This article first appeared in The Edge Malaysia Weekly, on September 28 - October 4, 2015.
THE volatile exchange rate and political uncertainties have impacted private investment in Malaysia this year. Growth in private investment slowed sharply to 3.9% in 2Q2015 from 11.7% in 1Q2015 — the slowest pace since 3Q2011, according to the latest economic data.
Economists foresee the growth pace will decelerate further if the domestic factors dampening investing sentiment continue to prevail. Plus, possible external shocks from the global economy could stop businesses from expanding or setting up in new markets.
The scenario is a matter of concern as private investment has been positioned as the driving force of the economy. In 2010, reform-minded Prime Minister Datuk Seri Najib Razak aimed to transform, through the Economic Transformation Programme (ETP), Malaysia’s economy from a government-dominated and commodities-driven model to one powered by private-sector growth.
To that end, the ETP has achieved early success. Data presented by Performance Management and Delivery Unity (Pemandu) shows that from 2011 to 2014, private investment grew at a compound annual growth of 13.9%, progressively upstaging public investment. In 2011, private investment made up 56% of the country’s total investments. It ballooned to 64%, or RM183.9 billion, last year.
But the political uncertainties and volatile exchange rate rudely interrupted the country’s private investment growth.
The “spillover effect” of external factors such as the US Federal Reserve’s interest rate policy and slowing growth in China has unsettled businesses, says private sector economist Lee Heng Guie. But the biggest obstacle standing in the way of new investment is Malaysia’s own economic and political woes, he adds.
Lee says the certainty in the Malaysian economy that investors have come to rely on is dissipating because of the volatile ringgit.
He points out, “If you look at the private investment growth momentum, it had been encouraging in 2010, until it started to slow down. In 2012, private investment saw 21.4% growth, 12.8% in 2013 and then 11% in 2014. In the first half of this year, we saw a more pronounced slowdown, when it averaged down to 7.5%.”
The dealings of 1Malaysia Development Bhd (1MDB) have attracted a lot of negative publicity. Investigations are being carried out by authorities domestically and abroad. Lee says Malaysia’s holy trinity — political stability, strict standards of good governance and integrity of public institutions — that makes the country an attractive investment destination is perceived to be at risk.
“These are Malaysia’s investment growth pull factors. Apart from a strong and stable currency, we need to maintain a business-friendly environment,” Lee says.
The ringgit has been the worst-performing currency in the region against the US dollar. The swing in the exchange rates has put off investments as costs become difficult to predict and expansion plans hard to execute.
RHB Research economist Peck Boon Soon expects Malaysia’s private investment growth to taper to 6% to 7%. He points out that a number of large-scale infrastructure projects, which usually spur private investment, have already been rolled out. “This means that we are only seeing existing investments, not new ones for the second half of the year,” he explains.
However, he expects private investment to gather steam once the government kick-starts new mega projects such as Mass Rapid Transit Line 2.
Despite economists’ generally dampened outlook for private investment, at least in the near term, Pemandu CEO Datuk Seri Idris Jala takes great pride in the country’s record-high private investments.
“Every single year, for the last few years, has been a new record for Malaysia. To the critics who say that Malaysia has lost the confidence of investors, the data is telling otherwise. Every single year, we have had record investments. This year, if we look at prorated, annualised numbers, we should achieve another record,” he said at the Economic Update 2015 Forum last Monday.
“If I take a look at Miti’s (Ministry of International Trade and Industry) approved investments in the past few years, every single year has shown record approval numbers. They are in the pipeline, not yet realised. When those numbers are implemented, it will lead to record (investment growth),” he added.
Indeed, Miti approved investments worth RM113.5 billion in 1H2015, an improvement from RM112 billion in the same period a year ago. Minister of International Trade and Industry Datuk Seri Mustapa Mohamed said at the same forum that he has approved investments of up to RM20 billion so far, on top of the RM113.5 billion in 1H2015.
Out of the RM113.5 billion, 81.1% were domestic direct investments and the remainder, foreign investments. Realised private investment numbers were also encouraging — up 5.6% to RM56.99 billion in 1H2015 year-on-year, according to the Malaysian Investment Development Authority.
However, the private investment figures are debatable as a large part of the ETP’s investments is driven by GLCs.
Miti’s approved investments also do not always translate into realised investments.
Peck says, “The government would have seen investment approval numbers and concluded that they are quite healthy. But, they are just approvals. Businesses can delay the implementation of their expansion plans. They will wait for conditions to improve before putting their money on the ground.”
In early September, the government introduced special economic measures and ordered government-linked agencies (GLCs) that are invested overseas to bring the funds back for domestic investment.
“In recent years, we have seen many Malaysian companies go abroad. As at June 2015, we had net investment abroad of RM522 billion compared with net foreign direct investment (FDI) into Malaysia of RM477 billion,” said Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar at the forum. “When the companies generate returns from these investments, it is good to lock them in and bring back the profits.”
It is worth noting that Malaysia has the fifth-largest investment outflow among East and Southeast Asian nations. The United Nations World Investment Report 2015 put the number at US$16.4 billion in 2014, a 16.6% growth year-on-year.
Government investment holding arm Khazanah Nasional Bhd will be injecting RM6.77 billion into various sectors on the economy but economists say the impact might be limited. “Additional investment spending by Khazanah should boost economic output at the margin but most of the benefits of the spending won’t be seen until at least 2016 and possibly, as late as the 2017-2020 period. Relative to the size of the Malaysian economy, the investments are fairly modest, amounting to about 0.3% of current-year GDP,” says CME Group senior economist Erik Norland.
Najib’s decision to fall back on GLCs’ widespread influence in times of need is an obvious one as the country is finding it hard to convince the business community, both local and international, to invest more.
Hopefully, public investment, which may have to be the “locomotive” of the country’s economic growth, would be able to cushion any adverse impact from continued lacklustre private investment until the dust settles on the domestic political front and the world economy.
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