Malaysia: Industrial production up

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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Malaysia: A farmer’s market

Recent efforts to upgrade Malaysia’s agricultural sector that include increased incentives for farmers to learn new techniques and adopt advanced technology are expected to lead to greater harvest yields and help meet rising domestic demand for food products.

While the sector contributes around 12% of GDP and provides employment to some 16% of the national workforce, most of this is concentrated in two key segments, palm oil and rubber production. The contribution of the rest of the agricultural sector is estimated at 4%, though its share of employment is higher, as much of Malaysia’s farming is still labour-intensive. At present, the input of the non-oil and rubber farming sectors is approximately $6.5bn a year, but the government wants to see this more than double by 2020 to $16bn.

To achieve this, Malaysia is trying to adopt smarter farming techniques. Agriculture was one of 12 separate National Key Economic Areas (NKEAs) identified under the Economic Transformation Programme (ETP), launched in late 2010 as part of the government’s efforts to increase national income to more than $500bn by 2020 and achieve developed nation status. The ETP made a clear distinction between agriculture and the palm oil and rubber industries, which fall under a separate NKEA.

The ETP set out a number of initiatives to boost the sector, including a growing focus on export cash crops (tropical fruits), tapping into the global herbal products market and increasing the usage of advanced technology to improve yields.

Though the government’s master plan for agriculture foresees a doubling of revenue, it only projects a modest increase in employment, with technology replacing labour-intensive practices and a shift in rural employment structures. While it is unlikely that agriculture employment levels will lift substantially over the coming decade, the growing pool of rural labour is expected to be taken up by a rise in food-processing operations, with the value-added component of agriculture seen as one of the segments to record the highest level of expansion.

On April 5, Muhyiddin Yassin, the deputy Prime Minister, said it was important for farmers to explore value-added agriculture activities, rather than just limiting themselves to cash-crop production. Farmers should look at venturing into food processing or producing material from by-products to earn extra money, he said during the opening of a fertiliser plant.

“To move forward, farmers must find new opportunities to enable them to earn long-term income,” Muhyiddin said.

In early April, Noh Omar, the minister of agriculture and agro-based industry, stated that the government was trying to create an environment in which farmers become businessmen and view agriculture as an industry, rather than merely growing produce.

“Our role is to facilitate the process and invest in capacity building in order to grow the agri-industry to become a key contributor to the nation’s economic wealth,” he said when speaking with the New Straits Times. “This has created opportunities for farmers to practice high-value agriculture and reach markets at all levels.”

Another opportunity recently unveiled by the government aims to protect local fruit and vegetable growers. In late March, the state announced that as of 2015, farmers’ markets and National Agribusiness Terminal (Teman) outlets will no longer be allowed to sell imported fresh produce.

According to data issued in late March by the Ministry of Agriculture and Agro-based Industry, some 40% of vegetables sold at the Teman outlets – centres set up by the state to market agricultural products – are imported from neighbouring countries.

As most of these vegetables are grown in Malaysia, the move by the government may not encourage the development of new product ranges, but it should help growers by reducing competition and giving them a stable market. A possible downside of the new policy, however, especially if it was extended to restrict fresh food imports beyond the limited scope of the farmers markets and Teman outlets, is that retail prices could be pushed up, as some of Malaysia’s neighbours have lower production and labour costs.

This could be offset to a large degree by improvements in economies of scale and efficiency, with higher production and turnover, as well as technological advances, helping to push down costs. These savings could then be passed on to the consumer.

Over the past 50 years, the Malaysian economy has become far more diverse, moving away from a time when agriculture accounted for 30% of GDP and provided employment for half the workforce.

While the government wants to see agricultural output increase, it is likely that other sectors of the economy will continue to outstrip rural production. By promoting smarter farming, and seeking to supply niche markets, Malaysia will come closer to achieving food security and increasing earnings.

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Malaysia: A farmer’s market

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