Malaysia is poised to regain the affections of foreign investors. Ever since the Asian financial crisis of 1997, the country has struggled to repeat the sizzling growth it achieved in the 1980s and 1990s.
Things are looking up. Economic growth is reviving, reflecting not just a cyclical bounce but also a structural uplift in the country’s longer term prospects.
Broad growth
GDP growth of 5.8% in Q2 of 2024 was the fastest since early 2023 and all the more welcome for its broad-based nature. The service sector expanded by a robust 5.6%, reflecting resilient domestic demand and the revival of tourism. Manufacturing output saw markedly improved growth of 4.7%, as export-oriented sectors benefited from improvements in global demand. Construction activities also boomed, rising by 17.2%.
The unemployment rate remains at post-pandemic lows of around 3.3%, providing support to household spending
The cyclical recovery is set to continue as the bounce in the electronics cycle powers Malaysia’s large semiconductor sector in the second half of this year. The gradual recovery in outbound Chinese tourism will also benefit the country.
Domestic factors help as well. The unemployment rate remains at post-pandemic lows of around 3.3%, providing support to household spending. The upcoming revision of public sector salaries is likely to help boost wage increases across the rest of the economy as well.
The government has reduced some fuel subsidies and is preparing more subsidy rationalisation. It has also set out its plans for longer term growth, industrial upgrading and decarbonisation. That gives the private sector greater clarity on policy issues, and should encourage businesses to step up domestic investment, helping to cement the ongoing economic rebound.
The biggest factor supporting medium-term prospects is the ongoing supply-chain reconfiguration
FDI boost
The biggest factor supporting medium-term prospects is the ongoing supply-chain reconfiguration, under which production activities are moving to developing economies such as Malaysia.
The result is an impressive revival in foreign direct investment. Major technology firms are pouring money into the country, particularly the semiconductor sector. Chip giant Intel is investing US$7bn in a large semiconductor testing and packaging facility. Other tech companies, including GlobalFoundries, ASML, Infineon and NVIDIA, have followed suit.
Interestingly, it is not only Western companies that are investing in Malaysia. Chinese semiconductor firms are also planning to relocate production to Malaysia, with firms such as Xfusion, Tongfu Microelectronics and Fengshi Metal Technologies confident in the country’s eco-system.
Malaysia is also performing admirably in terms of attracting investments into data centres. Google just announced a US$2.0bn investment in Malaysia, making it only the 12th country in the world to operate data centres servicing the company’s global needs.
Partnership advantage
Certainly, a highly open economy like Malaysia’s has to be concerned by the trend of countries pursuing industrial policies that favour domestic producers.
Malaysia has pursued economic partnership agreements that provide it with some protection. It is a member of both the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, two of the biggest free trade agreements in recent years.
It is also likely to get another major boost when the proposed Special Economic Zone between its southern state of Johor and neighbouring Singapore is announced – probably in September. The synergies between Singapore, with its high-cost structure and its limited land, labour and carbon resources, and Johor, with its ample land, labour and potential for renewable energy, are likely to be immense. There is every reason to believe that the growing optimism about Malaysia will be sustained.
