BNM: Lack of quality investments a hindrance to Malaysia's future growth

The lack of quality investments, declining cross-border investments and increasing global competition to attract foreign direct investments (FDI) are impacting Malaysia’s future growth potential.

In its Economic and Monetary Review 2019 report released today, Bank Negara Malaysia (BNM) said despite the strong increase in FDI approvals, realised foreign investments have slowed down substantially over the recent years.

Last year, private investments only expanded by 1.5 percent - the lowest growth recorded since the global financial crisis in 2007 and 2008.

“Compared to a strong average of growth of 14.4 percent between 2011 and 2013, realised foreign investment growth has declined to an average of 1.2 percent between 2014 and 2018, resulting in a smaller share of foreign affiliate investments to nominal private investment of 27 percent in 2018, compared with 41 percent in 2011,” it said.

It added that the sharp moderation was due to slower growth, mainly in the mining and manufacturing sectors.

The trend was also evident in domestic investment growth which moderated from an average of 13.5 percent from 2011 to 2013 to 6.0 percent between 2014 and 2018, mainly attributed to slower investment growth in mining, agriculture and construction sectors.

The report pointed out that the lacklustre investment landscape was also due to global headwinds such as weak growth performance, trade and geopolitical tensions, a sharp decline in energy prices, volatile capital flow and policy uncertainties in major economies.

“Globally, the average net FDI growth dropped from 8.0 percent (2000-2007) to only 1.0 percent in the recent decade.

“In Malaysia, the net FDI declined by an average of 11 percent a year between 2016 and 2019,” it said.

Malaysia’s overall capital stock is slightly lower than the average of countries at a similar stage of development and has been slower than the benchmark economies, said BNM.

The share of investment to gross domestic product (GDP) had fallen sharply during the Asian Financial Crisis from its peak of 49 percent in 1997 and 25 percent in 2000, and never recovered to above 30 percent compared to countries such as Japan and South Korea.

“The decline is mainly attributed to the sharp downturn in private investments, from 36 percent to 13 percent of GDP in the same period,” it said.

BNM noted that countries with higher capital stock tend to have higher incomes.

The central bank emphasised that without swift and effective reforms, the lack of quality investments will impede Malaysia’s transition towards becoming a high income, innovation-driven and inclusive economy.

It highlighted the main obstacles - the country’s tendency to exhibit lower innovation creation and slower development of forward and backward linkages to regional peers, slower economic complexity gains compared to most regional economy and an insufficient number of high-skilled job creation.

- Bernama