Is competitiveness on a downtrend?
TIMES are tough. But, as the saying goes, “What goes up must come down.” We take the reverse as also true.
The same applies to the global economy as it starts to gain momentum, spilling positive impact on the region, including Malaysia. Growth is gaining traction, slowly but surely!
The International Monetary Fund (IMF), in its April World Economic Outlook, upgraded its 2017 global economic growth forecast to 3.5% from 3.4% previously – a step up from a very bearish tone adopted in 2016.
The fund also sees slightly higher growth of 3.6% in 2018.
For Malaysia, the trend has been surprisingly pleasant. The economy rebounded strongly by 5.6% year on year (y-o-y) in Q1’17, a sharp contrast when compared to a mere 4% growth in Q2’16.
Moving forward, Bank Negara is more confident of sustained momentum. The country’s underlying economic resilience should keep the domestic macro relatively resilient, as demonstrated by household consumption performance – expanding 6.6% in Q1’17.
Competitiveness hanging by a thread?
Despite strong domestic fundamentals, Malaysia is still struggling to attract more high quality foreign investments, as competition has been stiff in recent years.
External headwinds, such as geopolitical concerns, have also been dictating the course of the global economy and hence affecting domestic exchange rates and exports growth.
Recent reports released on Malaysia’s performance, on a global scale, have been mixed.
According to the World Bank Ease of Doing Business 2017 report, Malaysia fell one spot to 23rd out of 190 economies.
This is in sharp contrast to our best ranking achieved, at 6th place in 2014. That is a decline of more than 10 spots within a span of three years.
In addition, a global macroeconomic and business competitiveness report released by the International Institute for Management Development (IMD) World Competitiveness Centre listed Malaysia in the 24th position (out of 61 economies), dropping five rungs from 19th place in 2016.
The IMD competitiveness ranking is heavily based on “hard data” such as macroeconomic performance and government policies.
In their recent report, IMD stated that Malaysia’s drop in the rankings was dragged down by the ringgit volatility.
However, we need to note that the ringgit exchange rate had been largely dictated by external factors and only to a certain extent by domestic fundamentals.
Furthermore, the weak ringgit exchange rate has been the new norm for some time now.
However, recent measures by Bank Negara have stabilised the ringgit and lifted it from a historic low of RM4.45 per US dollar.
Further improvement from the current level of RM4.27 per US dollar would likely lift the ranking higher in the years ahead.
Nevertheless, we should pay more attention to World Bank’s study.
In the report, the World Bank provides quantitative indicators which cover 11 areas of the business environment – starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
The report highlighted areas of strength in doing business in Malaysia, which are: issuing construction permits, getting credit, as well as establishing utilities connections.
It is imperative that we maintain current standings and even strive to improve on these key areas.
On the other hand, it may also seem that doing business in Malaysia has actually become more costly.
In the report, Malaysia scored poorly in other categories such as starting up a business and paying taxes, which have dragged the overall ranking down.
Tiresome and costly procedures should be eliminated to elevate Malaysia’s attractiveness in the region.
While economically Malaysia might seem attractive, these soft indicators will give a clearer picture at how the business environment works.
Although Malaysia is ranked higher among its Asean peers such as Thailand (46th) and Indonesia (91st), we reckon the government will focus heavily on these processes in order to raise the rank in the coming years.
Some of the more tedious processes should be made simpler and straightforward for foreign investors.
Recently, various manufacturing companies, even the likes of some multinationals such as British American Tobacco and Seagate Technology, had to close some of their plants in Malaysia, given the unsustainable rise in costs.
Various cost-increasing measures such as the removal of subsidies, implementation of GST, and the increase in corporate taxes have led to businesses incurring higher costs, resulting in dwindling profits in recent years.
The problem with taxes
Not only does increasing affect a business, but it impacts investment flows.
The private investment trend (approximately 17% of total GDP) has been declining after its peak in 2014, registering growth of 4.4% and 6.4% in 2016 and 2015 respectively.
While the cost of living in general has been rising, the focus will be on corporate taxes, which has dampened business sentiments.
Currently, the corporate tax is divided into two categories: companies with profit of less than or equal to RM500,000 are taxed at a rate at 19%.
However, for companies with profit over RM500,000, the tax rate is set at 24%.
The tax rate is also set at 24% for foreign-owned companies.
Going back to World Bank’s report, taxes as a percentage of profit is high at 40% in Malaysia, compared to around 34% in 2010.
The issue with taxes is a tricky one; high taxes do not necessarily costs also mean more government revenue.
Smaller companies would be less inclined to report their profits and will most probably shift their business into the shadow economy to avoid excessive taxation.
On the other hand, multinational companies operating in Malaysia have the option to move out into low tax Asian nations such as Singapore (where corporate tax is only 17%) or into similar middle income nations such as Thailand where corporate tax is 20%, still lower than in Malaysia.
It would be ideal to have low tax rates, or even a zero tax rate situation in Malaysia (although this would be more suited in a Utopian context).
In the short term, lowering corporate taxes or even providing incentives for declaring profit would be the ideal strategy to boost regional competitiveness.
This would leave Malaysia in a better position to attract foreign and domestic investments and compete with low tax nations such as Singapore and Hong Kong.
Focus on FDI
Not only does investment play a pivotal role in GDP growth, but it also expands the capacity for future potential growth.
In addition to domestic investments, it is vital to attract foreign direct investment for strong GDP growth.
According to recent statistics released by Malaysian Investment Development Authority (Mida), around 28% of the 4,972 projects worth RM208bil in 2016 approved were from foreign sources.
This is higher than total approved investments in 2015, of which FDI constituted around 19% of total approved investments.
The expansion in FDI net inflow may signal foreign investors’ confidence in the recovery of the Malaysian economy.
However, total approved investments are still lower than investment performances seen in 2013 and 2014, at RM219bil and RM236bil respectively.
On the other hand, according to 2015 Asean statistics, Singapore leads the region with US$61.3bil of net FDI inflow.
Within Asean-5 and Singapore, Malaysia comes in 4th, with a total FDI inflow of US$11.3bil, after Indonesia and Vietnam with US$16.9bil and US$11.8bil respectively.
Despite the attractive exchange rate for the investors, why is Malaysia still struggling to hold its competitive advantage?
It could be possible that due to tougher business environments, mainly in terms of cost of production and country’s high dependence on foreign labour, firms would rather set up firms elsewhere – especially in low-cost nations.
Therefore, it is imperative to find ways to ease the burden on companies and strive to make Malaysia an attractive hub for investments.
Lastly, given the continued FDI inflow, Malaysia still remains an attractive destination for foreigners.
It is essential to leverage upon the strengths in order to maintain our position and even improve on it.