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Malaysia: Religious tourism boost

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Having been ranked the friendliest country for Muslim holidaymakers for the third year running, Malaysia has confirmed its position as a premier halal tourism destination. However, its position – and the revenue that comes with it – could be challenged by regional rivals seeking to cash in on the lucrative market.

The tourism sector is already a major contributor to the Malaysian economy, directly generating $21.4bn in 2012, the equivalent of 7% GDP, according to the latest report on the global industry’s economic impact, issued by the World Travel & Tourism Council (WTTC). The council’s report for 2013, released at the end of February, said tourism provided direct employment to more than 800,000 Malaysians, some 6.5% of the active workforce.

However, when indirect factors – such as state spending on tourism-related infrastructure and support, the supply and purchase of goods and services, transport, information technology and utilities – are taken into consideration, tourism’s total contribution to the economy came to $48bn, or 15.6% of GDP, and accounted for 1.7m jobs, 13.6% of the total.

The WTTC has also forecast Malaysia will continue to build on its achievements, with total tourism revenues expected to reach $81.5bn by 2023 on the back of a sharp increase in arrival numbers over the coming decade, as the number of visitors is projected to rise from 27m in 2013 to 45m in 10 years.

According to Jamil Bidin, CEO of local firm Halal Industry Development Corporation (HDC), Malaysia has made itself into a leading destination for visitors from the Middle East by making its halal brand what he called, “a seal of guarantee for consumers”. “If you want to encourage Muslim tourists to come to your country, halal-certified products and services are required,” Bidin told reporters at a halal trade fair in Kuala Lumpur in early April.

The international halal tourism trade is estimated to be worth more than $125bn per year, some 12.3% of the global outbound tourism market. This figure is set to rise by an estimated 4.8% annually through to 2020 – well above the forecast 3.8% global average – as disposable incomes in many Asian and Middle Eastern countries increase. Malaysia has already positioned itself to take a significant slice of the existing and future trade, being ranked first for the past three years in an international survey for being halal tourism friendly.

The annual market assessment, based on a number of factors, including the availability of halal food, prayer facilities, and halal-friendly accommodation, was carried out by Singapore-based consultancy and research firm Crescentrating. According to Fazal Bahardeen, CEO of the firm, the survey was conducted from the point of view of the traveller, meaning that it measured the ease of access by Muslim tourists rather than locals to halal food and services, with Malaysia scoring well across the board.

Malaysia’s continued strong showing was largely due to the fact that authorities have been focusing on the market for a number of years, he said. “Malaysia remains the top destination for Muslim holidaymakers,” said Fazal. “It is still the best place to enjoy your holiday and at the same time be completely worry-free when it comes to finding halal food and prayer places almost everywhere.”

Malaysia also benefits from being within a single flight of much of the world’s 1.7bn Muslims, as it has direct links to the Middle East, the Indian subcontinent and Asia.

While Malaysia may head the Crescentrating rankings, it is likely to face increasing competition from regional rivals in the years to come. The survey found that Indonesia was lagging when it came to catering for halal tourism, though Jakarta has announced it will launch a multi-faceted programme in June that aims to better Indonesia’s tourism sector to perform in the sharia-compliant segment of the global market. Singapore and Thailand also have strong market potential and hope to begin competing with Malaysia.

Under the government’s Tourism Transformation Plan 2020, launched in 2010, Malaysia is aiming to attract 36m overseas visitors by the end of the decade, a target it seems to be well on track to achieving, having seen arrivals hit a record 25m in 2012, some 40% up on the 2005 total. Similar progress over the next seven years will put Kuala Lumpur’s goal well within reach and on the road to the 45m the WTTC has forecast for 2023.

The Ministry of Tourism estimates that almost one-quarter of inbound visitors come from Muslim countries, which makes the need to maintain the flow of new services and facilities for this market essential to further growth and development of the sector, as well as to ensure it stays ahead of regional and international rivals.

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Malaysia: The year of LTE telecoms

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Following the launch of Malaysia’s first long-term evolution (LTE) mobile telephone network in January, this year should see a rush to market as major operators look to expand their data earnings. The rollout of new technologies and products offered by telecoms firms in Malaysia is in line with growth in the region, which has ambitions to become a global leader in mobile broadband access.

Mobile data traffic in Malaysia should double this year, following the global trend, according to a recent report by telecoms equipment firm Ericsson. The company said it expected mobile data volumes to rise by a compound annual growth rate of around 50% between 2012 and 2018, with video a major contributor to the increase. Growing data volumes, which generate higher earnings than voice traffic, should help bolster operators’ earnings at a time when the voice market is not far from saturation.

Todd Ashton, Ericsson’s new president for Malaysia and Sri Lanka, said this implied twelve-fold growth in the 2012-18 period. Malaysians are increasingly using mobile data services as smartphones become more widespread. The roll-out of LTE networks, which is to an extent fourth-generation (4G) mobile technology, should provide greater capacity for the rapidly growing data volumes.

In January, Maxis, the mobile market leader by subscriptions, announced the launch of Malaysia’s first LTE network, focusing on parts of the Klang Valley, the region around Kuala Lumpur where more than one-fifth of Malaysia’s population lives. Maxis says that speeds average 10-30 megabits per second (Mbps) and reach up to 75 Mbps.

The company also offers LTE-compatible USB internet through dongles and is strongly targeting the handset market, offering subscribers LTE mobile telephones to encourage them to access high-speed services. “As more and more LTE devices come into the market, the coverage and expansion will have to be matched,” Sandip Das, CEO of Maxis, said at a press conference in late March.

Maxis is planning to expand its LTE coverage to several major metropolitan areas by the end of the second or third quarter of 2013. Das said that LTE rollout was currently limited due to the requirement that it use fibre-supported networks. The telecoms firm also expects revenue growth to rise this year, partly thanks to growing data business. In 2012 the company’s revenue grew 1.9% to RM8.97bn ($2.95bn) from RM8.8bn ($2.89bn) in 2011, in part due to higher revenue from its corporate business across the board.

Several other operators are set to swiftly follow Maxis’ adoption of LTE technology. In March Celcom Axiata, Malaysia’s second-largest mobile operator by subscriptions, announced that it would be allocating RM100m ($32.9m) in capital expenditure to roll out LTE, with commercial launch of the high-speed network due to be announced in the second quarter of this year.

Ole Martin Gunhildsbu, the chief technology officer at DiGi, Malaysia’s third-largest mobile operator by market capitalisation, said in March that the company would complete its network modernisation by the end of the year, allowing its customers to be able to enjoy “wireless fibre-like speeds” on LTE-compatible devices. DiGi started the upgrade in 2011, and dedicated a substantial part of its RM700m ($230.5m) capital expenditure in 2012 to the process. DiGi is deploying a single radio access network, which provides multi-spectrum data access on 2G, 3G and LTE. Local press reports suggest the introduction of this technology could lower costs per user.

The planned launches this year make Malaysia one of the leaders in the Asia-Pacific region in LTE rollout, along with Singapore and the Philippines. Ericsson’s Ashton said that he expected LTE coverage in the region to overtake the global average in 2017, reaching 60% against 50% internationally, and could account for around two-thirds of the world’s LTE population coverage.

He added that Malaysia’s high demand for broadband through other media – fibre-to-the-home has take-up of nearly 40% and household broadband penetration tops 65% – bodes well for the growth of the LTE market. “As broadband goes mobile, Malaysians will expect good coverage, with higher speeds and better quality of service, which is what our LTE technology will enable,” Ashton said.

The launch of LTE networks is the latest stage in the evolution of Malaysia’s telecoms market. While rollout will be incremental at first, it is likely to pick up as more competitors join the market and investments in capacity are completed. Indeed, as the country moves toward high-income status, the opportunities for capitalising on strong demand for broadband will continue to grow.

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Malaysia: CPO Power

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After a slow year in 2012, Malaysian officials expect exports of crude palm oil (CPO) to expand in 2013. Prices that have fallen due to oversupply and slower demand are now on the rise again, and though they may moderate in the second half of the year, an average steady climb over the next two years seems likely.

CPO is a major export earner for the country, which is the world’s second-largest producer of the product. In 2012 Malaysia exported RM71.5bn ($23.03bn) worth of palm oil, down from RM80.4bn ($25.9bn) in 2011 – an all-time high. The 11% drop was largely attributed to a fall in CPO prices caused by a number of factors, including the uncertain international economic environment, a production glut and controls on the CPO trade. The average CPO price fell 27% year-on-year (y-o-y) and 24% quarter-on-quarter in the last quarter of 2012.

Despite this, officials believe the long-term outlook for CPO exports looks sound. In February Hamzah Zainuddin, deputy minister of plantation industries and commodities, said he expected CPO exports to exceed the 2011 record within three to five years. Even given ongoing issues of inventory surplus, the ministry forecasts growth in 2013, partly thanks to an export tax cut.

From January, the government brought the levy down from 23% to a sliding scale between 4.5% and 8.5%; if the CPO price falls below RM2250 ($725), the tax will be cancelled. Meanwhile, Indonesia, the world’s largest CPO exporter, raised its export tax from 7.5% to 9% in January.

Mohammad Jaaffar Ahmad, CEO of the Palm Oil Refiners Association of Malaysia (PORAM), said his members were already “seeing better margins as they ramp up production”. Jaaffar said rising exports would help lower Malaysia’s inventory, which was in substantial surplus at 2.53m tonnes at the end of January 2013, to a “manageable level” of 2m tonnes.

In the first half of February, Malaysian palm oil shipments rose 18%, to 673,555 tonnes, following a 10% decline in output and 1.6% fall in exports in January, the former partly attributable to a run-down of existing stocks and seasonal factors. Rabobank, a Dutch agricultural bank, said it expected Malaysia’s palm oil production to fall 2% y-o-y in the first six months of 2013 as the inventory is fed into exports. However, Malaysia-based Kenanga Research said that it did not expect stocks to fall below 2m tonnes in the first quarter of 2013 due to lower export demand.

Jaafaar said he expected the price of CPO to rise as inventories ran down. In early February, it climbed to around the RM2250 ($725) tax threshold, and by the end of the month, it stood at RM2330 ($751). Meanwhile, futures for delivery in April topped RM2500 ($805) in mid-February. Officials take the view that prices have now bottomed out, as the surplus falls and a number of demand factors kick in, but also due to a seasonal drop in production.

Local press reported that analysts expect prices to rise to RM2600-2700 ($838-870) by the middle of 2013. Kuala Lumpur-based RHB Research Institute, part of bank RHB, has said it has a price assumption of RM2800 ($902) per tonne for 2013, rising to RM3000 ($966) in 2014. It expects prices to fall again in the second half of this year due to the seasonal rise in output.

Meanwhile, Kenanga expects an average price of RM2500-2700 ($805-870) this year and next, and takes a more bearish view on planters’ stocks than some of its counterparts. PublicInvest Research has a neutral recommendation, expecting an average price of RM2750 ($886) this year and RM2850 ($918) in 2013.

As ever, CPO prices will be strongly influenced by the global economic situation, particularly by major importers, such as China and India. India’s proposal to levy a tax on CPO imports concerns Malaysian planters, for whom the country is the second-largest market. With the worldwide economy expected to grow only moderately in 2013 and 2014, it is little surprise that CPO prices are unlikely to reach the peaks seen five years ago. However, as oversupply moderates, a steady rise should boost the sector.

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Malaysia: Banks shift lending patterns

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With an election looming and uncertainty over the state of the global economy, Malaysia’s banks may have to work hard to maintain earning levels amid predictions of lower rates of household borrowing growth.

Many analysts are tipping a slowing of loan growth in 2013. The results of a study by Alliance Research, a division of Alliance Investment Bank, points to loan growth of between 7% and 9% in 2013, down from the 11% for 2012 and 13.6% in 2011, respectively, in part due to net interest margin compression and higher provisions for non-performing loans.

The report, released at the beginning of January, also said even the lower levels of growth could be optimistic – at least in the first part of the year – if consumers became more cautious in their spending patterns ahead of the general election, scheduled for the end of April at the latest. Consumer activity, and subsequently bank lending, could also be negatively affected by the possible introduction of new taxes and higher utilities tariffs following the election, the report noted.

While individual lending could slow, this may not apply to the business sector, at least according to an investors’ note issued by HwangDBS Vickers Research, a division of a local investment bank by the same name, in early January. The report says there should be increased demand for finance from firms looking to benefit from the Economic Transformation Programme (ETP), a government initiative to develop the country into a high-income economy by the end of the decade.

With the ETP aiming to more than double per capita income by 2020 and create 3.3m new jobs, the government is encouraging private sector investment in key areas. The private sector in turn is looking to the banks to help finance the retooling, infrastructure and expansion needed to take part in the state-backed projects. These borrowing requirements could boost bank-lending activity during the year, HwangDBS said.

Wong Yin Ching, co-head of financial institution ratings at RAM Ratings, a domestic credit ratings agency, told local media in early January, “We anticipate stronger financing demand from corporations as well as small and medium-sized enterprises (SMEs), underscored by the rollout of projects under the ETP and the 10th Malaysia Plan”.

These views were backed by a report prepared by the research unit of MIDF Amanah Investment Bank in early January, which noted the ETP projects would drive demand for corporate loans debt-capital fundraising, again with strong calls for funding from SMEs.

While the elections and unsteady global markets could impact the Malaysian economy, an investor note issued at the end of December by RHB Research Institute said it was maintaining its overweight outlook for the banking sector, which it described as robust and “safe”.

“We think the sector’s ‘defensive’ qualities will help tide investors through the volatile first half on even keel,” RHB said. “As macro conditions improve after that, we see the banks as one of the major beneficiaries.”

While the reduced rate of growth for banks’ loan portfolios could see a lower level of earnings across the sector, there was potential for revenue-generating expansion elsewhere. According to Asian Development Bank economist Jayant Menon, the opening up of the Myanmar economy to outside investment, along with the development of the economies in Cambodia, Laos and Vietnam, held out the promise of growth for Malaysian banks.

“There is also a lot of potential for banks to increase their sales and revenues in these new frontier markets,” he said in an interview with state news agency Bernama in late December.

RHB Bank board member Tan Sri Azlan Zainol said recently RHB would explore opportunities in Myanmar. This, along with a move into the Indonesian market, was part of RHB’s strategy to expand its overseas earnings from 5% of revenue to 30% by 2020, he said in mid-January.

Though loan activity may slow this year, the economy is predicted to expand by around 4.8% in 2013. With a rebound in Asia in 2014 forecast, the country’s lenders should be well placed to boost revenue in the medium term.

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Malaysia: In search of broader tourist base

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A focus to attract more tourists from growing regional markets will spearhead Malaysia’s efforts to boost visitor numbers in 2013. However, efforts to increase arrivals from certain key segments may not be enough to drive visitor figures up across the board.

Despite ranking as one of the world’s top 10 tourist destinations, the market base remains narrow, with more than half the visitors coming from neighbouring Singapore. This year will see Malaysia focus on broadening its reach to tap into emerging markets that are demonstrating significant growth, such as India.

Final figures still to be published are expected to show that despite global economic uncertainty, visitor numbers to Malaysia from India rose 36% in 2012, according to international media in mid-January.

A total of 514,926 tourists entered Malaysia from India in the first three quarters of 2012, already up 2.6% on full-year visitor numbers for 2011, according to the Tourist Development Corporation of Malaysia (TDC). Zulkifly Md Said, the director of the international marketing division for South Asia, East Asia and Africa at the Malaysia Tourism Promotion Board (MTPB), told reporters he expected the country to have met or topped its target of welcoming around 700,000 arrivals from India in 2012. Malaysia aims to push the number up to 780,000 this year, Said added.

The rise in visitor numbers from India is thought to be due to a combination of improved connectivity between the two countries and an increase in the range of packages and products being offered to Indian tourists. Reports also suggest that India’s population, especially its affluent middle class, are increasingly looking at medium-haul destinations, such as Malaysia, which remain more affordable than Europe and North America, long popular with the Indian elite.

Zulkifly said Malaysia was benefitting from well-formulated packages aimed at targeted groups in the Indian market, including families and honeymooners. The country also offered quicker visa processing, a wide range of tourist attractions and affordable food and travel costs, he added. With the world economy still struggling, and many tourists from emerging-markets on tight budgets, officials have suggested that Malaysia’s relatively low costs are also giving the country an important competitive advantage.

Air connectivity has risen to meet growing demand, with Malaysia Airlines (MAS), the country’s flag carrier, increasing capacity between India and Malaysia by 25% in 2012. The airline expects to continue expanding its routes to India this year. Malaysia’s low-cost AirAsia, which has strengthened its regional presence in recent years, is also looking to increase the frequency of flights to the Indian cities it serves.

China is another growing market that offers potential for Malaysia’s tourism industry in both the leisure and business segments. The TDC set a target of attracting 1.5m visitors from China in 2012, up by 20% on 2011’s figures. As of end-September 2012, 1.18m Chinese tourists had visited Malaysia, up from 933,540 in the same nine months of 2011. The country hopes to break the 2m-barrier by 2014.

Boosting visitor numbers from emerging markets forms a key component of Malaysia’s bid to maintain its position as one of the world’s leading destinations. The country attracted 24.7m international visitors in 2011, placing ninth in the world, according to the UN World Tourism Organisation (UNWTO), just below Turkey, which received 29.3m visitors from abroad, and the UK, with 29.2m. France topped the list, registering 79m international arrivals.

However, the total number of international tourists in 2011 was only up 0.4% from 2010 figures, which reached 24.6m. This figure was a 4% rise on the number of visitor arrivals in 2009, when Malaysia received 23.6m international tourists. Over the same period, earnings from tourism also increased, rising from $15.8bn in 2009 to $18.2bn in 2010 and reaching $18.3bn in 2011.

But broadening its narrow market base remains a challenge for the country. Visitors from Singapore are expected to continue dominating numbers in 2013 and 2014, according to officials. In the first six months of 2012, the top 10 markets, including Singapore, China and India, accounted for 87.55% of the 11.6m arrivals.

Tourism industry leaders in the private sector are keen for the TDC to continue broadening its promotional activities, targeting both emerging markets, including Russia, the Middle East and Eastern European countries, alongside well-established outbound segments such as France and the US. Plans to boost arrivals from diverse sources should also stand the tourism industry in good stead, despite its remaining sensitive to fluctuations in the international economy.

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Oxford Business Group – Homesun Guest Post

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We recently shared a guest post with our friends at Homesun. It is titled “Oxford Business Group Reports Show Morocco Emerging as a Solar Energy Powerhouse.” and looks at the adoption of solar energy across north Africa.

Indeed, as economic and social conditions shift in the MENA region, investing in solar capacity has become a more attractive option. During the 20th century, it was the fastest-growing part of the world. This has left countries such as Egypt with some serious challenges, including overcrowding, a high rate youth unemployment and a lack of resources. At the same time, the oil riches that once supported a number of regional economies are beginning to run out. Read More

Malaysia: New year looks bright for construction industry

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While 2013 will produce a number of challenges for Malaysia’s construction sector, including a degree of uncertainty surrounding the approaching election and a shortage of workers, the industry is still expected to post a decent performance this year.

Malaysia goes to the polls in June at the latest, with most pundits predicting a win for Prime Minister Najib Razik’s ruling Barisan Nasional and his coalition allies, although there have been suggestions that the race could be close.

Analysts remain divided, however, about whether nerves among investors prompted by the forthcoming election will produce knock-on effects of any significance across the construction industry.

In an advisory note to investors issued in mid-December, market analyst Nomura International said it remained bullish on construction, energy and banking. The firm’s confidence was shared by Alliance Research, which on December 17 gave a buy recommendation to construction shares.

JP Morgan Securities, however, was more cautious, placing a neutral buy advisory on Malaysia, due to what the firm’s executive director of equity research, Mak Hoy Kit, called election overhang. “Investors will be worried if the opposition wins. When there is uncertainty, investors typically act negatively,” Mak said on December 12. An opposition victory could leave question marks hanging over the current government’s infrastructure programmes, he said, which would likely go ahead as planned if the Barisan Nasional is returned to power.

A similar muted warning was also sounded by the government, when, at the end of November, Deputy Finance Minister Datuk Donald Lim said that although the construction sector’s contribution to the economy would remain significant, the new year would bring a slight reduction in activity.

Construction’s contribution to GDP is expected to fall to 13.5% in 2013 from 15% in 2012, with tourism and the services industry earmarked for a bigger role. “In 2013, we believe domestic demand will still be there but we expect the construction sector to slow down a little. Other industries would contribute to our growth,” Lim said.

The minister said that the slight drop in construction activity could be attributed to the completion of key, large-scale projects, which the government drove through to help the economy recover from a flat patch caused by the global financial crisis.

The industry is set to receive a further boost from a wave of new developments earmarked for 2013, including rail projects worth an estimated $52bn that should be launched in the coming year, prompting some analysts to suggest that while growth in other sectors will largely drive Malaysia’s economy, the construction sector’s contribution to GDP could still remain stable. Malaysia’s GDP is forecast to grow by at least 4.5% this year.

However, while the construction sector is expected to have a solid 2013, it remains hampered by a shortage of skilled labourers, with rapid growth in recent years triggering a drain on its workforce. In late November, the Master Builders Association Malaysia (MBAM) called on the government to do more to facilitate the training of building workers or run the risk of supply-side bottlenecks delaying new projects.

MBAM’s president, Matthew Tee, said that with over a third of the industry’s existing workforce approaching the age of 50, measures needed to be taken to replenish the ranks of the sector. Suggestions include the association’s proposal that the government set up vocational schools that would train construction workers. However, a programme will take time to produce results, and cooperation with the private sector would also be essential for providing work experience and training to students.

In the short term, the government is acting on a proposal floated by MBAM and other industry groups to bring in foreign workers to bolster the ranks of Malaysia’s construction sector workforce. At the beginning of December, the government announced the signing a memorandum of understanding (MOU) with Dhaka that set out the terms for Bangladeshi workers to be employed in Malaysia. The first wave of foreign labourers is due to arrive in February.

If, as is widely expected, Malaysia’s current government wins the forthcoming election, the country’s construction firms should benefit from a wave of new, state-backed infrastructure projects which, combined with rising demand for residential properties, suggests that predictions of a bright 2013 for the sector appear to be well founded.

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Malaysia: Year in Review 2012

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It has been another year of good growth for Malaysia, even as the international economic climate has been uncertain. Strong domestic demand, government investment, greater diversification and regional resilience have all played their part.

GDP growth is expected to hit 5% this year or possibly exceed it, according to several analyses. The economy has been supported by higher incomes and accommodative monetary policy, as well as by government spending. Malaysia has been pushing ahead with its Economic Transformation Programme (ETP), which seeks to lift the country to its long-term target of achieving middle-income status by 2020.

To this end, the ETP entails large-scale investments in infrastructure, health and education, as well as interlinked efforts to push key sectors further up the value chain, in order to reduce Malaysia’s reliance on raw material exports and increase skill and income levels.

After talks between Malaysia and Singapore in January, the two countries agreed to strengthen transportation links to benefit bilateral trade and the construction sector. Progress has been made on a $9.7bn mass-transit railway system linking Malaysia’s southern Johor state and Singapore, which is part of a new line that will cut travel times from Kuala Lumpur to Singapore from six hours to 90 minutes.

In May, the international business press reported that AECOM Technology had been awarded the $42m contract for the design and engineering study for the Malaysia-Singapore Rapid Transit System (RTS) link by the relevant Singaporean and Malaysian authorities.

Infrastructure development also entails the expansion, upgrading and diversification of Malaysia’s power-generation capacity. In May, Peter Chin Fah Kui, the minister of energy, green technology and water, announced that Malaysia would increase the proportion of electricity it generated from coal to 44%, up from 30%, and lower the share derived from gas to 46% from 60%.

The government’s desire to lower dependency on gas supply was informed by rising gas prices, and a desire not to pass them on to customers, as well as by a connected gas supply shock in 2011. In May, the government confirmed plans to invest $3bn through state power firm Tenaga Nasional to construct two new hydropower plants and two new coal-fired stations, with a total of more than 2500 MW of installed capacity.

Meanwhile, further generation capacity is needed to support the demands of Malaysia’s manufacturing sector, which has performed well in 2012. Industrial production rose by 4.9% in the first nine months of 2012, according to official data. Manufacturing output rose by 5.2% year-on-year, while the other segments included in industrial production – mining and electricity – grew by 5.9%.

Growth came despite the uncertain global economic climate, which was affected by the eurozone crisis, the US’s debt problems and slowdowns in major emerging markets. However, strong domestic demand has helped manufacturers offset slower exports.

Together, manufacturing and mining contribute 35% of GDP, so the expansion of industry has been key to the economy’s good performance in 2012. Next year seems likely to see similarly healthy levels of GDP growth, as both upside and downside risks from 2012 are likely to continue into 2013. On one hand, the Malaysian economy should continue to benefit from its realignment towards domestic demand, supported by an expected maintenance of low-interest rate policy and the further roll-out of the ETP. The development of value-added industries, as well as service sectors such as tourism, should also help the economy.

On the other hand, Malaysia cannot be immune from international events. A significant worsening in the eurozone, the US, or a “hard landing” slowdown in China would undoubtedly have an impact. The Malaysian general election, due by June 2013, may also create an element of political uncertainty, though it is also spurring government spending. The economy, particularly government finances, remains sensitive to fluctuations in commodity prices, including that of oil.

Observers are split on whether there will be a slowdown, or if the economy can accelerate further. The UK’s Institute of Chartered Accountants in England and Wales sees a drop to 3.8%, and international investment bank Nomura expects a fall to 4.3% from 5.3% in 2012. Manokaran Mottain, the chief economist at Kuala Lumpur-based Alliance Investment Bank, forecasts a slight fall to 5% from the 5.2% he expects this year. The independent Malaysian Institute of Economic Research, however, forecasts a pick-up from 5.1% to 5.6%.

Policy-makers will be keeping a keen eye on the international environment, as Malaysia cannot go it alone. However, next year should see the developed and diversified future economy envisaged by the ETP move closer.

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Malaysia: Gas imports to strengthen growth

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Rising domestic demand for energy, fuelled by industrialisation and a growing population, has prompted Malaysia to take on a new role of major gas importer as it looks to augment its own extensive reserves.

The government’s decision to boost gas imports forms part of a shift in energy-related economic policy that will see Malaysia’s long-standing power subsidies phased out by 2016.

While the new pricing structure for energy has been in the pipeline for some time, it is almost sure to prove unpopular, as consumers may well bear the brunt of sharp increases passed on by producers.

Malaysia has long been finalising its plans to begin using imported gas as a driver of economic growth. In 2009, Petroliam Nasional, the state-owned oil and gas company more commonly known as Petronas, signed an agreement with Gladstone LNG of Australia to buy 2m metric tonnes of liquid natural gas (LNG) annually for a 20-year term, from 2014 onwards.

The agreement, which included an option to purchase an additional 1m tonnes, was part of Petronas’s plans to secure adequate supplies for the domestic market. Since then, Malaysia has struck similar deals with other producers, including Statoil of Norway, France’s GDF Suez and Qatargas.

Petronas is currently developing a receiving and regasification plant at the Sungai Udang Port, Melaka, which will process imported LNG. In a statement issued to Bursa Malaysia in late November, the company said that although the project is behind schedule, the facility was expected to be commissioned by the second quarter of 2013. Once fully operational, the plant will have the capacity to process 3.8m tonnes of gas annually.

On November 26, Malaysia LNG, a production subsidiary of Petronas, announced that the German engineering firm Linde Group had won a tender to design, build and deliver a new boil-off gas re-liquefaction facility that will be constructed at the Bintulu LNG complex in Sarawak, East Malaysia. The plant will have a daily capacity of processing 670,000 tonnes of gas annually and should be up and running by the end of 2014.

The shift to imported gas will signal the end of an era for Malaysian consumers who have long benefitted from the subsidies policy, which the government was able to maintain thanks to ample quantities of cheap, locally-produced stock.

The government is believed to have subsidised gas prices by approximately $6.6bn in 2011, half of which was channelled into the electricity segment. The subsidies, which formed part of a government drive to keep down electricity costs and promote industrial growth, are expected to be phased out by 2016, when gas prices should be fully deregulated.

While Malaysia is laying the foundations for gas imports, it continues to work on maximising output from its existing fields, exploring how it can use extraction enhancement technology to extend production life.

Malaysia’s gas reserves remain extensive, with its proven deposits of around 2.4tr cubic metres earning it a 13th -place global ranking for untapped holdings. Existing reserves should allow Malaysia to maintain production at its present rate of around 63bn cubic metres for years to come, although projected increases in domestic usage are likely to speed up a reduction in the life expectancy of its fields. Much of the increased demand will come from industries dependent on gas for feedstock, such as manufacturers of plastics, chemical fertilisers and other petrochemical products.

Efforts are also being channelled into identifying and developing new reserves. In November, Petronas and its partners announced a number of new finds in offshore fields, although the full extent of reserves and their quality have yet to be determined.

While new fields will help prolong the lifespan of gas production, Malaysia’s rising demand for gas is set to grow at a rate easily outstripping domestic output. Despite concerns that higher energy bills will irk consumers and could push up inflation, foreign gas looks set to play a growing role in powering Malaysia’s economy.

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Malaysia: Gas imports to strengthen growth

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Malaysia: Industrial production up

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Growth in Malaysia’s industrial production has so far been above expectations, suggesting that the manufacturing sector is supported by domestic expansion and reorientation toward the region even though demand in traditional export markets in the US and Europe look uncertain.

Industrial production grew by 4.9% in the first nine months of 2012, according to official data. Manufacturing output rose by 5.2% year-on-year (y-o-y), while the other indices included in industrial production – mining and electricity – rose by 5.9%.

Within the manufacturing sector, production of non-metallic minerals, as well as basic and fabricated metal products, grew by 17.7% over the first three quarters of the year; petroleum, chemical, rubber and plastics increased by 1.9%; and electrical and electronic (E&E) products by 4.4%.

Manufacturing is a vital economic driver for Malaysia, accounting for 35% of GDP when combined with the mining sector. The sector currently employs around 1.02m people, according to the Department of Statistics. The better than expected figures suggest that the regional economic slowdown is easing, supported by government spending, higher domestic consumption and a favourable interest environment. The manufacturing sector’s performance is particularly impressive, given the impact of the eurozone crisis and the slow recovery in the US, both of which have affected global growth this year. Indeed, Malaysia’s nominal exports fell 2% in the third quarter of 2012, bringing y-o-y GDP growth down to 4.9% from 5.4% in the second quarter.

However, the industrial sector may have received a boost from domestic and regional sales, offsetting broader international effects. The government’s investments in infrastructure, higher transfers to public employees, and inflows of foreign capital from investors seeking a haven from turbulent or slow-growing developed markets, have all played a role in keeping the Malaysian economy moving at an impressive pace.

In November, during a visit to Kuala Lumpur, Christine Lagarde, the managing director of the IMF, said she expected the Malaysian economy to grow by 4-5% this year, in line with the government’s target. Low and steady interest rates have helped in this regard. On November 8, Bank Negara Malaysia (BNM), the central bank, opted to keep its key overnight policy rate at 3%, where it has stood since July 2011, to support expansion. Interest rates are particularly important for the capital-intensive manufacturing sector, making it cheaper for industrial firms to borrow to invest, and easier for them to service existing debt.

However, Lee Heng Guie, the head of economic research at CIMB Investment Bank, sounded a note of caution over a possible slowdown in the fourth quarter, with a slowdown in China adding to the effect on Malaysia’s manufacturers.

Lee said that regional purchasing manager indices (PMI) were still in negative territory, and that Malaysia’s export-oriented electrical and electronics (E&E) segment could be affected by external factors. He added that industrial performance would continue to be linked to the strength of domestic consumption and investment.

Anthony Dass, the chief economist at MIDF Amanah Investment Bank, an Islamic investment and advisory services firm, said he expects the picture to be mixed, with some industrial segments performing better than others. He did suggest, however, that exports of primary industrial products, including chemicals, timber and timber goods, should hold up. Dass added that the construction materials industry would continue to benefit from the government’s investments through its long-term Economic Transformation Programme (ETP).

The ETP is a wide-ranging programme of investment and reform that aims to shift Malaysia’s economy up a gear to achieve the long-anticipated goal of “developed nation status” by 2020. Its impact on the manufacturing sector is significant, as the programme seeks to increase value-added across the economy. In the industrial sector, this entails leveraging Malaysia’s competitive advantages, including its ample natural resources, geographical position and existing strengths in certain segments.

Malaysia is also hoping to develop higher-value, higher-margin business, such as increasing its export of petrochemicals to taper down reliance on crude oil; expanding sectors such as biotechnology and medical equipment; and nurturing high-tech, knowledge-intensive businesses.

“Under the New Economic Model, growth areas that are being targeted in the manufacturing sector include biotechnology, advanced electronics, optics and photonics, renewable energy, aviation, pharmaceuticals and medical devices,” Mustapa Mohamed, the minister of international trade and industry, told OBG.

This cannot be done without capital and expertise, and, as a result, Malaysia is trying to bring in greater foreign investment through agencies such as the Malaysian Investment Development Authority (MIDA). In 2011, 61% of the $18.1bn worth of approved manufacturing projects were foreign, according to the MIDA. The development of value-added industry also goes hand-in-hand with Malaysia’s strong emphasis on improving and expanding its education system.

Malaysian manufacturers have benefitted from the relatively benign domestic climate this year, good news for a country that is rebalancing towards local consumption. The ETP is already having an effect on demand; in the coming years the challenge will be securing the investment that can drive industry up the value chain.

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Malaysia: Industrial production up

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