This article first appeared in The Edge Malaysia Weekly on November 13, 2017 - November 19, 2017

LAST week, residents in Penang, Kedah and Perak woke up to a rude shock. Unprecedented heavy rainfall that lasted for 15 hours caused water levels to rise as much as 10ft to 12ft in certain parts of Penang.

The situation in the state became of immediate concern to the investing community, given that it plays host to a vast number of manufacturing companies — especially in the semiconductor industry — that contribute significantly to the country’s export numbers.

Penang contributed about 6.7% to Malaysia’s total gross domestic product (GDP) in 2016, according to Department of Statistics data — the highest among the three flood-affected states.

Many of the semiconductor manufacturers in Bayan Lepas reported that their plants were not affected by the floods, indicating that manufacturing — and exports — would remain intact.

As the waters receded, the Federation of Malaysian Manufacturers (FMM) estimated that the floods could cost the state’s manufacturing industry RM200 million to RM300 million.

Experts believe any impact will only be temporary, with minimal disruption to economic activities, unlike the 2011 floods in Thailand that crippled the country’s economy as flood waters hit the central business district and industrial zones, causing supply chain disruption.

Back then, the Thai Central Bank slashed the country’s gross domestic product growth to 2.6% from 4.1%.

“The extent of the impact will depend on how soon the factories can normalise operations, including production and shipments. The policies announced — including Bank Negara Malaysia’s disaster relief facility, financing at concessionary rates and 60% guarantee on financing from CGC — will help to facilitate a faster restart of operations,” says UOB (M) Bhd economist Julia Goh.

“While there could be a temporary flood effect, economic growth will jump-start once production restarts, followed by rebuilding and repair works.”

Following the floods, Bank Negara announced a RM500 million Disaster Relief Facility to help affected small-medium enterprises.

Penang Institute chief operating officer Tim-Niklas Schoepp says the businesses most affected were small businesses and shop owners in flooded areas, many of whom are not insured.

However, losses in the tourism and services-related sectors have yet to be accounted for, Goh points out.

Given that November and December are usually when tourist arrivals peak, it is uncertain whether the recent floods will have an impact on the tourism industry. Tourism is the second largest source of income after manufacturing, according to Penang Institute.

Affin Hwang Investment Bank Bhd chief economist Alan Tan opines that the tourism sector may see some impact, but believes holidaymakers are likely to continue with their plans, especially if hotel bookings or flight tickets have already been booked.

Penang International Airport recorded the third highest passenger traffic behind KLIA and Kota Kinabalu International Airport, according to Malaysia Airport Holdings Bhd’s passenger movement data for 2016.

Meanwhile, the average occupancy rate for hotels in Penang averaged at 59% between January to June this year, higher than the country’s average of 35% to 40%.

Thankfully, experts see little impact on economic activity from the recent flooding and believes Malaysia’s 2017 GDP target of 5.2% to 5.7% will remain intact.

Economists are expecting another robust quarter when the 3Q2017 gross domestic product statistics are released on Nov 17.

“I expect 3Q GDP to come in at 6%. Manufacturing growth in 3Q was higher than 2Q while the export numbers for September, which came in below expectation, will be cushioned by July’s and August’s strong export numbers,” says Affin Hwang’s Tan.

Industrial production stood at 5.9% year on year for 3Q2017, the fastest pace of growth since 1Q2015, RHB Research says in a report. The services index was robust at 6.9% y-o-y in 3Q2017, although it eased from 7.1% in 2Q2017 as growth was slower in wholesale and retail trade, finance and insurance, and real estate.

RHB Research is also expecting GDP growth of 6% for 3Q2017.

Goh has a more modest expectation of 5.4% to 5.8%, and a full year growth estimate of 5.2%.

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