Malaysia: The Star exclusive – FDI seen reviving gradually

• Nov 23, 2020

PETALING JAYA: Foreign direct investment (FDI) inflows this year are projected to come in at RM16bil to RM17bil, markedly lower than in 2019, while next year it is expected to be lower than pre-Covid 19 levels, no thanks to the pandemic and political uncertainties.

Economists are of the view that there would be some pick up in FDI inflows next year but it would not be significant and only in 2022 would there be a clear passage of recovery for FDIs to grow.

Nevertheless, they concurred that the government has put in concrete measures to attract FDIs, one of which is the recent signing of the Regional Comprehensive Economic Partnership (RCEP) that would draw more investments and boost trade with partnering countries.

For 2020, FDI inflows are forecast to be in the region of RM16bil to RM17bil.

Socio Economic Research Centre executive director Lee Heng Guie (pic above) told StarBiz that in view of the worst ever global recession and economic slump following the pandemic, FDI inflows into Malaysia would be substantially lower at around RM16.6bil this year, a drop of 55.7% from RM37.5bil in 2019.

In the first nine months of this year, net FDI inflows declined sharply by 57.6% to RM11.7bil compared with RM27.5bil a year ago.

For 2021, he said FDI inflows are expected to revive gradually but still markedly below pre-pandemic levels of averaging RM41.1bil per year in 2015-2019.

Lee noted that the FDI scenario for next year would depend critically on the future of the virus path, the country’s economic recovery prospects as well as the pace and strength of recovery in Malaysia’s major investors.

The United Nations Conference on Trade and Development expects global FDI to decrease further, albeit at a smaller magnitude of between 5% and 10% in 2021, and sees a recovery in 2022.

OCBC Bank economist Wellian Wiranto (pic below) said while there is hope that FDI inflows would improve alongside global economic recovery in 2021, it is unlikely to see headline numbers beating 2019’s intake just yet due to lingering reservations by businesses to commit to longer-term investments and a continuing climate of political uncertainties.

Moreover, he said, if the pandemic resurgence did not come under better control next year, it would act as another deterrent for any would-be FDI investors into Malaysia.

“On the flip side, it must be said that Malaysia would continue to be a beneficiary of two intermingling structural trends.

“One is the move to shift manufacturing facilities out of China due to geopolitical considerations.

“Another is the uptick in demand for high-tech products due to the stocking up of semiconductors and higher demand from the work-from-home crowd during the pandemic.

“On both fronts, the specific tech-oriented FDI inflows should benefit Malaysia, especially within the established tech clusters such as in Penang. These supporting factors should help to put a floor on FDI numbers in 2021, ” Wellian said.

AmBank Group chief economist Anthony Dass said the signing of the RCEP would help attract foreign companies keen on entering into an integrated Asean market.

The agreement would enhance transparency in trade and investment and lower trade barriers, he said.

Also, he said, it would improve market access, participate in new value chains, increase economic activities and strengthen supply chain links across Asia.

“While looking at an improving environment, the downside risk remains. Much depends on the vaccine for the pandemic virus and when it will reach the mass.

“Pending the vaccine, there is still the risk of lockdowns should the number of new cases rise. That will impact FDI flows, ” Dass noted.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the government via Budget 2021 has unveiled measures to make Malaysia the destination for high-value service activities.

Among these are the relaxation of tax incentive for principal hub that would be extended until Dec 31,2021 and new tax incentive for the establishment of Global Trading Centre at a concessionary rate of 10% for a period of five years and renewable for another five years.

He agrees that the signing of the RCEP would open up more opportunities for FDI inflows, especially from key countries such as China, Japan and South Korea.

“The way we see it, incentives to attract FDIs have been abundant. What matters now is how these incentives will be administered and to ensure the incoming FDIs will benefit the most from it, ” he noted.

To accelerate FDIs amid the pandemic, Dass said there is a need to reassess FDI strategy and priority sectors, adding that there must be end-to-end support for committed investments.

“The FDIs attracted should deepen linkages in the domestic supply chain and build new growth clusters. For instance, focusing on FDI in the real-estate and construction are channelled mainly to the higher-end segment and have limited spillover effects in the broader economy.

“We need targeted investments to help create high-skilled jobs, as well as expand knowledge transfer and product sophistication. Hence, Malaysia will have to up its game to lure the multinational corporations, ” he said.

Lee said government policies and regulations played a decisive role in fostering business competitiveness.

Although lowering effective tax rates helped boost FDI, the effect is stronger if augmented with a good investment climate, he noted.

“Maintaining good governance, a clear articulation of rules and regulations as well as reducing regulation risks can facilitate business to make better informed investment decisions.

“What is crucial is that we must set a clear and right policy direction and continue to ensure that the underlying economic fundamentals are resilient and the investment climate is conducive, ” he said.

Afzanizam said the country has what it took to propel inward FDIs.

“We have good infrastructure such as ports, highways, airports and reliable electricity supplies. The challenge is how we could encourage inward FDIs to absorb our local graduates and be able to reduce our dependencies on low-skilled foreign labour.

“Clarity in policy making is a pre-requisite alongside with smooth and better coordination among government agencies to ensure a better success rate to attract inward FDIs, ” he noted.

Source: https://www.thestar.com.my/business/business-news/2020/11/23/the-star-exclusive—fdi-seen-reviving-gradually