Strong FDI growth a bright spark

In last week’s issue, we indicated that it was a bit too early to be bullish on exports to boost Malaysia’s economic growth. Slowing growth in China, the “disconnect” of the US economy from Malaysian export performance and ominous signs from the hard commodities sector about the state of the global economy point towards sluggish export growth. 

This week, the spotlight is on private sector investments. It also comes in the wake of Bank Negara Malaysia (BNM) forecasting 2014 real gross domestic product (GDP) growth of 4.5% to 5.5% versus the market consensus of 5%. Can the private sector deliver enough investment growth to power the economy?

Historically speaking, yes.

Since 2010, the private sector has registered strong double digit growth in investments. By growing at an average annual rate of 16.1%, it has outpaced average private consumption growth at 7.2% and helped cushion the substantial contraction in Malaysia’s net exports.  

The strong growth has also driven private sector investment expenditure to become the second largest contributor to Malaysia’s GDP at 16.9% in 2013, placing it behind private consumption at 52%.  What has caused the recent emergence of the private sector as a growth driver?

The answer lies in the government’s Economic Transformation Programme (ETP), which was launched in October 2010 and implemented by PEMANDU. The goal of the ETP is to elevate Malaysia to developed-nation status. One of the ways is by attracting US$ 444 billion in investments. Of this amount, 92% is targeted to be driven by the private sector. 

With such robust growth coming from private sector investments, it appears that the economy has a steady growth driver to depend on. The 10^th Malaysia Plan (10MP) states that for Malaysia to become a high-income nation, private sector investment growth has to average 10.9% annually. Historical growth since 2010 has already beaten this benchmark.

However, investors always need to be vigilant about the downside risks in the future. There could already be signs that private sector investments might grow at a slower pace.

Read the full article in The Edge this week.