Cover Story: How to revitalise private investments

This article first appeared in The Edge Malaysia Weekly, on October 26, 2020 - November 01, 2020.
Cover Story: How to revitalise private investments
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REVITALISE private investments in the country” has been a common refrain over the last few years. And now, with the Covid-19 pandemic affecting almost every facet of the economy, it is even more crucial for policymakers and regulators to address this issue, especially with most businesses refraining from making new investments or putting further funds into existing businesses.

The year 2020 is seen as a “lost year” for private investment, as evident from the total approved investments of RM65 billion recorded for 1H2020, as recorded by the Malaysian Investment Development Authority. Even at an annualised figure of RM130 billion, it is only slightly more than half of the RM211.3 billion total approved investments recorded in 2019.

But, it is worth noting that the growth of total approved investments had been slowing down in the past five years, although it grew from RM106 billion in 2010 to RM211.3 billion last year. Total approved investments grew 120% from RM106 billion in 2010 to RM235.9 billion in 2014, but from 2015 to 2019, it only registered a growth of 13% from RM186.7 billion to RM211.38.

What is also noteworthy is that domestic direct investment (DDI), which makes up the bulk of total approved investments, has been on a decline since 2014, falling from RM171.3 billion to RM129.03 billion last year.

Meanwhile, foreign direct investment (FDI) increased 27.5% to RM82.3 billion from RM64.6 billion over the same period.

At a recent economic briefing organised by the Associated Chinese Chambers of Commerce and Industry of Malaysia’s (ACCCIM) Socio-Economic Research Centre, the latter’s executive director Lee Heng Guie said investors are looking forward to the upcoming budget for some form of catalyst to revive business sentiment.

However, Amarjeet Singh, Ernst & Young Tax Consultants Sdn Bhd (EY) Asean and Malaysia tax leader, is hoping for more. At the top of his wish list for Budget 2021 is seeing the government continuing to refine and improve its existing policies and philosophy to be business friendly and to encourage businesses to set up shop in Malaysia. This will lead to the creation of new jobs and the improvement of livelihoods of Malaysians, he says.

He believes that Malaysia has all the right attributes, with the government putting in place many measures to attract foreign businesses. However, the competition for foreign investors in the region is stiff.

“Hence, to distinguish Malaysia, it is important that the government’s measures are clear and easy to implement and that these measures as well as Malaysia’s positive attributes are made known to the world. Our neighbours are good at getting the right publicity and attracting attention from investors. We need to continue to improve on this front.”

Amarjeet also highlights that it is crucial to look after existing businesses and investors, adding that the expectation of investors today has gone beyond incentives.

“Investors want to operate within a supportive ecosystem, including an efficient operating environment with a high degree of certainty and consistency. They want the government to stand by their side and support them throughout their stay in Malaysia. For example, if an investor is given a tax holiday and has followed through on its commitments to Malaysia, the investment promotion agencies should support the audit process when the investor is audited by the tax authorities to ensure that the spirit of the incentive is upheld,” Amarjeet says.

Others agree that foreign investors are not only drawn to incentives.

“While tax incentives are a key factor in attracting FDI, it is not the only consideration. I expect to see continued investments in infrastructure development to ensure that Malaysia is an attractive hub for high-value functions and larger components of the regional or global supply chain,” says PwC Malaysia tax leader Jagdev Singh.

He adds that what could encourage businesses, with many expected to make losses during this period, to continue investing is a reversion to the previous position where businesses could carry forward their losses indefinitely.

Prior to the year of assessment (YA) 2019, unutilised business losses could be carried forward indefinitely to be set off against income from any business source. However, this has been capped at a period of seven YA.

ACCCIM’s SMEs committee chairman Koong Lin Loong believes that while FDIs are important to countries like Malaysia, which is an open economy with a small population, emphasis also needs to be put on DDI, of which the SME (small and medium enterprise) industry is a part of.

“Now that borders are closed, there are no FDIs coming in. But even when they reopen, it would take some time before foreign investments flow into the country again. So, it is really important to encourage local investments now,” he says.

Notably, the SME industry represents about 98.5% of companies in Malaysia — in 2018, it contributed 38.3%, or RM500 billion, to the country’s gross domestic product.

Koong says the government can encourage local investments, especially among the SMEs, by getting financial institutions to offer soft loans with favourable terms.

He points out that policies need to be revised to give local businesses a business-friendly environment as well. “Local businesses must be treated well too, like how we treat foreign investors. We must allow SMEs to grow freely. We often are told of how [local businesses,] SMEs especially, go through a hard time with authorities, often over minor issues.

“Don’t get me wrong, I’m not against the authorities going after those who violate the law, but what is important is for them to go after the ‘genuine’ wrongdoers,” says Koong.

Malaysia currently ranks No 12 in the World Bank’s Doing Business 2020 rankings. Can the country improve further and attract more DDIs and FDIs in the years ahead?

Healthcare expenditure likely to be in focus

With the resurgence of the Covid-19 virus and rising anticipation over Covid-19 vaccines being available sometime next year, it would be no surprise if the allocation for healthcare expenditure is increased this time.

In the last three years, the healthcare budget has grown by high single digits year on year. Budget 2020 allocated RM30.6 billion in healthcare spending, a 7% increase from the 2019 Budget of RM28.7 billion.

AffinHwang Investment Research says in its report that it believes the government is likely to spend on the social services sector, especially on building new public hospitals and upgrading healthcare facilities to meet the rising demand for public healthcare services amid the pandemic.

“We also expect the government to allocate funds for a vaccine. The Minister of Science, Technology and Innovation recently noted the proposal to the finance minister for RM3 billion to be allocated in Budget 2021, mainly for the purchase of a vaccine. Malaysia is not expected to receive any subsidy or financial assistance from the World Health Organization’s (WHO) global Covid-19 vaccine access plan as Malaysia is categorised as a middle- to high-income country,” adds the research house.

In terms of the vaccine, United Overseas Bank (M) Bhd believes the top concern will be the cost, especially upfront payments. The cost is said to be set at a ceiling price of US$20 (RM83) per vaccine or dose for committed purchases under the Covid-19 Vaccine Global Access (COVAX).

“Using that as a base price, the down payment to immunise 10% of the country’s population could go up to RM90 million,” says the research house.

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