2nd Penang Bridge during dawn

Malaysia: On track for long-term growth

Find out how ASEAN’s fourth-largest economy continues to diversify, and how trends and market forces are transforming policy, strategy and growth trajectories in Malaysia.

Malaysia has transformed itself over the decades into one of Southeast Asia’s most vibrant economies. Once heavily reliant on agriculture and commodity-based industries, the country which is now ASEAN’s fourth-largest economy, has successfully diversified to focus on the manufacturing and services sectors.1

GDP growth stood at 4.3 per cent year-on-year in 2019 amid an uncertain global macroeconomic climate.2 And while the coronavirus outbreak is expected to hurt near-term growth, Malaysia is targeting stimulus measures aimed at sensitive sectors, such as retail and tourism, to counter the impact.3 Over the long term, the country is expected to record stable annual GDP growth of approximately 4-5 per cent between 2019 and 2024, driven by multiple factors, such as stabilising global commodity prices, improvements in global demand for Malaysian electrical and electronics (E&E) exports, and increasing domestic consumer spending.4

Private consumption grew at 6.5 per cent CAGR from USD122 billion in 2010 to USD203 billion in 2018.5 In 2019, private consumption and investment rose 6.8 percent and 1.5 percent, respectively, and are anticipated to grow faster in 2020, by 6.9 percent and 2.1 percent, respectively.6

Sound economic fundamentals combined with a skilled labour force and highly developed infrastructure make Malaysia an attractive business-friendly destination for foreign investors leading to strong capital inflows.

Data for the first half of 2019, shows foreign direct investment (FDI) rose by 97 per cent to RM49.5 billion, compared with RM25.1 billion in the year ago period.7

The strong showing underscores the country’s resilience and its ability to buck the trend in Asia, which has been hurt by slowing global growth and the ongoing US-China trade negotiations.8

Adapting to disruption

Despite these positives, global sectoral trends are impacting Malaysia’s main industries, such as rubber and plastics, and high-value manufacturing. In the rubber industry, for instance, price volatility triggered by demand and supply imbalances is hurting domestic companies. Additionally, the global economic slowdown, a strong US dollar and weak crude oil outlook for 2019 are further putting downward pressure on rubber prices.9

Meanwhile, shifting consumer preferences have led to rising demand for reusable plastic products and sustainable packaging, which is adding to the cost pressures of Malaysian mid-corporates in the sector. The issue is exacerbated by recent government action targeting the elimination of single-use plastics by 2030.10

But there are signs local companies are taking the right steps to adapt and stay relevant. “We are focusing on sustainability and differentiating our products with new, eco-friendly materials. This is important to our customers across the manufacturing chain,” noted Kim Meng Ng, Vice President Asia of Infiana Group.

Meanwhile, growing regional competition in high-value manufacturing is making it critical for Malaysia to offer new value propositions to continue attracting producers to the country. Growing demand for customisation and quicker order fulfilment are also posing challenges for companies down the supply chain, affecting the bottom lines of mid-corporates, especially in the E&E segment.

In the medical technology (medtech) sector, a major growth market, rising wages combined with low productivity are seen hurting margins at mid-corporates firms. Here too, companies are moving quickly to cope with change, by adopting new technology solutions to diversify their product offerings while keeping production costs in check.

“We are amongst the early adopters of Industry 4.0 technologies using specialised machines to perform automatic optical inspection,” said Kean Cheong Lau, CEO of Inari Amertron.

Positive growth trajectory

Near-term challenges notwithstanding, the growth potential for the long term remains bright for Malaysia’s key growth industries.

The rubber industry is expected to become the number one commodity contributor to Malaysia's economy surpassing palm oil,11 underlining its market potential. Plastics remains one of Malaysia’s most vibrant growth sectors with revenues of USD3.3 billion in 2017.12

To capitalise on rising global demand, especially in the medtech segment,13 the government has launched the Industry 4.0 (Industry4WRD) initiative to transform Malaysia’s manufacturing landscape in the next decade. The medtech segment, which is witnessing growing government support as an area of national economic focus, is poised to reach USD2.2 billion market by 2023, with a CAGR of 8 per cent (2018-2023).14

Mid-corporates in both sectors also stand to benefit from improving prospects in overseas markets. The market for Malaysian rubber and plastics exports in ASEAN has expanded from 2012 to 2017, growing at 2 per cent CAGR over the period.15 Similarly, North Asia is the second largest destination market after Europe for exports of high-value products from Malaysia, accounting for 25 per cent of high-value exports.16

While demand is being spurred on by economic development and the modernisation of industries, presenting growth opportunities,17 the strengthening of diplomatic and commercial ties also provide Malaysian mid-corporates greater access into the region’s high-value manufacturing sector.18

Reforms-led growth

Malaysia’s economy has been on an upward march averaging a growth rate of 5.4 per cent since 2010.19 This momentum is likely to gather speed on the back of ongoing reform efforts to counter growing external risks, tackle domestic structural issues and put the country on a stronger and more sustainable long-term growth path.

One of the key objectives of the government’s 2020 budget is making Malaysia a preferred investment destination by reducing the number of steps needed to register a business in the country. It is also planned to offer nearly USD250 million in incentives to attract Fortune 500 companies and global unicorns to Malaysia. Enhancing the country’s digital infrastructure and promoting green energy projects are also main focus areas.20

The government’s Shared Prosperity Vision 2030 masterplan intends to transform Malaysia into a higher-value economy while addressing the income and wealth disparities in society.21 There is a renewed push towards productivity-driven growth with a focus on upgrading skills to prepare its workforce for the new knowledge economy.22 Recent institutional reforms to combat corruption and improve corporate governance,23 further help to boost private sector confidence.

On the investment front, the government expanded tax incentives for businesses in 2019, which should help attract multinationals to set up regional headquarters in the country. The move is part of a broader strategy to attract companies that are looking to extend their production hubs beyond mainland China in a bid to mitigate the impact of US tariffs.24 Additionally, the government is making significant investments to improve digital infrastructure and connectivity in rural areas with the help of public-private partnerships, as it strives to bring 5G network to the country.25

These pragmatic policy initiatives are expected to help unlock Malaysia’s economic potential in the near future and provide the impetus needed to advance the country’s ambition to transition from an upper middle-income to a high-income economy by 202426 and help create a more united, equal and prosperous society.27

1 PwC Report; International Monetary Fund, ‘World Economic Outlook’, April 2019; World Bank, ‘Malaysia Overview’, March 2019
2 https://asia.nikkei.com/Economy/Malaysia-GDP-growth-slows-to-4.3-lowest-in-10-years
3 https://www.scmp.com/week-asia/economics/article/3051835/stimulus-economic-cure-malaysias-coronavirus-woes-china-losses
4 International Monetary Fund, ‘World Economic Outlook’, October 2019; World Bank, ‘Malaysia Overview’, March 2019; Standard Chartered Global Research
5 PwC report; Malaysia introduces a slew of market initiatives’, August 2019
6 http://www.xinhuanet.com/english/2019-10/12/c_138464769.htm
7 https://www.straitstimes.com/asia/se-asia/malaysia-aims-to-lure-investments-amid-sluggish-economy-and-us-china-tensions
8 https://asia.nikkei.com/Economy/Malaysia-s-GDP-accelerates-to-4.9-growth-bucking-Asian-trend
9 https://www.thehindubusinessline.com/economy/agri-business/recovery-in-rubber-prices-unlikely-in-2019-due-to-unfavourable-demand-supply-fundamentals/article25913469.ece
10 https://www.channelnewsasia.com/news/asia/malaysia-zero-single-use-plastics-roadmap-2030-11555336
11 https://www.thestar.com.my/business/business-news/2018/09/19/rubber-to-surpass-palm-oil-contribution-to-economy
12 https://www.thestar.com.my/business/business-news/2018/10/15/analysts-cautious-on-the-future-of-domestic-plastics-industry
13 PwC Report; Oxford Business Group, ‘Malaysian manufacturing sector expanding but faces challenges’, 2016; Ministry of International Trade and Industry Malaysia, ‘MITI Report 2018’, June 2019
14 PwC report; Fitch Solutions, ‘Malaysia Medical Devices Report Q3 2019’, 2019
15 International Rubber Study Group, ‘Statistical Summary of World Rubber situation’
16 The Straits Times, ‘China, Malaysia to strengthen cooperation in development of twin industrial parks’, 2019
17 World Integrated Trade Solutions, Malaysia rubber and plastics exports, 2019
18 Observatory of Economic Complexity, International Trade Data, 2017; World Integrated Trade Solutions, ‘International Trade Data’, 2017
19 https://www.worldbank.org/en/country/malaysia/overview#2
20 On the ground – 11 Oct 2019, Pg 10; SC Global Research
21 https://www.malaymail.com/news/malaysia/2019/10/07/three-things-we-learned-about-shared-prosperity-vision-2030/1797797
22 https://www.malaymail.com/news/malaysia/2019/04/19/pm-malaysia-must-move-to-productivity-driven-growth/1745049
23 https://www.freemalaysiatoday.com/category/nation/2019/10/11/reforms-serve-as-launch-pad-to-achieve-economic-growth-says-pm/
24 https://www.channelnewsasia.com/news/business/malaysia-sweetens-tax-incentives-for-companies-to-set-up-hubs-11981404
25 https://www.malaysiakini.com/news/495440
26 https://www.worldbank.org/en/country/malaysia/overview#2
27 https://www.mea.gov.my/sites/default/files/FullBookEN.pdf