TO achieve its stated ambition of becoming a high-income nation by 2020, Malaysia would have to boost gross national income per capita to US$15,000 (or 65%) in three years’ time from US$9,096 in 2016.
To do this, Malaysia would need to improve certain areas to boost growth, including by improving contract enforcement, speeding up digitalisation, and strengthening ties with Asean and China, says Mahamoud Islam, senior economist for Asia at Euler Hermes-Allianz Research.
According to him, the stars are aligning for Malaysia’s export-oriented economy, with global trade value set to increase by 3.6% in 2017 (versus -2.4% in 2016). Commodity prices are now slowly improving, while demand from major trading partners, such as China and the US, is set to remain strong.
Domestically, demand drivers are improving at a slow pace. For corporates, better revenues provide some leeway for increased capital expenditures. Business sentiment is rising, supported by increasing output and new orders.
For households, both confidence and employment are improving.
However, weak income growth and higher inflation point to limited momentum, with GDP growth set to accelerate only slightly to 4.5% in 2017 (from 4.2% in 2016).
Moreover, Malaysia’s financial capacity to support growth is limited. Fiscal maneuvering is constrained by a hefty public debt compared to regional peers (above 50% of GDP).
High household debt (88.4% GDP) keeps Bank Negara from easing monetary policy, and a continued decrease in gross national saving to 29% of GDP (from 35% in 2010) gives little room for a strong rise in investment using national funding.
Also, competition from neighbouring countries is intensifying as regional manufacturing powerhouses aggressively expand their market share, while Malaysia’s market share remains stuck at around 1.2%.
Thirdly, the global political environment is not supportive, with geopolitical tensions (e.g. with North Korea) creating a vast array of uncertainties for companies and protectionism becoming more prevalent.
Nonetheless, Mahamoud says there are four growth game changers that may help Malaysia grow faster.
Game changer No.1: A more supportive business environment enabling Malaysia to become a capital magnet
A more supportive business environment would require improvements in the regulatory framework to enforce contracts, the tax environment and insolvency related procedures.
While Malaysia ranked 23rd in the World Bank’s Doing Business survey, it ranked low in the key components of contract enforcement (42nd) and insolvency procedures (46th).
Game changer No. 2: Investing further in innovation and infrastructure
Efforts to spur innovation could help Malaysia move up the value chain and increase its global market share. Improving both hard (e.g. airports and ports) and soft (e.g. efficiency of customs) infrastructure could also help reduce transaction costs and boost Malaysia’s overall competitiveness.
Game changer No 3: Digitalisation & Servitisation
Digitalisation currently accounts for 9.4% of annual global economic output, and by 2020 will account for 16.6%.
Malaysia ranks 36th out of 137 countries in Euler Hermes’ Enabling Digitalisation Index. While it performs relatively well in logistics, progress could be made in business environment and the quality of connectivity.
Services are on an upward trend, with their share of GDP growing steadily to 54% in 2016 (from 50% in 2011), and to an expected 56% in 2017. On the demand side, a continued rise in the middle class will support a rise in both intermediate (information and communication) and final services (finance, retail sales), while on the supply side, companies are set to adapt fast through servitisation – the delivery of a service component as an added value – when providing products.
Game changer No. 4: Selective Partnerships
Malaysia could deepen ties with fellow members within the Asean Economic Community (AEC) framework.
Merchandise exports to Asean account for 28% of Malaysian exports. Economic growth in the AEC is set to be around 5%, driven by a strong domestic demand.
The country could also strengthen ties with China to leverage on its mega trade initiative “One Belt One Road”. This could lead to a capital boost, with China’s foreign direct investment approved for Malaysia’s manufacturing sector reaching RM4.7bil in 2016.
It could also lead to a rise in new orders. China is Malaysia’s second largest export partner (after Singapore), accounting for 13% of its merchandise exports.