Digital economy in the spotlight as Malaysia commits to tech expansion and education

Malaysia has taken another step towards expanding its digital economy, with the newly tabled 2018 budget containing a series of initiatives designed to promote growth in tech companies and ICT skills development.

Included in the budget, submitted to Parliament on October 27, was a RM250m ($59.1m) pledge to improve the digital education of Malaysian school students. The funding forms part of the long-term National Transformation 2050 plan, and is targeted at boosting embedded programming and creative technology.

Public spending targets digital opportunities

Efforts to improve the digital skills of future generations have been complemented by the allocation of an additional RM100m ($23.6m) to the government’s eRezeki and eUsahawan programmes.

The initiatives, overseen by the Malaysia Digital Economy Corporation (MDEC) and launched in 2015, connect low-income households to digital income opportunities, providing training and employment to selected citizens.

The MDEC expects around 350,000 Malaysians will take part in the programmes next year.

The budget also included a number of measures aimed at promoting business development and growth in the start-up scene, with RM1bn ($236.3m) put towards venture capital investment in selected sectors, along with a widening of tax exemption guidelines to include management and performance fees.

The changes will make corporate and individual investors in venture capital companies eligible to claim tax deductions up to a maximum of RM20m ($4.7m) a year, while exemptions on income tax will be extended until the end of 2020.

Tech companies targeted as Digital Free Trade Zone launches

These incentives come amid a broader national strategy designed to expand the digital economy.

The tech industry has been identified as a key future growth driver, with the government rolling out a series of plans to improve digitalisation rates of businesses and boost the technological literacy of individuals.

ICT-related businesses have accounted for 18.2% of GDP so far this year, according to the MDEC, and are on track to exceed the target of 20% by 2020, highlighting the importance and growth potential of the sector.

A key component of plans to boost ICT growth was realised with the launch of Malaysia’s Digital Free Trade Zone (DFTZ) in November, the first of its kind to be established outside China.

Located in Kuala Lumpur International Airport, the DFTZ offers technical and market expertise, as well as tax incentives to assist businesses looking to export their goods and services abroad, while also acting as a digital headquarters for local and international tech companies operating in Malaysia.

The development, jointly established by the Malaysian government and Chinese e-commerce firm Alibaba, is also expected to provide local businesses with an opportunity to break into the Chinese market.

Around 1900 export-ready small and medium-sized businesses (SMEs) are initially expected to utilise the DFTZ’s services, the MDEC’s CEO, Yasmin Mahmood, told regional press last month, with the site expected to double SME exports and create 60,000 new jobs by 2025.

Fintech services earmarked for expansion

As well as SMEs, the financial technology (fintech) segment also stands to benefit from the Malaysian government’s commitment to technological advancement.

Given mobile phone and internet penetration rates of 141% and 81%, respectively, banking industry leaders have identified significant potential for fintech products and services in the country.

These factors, combined with Malaysia’s increasing rates of digitalisation, have led to a series of fintech developments.

In May Bank Negara Malaysia (BNM), the country’s central bank, established both a regulatory “sandbox” for the segment, and a unit called the Financial Technology Enabler Group to facilitate the entrance of new players and innovation in the market.

Six companies are currently undergoing testing within the regulatory sandbox, each over a 12-month period. Three of these firms – GoBear, which was the first to join in January; WorldRemit; and a joint venture called CIMB Bank & Paycasso Verify – are foreign owned. The remainder are the domestic firms GetCover, MoneyMatch and Jirnexu, which was the last to come onboard in late October.

The Islamic finance segment has also earmarked fintech as a key area of potential growth.

Speaking at the Islamic Fintech Dialogue seminar in Kuala Lumpur in October, Marzunisham Omar, the assistant governor of the BNM, urged the Islamic banking segment to take a leading role in developing the digital banking ecosystem, arguing that offering sharia-compliant fintech products and services could help accelerate the adoption of such technology in the country.

While growth in the global Islamic financial services industry has slowed in recent times, Malaysia has bucked this trend, with the segment expanding by around 10% last year, according to the Islamic Financial Services Board’s “Industry Stability Report” for 2017,  highlighting the potential room for growth in digital products.


Malaysia develops infrastructure to support regional e-fulfilment ambitions

Several major international retailers are opening logistics centres in Malaysia, furthering the country’s aim of becoming a regional distribution hub.

In March Chinese e-commerce giant Alibaba announced it would set up an integrated logistics and distribution facility in Kuala Lumpur, part of an initiative to develop a Digital Free Trade Zone (DFTZ) in concert with the Malaysian government.

Set to be launched in late 2019, the Alibaba facility will combine Customs, warehousing and fulfilment operations, with the aim of providing faster clearance and delivery for imports and exports around the region.

After taking majority control of logistics firm Cainiao last month, in a deal valued at RMB5.3bn ($796.8m), Alibaba announced plans to invest some $15bn in its global logistics network through to 2022.

Sri Liow Tiong Lai, the minister of transport, said other companies could also join the initiative.

Other global retailers select Malaysia as a regional logistics base

Alibaba is the third retailer so far this year to choose Malaysia as a base for its regional logistics and distribution operations.

In early March Zalora, a Singapore-headquartered online fashion retailer, opened a 43,600-sq-metre e-fulfilment hub in the country. The $4.2m facility has the capacity to hold 4m items and process up to 100,000 items per day, and is intended to be the sole supplier of Zalora products to Malaysia and other high-growth markets across South-east Asia, including Singapore, Hong Kong and Taiwan.

The facility’s location in Shah Alam, on Malaysia’s west coast, is well connected by both sea and air, and was chosen in part for its proximity to Kuala Lumpur, one of Zalora’s biggest markets.

The retailer has been awarded Authorised Economic Operator status by Malaysia, allowing it to move quickly through Customs, and reduce the lead time from order to delivery to as little as two days for customers in the region, local media reported.

In late August Swedish furniture retailer IKEA also announced plans to establish a 100,000-sq-metre distribution and supply chain centre in Malaysia.

Built to supply the ASEAN region, the RM908m ($216.2m) facility will have an annual capacity to store 9500 stock keeping units valued at RM6.6m ($1.5m). The facility will initially serve 12 IKEA retail stores in the region, with plans to expand operations to 20 by 2026.

Upon completion, the facility will be one of IKEA’s 10 largest regional distribution centres globally, according to a statement by the Malaysian Investment Development Authority.

E-commerce and regional distribution the focus of airport city

The new DFTZ under development is part of the Kuala Lumpur International Airport (KLIA) Aeropolis, located on the site of the former low-cost carrier terminal. It will include a 17.5-ha e-fulfilment centre, a 46,000-sq-metre satellite services office and an e-services platform, according to Lai.

“The DFTZ is a special trade zone designed to promote the growth of e-commerce and to capitalise on the exponential growth of the internet economy, making Malaysia the regional fulfilment hub for ASEAN consumers,” he told attendees at the FIATA World Congress in Kuala Lumpur earlier this month.

In addition to the 1250 regional flights per week on offer, the KLIA Aeropolis is already home to four major logistics integrators and 20 of the top-25 freight forwarders, according to Lai.

The airport sees 72 aircraft movements per hour, and a combined 750,000 tonnes of cargo transported each year, Badlisham Ghazali, managing director of Malaysia Airports, the parent company of the operator of KLIA, told industry press in September.

With capacity for 1.1m tonnes, there is room for further growth at KLIA, though additional infrastructure investment will be needed as inter-ASEAN trade expands. By 2050, Malaysia aims to increase its annual cargo volume to 3m tonnes.

Broader policy blueprints to develop logistics sector

In Malaysia alone, the e-commerce market is projected to reach RM114bn ($26.9bn), or 6.4% of GDP, by 2020, according to the National E-Commerce Strategic Roadmap.

The roadmap, of which the DFTZ is a part, aims to facilitate cross-border trade and nearly double sector growth, from the current 10.8% to 20.8%, by 2020.

It dovetails with the government’s Logistics and Trade Facilitation Masterplan 2015-20, which seeks to establish Malaysia as the preferred logistics gateway to Asia for major manufacturers, traders and e-business organisations.

To achieve this, the three-phase plan aims to tackle persistent problems in the sector, such as existing distribution bottlenecks, as well as encourage domestic growth and regional expansion.

Malaysia ranked fourth out of 50 markets on the Emerging Markets Logistics Index 2017, produced by global logistics company Agility, behind only the UAE, India and China, underscoring the country’s attractiveness as a transport and logistics centre.

Liberalisation to create new opportunities in Malaysia’s insurance sector

Ongoing reforms in Malaysia’s insurance industry should increase competition and cut premiums costs for consumers, though a flatter economy has seen revenues dip as the market adjusts to a newly liberalised operating environment.

Beginning July 1, the second phase of reforms to gradually ease tariffs in the motor and fire insurance segments came into effect as part of a larger effort to liberalise Malaysia’s insurance market.

The second round of reforms rids the segments of the rigid tariff structure, allowing for insurers to charge premiums aligning with the risk profile of clients. This is particularly applicable in the auto segment, in which underwriters can reward drivers with clean records and protect themselves against clients with a history of accidents or misdemeanours.

The reforms also allow insurers to offer newer features as part of their motor and fire products, building on earlier liberalisation begun in July 2016. At that time, insurers were given authorisation to introduce new products, as well as add-on covers at market-driven prices.

Motor and fire represent the two largest segments in Malaysia’s insurance industry, accounting for roughly 45% and 20% of total premiums, respectively, in the first quarter of this year.

General insurance expansion slows to 1.1%

While the liberalisation process should boost competition in auto and fire coverage, the potential for growth should offset any falls in premiums, according to Suparno Ahmad, head of takaful (Islamic insurance) operations at Hong Leong MSIG Takaful.

“It is a conservative approach by the regulator, so we don’t expect price movements of more than 10% in the market,” he told an industry conference in early August.

This steady implementation, Ahmad said, should give insurers the opportunity to rebalance their portfolios in preparation for full market liberalisation in 2019.

The industry – composed of both general insurance and takaful players – reported a modest dip in gross written premiums, which fell 1.8% year-on-year to RM5.56bn ($1.3bn) in the first quarter of this year.

This continues a trend of slowing premium expansion in general insurance, which eased from 2.2% in 2015 to 1.1% last year, reaching RM17.67bn ($4.1bn).

This deceleration was partly caused by weaker performance in the Malaysian economy, as well as falls in the maritime, aviation and transit component due to a drop in hull insurance and policies for the oil and gas industry.

Profitability projected in fire and automotive

Ratings agency S&P rated Malaysia’s life, property and casualty insurance segments as “intermediate risk” in reports issued in July.

The premium growth rate in Malaysia’s life component remains moderate, the report said, due to low interest rates, an early phasing-in of regulatory initiatives and the economic downturn. Despite these factors, however, it said the life segment will continue to be profitable.

For the property and casualty segment – which includes fire and auto – S&P noted that while growth would remain slow due to recent reforms, the overall outlook was bright.

“In our view, Malaysia’s property and casualty industry performance will remain positive compared with that of regional markets,” the report said.

Investment interest rising

Positive prospects from market liberalisation could see the insurance sector attract more international interest in the coming years.

Overseas investors are looking to re-engage with Asian economies as costs rise in the Chinese market, according to a report by Japanese investment house Nomura issued in August. In particular, the Malaysian financial sector, including the insurance component, could see a rise in foreign direct investment, the report said.

“We believe joint ventures or strategic partnerships in insurance or stockbroking businesses are positive for Malaysian financials,” Nomora wrote.

Fighting insurance fraud

The bottom lines of Malaysian insurers could also improve further as the industry adopts advanced fraud mitigation technology to reduce losses.

Expected to be fully operational at certain companies in October, the fraud intelligence system (FIS) will use advanced data analytics to provide a risk-scoring mechanism, thus allowing for an assessment of possible fraud.

Industry officials have said they hope up to 30% of all fraud will be eliminated through the implementation of FIS, representing significant savings.

Currently, five insurers are piloting the scheme, with the remaining 22 in the sector set to adopt FIS in the coming months, with the entire industry to be covered by the second quarter of 2018.

New taxes to help fund tourism investments in Malaysia

Infrastructure and tourism-related programmes will be among the beneficiaries of a new levy on hotel stays that Malaysia’s government is imposing to help fund expansion of the country’s tourism offering.

Approved by Parliament in early April, the bill came into effect on August 1, having been postponed from its initial start date of July 1.

Revenue from the tax – which will apply only to stays by foreign tourists – will be reinvested back into the industry and its supporting infrastructure, according to Nazri Aziz, the minister of tourism and culture.

The levy will be imposed on a sliding scale: guests at five-star hotels pay a surcharge of RM20 ($4.66) per room per night, falling to RM10 ($2.33) for four-star establishments, RM5 ($1.17) for one- to three-star ones, and RM2.5 ($0.58) for budget or unrated accommodations.

Exemptions are made for homestays and kampung (village) accommodations registered with the Ministry of Tourism, as well as for properties run by schools, universities, training institutes or religious institutions, provided there are no plans to use the site for commercial purposes.

Revenue forecasts

Government figures predict the new levy will generate revenues of RM654.6m ($152.8m) in its first full year if hotel occupancy rates reach 60%, rising to RM872.8m ($203.7m) if they hit 80%.

Reaching the latter figure could prove ambitious, with last year’s hotel occupancy rate up 2 percentage points at 65%, according HVS, an industry consultancy. Yet the absolute revenue figure could also rise in the coming years thanks to capacity increases, given the number of new hotels set to come on the market.

If all current projects are completed, more than 25,500 new rooms will be added to the country’s hotel stocks by 2021, for a total of almost 350,000, according to HVS.

Industry voices weigh in

As with any new tax measure, the levy has received a lukewarm response from some industry players and local officials.

Hotel operators have raised concerns that it will harm profitability and reduce cost appeal amid tight regional competition, heightening the risk that tourists will choose alternative destinations over Malaysia.

“Local Malaysian businesses and leisure travellers are already paying for [goods and services tax] and income taxes. Subjecting them to new taxes is of concern,” vice-president of the Malaysian Association of Tour and Travel Agents, K L Tan, told local press, adding it would have the biggest effect on price-sensitive tourists, corporate and incentive groups, and long-haul travellers.

The tax has also met with opposition from key state governments, such as Sabah and Sarawak, which already impose similar levies on the hospitality sector. Both states have sought to defer the implementation of the new national tourism tax, though as of early August no such deferment had been announced.

Growth and forecasts

How much the new levy might impact bookings and tourism numbers is unclear, but at present the sector outlook is strong.

After a downturn in 2015, the industry is enjoying stronger growth in both arrivals and earnings: foreign arrivals rose by 4% last year to reach 26.8m, according to state agency Tourism Malaysia, generating record earnings of RM82.1bn ($19.2bn), up 18.8% on the previous year.

Stronger receipts were also bolstered by longer stays, with the average foreign visitor stay increasing from 5.5 to 5.9 nights in 2016.

Tourism figures for 2016 nonetheless fell short of the official 30.5m target for foreign arrivals.

The new goals set by Tourism Malaysia are to reach 31.8m arrivals and RM118bn ($27.5bn) in revenue this year, rising to 36m and RM168bn ($39.2bn), respectively, by 2020 – more than double the industry’s earnings last year.

International cooperation pushes Malaysia towards higher education goals

Malaysia is strengthening its position as a destination for international students, having recently inked bilateral deals related to tertiary-level education with partners in Turkey and Senegal.

The most recent of these moves took place in May, when Malaysia’s Al Bukhary International University and Turkey’s Ibn Haldun University signed an agreement to work on a collaborative education programme.

Set to begin in September, the arrangement will see greater academic cooperation between the two countries, with the goal of fostering cultural as well as educational links.

This followed a memorandum of understanding (MoU) undertaken between Malaysia and Senegal in March. On top of offering 10 scholarships for Senegalese students to study in Malaysia, the MoU aims to increase the number of student and lecturer exchange programmes between the two nations.

Both agreements should help to enhance student mobility, particularly in an environment when students are choosing less traditional destinations to obtain their education. This trend was highlighted by Idris bin Jusoh, minister of education, in an opinion piece published by local media in May.

“Various factors around the world today, including a challenging global economy and changes in geopolitical trends in the US and Europe, mean that international students are looking to pursue higher education outside of traditional destinations, such as the US, the UK and Australia,” he wrote.

High-class appeal

One development playing a key role in bolstering Malaysia’s higher education offerings is EduCity. A fully integrated education centre that stretches over 123 ha, EduCity hosts several private universities and branch campuses.

The University of Reading is the most recent international addition to the EduCity hub, opening in March 2016. Enrolment at the branch campus is forecast to reach 2500 by 2024, with the UK-based university joining Malaysian branches of the UK’s Newcastle University and University of Southampton, as well as the Netherlands’ Maritime Institute of Technology.

A new addition is also expected in September, when the Management Development Institute of Singapore is scheduled to move from its current location in the city centre of Johor Bahru to a new EduCity campus currently being constructed.

The influx of foreign universities aligns well with Malaysia’s aim to take advantage of growing globalisation in the job market, as skills learned in one country become marketable in many, according to Joanne Oei, managing director of EduCity.

“It is important to understand that the job market and labour are becoming increasingly mobile and global,” she told OBG. “EduCity should prepare students to enter today’s global market.”

Education windfall

Attracting foreign students is a key goal in the National Education Blueprint for Higher Education 2015-25, which sets the target of hosting 200,000 by 2020 and 250,000 by 2025.

Malaysia is well on its way to achieving the mid-term goal, with foreign enrolment at just under 173,000 at the start of this year, according to the Ministry of Higher Education.

Hitting its 2025 target could generate significant revenue: the Ministry of Education estimates that foreign students bring in RM5.9bn ($1.4bn) each year, a figure that it says could more than double by 2020 as student numbers climb towards the 250,000-mark.

Malaysia’s recent focus on improving higher education services has yielded some international recognition, with Kuala Lumpur ranked 41st globally and eighth in Asia in the 2017 QS Best Student Cities Index. The 2017 result, a jump of 12 places on the last year, was based on the capital city’s affordability, quality of education and multicultural appeal.

Kuala Lumpur came in first on the affordability ranking due to its low cost of living and tuition fees, which averaged $2900 a year, much lower than in other prominent educational centres such as London ($21,400), Sydney ($23,000) and Boston ($46,800).

While the city ranked lower on other indicators such as desirability (74th) and employer activity (59th), high levels of investment could spur improvement in these weaker facets of the country’s tertiary-level offerings.  “Malaysia devotes a higher proportion of the national budget to education than many countries, and establishing itself as an international destination for university education is part of the economic plan,” professor Tony Downes, provost and CEO of University of Reading Malaysia.

Malaysia pushes forward with robotics agenda

A new investment drive to make Johor the centre of Malaysia’s nascent robotics industry is moving ahead, part of a broader push to attract more high-tech developments.

In mid-May Malaysia’s Johor Corporation (JCorp) signed a letter of intent on cooperation with China’s Siasun Robot Investment, outlining plans to develop a large-scale centre for robotics research and development. Under the deal, Siasun will invest RM15bn ($3.5bn) in a project dubbed the Robotic Future City.

Covering an area of more than 400 ha in west Johor Baru, the state’s capital city, the site will include a planned regional base for Siasun, including robotics equipment and components, parts production facilities, research and development (R&D) labs, and a service centre.

The agreement builds on a memorandum of understanding signed in mid-April between JCorp, the Malaysian Investment Development Authority (MIDA) and Siasun subsidiary Beijing Huize Boyuan Robot Investment.

The centre’s development will further the government’s objective of creating high-income jobs and accelerate economic growth in the state of Johor, according to Kamaruzzaman Abu Kassim, president and CEO of JCorp.

“This strategic cooperation with Siasun represents a significant step towards leveraging advanced technologies in the areas of robotics, innovation and automation to benefit Johor and Malaysia,” he said in mid-May.

Malaysian officials have said they hope initial investments in the project will start to flow before the end of the year.

New arena

The Johor robotics agreement was one of nine business deals with a combined value of RM31.3bn ($7.3bn) inked between Malaysian and Chinese firms during a five-day visit to China by a delegation led by Prime Minister Najib Razak.

While other investments pledged during the trip focused on established sectors such as petrochemicals and logistics, the planned robotics centre represented a breaking of new ground.

As the first large-scale foreign investment in Malaysia’s robotics sector, the Johor project is expected to shape the industry’s future and generate the right set of conditions to attract further projects.

The push to build up production capacity in robotics comes as Malaysia’s industries try to keep abreast of a changing operational environment, according to Datuk N Rajendran, deputy CEO of MIDA.

“In line with the Industry 4.0 [the so-called fourth industrial revolution of digitally-driven manufacturing], local companies need to adopt automation, robotics, smart technologies and invest in R&D, and upskilling of talent to stay competitive,” he told an investment seminar in mid-May.

Developing a skilled workforce

Robotics is also a sector the government hopes will help drive the country’s next wave of industrial development, moving it up in the global value chain by reducing dependence on low-skilled jobs and increasing the number of high-skilled employees.

However, as Manoj Menon, managing director of Frost & Sullivan in Johor, told OBG, “Attracting talent is one of the major challenges for companies operating in Johor: a weaker ringgit makes local salaries uncompetitive compared to those offered in neighbouring Singapore”.

In the face of this issue, a shortage of skilled labour could be ameliorated through the government’s commitment to bringing internationally recognised private universities into EduCity – an integrated education hub in the Iskandar special economic region in Johor – according to Manoj.

Looking beyond China

China is rapidly becoming both a leading developer and a top market for robotics, making it a strong partner for Malaysia.

An early-April report by market research firm International Data Corporation (IDC) estimates that Chinese spending on robotics and related services will more than double to $59.4bn by 2020, reaching a 30% share of the global total that year.

Such increases will likely be driven by firms like Siasun, the world’s third-largest robotics developer and China’s biggest, which now has a market capitalisation of RM25bn ($5.8bn).

Malaysia has, however, been keen to promote its robotics potential beyond China’s shores.

During a trade-promotion road show in South Korea in mid-April, Mustapa Mohamed, Malaysia’s minister of international trade and industry, said his country hoped to develop tie-ups with Korean firms in the sector.

“We are interested in the automation and robotics industries, which South Korea has strength in,” he said. “We want to improve productivity of Malaysian small and medium-sized enterprises, so we encourage partnerships and joint ventures between companies from both countries.”

Expanding the market

Malaysia is also looking to incorporate robotics into spheres beyond industry, such as the banking sector.

Some of its banks are already considering using advanced technology to improve services and support growth, according to Liew Nam Soon, managing partner for financial services at EY ASEAN.

“These banks typically engage with them for projects revolving around mobile banking, payments, and loyalty programs,” he told local media in early May. “Others are looking at robotics or automation of their front- and back-office operations, including chatbots in place of call centres and electronic ‘Know Your Customer/Anti-Money-Laundering’ enablers.”

As interest in Malaysian manufacturing continues to rise, and as new ways of combining automation with “big data” are discovered, Johor’s robotics centre stands a good chance of building a waiting list of prospective clients before it breaks ground.

Positive growth prospects for Malaysia’s agriculture sector

Steady global demand for palm oil and improved weather conditions ending last year’s drought should help Malaysia’s agriculture sector recover from a decline in 2016, boosting returns for growers and processors and helping to ease inflation.

In its annual report issued in late March, the Bank Negara Malaysia (BNM) – the country’s central bank – forecast the agriculture sector to expand by 4% this year, contributing 0.3 percentage points to GDP growth.

“On the supply side, all economic sectors are projected to register positive growth in 2017,” the BNM report said. “The agriculture sector is expected to rebound as yields recover from the El Niño weather phenomenon.”

Warmer than usual seasonal temperatures related to El Niño saw production decline 5.1% last year, following a 1.2% decrease in 2015. This contributed to a decline in GDP growth, which hit 4.2% in 2016, down from 5% the year before, according to the Department of Statistics Malaysia (DOSM).

Agriculture currently makes up 8.1% of GDP, down from 11.5% in 2011. While the latter figure does reflect higher commodity prices at the time, the decline in the sector’s contribution has continued for decades as Malaysia’s economy has shifted towards manufacturing and services.

Nonetheless, agriculture remains a key facet of the country’s macroeconomic profile, with an improved performance from the industry this year likely to support growth in downstream industries such as food and edible oil processing. This should help to bring about the BNM’s GDP growth forecast of between 4.3% and 4.8% this year.

Palm oil market

According to the latest official data from 2015, palm oil made up 46.9% of agriculture’s contribution to GDP, followed by “other” (17.7%), livestock (10.7%), fishing (10.7%), rubber (7.2%) and forestry and logging (6.9%).

As the economy relies heavily on the crop, the impact of last year’s dry spell continues to be felt, with Malaysian traders importing above average quantities of palm oil and related products from Indonesia for processing.

Inbound shipments in the year to April were estimated to be up to 50% higher than the 40,000-50,000 tonnes usually imported each month, but these levels are expected to return to normal later in the year, local media reported at the end of March.

Analysts forecast the palm oil segment to continue improving through to the end of the year, in terms of both yields and productivity, driving up output to 19.85m tonnes, a 13% increase on 2016.

Higher yields, combined with increased imports, should push prices down to around RM2500 ($577) per tonne later in 2017, well below their four-year high of RM3000 ($692) per tonne recorded in January.

Sources of inflation

Lingering effects of the drought can also be seen in inflation figures, with the consumer price index up 5.1% year-on-year (y-o-y) in March, according to the DOSM – an eight-year high driven in part by rising food costs, especially for key staples.

The subindex for food and non-alcoholic drinks, which has a 30.2% weighting, climbed 4.1% y-o-y. Though some subgroups rose more slowly, those most affected by the drought increased at higher than average rates, with oil and fats up 38.8%, vegetables up 7.4% and meat up 3.4%.

Malaysia’s producer price index in March was higher still, as per the latest figures from the Department of Statistics, increasing by 9% y-o-y. This was mainly driven by rises in wholesale costs for agriculture, forestry and fisheries, which climbed by 13.8% over the preceding 12 months.

While production costs are likely to soften as yields rise and prices fall this year, they may feed into inflation for some time to come. In the latest revision of its inflation outlook for this year, the BNM projects year-end price increases of 3-4%, above the 3% ceiling in its earlier forecast.