A combination of external and domestic factors is making it hard to project how strongly foreign direct investment (FDI) into Malaysia will grow this year although indicators point to more moderate inflows for the rest of 2012 compared to the last two years.
Nomura Singapore Ltd economist Euben Paracuelles told StarBiz that the situation for FDI inflows remains unclear at this point because the eurozone debt crisis may further impact Asia in the second half of the year.
In an update to the 2012 World Economic Outlook, the International Monetary Fund (IMF) said elevated unemployment numbers in advanced economies, the escalating stress of the eurozone's periphery economies, less robust growth in the United States and slowing growth momentum among major emerging markets point to weaker growth for the remainder of the year.
The IMF projects the Asean-5 (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) economic growth to remain unchanged at 5.4% year-on-year compared to the April update but to be marginally lower at 6.1% next year.
Overall, global growth is projected to moderate to 3.5% in 2012 and 3.9% in 2013, some 0.1 and 0.2 percentage point respectively lower than forecast in the April update.
“Downside risks to this weaker global outlook continue to loom. The most immediate risk is still that delayed or insufficient policy action will further escalate the eurozone crisis,” it said.
“I think it is a tough call whether FDI inflows will remain positive in the second half of 2012. Government initiatives have been and will likely remain, a key driver. But on the other hand, there is still so much uncertainty in the outlook for the global economy and one of our fears is that the uncertainty is already starting to hurt investment sentiment,” Paracuelles said.
The World Bank's senior country economist for Malaysia Frederico Gil Sander said in an email reply that given the country's healthy external accounts, the main reason to attract FDI would be to benefit from technology and knowledge transfers.
“This means that it's more important to focus on the quality rather than the quantity of FDI something that's not easy to assess at this time,” he pointed out.
Sander said it was unlikely that fixed investment, which grew strongly in the first quarter (by 35% compared to the previous quarter) driven by the construction as well as the oil and gas industries, would be maintained in light of the external headwinds.
However, he still expected healthy investment levels this year because these industries had long implementation periods.
In a recent report, CIMB Investment Bank Bhd economic research head Lee Heng Guie said gross FDI inflows could slow to US$8bil to US$10bil this year as both internal and external headwinds persist.
For the first quarter, FDI inflows dropped 33.9% year-on-year to US$2.4bil.
FDI inflows into the country rebounded strongly to US$9.1bil in 2010 and US$12bil last year aided by the recovery in global FDI as well as improved domestic economic conditions with Malaysia's share of Asean FDI inching up to 10.3% in 2011 (9.8% in 2010, 3.1% in 2009).
Lee said a combination of a subdued global outlook, cautious investor sentiment in times of capital flows and currency volatilities and domestic political risk could negatively impact FDI inflows.
However, he said stable economic fundamentals, Economic Transformation Programme (ETP) projects and regional integration via bilateral free trade agreements and the Asean Economic Community could counter the slowdown in FDIs.
Moreover, Lee said there was a race to court alternative sources of investment, which would be crucial to ensure a sustained expansion of inward FDI for Asia.
“We think the US, Japan, China, India and Asean are potential sources of FDI to fill the void left by European counterparts,” he added.
Lee said Japan has gained ground as an investor in the region, partly due to the strengthening of the yen while the country's transnational corporations have strengthened their efforts to invest and diversify operations abroad, particularly after the tsunami-earthquake.
“In 2011, Japanese companies pledged to invest about US$1.8bil in Vietnam and US$6bil in China. Asean, particularly Singapore, Malaysia and Thailand, are also emerging as major investors in the region. Intra-Asean FDI flows have risen 32% per annum from US$2.7bil in 2003 to US$12.3bil in 2010,” he said.
Lee said Malaysia has also been a net capital exporter since 2007.
“During the period 2008 to 2011, outward investments by Malaysian companies flowed to Singapore (15.4% share of total investment), Indonesia (11.6%), Australia (9.1%), UK (8.3%) and Mauritius (6.6%),” he said.