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The significant fall in Malaysia’s FDI flows in 2017 adds fuel to the debate surrounding the future of the export-led economy. Will new government measures make a difference? Olivia Azadegan reports.

Malaysia’s FDI has become the latest casualty of the global slowdown in investment momentum, according to Unctad’s 2018 World Investment Report, despite FDI in the Association of South-east Asian Nations countries rising by 11% to $134bn in 2017. The news comes against the backdrop of uncertainty sparked by rising US-China trade frictions.

Net inflows of FDI fell to $10.11bn last year from $11.54bn in 2016, the Malaysian Department of Statistics said in a statement in August. In 2017, Malaysia’s greenfield FDI hit a record low since 2005, garnering 123 projects worth $5.8bn. This marked a 70% year-on-year decrease in terms of capital expenditure, according to greenfield investment monitor fDi Markets.  

“Minimum wage, cost competition from other countries and political uncertainty could be the factors leading to the underperformance of Malaysia. Both the services and the manufacturing sectors saw a setback in FDI inflows,” said Frances Cheung, head of macro strategy, Asia, at Westpac Banking Corporation. “Lingering trade conflicts may also have kept direct investors on the sidelines.”  

The current government is reviewing a few mega-projects, which pose downside risk to FDI flows for 2018 and 2019. “The new prime minister, Mahathir Bin Mohamad, has stated that he welcomes foreign private investments and productive FDI with mutual benefits,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank.

Since Mr Mahathir’s unexpected election victory in July, the prime minister has earned a reputation for pushing populist economic policy and has pledged a crackdown on corruption. “Mr Mahathir is very clear that it is not feasible for the government to finance all the projects/investments, and public-private partnerships models are most welcome – be it partnering domestic or foreign firms,” added Mr Varathan.

Attempts to make FDI more attractive include Mr Mahathir’s pledge to extend new tax incentives for foreign companies investing in the country. This signals his assertiveness to shake up the country’s present government-linked companies, which have historically limited private investment.

“FDI and domestic investment are both likely to ease over the next 12 to 18 months as investors assess the new government’s attitude to foreign investments and review major infrastructure projects,” said Sian Fenner, Asia economist at Oxford Economics.

Dr Indranil Ghosh, CEO of Tiger Hill Capital, believes the tax measures alone are not enough. “Malaysia needs clarity on legal processes, improvement in governance issues, and commitment to keep tax and investment policy consistent, all of which are important to business. Investors must have confidence that there will not be government appropriation of assets – a phenomenon that has plagued the region,” he said.

Adding to this is uncertainty over the global trade outlook amid rising US-China trade tensions, said Mr Fenner. “Indeed, this uncertainty could dampen FDI inflows into the region at least in the short term, given the region’s heavy dependence on China and exports,” he added.

This article is sourced from fDi Magazine
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