MCO, political instability caused FDI drop, say economists

 

An economist says Malaysia should invest in transport infrastructure. (Bernama pic)

PETALING JAYA: Economists agree that political instability and the effects of the movement control order were among the key factors contributing to the huge drop in foreign direct investment last year.

Malaysia recorded a 68% decline in FDI to US$2.5 billion in 2020 according to a recently released UN report.

“Some factors affected Malaysia more than the region. The MCO had a longer duration, and there was a tighter lockdown compared with much of the region ,” said Vishrut Rana, an economist at S&P Global Ratings.

“We see the decline in FDI into Malaysia in 2020 as a sharp, but temporary, cyclical downturn.”

Vishrut Rana.

Stating that political uncertainty did not play a significant role in affecting investment, Rana said the key factors – policy visibility and continuity – remain favourable in the country.

Diana del Rosario, the Asean+3 Macroeconomic Research Office’s country economist for Malaysia, also said that the decline in Malaysia’s FDI should be taken in the context of the MCO that was imposed for the most part of Q2 2020.

While she said business activities were severely curtailed by the nationwide lockdown and the impact of international travel restrictions, del Rosario noted that FDI held up at 1.1% of GDP in the first three quarters of 2020.

Diana del Rosario.

“That is down from 2.5% in the same period in 2019, but can be considered a decent outturn considering the heightened uncertainty clouding the outlook of global investors,” she said.

Of more significance, she said, was the strength in foreign investment approvals for nearly three years running from 2018.”

Del Rosario noted that FDI approvals averaged 5.0% of GDP from 2018 through Q3 2020, up from 3.9% in 2015-17, an increase driven by commitments in the manufacturing sector.

Steven Cochrane.

Steven Cochrane, chief Asia Pacific economist at Moody’s Analytics, said that apart from the change in leadership last February just as the Covid-19 crisis was emerging, Malaysia’s policy of fiscal consolidation to manage its government debt before the pandemic might have kept investors away.

“For instance, major infrastructure projects like the KL-Singapore High-Speed Rail (HSR) were postponed under the Pakatan Harapan government and recently cancelled altogether,” he said when asked to analyse the decline in FDI.

“This also signals that changes in leadership might cause contracts to be void if they had been signed with a previous administration,” he added.

Fitch Ratings also issued a reminder about Malaysia’s political volatility this week, stating that it weakens prospects for improvements in governance and may have a dampening effect on private investment growth.

Bouncing back

For the future, del Rosario said Malaysia should look into improving the ease of doing business and ramping up investment in transport infrastructure and broadband services.

Besides providing incentives in high-value manufacturing and service activities, she said credit guarantees should be extended to foreign-owned companies with a mostly Malaysian workforce.

She also called for grants to upgrade labour skills and speed up digitalisation across industries and SMEs, stating that these initiatives are particularly timely as several economies are looking to diversify their supply chains and enhance resilience.

Cochrane, meanwhile, advocated more technical education geared towards digitisation – especially as he said Malaysia cannot compete on wages with countries like Vietnam and Thailand.

Noting Malaysia has been trying to attract more Chinese investors through its ‘China Special Channel (CSC)’ programme launched in Jan 2020, he pointed out that Chinese firms are more likely to prefer Hong Kong or Singapore due to their more established infrastructure.

“Malaysia might want to expand its interest to other Asian or Southeast Asian countries, instead of focusing on Chinese investments,” he said, adding that the Regional Comprehensive Economic Partnership (RCEP) signed in November would help smoothen trade and investment across the ASEAN region.

Published on Sunday, the UNCTAD report noted that FDI in Southeast Asia decreased by 31% to US$107 billion in 2020 while global FDI decreased by 42% to US$859 billion.

Among the other Southeast Asian nations, Thailand’s FDI fell by 50% to US$1.5 billion, Singapore’s FDI by 37% to US$58 billion, Indonesia by 24% to US$18 billion and Vietnam by 10% to US$14 billion. - FMT