Thursday 28 Mar 2024
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Investment-income_10_1073_theedgemarketsMALAYSIA saw a 7.4% year-on-year drop in net foreign direct investment (FDI) to RM35.34 billion last year — a big contrast to the impressive 33.8% jump in 2013 — according to the United Nations Conference on Trade and Development’s (Unctad) World Investment Report 2015.

The UN defines “net FDI inflow” as the value of inward direct investments made by non-resident investors in an economy, including reinvested earnings and intra-company loans, minus the repatriation of capital and repayment of loans.

However, at the launch of the report last week, International Trade and Industry Minister Datuk Seri Mustapa Mohamed said the lower net inflow of FDI was “not a concern” as Malaysia could not be spared from the investment slowdown globally.

Global FDI inflows fell to US$1.23 trillion (RM4.62 trillion) last year from US$1.47 trillion in 2013 due to the frail global economy, policy uncertainty for investors and higher geopolitical risks, the report says.

Economists, too, are not worried about the FDI contraction and point out that the structure of the Malaysian economy is different now. A large chunk of the investments is domestic private investment, instead of FDI like in the past.

The net FDI made up only 3.7% of gross domestic product in 2013, compared with more than 8% in the early 1990s.

“These days, it is not so much about the nominal increase in FDI; what is more important is the quality of FDI we attract. The days of large greenfield investments are not here anymore,” says Hong Leong Research economist Sia Ket Ee.

“Now, it is about existing foreign investors reinvesting, upgrading and retaining investments in the country.”

Although the decline in FDI inflow is not a major concern, it does not mean that the country can do without it altogether.

The pertinent question is, has Malaysia been able to attract more quality or high-value-added FDIs that are not dependent on subsidised fuel or cheap foreign labour?

According to the Unctad report, China surpassed the US to become the world’s largest FDI recipient last year. Inflows to China totalled US$129 billion, up 4% from 2013. The US fell two rungs to third place, with inflows of US$92 billion, behind Hong Kong (US$103 billion).

China’s FDI inflows were driven by the increase in investments in the services sector, particularly retail, transport and finance, says the report.

In East and Southeast Asia, the top five recipients of FDIs — which takes into account mergers and acquisitions — are China, Hong Kong, Singapore, Indonesia and Thailand.

RHB Research economist Peck Boon Soon says Malaysia may be losing out on FDI inflows because it is neither enticing to lower-end investors due to the rising cost of doing business nor attractive to high-end investors due to a shortage of skilled workers.

Sia opines that the country is in a “neither here nor there” situation. “We have graduated from the low-level manufacturing FDIs, but [are] not yet at Singapore’s level to attract high-value-added FDIs.

“We are endowed with natural resources. So, we have the advantage of a resource-based industry. The oil and gas industry is a good example where we have the upstream and downstream sectors [which have seen FDI inflows]. Besides that, for the services sector, Islamic financing has been one of the key areas where we have managed to attract FDIs.”

Nonetheless, CIMB Research economist Jarratt Ma points out that the country’s manufacturing and electrical and electronic sectors have seen some success in attracting high-value-added FDIs. He says in recent years, there were also FDI inflows into the medical products sector, which requires skilled workers.

While the fragile global economy was a key factor in the weaker FDI inflows last year, Malaysia has had its fair share of local challenges in recent times. For one, a possible downgrade of its credit ratings by Fitch Ratings may have caused prospective investors to hold back their investment decisions.

Furthermore, there is also continued negative newsflow regarding 1Malaysia Development Bhd, which is wholly owned by the Ministry of Finance. The strategic investment fund’s RM42 billion borrowings have caused concerns that the government will have to step in to help it settle its debts.

It cannot be denied that the perception of the country has been somewhat affected by these issues, but economists believe that FDIs tend to look beyond them. Long-term returns and the country’s fundamentals are usually the key considerations.

“We still have a lower political risk and a more stable inflation than many countries in the region. I believe that after the third quarter, many of these negative sentiments regarding the fundamentals of Malaysia, such as growth and current account surplus, will clear up when the data is released. By then, we will have a clearer picture of things,” says CIMB’s Ma.

In terms of FDI outflow — investments abroad by locals — it expanded 16.6% to US$16.4 billion last year, according to the Unctad report. This exceeded the amount of FDIs Malaysia received by some US$10.8 billion.

This is a good sign, say economists. “As the country develops, companies accumulate wealth, and this is used to invest in areas of high growth outside the country. It is good as long as it is productive, meaning that it generates returns,” says Ma.

Sia says the increase in FDI outflows means that the economy is maturing and local companies have become competent enough to venture abroad. “In the short term, there could be some capital flow issues where the balance of payments faces some stress. But long-term-wise, the income will be accrued to Malaysia. It could be repatriated to the country in the form of dividends or earnings or through asset appreciation. This will increase the gross national income of the country.”

The Department of Statistics reveals that the investment income received from abroad has increased in the last few years. It amounted to RM24.194 billion and RM22.308 billion in 2014 and 2013 respectively.

Malaysia-invesment-abroad_Trend-net-FDI-inflows-into-malaysia_10_1073_theedgemarkets

This article first appeared in The Edge Malaysia Weekly, on June 29 - July 5, 2015.

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