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Economic optimism rides Malaysia's winds of change

Investors now look towards the Budget and mid-term review of the 11th Malaysian Plan for clarity on KL's economic policy direction.

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Malaysia celebrates its 61st Hari Merdeka, or Independence Day, on Aug 31.

AS Malaysia celebrates its 61st Merdeka Day, it also celebrates the bold transformation and resilience of its economy and the potential that lies ahead.

Over the last six decades, Malaysia has weathered financial and economic crises to diversify from being an exporter of natural rubber and palm oil to become a vibrant regional hub for financial, infocomms and logistics services, with a solid industrial base for global manufacturers.

Since the historic general election in May that brought about Malaysia's first change in government since independence, there has no doubt been heightened uncertainty over policies and large infrastructural projects.

But if there is one message Malaysia's new leaders seem to want broadcast abroad, it is this: Malaysia welcomes foreign investors and has much to offer.

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Malaysia has remained attractive for foreign investors, despite concerns over international crises such as the collapse of the Turkish lira, Finance Minister Lim Guan Eng told Malaysia's Parliament this month.

He believes foreign investors can appreciate the government's accountability and transparency in reforming Malaysia's institution's and how that will translate into business prospects. "Not only are foreign investors confident in the strength of the Malaysian economy, consumer confidence has risen and this will support the growth of the country's economy," he said.

This stance was reiterated by Malaysia's Deputy Minister of International Trade and Industry Ong Kian Ming at a forum in Johor this week. "The new government is committed to ensure that our policies remain investor-friendly and Malaysia continues to be an attractive destination for investors to not only conduct business activities, but also to expand and diversify their existing operations."

Malaysia already offers an array of foreign investment incentives, with specific carrots to encourage investments into high technology-intensive industries and the setting up of regional operations. The new government has also said that it may extend tax breaks for key foreign investors able to guarantee the creation of better-paid jobs for Malaysians.

Outside of the political leadership too, there appears to be optimism over what this new phase of Malaysia's economic history could bring.

The World Bank's Malaysia Economic Monitor report, published in June, said: "Malaysia is entering a new period that offers an opportunity to strengthen structural reforms and to accelerate its convergence with high-income economies."

Though the report acknowledged that the cancellation and reassessment of several planned large infrastructure projects has raised uncertainty for both public and private investments, Malaysia nevertheless now has an "unprecedented opportunity for change".

OCBC economist Alan Lau sees optimism among businesses on the ground. Private investment growth for Q2 2018 recovered to 6.1 per cent year-on-year, up from just 0.5 per cent in Q1, thanks to capital spending in the manufacturing and services sectors. "Businesses possibly may be more focused on positive points such as institutional reforms," he wrote in a recent research note.

He said he expects investment to stay strong as businesses remain convinced of the country's longer-term potential. "Any policy uncertainty may mainly affect only businesses tied to the major projects that are under review, or have been reviewed."

Barometers of economic sentiment back this view. The Malaysian Institute of Economic Research's consumer and business conditions indices both crossed the 100-point threshold into optimism in Q2 this year. For the consumer index in particular, this was the first optimistic reading in several years.

And such positive domestic economic sentiment comes despite Malaysia reporting relatively sluggish GDP growth in Q2. This was largely attributed to supply shocks in the palm oil and liquefied natural gas sectors.

The external economic environment, the effects of fiscal consolidation, and the possible negative impact of a trade war did lead several private-sector economists to trim their 2018 forecasts for Malaysia's growth to under five per cent - from 2017's 5.9 per cent growth.

Even so, economy-watchers remain sanguine about the longer-term.

The World Bank report said: "Malaysia's economic fundamentals remain sound … Malaysia's underlying economic strengths, including a diversified economic structure, a strong external position, robust institutions and significant natural resources and human capital endowments, remain unchanged."

It is within this context and environment that investors are considering the Malaysian market.

The Malaysian Investment Development Authority (MIDA), in its latest investment performance report, notes that a growing number of global companies are choosing to make Malaysia their regional hub.

These include Peugeot's Asean manufacturing hub, IKEA's regional distribution and supply chain centre for Asean, and Honeywell's Asean regional headquarters.

As Singapore's closest neighbour, Malaysia remains a convenient first choice for overseas expansion for many local companies. Proximity aside, socio-cultural similarities and the larger market across the Causeway makes Malaysia a natural first port-of-call for local companies, particularly the smaller businesses making their first foray abroad.

Despite bilateral issues that have arisen in recent months over the 1962 Water Agreement and the High-Speed Rail project, government officials and business leaders on both sides have asserted the strength of Singapore and Malaysia's economic links.

In Singapore earlier this week, Malaysia's International Trade and Industry Minister Darell Leiking said Malaysia-Singapore economic relations are "good", and that the businesses and investors he met remain positive about prospects up north.

Singapore's businesses have indeed been key investors in Malaysia.

Data from MIDA listed Singapore as the third largest foreign direct investor in Malaysia last year, after China and Switzerland. Singapore contributed some 8.6 per cent of FDI inflows into Malaysia last year.

Of the S$43.3 billion that Singapore investors put in Malaysia in 2016, the bulk flowed into the financial and insurance-services sector; the manufacturing sector attracted a significant chunk too, according to Singapore's Department of Statistics.

Enterprise Singapore (ESG), the agency which supports Singapore businesses' global ambitions, has also flagged several sectors in Malaysia with investment opportunities well-suited to local companies.

Education is seen as a key growth sector, given the Malaysian government's commitment to human capital development and addressing talent shortages across key industries. For Singapore firms, this could mean opportunities to provide vocational technical education. The growth of private early childhood education will also drive demand for teachers.

Urban infrastructure, particularly in developing green and sustainable buildings, is another area that local companies could have an edge in. In Malaysia's increasingly competitive residential property market, developers are also looking to partner established brands to incorporate health and education amenities in their townships.

The private healthcare and wellness sector in Malaysia has also experienced a boom, thanks to increased medical tourism. This has meant relaxed foreign ownership rules for private hospitals, medical specialist centres and dental services, which open up opportunities for Singapore's healthcare and pharmaceutical companies.

One industry sector in which socio-cultural similarities offer a natural advantage is in retail and food services. The F&B sector leads the franchise industry in Malaysia, one route via which many Singapore companies have chosen to grow their brands. In 2016, Malaysia's franchise industry contributed RM26.6 billion (S$8.95 billion) to its economy.

And ever since foreign ownership rules were relaxed to allow 100 per cent ownership in the retail and food services sector, more Singapore firms have been able to run fully-owned subsidiaries in Malaysia too.

Malaysia's startup ecosystem has also generated buzz. The Malaysia Digital Hub has been set up to address gaps in funding, market access, talent and technology. The Malaysia Tech Entrepreneur Programme was introduced to draw global tech talent to Malaysia.

With the longer-term outlook in mind, investors surveying the opportunities now look to the upcoming Malaysian Budget and the mid-term review of the 11th Malaysian Plan for greater clarity on the government's economic policy direction.