• Sabah’s GDP expected to grow by 2.0% in 2024 & 2.5% for 2025
   
• Sabah contributes about 5.3% of Malaysia’s GDP
   
• Sabah is one of major trade surplus contributor for Malaysia

• A new high of Sabah’s fiscal expenditure

• Return of power-regulating autonomy to Sabah

• SDC Blueprint 2.0 will chart Sabah development till 2030

Sabah’s GDP expected to grow by 2.0% for 2024. In the Sabah Budget 2025 opening remarks, Finance Minister Datuk Seri Panglima Haji Masidi Manjun projected Sabah’s economy to grow by 2.0% in 2024, supported by better external demand and rising domestic activity. Services sector largely to be boosted by reviving tourism activity. According to Tourism Malaysia, recovery rate of foreign tourists’ arrival to Malaysia is 91.4% of 2019-level as of 9M24. In primary sectors, agricultural output, particularly from palm oil plantations, is expected to rise steadily due to favourable crude palm oil prices. The mining sector is anticipated to grow at a modest pace, supported by ongoing exploration and favourable global oil prices. The manufacturing sector is set to improve, largely driven by the recovery in external trade and increased downstream palm oil activities. Additionally, the construction sector is projected to continue on an upward trend, bolstered by ongoing infrastructure projects as well as residential and non-residential developments.

Looking into 2025, the Finance Minister foresees Sabahan economy to expand stronger by 2.5%. Continuous revival of tourism activity, solid domestic demand, favourable CPO price, realization of approved manufacturing investments and completion of construction projects are among growth catalysts for Sabah’s 2025 economy.

Sabah contributes about 5.3% of Malaysia’s GDP. Using 2015 as the base year, Sabah's contribution to Malaysia's GDP fell to its lowest level of 5.3% in 2023, down from 6.3% in 2015. The slowdown in growth in the agriculture and manufacturing sectors has been a significant factor in this decline over the eight-year period. After the pandemic, the construction and services sectors have been the primary drivers of growth in Sabah, while the other three sectors experienced contractions. Sector-wise, Sabah ranks as the fourth largest contributor to Malaysia's agriculture, accounting for 12.5% of the national agriculture sector. Additionally, Sabah represents nearly one-fifth of Malaysia's mining sector. In other sectors, Sabah contributes less than 5.0% to the national output.

Services and primary sectors are main drivers. More than half of the Sabahan economy generated by services sector, 50.9% in 2023 (Malaysia’s: 59.2%). More than half of services sector is related to tourism activity namely transport & storage and distributive trade & accommodation. Also, there is a strong pick-up of government services in Sabah since 2015. Mining sector remains pivotal while agriculture sector contributes about 15.2% which predominantly by palm oil plantation. For manufacturing sector, downstream of palm oil and other food & beverages products dominate the factory output. The construction sector in Sabah is heavily supported by civil engineering and buildings. Major projects like upgrade dilapidated school buildings & facilities, Sarawak-Sabah Link Road Phase 2, Phase 1b of the Pan Borneo Highway, flood mitigation projects, new border points are key catalysts, sustaining strong demand in the construction industry.

Realization of post-pandemic investments to turn into growth ahead. As of 1H24, Sabah received RM1.7bn investments for manufacturing and services sectors. Based on our engagement with MIDA, approximately 85% of approved investments are realized, with an estimated timeframe of 18-24 months for manufacturing projects and 6-12 months for service-based businesses. The realization of these investments is anticipated to stimulate greater activity in Sabah's construction sector in the near term, leading to an increase in output for both the manufacturing and services sectors. Since 2019, approved manufacturing investments are mainly contributed by transport equipment of 35.1%, petrochemicals of 17.7% and beverages & tobacco of 17.7%. Transport equipment mostly by foreign investors while domestic investors focus on petrochemicals and beverages & tobacco. By country, 72.6% of investments by China and South Korea contributes 26.7%.

Sabah is one of major trade surplus contributor for Malaysia. Close to 20.0% of Malaysia’s trade surplus originated from Sabah. We opine Lahad Datu and Sandakan trade points are closely associated with palm oil exports. Labuan and Teluk Sepanggar are likely related to outbound shipments of mining products. Even though total trade via Sabah represents less than 3.0% of Malaysia’s external trade, high-value products are produced and shipped out from the state. With CPO price is projected to stay above RM4,000 per tonne next year, we foresee continuous upbeat momentum for external trade activities in Sabah especially thru Lahad Datu and Sandakan. With the signing of Commercial Collaboration Agreement (CCA) between the state government and Petronas in December 2021, we should expect more oil & gas activities among local players as well as external trade flows of mining-related products moving forward. In addition, Sabah’s external trade prospect to turn brighter if more free-trade-zone (FTZ) status given to Kota Kinabalu, Sandakan and Tawau. Currently, only POIC port in Lahad Datu is given the FTZ status. Sabah is the only state to have borders with three nations; Brunei, Philippines, and Indonesia.

A new high of Sabah’s fiscal expenditure. On 20th November 2024, Sabah State Assembly approved its largest ever annual budget of RM6.42bn. The expansionary fiscal policy is aimed at improving infrastructure, fostering economic resilience, and uplifting public welfare. The expenditure is 10.0% higher than the previous year yet Sabah government is predicted to record a surplus of RM24mn. Out of the expenditure, RM5.44bn is slashed for OPEX which includes emoluments (RM0.9bn), recurring expenses (RM2.27bn), and special expenses (RM3.25bn). Emoluments cover new salary adjustments and new public servants’ appointments. Recurring expenses refer to Sabah State Government scholarships, road maintenance programs & bridges, maintenance of government buildings, water discharge operations & maintenance, repair of piping systems, contributions to local councils, and expenditure for state Customary Heads. Special expenses address the issues of infrastructure facilities, among others especially activities to restore water supply & management services water plants under outsourcing contracts, maintenance of roads, bridges & slope, new construction & maintenance of public facilities, various food security programs and Village Development & Security Committee (JKKK) allowance payment.

RM1.3bn for DEVEX with inclusion of federal allocation of RM0.3bn. On top of RM0.9bn by Sabah government, additional RM0.3bn in the forms of federal loans to be allocated for development expenditure. 57.0% for economic sectors while 41.0% for social sectors and 2.0% for general administration. There are various focus areas including (i) Agriculture & Food Security, (ii) Blue Economy, (iii) Industrial & Entrepreneurship Development, (iv) Tourism, (v) Urban & Rural Development.

Support for Agriculture & Food Security. The RM611mn allocation were among others for strengthening of domestic food supply chains, special incentives for paddy farmers, additional of five agricultural produce collection centres, incentives for aquaculture & rubber plantations and water irrigation projects for agriculture purposes.

Strenthening Blue Economy. The Sabah government is preparing a blueprint which to be called as Sabah Blue Economic Framework. The blueprint to delve beyond aquaculture & fisheries among others sustainable exploration of marine and coastal resources.

Urban and rural development. RM0.35bn allocated for construction of new district office buildings for Kunak, Sukau and Kecil Kiulu. RM0.25bn slashed for affordable housing, construction of government buildings and upgrading works of public housing. Almost half of RM1bn to be spent on building & upgrading roads in urban, rural, and small-town areas, building & upgrading bridges, slopes, government buildings and infrastructure programs. Among key concerns in Sabah, high non-revenue water ratio leads the government to allocate RM0.73bn for water projects. Three projects including of upgrading water treatment plants and upgrade booster pumps for reservoir faces & water treatment plants in the districts of Putatan, Beaufort, Papar, Keningau, Lahad Datu and Kota Kinabalu. In addition, close to RM100mn reserved for repair works of pumping stations, sewage treatment plants and sewerage pipe networks in the district Kota Kinabalu, Tawau, Sandakan, Penampang and other districts.

Tax revenue make up half of government income. Approximately RM2.7bn to be contributed via tax income which mainly thru sales tax on oil & gas and plantations RM2.6bn. The non-tax is estimated to record RM2.6bn especially thru petroleum royalty of RM1.3bn and interest & investment income of RM0.5bn. Lastly, contribution from federal government worth of RM1.2bn amid higher special grants payment.

Dividend income to grow higher in the long-run. Based on the Budget 2025 presentation, the Finance Minister announced the dividend income of RM131.25mn was recorded for 2024 which lower than the year before. However, we foresee the Sabah government will explore more investment opportunities and gain steadier dividend income moving forward. Plus, we believe the Sabahan government will diversify its income and reduce reliance on income generated from primary sectors

RM6.7bn allocated for Sabah under federal’s Budget 2025. For development purposes, the federal government has allocated RM6.7bn for Sabah and interim special grants increased to RM600mn in the recent Budget 2025 announcement (Budget 2024: RM6.6bn, RM300mn). The allocation is mainly for essential infrastructure such as roads, electricity, and clean water. During the Budget 2025 presentation, Prime Minister Datuk Seri Anwar Ibrahim mentioned 17 work packages for the Pan Borneo Sabah Phase 1B had been issued with a contract value of RM9.7bn, covering the routes from Kota Belud to Kudat, Tawau to Kampung Lot M, and Telupid to Ranau. The federal government has finalised four work packages for the Sabah Sarawak Link-Road (SSLR) Phase 2 valued at RM7.4bn. Also, the federal government agreed to proceed with expansion projects for Tawau Airport.

In the spirit of MA63. Starting in 2025, the federal government will be paying special grants of RM600mn to Sabah and Sarawak each. Negotiations are still ongoing on a formula to return Sabah's 40.0% net revenue owed to the state. After 54 years, the federal government increased the allocation to RM300mn each to Sarawak and Sabah respectively in 2023. In the spirit of MA63, both governments can proceed with projects valued below RM50mn without the federal’s nod since 2023. Also, Inland Revenue Board of Malaysia (Amendment) Bill 2023 was passed to appoint representatives of Sarawak and Sabah as board members of the Inland Revenue Board.

Return of power-regulating autonomy to Sabah. Early this year, Sabah State Assembly unanimously passed the Sabah Energy Commission Enactment 2023 (Amendment 2024) Bill, Electricity Supply Enactment Bill 2024, and Sabah Renewable Energy Enactment Bill 2024. Almost 40 years ago, Sabah regained its regulatory authority of its power supply and renewable energy from the federal government. As of 4Q24, Sabah’s electricity reserve margin is roughly 5.0%. The generation capacity of 1,226 megawatts (MW) while current demand is roughly 1,166MW. According to Sabah Electricity (SESB), the reserve margin is predicted to reach more than 20.0% by June 2025 amid completion of Tenom Pangi Hydroelectric Power Station 66MW, Battery Energy Storage System 100MW (BESS) in Lahad Datu and 100MW gas-powered facility in Kimanis.

SDC Blueprint 2.0 will chart Sabah development till 2030. Sabah Development Corridor Blueprint 2.0 (2021-2030) is a comprehensive strategic plan for the state economic growth and development. The blueprint covers the impacts and challenges of Covid-19 crisis as well as recovery strategies. Also, the blueprint is an alignment of federal government and Sabah Maju Jaya plans. The blueprint will utilise the opportunities of Sabah’s geographical location, bordering with Sarawak, Brunei, Indonesia, and the Philippines. There are five strategic thrusts and 30 initiatives under SDC Blueprint 2.0. The strategic thrusts namely (i) Restructuring the Business and Industry Ecosystem, (ii) Spurring Key Economic Growth Areas, (iii) Transforming Human Capital, (iv) Improving Regional Inclusion and (v) Enhancing Environmental Sustainability.

Strategic gateway for regional trade, serving as a connecting point to the BIMP-EAGA (Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area). Under the blueprint, Sabah is aiming to turn Kota Kinabalu Industrial Park (KKIP) as Special Economic Zone (SEZ). The sector-focus areas are, (i) Bio-tech, (ii) Green-tech, (iii) Marine-tech and (iv) Aerospace. Under logistics sector, Sabah to develop Sapangar Bay Container Port (SBCP) as a transshipment hub that leverages Sabah’s strategic location along the busy Indonesia and Philippines trade route. The quay length will be expanded to 1.2km to handle 1.3m TEUs by 2025 (from 0.4m TEUs in 2021). Following to that, Sandakan, Lahad Datu & Tawau to be feeder ports for SCBP and regional trading hubs mainly on agro-marine products and palm oil.

Sabah is set to become an Oil and Gas Services and Equipment (OGSE) industry powerhouse. 3 years ago, Sabah state government signed a Commercial Collaboration Agreement (CCA) with Petronas. This will enhance greater collaboration between the two parties to develop oil & gas industry in Sabah. This agreement will allow Sabah to participate upstream petroleum arrangements including in partnership with PETRONAS Carigali Sdn Bhd. Primarily, the objective of this agreement is to get more involvement of Sabah especially local-based companies to participate in the value chain of oil & gas industry in Sabah as well as Malaysia. Thru SDC Blueprint 2.0, Sipitang Oil and Gas Industrial Park (SOGIP) will be strengthened to attract export-oriented investments and develop a cluster of downstream processing facilities.

Infrastructure as tool for improving regional development. Infrastructure upgrade is one of ways to reduce urban-rural gaps in Sabah. Access to clean water, electricity supply, schools and healthcare centres are among main reasons of infrastructure development. Apart from infrastructure, SDC Blueprint 2.0 emphasizes on entrepreneurship skills and agricultural productivity. Under infrastructure focus area, the blueprint highlights on Pan-Borneo Highway and Road Network Expansion which entails;

• Phase 1 (706 km): Sindumin-Kota Kinabalu-Kudat-Ranau-Batu 32 Sandakan-Tawau.

• Phase 2 (98 km): Tamparuli-Ranau.

• Phase 3 (432 km): Tawau-Kalabakan-Keningau-Kimanis.

• New road - connecting Penampang to Kiulu via Jalan Kibunut to Kokol Hills.

• Priority to pave gravel rural roads should be given to major agriculture production areas and tourism related activities areas like Kundasang/Ranau, Long Pasia, Keningau.

Sabah’s Pan Borneo Highway project will keep contractors busy. According to Works Minister Datuk Seri Alexander Nanta Linggi, the Phase 1B highway works to be completed by 2029. Phase 1B has been divided into 19 out of 35 work packages for Pan Borneo Highway Sabah Phase 1, with the scope involving the construction of a new federal road from Kota Belud to Kudat and the improvement of the federal road from Ranau to Lahad Datu, covering 370km.

Expansionary Sabah’s fiscal policy and economic potentials to strengthen Malaysia’s growth trajectory. Going into 2025, Malaysia economy is expected to grow at the range of 4.5-5.5% supported by upbeat momentum from domestic demand and steady expansion of external trade sectors. By sector, Malaysia’s growth among others to be driven by steady expansion of construction and services sectors. With the new record high fiscal expenditure by Sabah government, we view this will give positive spill-over impacts on Sabah as well as Malaysia’s construction sector for next year. Apart from that, bright prospects of Sabahan economy especially in attracting foreign tourists will strengthen Malaysia’s growth trajectory in the long-run.
 

Source: BIMB Securities Research - 9 Dec 2024