This article first appeared in Forum, The Edge Malaysia Weekly on June 8, 2020 - June 14, 2020

Malaysia’s first-quarter GDP performance came in above expectations.

Expanding 0.7% year on year, it beat economists’ expectations of a 1% to 2% contraction. This is good news, especially because consumers were able to provide a lifeline to the economy during that period. However, this is not surprising, as the Movement Control Order (MCO) took effect only in the latter part of March. During the quarter, consumer spending grew at a robust pace of 6.7%.

The bad news, however, is the economy is expected to contract in the second quarter, according to many economists. This is, again, not surprising as the lockdown has put the brakes on economic activity in the country.

With Malaysia’s economy likely to experience its first recession since 2009, individual states look set to face stiff challenges. Their overall economic performance will largely depend on the strength of their fundamentals, which, to some extent, hinges on the structure of their economies. Essentially, the impact of the slowdown on each state will depend on their unique economic characteristics.

From a broad macro perspective, Malaysia’s four major state economies (Selangor, Sarawak, Johor and Penang) collectively account for roughly 50% of Malaysia’s gross domestic product (GDP). Each of them has a unique set of strengths that will help them to confront the economic challenges brought on by the Covid-19 pandemic.

Selangor, the largest contributor to the Malaysian economy (about 24% of GDP), will likely see growth moderate in 2020. Its economic structure could explain this: In 2018, the share of Selangor’s services and manufacturing sectors had risen to 62.0% and 28.3% of the economy respectively. As both sectors will be affected by supply chain disruptions in the coming months, Selangor’s overall GDP growth for 2020 will likely cool off, in line with Bank Negara Malaysia’s projection for Malaysia of between -2% and 0.5%.

Notwithstanding this, Selangor’s economy has its own strengths. Its median real GDP growth was the highest among all Malaysian states between 2014 and 2018, at 6.8% per annum. The state also has the largest labour force. At 3.4 million persons in 2018, it made up 23% of the national labour force. The state’s labour force participation rate of roughly 76% is also the highest nationwide.

In addition, statistics show that close to 24% of employed persons in Selangor are managers and professionals, followed by service and sales workers (19.6%), technicians and associate professionals (14.4%), and plant and machine operators and assemblers (13.9%). Such strong fundamentals will provide some buffer against economic shocks.

As for Sarawak, its commodity-based economy will come under increasing pressure due to the sharp drop in commodity prices amid a global economic slowdown. Sarawak has an open economy, as evidenced by its external trade making up roughly 72% of the economy. Its major commodities, which include liquefied natural gas, crude petroleum and palm oil, account for about 64% of its total exports. With global crude oil prices halving in recent months and palm oil prices remaining 33% below their December 2019 peak, the state’s revenue could come under pressure in 2020.

Fortunately, Sarawak has built up strong financial buffers from past fiscal surpluses. Its consolidated surplus stood at almost RM23 billion in 2018, the largest among Malaysian states. Not surprisingly, its fiscal performance vis-à-vis other states is commendable. Over the 2014-2018 period, for instance, its median fiscal balance came in at 0.8% of GDP, exceeding that of other states (-0.1% of GDP). As a percentage of total revenue, Sarawak’s median fiscal balance stood at roughly 14%, well above all states’ median of -5.8%.

As for the northern state of Penang, the global manufacturing sector’s rapid slowdown in 2020 will be the key challenge. This is because Penang is a major contributor to Malaysia’s overall manufacturing sector output (circa 13% in 2018).

The slowdown in the electrical and electronics (E&E) sector will likely mean that Penang’s GDP growth will moderate significantly in 2020. This is despite the fact that Penang’s median real GDP growth had been strong at circa 5.4% between 2014 and 2018, the third highest among all Malaysian states. The likelihood of a contraction in Malaysian exports in 2020 due to waning global demand could also add pressure on Penang’s economy in the near term, considering that the state contributed about 29% of Malaysia’s exports in 2019.

Having said this, any rebound in global economic growth will significantly benefit Penang’s economy. This is partly because the state remains the preferred foreign direct investment (FDI) destination among foreign investors. In 2019, it garnered RM16.9 billion worth of total proposed capital investment, more than triple the amount recorded in 2018.

The strength of Penang’s manufacturing base lies in its wealth of industrial knowledge and experience accumulated over the last five decades. Strategically located, it has well-developed infrastructure with a robust supply chain ecosystem. The state also has one of the largest pools of highly educated workers in Malaysia. About 33% of Penang’s workforce are employed in high-skill positions — professionals, managers, executives and technicians.

For the southernmost state of Johor, the impact of the current economic slowdown on its property sector will likely be the key focus. Imbalances in its property sector could pose a challenge, especially if the national economy remains subdued in the near term.

For the record, Johor had the largest number of unsold commercial and residential properties, amounting to 55.9% and 18.4% respectively of the national output, as at end-2019. According to Johor’s Housing, Communication and Multimedia Committee, properties priced above RM600,000 made up about 60% to 70% of total unsold properties in the state.

Having said this, on the whole, Johor’s economy remains resilient. As one of the most developed states in Malaysia, its economy is underpinned by its diversification, strong fiscal management and low debt. Johor, whose economy was one of the fastest growing in 2018, has Malaysia’s largest manufacturing hub.

Not surprisingly, the state was one of the top four favourite destinations for investment in Malaysia in 2019. The state also has a track record of prudent fiscal management. For instance, it managed to churn out fiscal surpluses, or at least balance its budget, in the post-global financial crisis period. In terms of debt, Johor has one of the lowest gross debt-to-GDP ratios, just behind Penang and Selangor. Given these strong fundamentals, it should be able to weather any upcoming economic challenges.

On the whole, many Malaysian states will likely feel the pinch of a sharp downturn in economic activity in 2020. This is to be expected, as the Malaysian economy will be impacted by a contraction in the global economy and weak domestic demand. That said, major states such as Selangor, Sarawak, Penang and Johor have unique strengths that will likely tide them over during the challenging year ahead.

Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd. The views expressed here are his own.

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