Staying the course and maintaining momentum

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“In the oil, gas & energy NKEA, projects such as PETRONAS’s RAPID project (illustrated) and the Gumusut-Kakap field in Malaysia’s upstream and downstream energy sectors allow the industry to look to 2015 with optimism,” says RHB Research.“In the oil, gas & energy NKEA, projects such as PETRONAS’s RAPID project (illustrated) and the Gumusut-Kakap field in Malaysia’s upstream and downstream energy sectors allow the industry to look to 2015 with optimism,” says RHB Research.

Malaysia has shown significant progress towards becoming a high-income nation since the Economic Transformation Programme (ETP) was launched in October 2010. As the nation enters the final phase of the ETP, it is more important than ever to stay the course and maintain the momentum that has been established in the country’s transformation, economists opine.

The success of the ETP will be measured against the nation’s achievement in its goal of becoming a high-income nation by the year 2020, say Kenanga Investment Bank economists.

According to World Bank criteria, this would equate to a gross national income (GNI) per capita of USD15,000 in 2020 dollars. Between 2009 and 2014, per capita GNI grew 47.7% to USD10,426 or at an average annual compound rate of 8.1%. To reach the 2020 target, per capita GNI would only need to grow at an average annual rate of 6.3%. As such, ETP custodian Performance Management & Delivery Unit (PEMANDU) is of the view that high-income status can be achieved a year before the 2020 end date.

“We concur with the view but note that their projection is on a straight line basis, therefore it does not anticipate for business cycle downturns, which in 1985, 1998 and 2009 caused a dip in per capita GNI,” says Kenanga.

RHB Research economists also note that per capita income, which grew by double-digits in the first two years of the ETP (2010-2011), had flattened out in recent years. “While the NKEAs still contributed the bulk of GNI with 68.0% share, it represents a shrinking share since reaching 70.2% in 2011. Therefore, more efforts are needed if the country aims to remain on its trajectory to achieve a high-income nation status by 2020,” they opine.

Kenanga notes that the ETP’s 2014 annual report, released recently, reveals that the programme has become more intricate and involved at the micro level, as well as the macro level.

“In pushing for incremental change at the local community level as well as on government policy direction, the ETP is better able to effect economic transformation not only from the top-down but also from the bottom-up,” it says.

It lauds the latest annual report as a confidence booster for investors, who view regular progress reports as a commitment by the government to structural reform on all levels of the economy. It adds that investors will also appreciate the news flow on various industry-specific initiatives and the report card-style grading of the ministries.

“Most importantly, and the reason that the report is closely watched, is that it is a good gauge of future infrastructure project announcements. We read that most mega infrastructure projects will be implemented under public-private partnership (PPP) which is generally encouraged for projects that might have a long gestation period and require substantial capital injection as is the case with ETP projects such as the Pengerang petrochemical hub, MRT urban rail lines 1 and 2 and the Kuala Lumpur-Singapore high-speed rail,” highlights Kenanga.

According to the ETP annual report, the overall achievement rate for its combined 12 National Key Economic Areas (NKEAs) was 110% in 2014, higher than the 102% achieved in 2013 but lower than the 118% recorded in 2012 and 123% in 2011. All but one NKEA (business services NKEA) met their KPIs in 2014 compared to four NKEAs that failed to meet their KPIs in 2013. Meanwhile three NKEAs exceeded their KPIs in 2014 in outstanding fashion, namely the financial services, agriculture and tourism NKEAs.

“This suggests that the ETP is overcoming the setback it faced in 2013, responding with the improvement in KPI achievements for 2014,” says RHB.

RHB notes that in line with the ETP’s objective to elevate the private sector as the main driver of the economy, private investment has outpaced public investments, growing by a CAGR of 13.9% over 2011-2014, compared to 5.6% CAGR in 2007-2010. As a result, the share of private investment to total investment rose from 52% in 2009 to 64% in 2014. Malaysian Investment Development Authority (MIDA)-approved investments stood at RM235.9bn in 2014, continuing to surpass the 10th Malaysia Plan annual target for investments of RM148bn for the fourth consecutive year. Consequently, the private investment’s share of GDP increased to 17.5% in 2014, the highest in 16 years and from 16.9% in 2013 and a low of 8.2% in 2002.

“Although the share of private investment still paled in comparison with a high of 36.3% recorded prior to the Asian currency crisis in 1997, the ETP is moving in the right direction in encouraging private investment,” says RHB.

RHB believes that the momentum of private investments will likely grow at a more measured pace after hitting double-digit growth since 2010. “We are of the view that the tougher economic environment, particularly the rising costs of doing business domestically and a clamp down on property speculators will likely cap the upside of private investment. This will likely be compounded by uncertainties caused by the implementation of GST on 1 April. We project private investment to sustain its growth at around 8.5% in 2015, albeit lower than +11.0% in 2014.”

While the Government continues to ensure a supportive and conducive environment for commercial activity, RHB believes that the responsibility for driving economic growth must rest on the private sector, which is better equipped with resources and capabilities to develop the NKEAs. “Fiscal discipline should be practiced to protect economic fundamentals. This is especially important as global economic recovery remains weak in the short term.”

“In the oil, gas & energy NKEA, projects such as PETRONAS’s RAPID project and the Gumusut-Kakap field in Malaysia’s upstream and downstream energy sectors allow the industry to look to 2015 with optimism.  Meanwhile, the wholesale and retail trade NKEA is expected to continue its robust growth in 2015, supported by strong domestic consumption and higher tourist arrivals. The E&E industry is expected to continue growing in 2015, driven by activities in smart manufacturing and continued investments in the sector’s EPPs [Entry Point Projects],” the house adds.

Etiqa Insurance & Takaful’s head of research/ head of products & alternative investments Chris Eng notes that while the fanfare surrounding the initial launch of the transformation programmes and the large EPPs have generally died down, “it is encouraging to see that the government has quietly kept its head down and continued the good work first identified.”

“As a frequent user of public transport, I can attest to the improvement in the LRT and monorail services. It is now hoped that in the areas where performance is still lacking, such as where the government still needs to reduce its involvement in business, that there will be effort and political will to do the right thing. Let business be business and the government focus on the welfare of the rakyat,” he says.

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