No direct FDI-boosting measures found in Budget 2019

This article first appeared in The Edge Financial Daily, on November 7, 2018.
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KUALA LUMPUR: Southeast Asian countries are poised to benefit the most from the escalating US-China trade tensions, which are prompting many manufacturers to relocate their production in China to elsewhere. Yet there are no specific measures to drive foreign investment growth in the newly unveiled Budget 2019, economists The Edge Financialy Daily spoke to noted.

Net foreign direct investment (FDI) flow into Southeast Asia jumped 18% year-on-year (y-o-y) to US$73 billion (RM303.87 billion) in the first half of 2018, according to the United Nations Conference on Trade and Development, with Thailand, the Philippines, Cambodia, Singapore and Vietnam as major beneficiaries. The significant FDI improvement seen was a stark contrast to global FDI flow, which slumped 41% y-o-y to US$470 billion from US$794 billion.

However in Malaysia, net inflow of FDI in 1H18 fell 41.5% y-o-y to RM14.8 billion from RM25.3 billion, according to Bank Negara Malaysia.

Independent economic analyst Dr Hoo Ke Ping described the Pakatan Harapan government’s first national budget as “a first-class populist budget”, with no concrete steps to attract FDI. “I did not see any incentives, activities, mission or allocation that will be specifically channelled to boost FDI,” Hoo said when contacted by The Edge Financial Daily.

This, said Hoo, will result in Malaysia continuing to lag behind its neighbours in terms of FDI inflows. Putrajaya, he said, should seize the opportunity to seek out FDI to help the economy ride out the challenges it currently faces.

“There’s only been ‘bad noises’ since the Pakatan-led government won the 14th general election, like the 1MDB (1Malaysia Development Bhd) scandal and several large-scale infrastructure projects being scrapped or postponed amid mounting government debt,” Hoo said. Such news make foreign investors jittery about whether their money would be safe if invested here, and they will shy away if the situation persists, Hoo added.

And so far, local policymakers have yet to communicate or send positive signals to woo foreign investors to Malaysia, Hoo observed, adding that Malaysia’s deteriorating fiscal picture — it is widening its deficit target this year to 3.7% of gross domestic product from 2.8% previously — is also a worry for investors and a risk to the nation’s credit rating.

Against this backdrop, the country is facing slowing economic growth, with the ministry of finance saying Malaysia’s growth will slow to 4.8% this year from 5.9% last year, amid rising global trade risks. The World Bank has also cut its forecast for Malaysia’s economic growth this year to 4.9% from an earlier estimate of 5.4%, citing the cancellation of several infrastructure projects and lower export growth behind the weaker outlook.

But while there are no obvious FDI-boosting measures, some believe the overall budget will still be able to indirectly spur FDI growth, albeit in the longer term.

AmBank Group chief economist Dr Anthony Dass, for one, pointed to the announcement that the government will be reviewing existing tax reliefs and incentives to make them relevant and cut leakages as one indirect measure that will boost investor confidence.

Dass also lauded the planned “thorough review of over-130 types of fiscal schemes to support investments, administered by 32 approving authorities” to expire incentives which are no longer relevant or are duplicitous as another such measure.

Two other examples he cited are the government’s move to lower cost of doing business by granting exemptions on specific business-to-business service tax, and its plan to introduce a credit system for sales tax deductions for small manufacturers who import their products.

“The previous government has given enough incentives to attract FDI. We now welcome the decision made by the new government to review existing tax reliefs and incentives to streamline and potentially pave the way for lowering corporate tax,” Dass said. “It’s a good time to review and eliminate incentives and schemes that are not used or not so effective.”

Executive director of the Socio-Economic Research Centre Lee Heng Guie, meanwhile, said efforts to strengthen the government’s fiscal management and fundamental economics, together with institutional reforms, which would drive more sustainable economic growth while making the country more attractive to foreign investors.

“Neither good policy nor good investment is likely to emerge and be sustainable in an environment with dysfunctional institutions and poor governance, with distorted policies,” Lee stressed.

Lee also highlighted measures and initiatives in the new budget that underscored the government’s commitment to enhance competitiveness and ease of doing business in Malaysia, which will boost FDI, like the joint task force that the ministry of finance (MoF) and ministry of international trade and industry (Miti) will form to drive regulatory reforms, particularly in the areas of improving trade processes and tax administration. Another example is the Special Task Force that MoF will set up to evaluate the role and functions of statutory bodies and companies owned by the ministry to reduce duplication of functions and involvement in areas where the private sector is efficient and competent.

In addition, Lee said the government is seeking to increase investments of companies who use Malaysia as a principal hub by improving existing incentives — specifically imposing a concessionary income tax rate of just 10% on the overall statutory income related to principal hub activities for five years.

Besides that, Lee said Putrajaya is planning specific incentives and funds to support the country’s burgeoning digital economy, Industry 4.0 and green energy sector.

“We believe the streamlining of regulatory and compliance costs, the removal of impediments and redefining the role of government in business to avoid “crowding out”, along with institutional and economic reforms, would increase domestic investment and FDIs,” Lee added.