ICT tops priorities in Malaysia’s new budget

The latest national budget signals an acceleration of Malaysia’s digital drive, with both ICT research and development (R&D) and broadband provision awarded significant funding increases.

While higher investment in the digital economy spells good news for the sector, and small and medium-sized enterprises (SMEs) in particular, some stakeholders would like to see more done to boost industry sales.

Bigger, better broadband

Presented to Parliament on October 23, the 2016 budget sets out a series of spending programmes aimed at supporting ICT services and bolstering R&D.

The budget – which marks the first year of the government’s 11th five-year plan (11MP) – earmarks RM35m ($8.2m) worth of funding for the Malaysian Global Innovation and Creativity Centre, meant to reinforce its role as a regional business hub, while the Malaysian Innovation Agency is set to receive a RM100m ($23.6m) injection to help support R&D projects.

A total of RM1.2bn ($282.6m) will be channelled into developing broadband services in rural areas, seen as a pivotal part of Malaysia’s drive to boost economic opportunities and equality of services across the country. The funds, which are controlled by the Malaysian Communications and Multimedia Commission, will be spent on upgrading the national fibre-optic backbone as well as the undersea cable system.

Greater investment in broadband infrastructure should also strengthen Malaysia’s efforts to improve its international standing for average broadband speed, which the government plans to quadruple to 20 Mbps.

A recent study by Akamai Technologies, a US-based cloud services provider, found that Malaysia had slipped to 70th on a global list comparing broadband speeds, trailing many regional peers, including Singapore, Vietnam and Thailand. This came despite a 17% year-on-year increase in average internet speed in the second quarter of 2015, according to local media reports.

With the country also lagging behind in terms of affordability, the government has targeted cost reduction as part of its 11MP, with the goal of extending broadband infrastructure to 95% of populated areas by 2020.

Hoseok Kim, CEO of 11street, one of the largest e-commerce sites in Malaysia, said the decision to extend the reach of broadband in rural areas would increase ICT utilisation and raise the profile of online commerce.

“These allocations are certainly a step in the right direction to positively enhance, support and grow the Malaysian e-commerce market,” he told local media in late October.

Support for SMEs

SMEs could be among the biggest beneficiaries of the 2016 budget’s digital focus. SMEs are a key part of Malaysia’s economy, accounting for more than half of employment, nearly 20% of exports and roughly one-third of GDP, according to a recent study.

A new RM200m ($47.1m) fund will offer soft loans at 4% interest rates to firms looking to invest in ICT services or make related upgrades. The fund will be managed by SME Bank, established as a development financial institution for small businesses in 2005.

This comes alongside other tech-related incentives for Malaysian SMEs, including a double tax deduction for R&D project expenditures of up to RM50,000 ($11,800) per year from 2016-18.

Cheah Kok Hoong, chairman of the National ICT Association of Malaysia (PIKOM), believes the budget measures will allow SMEs to make the most of technological advancements.

“The SME Transformation Technology Fund will encourage SMEs to embrace ICT and move up the technological chain,” he told media in late October.

GST a sticking point

Despite the ICT focus of the new budget, the Goods and Services Tax (GST) remains a contentious issue for many tech companies – some of which pushed, without success, for the levy on ICT products and services to be reduced or waived under the new budget.

The broad-based 6% GST, which came into force in April, is expected to generate some RM39bn ($9.2bn) in government revenue next year, according to budget projections.

While the government views the tax as a key replacement for weaker energy and commodity revenues, many in the sector argue that it is driving down demand for ICT products.

According to PIKOM, demand for computers and related goods has fallen by 30% since the new levy came into effect, compounded by the nearly 30% year-to-date depreciation of the ringgit against the US dollar.

PIKOM had lobbied for a series of measures to boost the commercial side of ICT, including the removal of the GST from all related products and services. Only products classed as teaching tools for skills and vocational training are currently exempt from the tax.

To spur ICT uptake and bolster industry sales figures, PIKOM has also called for a higher income tax deduction for the purchase of desktops and laptops for personal use, which it believes should be increased from RM3000 ($700) to RM4000 ($950).

Malaysia to reduce palm oil stocks

According to Oxford Business Group, a national drive to reduce the oversupply of palm oil in Malaysia, the world’s second-largest producer, is expected to bring greater market stability, supported by government incentives and trade controls.

Climbing stockpile

According to data from the Malaysian Palm Oil Board (MPOB), palm oil stocks rose by 2.63m tonnes in September, up 5.46% over the previous month, a thee-year high. Crude palm oil holdings increased by 6.68% month-on-month to 1.56m tonnes, with processed oil stocks up by a more modest 3.74% to just over 1m tonnes, the board said in a statement in mid-October.

Stockpiles rose despite export growth in September, with overseas shipments reaching 1.68m tonnes, up from 1.61m in August, and biodiesel exports nearly doubling to 31,400 tonnes.

Officials have warned that further increases in stock would likely depress prices, with many market analysts monitoring Malaysian palm oil reserves as an indicator of future prices.

“If we don’t do anything now, it is expected that palm oil inventory would exceed 3m tonnes by November,” Amar Douglas Uggah Embas, minister of plantation industries and commodities, told local media in early October. “If it reaches that level, prices will likely come down,” he added.

This could have a significant impact on the country’s economy. Crude and processed palm oil accounted for 6.1% of total exports last year, according to figures from the Malaysian External Trade Development Corporation, generating RM47bn ($11.3bn) worth of revenue.

Incentives & trade controls

In a bid to shore up prices, the Malaysian authorities have pledged to halt the rise in stockpiles and curb the surplus to a more manageable 2m tonnes through a series of incentives and trade controls.

One such programme is a RM100m ($24m) scheme by the MPOB to encourages growers to replace old, low-yielding oil palms with new saplings on some 83,000 ha of plantations.

The initiative, which went into effect on October 1, will provide financial assistance for growers though the end of the year, with incentives of RM1000-1500 ($240-260) per ha, according to the Ministry of Plantation Industries and Commodities. The programme is expected to curb production by around 250,000 tonnes in the short term.

A second measure, also announced in early October, involves fast-tracking the launch of B10 biodiesel production. While an emphasis on the production of B10 – which is 10% palm oil and 90% diesel – could help boost demand for domestic palm oil, broader uptake could be limited by lower fossil fuel prices.

Meanwhile, on the trade side, the Malaysian government has pledged to control the flow of imported palm oil to help encourage greater use of domestic output. Malaysia imported around 66,000 tonnes of crude palm oil in August alone – equivalent to roughly 3% of its monthly domestic production – most of which came from Indonesia.

Additionally, Malaysia announced in October that it will maintain an export tax of 0% on crude palm oil – given that the price remains above RM2175 ($521) per tonne – for the seventh straight month in a bid to make Malaysian palm oil more competitive.

Demand upside

The replanting initiative in particular is seen as a fairly sustainable approach, as it will reduce production in the short term while still creating higher-yielding crops as the new oil palms mature, allowing growers to take advantage of expected increases in global demand further down the line.

In June the US Food and Drug Administration announced that food manufacturers had three years to remove harmful trans fats from their products. The move is expected to generate greater demand for replacement oils such as palm in the coming years, buoyed by the prospect of greater market access thanks to the recently agreed Trans-Pacific Partnership trade deal.

Changjian Ji, tropical oils merchant at US-based palm oil supplier Cargill, told industry press in September that palm oil is seen the number-one replacement for partially hydrogenated oils.

Regional cooperation

Given the ongoing volatility in palm oil prices, Indonesia and Malaysia – which together account for 85% of global palm oil supply, according to the Malaysia Palm Oil Council – could be looking to work together to promote greater market stability.

According to local press reports, in early October Indonesian President Joko Widodo and Malaysian Prime Minister Najib Razak agreed to spearhead the creation of an intergovernmental Council of Palm Oil Producing Countries (CPOPC), which could help regulate the oil’s production, stocks and prices.

The price of Malaysian palm oil has experienced a high degree of volatility of late, up 20% month-on-month in September after hitting a six-and-a-half-year low of RM1863 ($446) per tonne in August. The price swing has been exacerbated by the weaker ringgit, which was trading its the lowest value against the US dollar since 1998 in late September.

The CPOPC is expected to benefit the wider palm oil industry, the Malaysian Institute of Economic Research noted, helping to standardise efforts to promote environmental sustainability and reduce industry uncertainty.

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Upgrading Malaysia’s Construction Sector

Short to medium-term prospects for Malaysia’s construction sector remain promising, with state and private sector spending on the rise as the government launches initiatives to spur industry growth.

In mid-September the government issued a five-year blueprint to overhaul the nation’s construction sector. The scheme, known as the Construction Industry Transformation Programme (CITP), outlines measures to professionalise the industry, improve environmental sustainability at the design and construction stages, and increase overall productivity and competitiveness.

Stricter standards

According to Malaysia’s prime minister, Najib Razak, these goals are to be achieved through more stringent industrial standards, formalising professional training and promoting greater use of advanced technology.

Among the standards to be implemented is the Quality Assessment System in Construction, also known as QLASSIC, which will create a unified system for measuring the quality of construction workmanship.

“The CITP targets to make QLASSIC a mandatory element in all government projects by 2018,” Najib said.

During the launch, the prime minister emphasised the need for Malaysia to boost productivity in the sector and reduce the country’s dependence on low-skilled foreign labour. To achieve this, the plan’s 18 initiatives will focus on key productivity drivers, such as the workforce, technology and processes, with a specialist apprenticeship programme on the horizon to bolster local talent.

The new blueprint will also focus on effect multipliers such as building information modelling and industrialised building systems, which the country’s Construction Industry Development Board (CIDB) expects will keep sector growth in the double digits for a third consecutive year.

The construction industry is forecast to expand by 10.3% this year, according to the CIDB, after posting average annual growth of 13.5% over the last three years.

Infrastructure support

Medium-term prospects for the sector have been buoyed by a series of large-scale transport infrastructure projects rolled out by the government as part of the latest five-year development plan, the 11th Malaysia Plan (11MP). These include road, rail and port developments, as well as new affordable housing schemes, which could further accelerate the industry’s growth rate over the coming years.

According to Hong Leong Investment Bank (HLIB), “The current construction sector’s data on contract awards [shows] that the momentum of job wins remains strong for contractors. 11MP has witnessed a 13% allocation increase to RM260bn ($59bn).”

The industry’s strong project pipeline and state commitments to boost funding for infrastructure development prompted the research division of HLIB to issue an “overweight” outlook for Malaysia’s construction sector, noting that higher levels of spending under the latest five-year plan will result in a constant flow of new contracts for the industry.

As large construction firms reach capacity, smaller contractors are likely to benefit in the years ahead. “Given the fairly limited supply of capacity from some of the bigger players, we think that the smaller contractors should enjoy a much bigger spill-over effect compared to the last two to three years,” research firm CIMB Research predicted earlier this year. With the opportunity to broaden their bases, smaller firms could potentially gain capacity to bid on larger projects in the future.

Higher demand may also lead to a rise in technology and equipment purchases in the coming years, though, at least in the shorter term, any investment in imported equipment will be more costly due to the weaker ringgit.

Competition & costs

The industry as a whole is facing higher input costs, which could impact margins going forward. Like many of Malaysia’s import-dependant industries, the building sector has been affected by the declining ringgit, which slipped to a 17-year low against the US dollar in mid-August. This depreciation has eroded much of the positive impact of declining prices for steel and other dollar-denominated inputs.

According to the CIDB, another key area of concern is foreign competition, with the potential for global players to eat into the market share of local firms.

With the ASEAN Economic Community scheduled to launch in December, lower trade barriers across the 10-nation bloc could see an increase in competition as regional contractors enter the market, making government efforts to improve the local construction industry’s competitiveness all the more important.

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Malaysia’s innovative ties that bind

A commitment to closer bilateral cooperation in the fields of innovation and education was among the leading outcomes of a visit to Kuala Lumpur from a delegation led by UK Prime Minister David Cameron in late July.

International cooperation is a cornerstone of Malaysia’s strategy of becoming a developed economy by 2020, Mah Siew Keong, minister in the prime minister’s department, said during a ministerial roundtable discussion at the summit, with research and development seen as key growth drivers.

“International cooperation with other developed countries is crucial, and our strong partnership with the UK has helped us a lot, not only from an economic viewpoint, but also in terms of active collaboration on science, technology and innovation,” he said.

Strategic partnerships

Cameron, on a tour of South-east Asia, was accompanied by Sajid Javid, the UK’s secretary of state for business, innovation and skills, as well as representatives from “Northern Powerhouse” businesses – companies from the north of the UK seeking to strengthen trade ties with Malaysia and other countries in the region.

Speaking at the roundtable, Javid underscored the importance of advancing the UK’s relationship with Malaysia through joint efforts in science and innovation, in line with Malaysia’s goal of becoming a regional technology powerhouse.

To that end, a five-year intergovernmental programme, known as the Newton-Ungku Omar Fund, was launched last year to promote science, technology and innovation collaboration between two countries, backed by joint funding of RM239m ($58.1m). The fund will see closer cooperation between UK-based research councils and the Malaysia Industry-Government Group for High Technology (MIGHT), with a particular focus on sustainable urbanisation, Javid said.

“There has been a long history of trade links between our two countries, and now we’re going to build on that even further in the fields of science and innovation,” he said.

According to Javid, the programme will usher in a series of advanced fellowships and training, researcher mobility and institutional linkages amongst the UK’s Royal Society and Royal Academy for Engineering, the British Academy in Malaysia’s Ministry of Education, the Academy of Sciences in Malaysia and the British Council.

Reverse flow of technology

The UK also stands to benefit from the arrangement. Malaysia’s Petra Group announced plans in late July to invest RM72m ($17.4ms) in a plant to recycle used tyres, with the facility to be built in the north-east of the UK, creating up to 90 local jobs.

The plant will specialise in devulcanising waste rubber, with over 200m tyres targeted for recycling per year.

According to Petra, the recycled material has diverse industrial applications, including footwear, car mats, marine fenders, weather stripping, protective cushions and bicycle tyres, as well as retreaded tyres and sporting goods, offering investment potential in the region alongside direct employment.

Learning curve

Education was another area of focus at the summit. According to data issued by Malaysia’s Ministry of Foreign Affairs, there are some 17,000 Malaysian students enrolled in educational facilities in the UK, and five UK universities have already established campuses in Malaysia, representing one of the strongest national contingents in the country’s growing international educational market.

Christine Ennew, provost and CEO of the University of Nottingham Malaysia Campus, underscored the importance of the cultural blend fostered by the educational partnerships, particularly in terms of advancing scientific research and working with multinational firms.

“We’ve been able to work with the Aerospace Malaysia Innovation Centre, Rolls-Royce and Airbus, which is linked to the research being carried out by MIGHT, bringing expertise from the UK, from partners and from Malaysian industry,” Ennew said at the summit. “UK universities in Malaysia have a unique role to play in terms of bridging the two countries – we’re not British, we’re not Malaysian, we’re both.”

Build out

The international education market in Malaysia is set to see further expansion, with the British Council announcing plans in late July to open an international school in Kuala Lumpur’s Sentul West district, modelled after a similar project in Madrid.

The council has already signed a memorandum of understanding with Malaysian property development company YTL Land and Development to design plans for the campus, which will provide education aimed at Malaysian nationals with an emphasis on multilingual and multicultural learning.

According to Gavin Anderson, the British Council’s director in Malaysia, the school represents a significant step towards greater bilateral cooperation in the field of education. “Our school will take that work onto a new level, while helping to develop the next generation of Malaysian global citizens and leaders,” he told local media.

The plans for the school are part of a broader “year of education” between Malaysia and the UK in 2016, which aims to strengthen educational links between the two countries.

Malaysia’s tourism industry taxis towards recovery

Higher tourist spending and longer holiday stays are supporting Malaysia’s efforts to reignite its tourism industry, bolstered by a more favourable exchange rate.

Despite weaker arrival figures in the first quarter of the year, high-profile developments, including Malaysia’s role as chair of ASEAN this year and planned changes to visa requirements for Chinese tourists, could help put the country back on the map after a challenging 2014.

Tough times

Tourist arrivals were down 8.6% year-on-year (y-o-y) in the first three months of 2015, at 6.5m, due in large part by a drop in visitors from China, Australia, Singapore and Japan, according to figures from the Immigration Department of Malaysia, continuing a trend from the second half of last year.

“Over the first quarter of 2015, there has been a significant slowdown in tourist arrivals due to converging factors, which include the unfavourable media coverage of last year’s aviation tragedies and security issues in Sabah. Chinese arrivals in particular have dropped, and we have yet to see a reversal of that trend,” Mirza Mohammad Taiyab, director-general of the state agency for tourism promotion, Tourism Malaysia, told OBG.

Taking the positives

However, the number of visitors from some other Asian markets has been on the rise. Tourists from Nepal numbered 47,235 in the first three months of the year, up 14.6% y-o-y, while South Korean arrivals increased 11.2% to 121,178.

Tourist spending in local shops was also up, posting 10.8% y-o-y growth in the first quarter, according to Tourism Malaysia. With shopping representing 28.1% of total tourist outlays, followed by accommodation, at 26.3%, the solid increase in retail earnings could help offset the drop in arrivals.

Data from Tourism Malaysia, which showed an increase in the average length of stay, spelled further good news for the industry, with the average trip lasting 6.7 nights, compared to just five in 2015.

Spending levels are being driven in part by the weaker ringgit, which has lost almost 8% of its value against the US dollar so far this year, according to Bloomberg. While not good news for importers, the fall in the currency has made Malaysia more attractive as a holiday destination, Mirza explained, with visitors’ money going further and early bookings on the rise.

“The weaker ringgit has encouraged a lot of foreign operators to book rooms in advance, which will significantly reduce their selling prices,” he told OBG. While Malaysia has yet to see a reversal in the fall off in tourism arrivals, in particular from China, Mirza said a stepping up of promotional activities, Malaysia’s chairing of ASEAN and a renewal of confidence in the country as a destination would see the sector rebound in the latter half of the year and into 2016.

Reengaging China

In late June, the government announced plans to relax visa requirements for Chinese tourists travelling in groups in a bid to reach a target of 2m visitors from China this year. Arrivals fell 9.9% last year to 1.6m and remained down 27% y-o-y in the first quarter of 2015, according to Immigration Department figures.

Chong Yoke Har, deputy director-general for planning at Tourism Malaysia, told local media the regulations were being changed on a six-month trial basis as part of the country’s tourism promotion strategy, which is proving essential in a climate where regional rivalry for mainland visitors is on the rise. “We found out that the competition is getting very strong now, every market is paying special attention to China’s market,” Yoke Har said in June.

However, some local industry players are concerned with the lack of concrete information following the scheme’s announcement. “If we had waived the visa procedure sooner, we probably could have seen an influx of tourists from China in the country by now,” the president of the Malaysian Association of Tour and Travel Agents, Hamzah Rahmat, told local press in July.

Now boarding

The visa-free scheme is seen as one in a series of steps on the road to recovery for Malaysia’s tourism industry. Other measures, which include the restructuring of Malaysia Airlines and the launch of a new state-owned regional airline, bode well for a turnaround in 2016.

The rebooted Malaysia Airlines, expected to begin operating under a new brand name in September, will focus more on regional traffic, while flymojo, the government-owned and privately operated carrier launched in March, is expected to start covering regional routes in the first quarter of next year, flymojo’s managing director, Janardhanan Gopala Krishan, announced at the annual Langkawi International Maritime and Aerospace exhibition – better known as LIMA – in March.

Upgrading skills at the heart of Malaysia’s new development plan

The latest development plan in Malaysia has placed human capital at its core, setting ambitious objectives to improve professional training and education as the country works towards a broader vision to join the ranks of developed economies by 2020.

Under the 11th Malaysian Plan (11MP), unveiled on May 21st by Prime Minister Najib Razak, a series of policy initiatives have been launched with the aim of enhancing inclusiveness towards an equitable society, improving wellbeing and accelerating human capital development.

The success of the five-year plan, which covers the period between 2016 and 2020, will also be judged within the context of the government’s Vision 2020 programme, which was first set out in 1991 by then Prime Minister Mahathir Mohamad with a view to the country becoming a fully developed nation with 30 years.

Training, education opportunities

Among its objectives, the new development plan foresees annual growth averaging 5.6% in the next five years, higher than the 5.3% growth estimated at the end of 2013 for the same period. At this rate, average monthly household income would rise to RM10,540 ($2800) by 2020, up from last year’s RM6141 ($1630), while per capita GNI would reach RM54,100 ($15,690), raising Malaysia well above the developed economy level set by the World Bank of $12,745.

To achieve this, the 11MP has identified the need to reshape the national workforce, expand the skills pool and redirect the economy towards a higher-rate of production.

As part of the plan, the government is aiming to increase labour productivity from RM77,100 ($20,487) to RM92,000 ($24,446) per worker by the end of the five year period. To meet this target, a higher proportion of the labour force would need to be skilled – 35% by 2020 and rising to 40% by 2030, a level the government says will be achieved through increased spending on education and vocational training. According to the plan, up to 1.5m new jobs will be created between 2016 and 2020, with 60% of these requiring vocational education and training (TVET) skills.

According to a government study, it is estimated that skilled workers make up only a quarter of the labour pool at present, less than half the level of neighbouring Singapore. To address this issue, the 11MP envisions stronger cooperation between the public and private sectors, both through the provision of increased educational and training programmes as well as more opportunities for internships.

“The government will intensify collaboration with industry to increase intake in TVET, improve the quality of programmes and institutions, and improve the sector’s overall branding and profile,” according to the plan.

Bigger role for private sector

The sharpened focus on TVET could provide opportunities for private educational services, while supporting companies through additional funding for vocational training. However, industry participants are calling for greater dialogue between the private and public sectors to help implement changes.

“The government is investing extensively in upskilling Malaysia’s workers, but to achieve this aim there needs to be effective communication between public and private stakeholders,” C M Vignaesvaran, CEO of the Human Resources Development Fund told OBG. The agency, which operates under the Ministry of Human Resources, is charged with spearheading the development of Malaysia’s human capital.

Employers will continue to benefit from soft loans through the Skills Development Fund (SDF), which was first introduced under the previous 10-year plan. The upgraded programme will enable employers to play a larger role in the design of curricula, ensuring that training programmes are user-led, rather than driven by the state. The SDF provision was also doubled in the latest plan to RM1bn ($265m).

To meet the demand for skilled workers, the plan also envisages increasing the annual TVET intake to 225,000 students by 2020, up from 164,000 in 2013.

New vocational programmes will also be directed towards the acquisition of skill sets that match the requirements of a developed economy. Currently, at least 160,000 graduates between the ages of 20 and 24 are unemployed − 40% of the total jobless pool, according to official data issued in mid-May. The challenge for the government and the private sector will be to ensure that young Malaysians who undertake vocational training have a profession to pursue when they graduate.