The 12th Malaysia Plan (12MP) is crucial and challenging given the current circumstances of the Covid-19 pandemic given the limited government fiscal space that could curtail its fiscal sustainability. Against the current backdrop, the 12MP has shown a clear economic vision for the new decade to ensure that the country’s economic growth will continue to be inclusive and sustainable. Growth target appears to be realistic, projected at between 4.5% and 5.5% per annum under the 12MP, similar to that in the 11MP’s mid-term review while gross national income (GNI) per capita is expected to rise to RM57,882 in 2025 from RM42,503 in 2020. The 12MP laid the groundwork for an expansionary fiscal policy in the near term with the total development expenditure allocation of RM400 billion, the largest allocation (RM260 billion under the 11MP). By end-2025, the government aims to reach a fiscal deficit target of between -3.0% and -3.5% of GDP or RM68.5 billion.

Overview

• The 12th Malaysia Plan (12MP) is crucial and challenging given the current circumstances of the Covid-19 pandemic given the limited government fiscal space that could curtail its fiscal sustainability.

• Against the current backdrop, the 12MP has shown a clear economic vision for the new decade to ensure that the country’s economic growth will continue to be inclusive and sustainable.

• Among the key priorities are eradicating poverty, especially hard core poverty, and reducing socio-economic gaps by implementing more comprehensive and targeted programmes.

• Other key priorities identified under the 12MP include establishing a conducive ecosystem to develop micro, small and medium enterprises as well as accelerating the adoption of advanced technology and digitization.

• Besides, the goal of the 12MP goes beyond boosting economic growth as it also to ensure that the country's wealth can be distributed more fairly and equitably while maintaining environmental sustainability.

• We welcome the 12MP’s focus on market-oriented reforms. Although Malaysia is a business-friendly country that attracts large flows of foreign direct investment and is well-integrated in global value chains, there is an urgent need to reinvigorate business dynamism through regulatory reforms to achieve a robust post-Covid-19 recovery as the pandemic risks remain from the ongoing health crisis.

• Measures initiated under the plan are essential to drive growth in the post-pandemic world and to position Malaysia on a better footing as vibrant competition remains an essential component of business dynamism which will foster cost reductions, innovation and promote productivity growth.

• For business dynamism, the key focus is the ease of new firms in entering the market, or entrepreneurs starting up new businesses. As the country transitions to the high-income status, future sources of growth will increasingly need to shift to innovation and productivity gains. Hence, there is an urgent call for further improvements in business dynamism while ensuring a regulatory environment that encourage effective competition for long-term growth and sustainability of the country.

• And irrespective of the current scenario, Malaysia remains competitive in attracting foreign investors. In 1H2021, the country attracted investments worth RM107.5 billion from the manufacturing, services (two key sectors), which was a significant jump of 69.8% compared to RM63.3 billion for the same period in 2020. Foreign direct investment contributed 58.1% or RM62.5 billion compared to RM19.8 billion for the same period in 2020.

• With the 12MP set to steer the economy to the next phase of growth, the focus on high quality and value-add investment that will drive productivity, the emphasis on talent development and business-driven policies to support growth should continue to place Malaysia as a strategic investment destination.

• We remain optimistic despite the recent relocation of some FDIs as that could be due to many factors such as business rationalisation or policies relating to the MCOs.

• Looking at the equity market, the overall impact from the 12MP has been lukewarm. It could be due the measures announced that are more for the medium term. Besides, the market has been in a net foreign selling position, implying the support of local players. Also, the market could be focusing on Budget 2022, the opening of the cross-border travels, incoming data and the US Fed tapering. The bond market has also factored in the 12MP.

Realistic Growth Projection

• The plan’s strategic focus in ensuring sustainable growth, inclusiveness and sustainability, besides being market oriented with a diversified export market and the contribution from RCEP should see the domestic economy growing on an average 4.5%–5.5% (similar to that in the 11MP) and a GNI of RM57,882 by end-2025.

• Amid the downturn in 2020, growth targets are firmer across the board when compared to the historical average between 2016 and 2020. Private investment (3.8% in 2021–2025 from an average of 1.2% in 2016–2020), public investment (2.6% from -7.9%), public consumption (3.8% from 1.2%), exports of goods & services (5.8% from 0.2%), and imports of goods & services (5.8% from 0.2%). Private consumption will continue to be the anchor to growth, forecasted at 5.8% compared to 4.7%.

• The 12MP highlighted the need to evidence-based policymaking, moving up the value chain, the adoption of Industry 4.0 and digitalization, strengthening financial capabilities, improving productivity, and scaling up green practices. Key sectors targeted to deliver high growth contributions include services (58.3% to GDP in 2025) and manufacturing (23.7%), agriculture (7.0%), mining and quarrying (6.1%) and construction (3.8%).

• Within these sectors, the high impact sub-industries that were identified include electrical & electronic (E&E), global services, aerospace, creative industry, tourism, halal, smart farming and biomass. Nevertheless, the government encourages businesses from all sectors to build resiliency and competitiveness by leveraging advanced technology adoption and digitalization.

• The government continues to keep MSME digitalisation as national agenda. Apart from that, the government also plans to appoint a commissioner to assist small businesses in securing payments on time and resolving payment disputes. In addition, cooperative movement will be leveraged in developing entrepreneurs.

Source: AmInvest Research - 28 Sept 2021