KUALA LUMPUR: Although Malaysia chalked up impressive foreign direct investment (FDI) inflows last year, economists are sceptical whether such growth is sustainable.

Most economists do not share International Trade and Industry Minister Datuk Seri Mustapa Mohamed’s assessment that last year’s FDI growth rate can be maintained this year.

FDI rose 12% to RM32.9 billion last year from RM29.3 billion in 2010, reflecting a continuing path of recovery for both the national and global economy.

According to the Malaysian Investment Development Authority (Mida), FDI inflows to Malaysia rebounded sharply to US$9.1 billion (RM27.5 billion) in 2010 from US$1.4 billion in 2009 — an improvement of 550%.

That year, inflows to the Asean region more than doubled while global FDI grew 5% to US$1.24 trillion.

Prospects for 2012, however, seem bleak. CIMB Research for one, forecasts the country’s FDI inflows to fall a sharp 24% this year to RM25 billion.

“This is due to headwinds on the external side. The new development with Greece may signal that risks are lower but investors are still worried. Things are not fully resolved there, and the overall sentiment is cautious,” CIMB’s head of economic research Lee Heng Guie told The Edge Financial Daily.

A second bailout package amounting to €130 billion (RM520 billion) was approved for Greece on Tuesday — following the first €109 billion granted in the middle of 2010 — as part of the country’s debt restructuring programme to reduce debt to 120.5% of GDP by 2020 from the present 160%.

Lee said the 2012 forecast is still above pre-crisis levels, and reflects a “cautious” stance after considering last year’s volatile FDI performance. Though the year-on-year figure showed an overall increase, FDI inflows were less than stable on a quarter-on-quarter basis.

Based on Bank Negara Malaysia’s figures, FDI rose from RM7.6 billion in 1Q last year to RM13.4 billion in 2Q, before registering RM5.2 billion and RM6.5 billion respectively in the next two quarters.

Lee said FDI may take a hit as Malaysia’s major contributors — its top investors were Japan, South Korea, the US, Singapore and Saudi Arabia — are vulnerable to the situation in Europe.

However, certain emerging markets such as Indonesia will be able to retain their attractiveness to global investors.

According to the United Nations Conference on Trade and Development (Unctad), Malaysia was the third largest recipient of FDI last year behind Singapore and Indonesia.

The manufacturing sector, which contributed the largest share of Malaysia’s FDI last year, is expected to slow down.

Lee expects the sector’s total value of approved investments to cool down from RM56.1 billion in 2011 to RM50 billion this year.

“Our baseline forecasts for manufacturing investment approvals and FDI flows assume that the effects of a host of positive factors for investment growth will be tempered to an extent by factors such as the growth performance of advanced economies and domestic investors’ cautious sentiment given weak export and growth prospects,” Lee said in a report yesterday.

He expects FDI inflows to be more stable in the second half of the year, following an uneven performance in the first six months. This appears to be the general consensus among economists.

“The global economic scenario remains challenging, and FDI is expected to ease off for a while before strengthening again in the second half. China may be able to manage a soft landing then. If this happens, its demand will pick up along with global FDI,” MIDF chief economist Anthony Dass told The Edge Financial Daily.

Dass expects FDI inflows to grow at a slow pace of between 6% and 8% this year, though this is based on a GDP assumption of 4.8% for 2012.

FDI growth may fare higher at 8% to 10%, on a more optimistic forecast of GDP growth of 5.5% — closer to the government’s forecast of 5% to 6% expansion for the domestic economy.

Though it remains to be seen how FDI will perform this year, economists agree the country’s investments will continue to be anchored by the domestic sector.

AmResearch senior economist Manokaran Mottain believes domestic investments stemming from the government’s Economic Transformation Programme (ETP) and various private initiatives will help maintain FDI at RM32.9 billion this year.

“The drop in FDI may be compensated partially by a rise in domestic direct investment (DDI), the level of total investments can be maintained overall,” he said.

In fact, the domestic scene has consistently been the economy’s main source of investments — accounting for 55.4% or RM82.3 billion of the total approved investments last year.

Mustapa said Mida will be reoriented to focus on domestic investments. “The government will continue to create a conducive environment to promote private investments as the key driver of the country’s economy. In this regard, Mida will assume an important role in spearheading the national investment agenda with new investment strategies outlined for 2012,” said Mida in its latest report.

However, an analyst cautioned that private domestic investments may also slow due to the general election, widely expected to be held this year.

“General election years are tricky. Government spending will rise due to pump priming, but private investments will slow due to uncertainties over how the results will turn out. Investors will be worried about potential policy changes and may adopt a wait and see attitude”, the analyst said, adding that Malaysia also has to compete for FDI with neighbouring countries that are proving to be tough competitors.

This article appeared in The Edge Financial Daily, February 23, 2012.