tourism, medical services, education and so on. As there is a large price differential for such services in both countries, Malaysia is likely to offer the cheaper alternative for the masses, while Singapore focuses on the middle-to-high end niche and specialised markets.

Given Singapore’s limited land space residential property prices in this island state can only appreciate in the long run. As it is, current land prices in Iskandar Malaysia which is a mere 30 to 40 minutes drive from Singapore city centre, is on average 40 times lower. With 85% of Singaporeans still living in HDB flats (that is, subsidised housing by the Housing Development Board), Iskandar Malaysia is a very attractive alternative.

Singapore has developed a strong financial sector comprising commercial and private banking, as well as asset management and insurance. Greater penetration into the Malaysian market will mean that Malaysians can be offered a wider range of products and services, especially in private banking and wealth management. On the other hand, Malaysia’s well-developed Islamic banking products can also be introduced to Singaporeans.

On the retail front, it’s a well-known fact that many Singaporeans spend their weekends across the Causeway in Johor, Melaka and even as far up north as Kuala Lumpur. 25,000 vehicles use the Causeway during weekdays and this figure rises to 60,000 during weekends. This is in spite of Lee Kuan Yew’s famous quote that Johor Baru was “notorious for shootings, muggings and carjackings”.

Singaporeans are clearly fearful of the high crime rates across the border, but there is a price for everything. Clearly, such risks are factored into the large price differential for essential items across the Causeway. Food items like chicken, eggs, Coca-cola and KFC meals are 20% to 50% cheaper in Malaysia. Retail petrol price in Malaysia at S$0.70 per litre is 60% cheaper than Singapore, as it is subsidised by the Malaysian government. However, there have been stringent measures to prevent Singaporeans from benefitting from the petrol subsidies by ensuring that they cross the Causeway with at least a three-quarter-full fuel tank. Of course, that does not stop Singaporeans from filling up their fuel tanks in Malaysia prior to their journey back home.

For individuals with higher disposable income, Singapore is a haven for luxury goods shoppers. Tied-in with the annual F1 race (the only one in the world held in the night), its upcoming integrated resorts and well known tourists destinations like Singapore Zoo and Night Safari, Singapore attracts 10 million tourists every year. Malaysia on the other hand focuses on beach and mountain holidays, given its clear advantage over Singapore in those aspects.

Medical tourism is also increasingly popular in Singapore as it competes with other hubs in India and Thailand. Cost of treatment in Singapore is still cheaper than in the West and is also of better quality than other Asian countries. Given these factors and their specialist services, many Malaysians also flock to Singapore for medical treatment. It’s a well- known fact that travelling is good for one’s health and when the proposed wellness centre in East Johor is built, we can expect a fair amount of traffic from Singaporeans. Recent moves by the Singaporean government to allow its MediSave programme in selected Malaysian hospitals will encourage Singaporeans to seek alternative treatment across the Causeway where it is at least 20% cheaper.

There is room for a stronger domestic consumption story for Singapore and Malaysia arising from enhanced P-to-P ties. Consumption to GDP for Singapore and Malaysia are at very low levels of 40% and 43% respectively.

This relatively weak consumption behaviour is largely due to the forced savings in the system where Singaporeans contribute 34.5% of their wages to the Central Provident Fund (CPF) and Malaysians 23% to the Employees Provident Fund (EPF).

However, there are clauses within CPF and EPF which allow for partial early withdrawal prior to retirement, where funds can be utilised for property or unit trust purchases, home renovations, healthcare and so on. If a healthcare programme like MediSave is extended to include other activities across the border, this could potentially lift consumption to GDP ratios in both countries.


This CLSA special report was compiled by a team of Malaysian and Singaporean researchers led by Clare Chin (Malaysia) and Dhruv Vohra (Singapore). The first part appeared last week.


This article appeared in Cover Story page of The Edge Malaysia, Issue 779, Nov 2-8, 2009.

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