OCBC Bank: Political turmoil could dampen FDI inflow

by FARA AISYAH/ pic by BLOOMBERG

THE inflow of foreign direct investment (FDI) into Malaysia could be affected by the recent political turmoil in the country, warns OCBC Bank (M) Bhd economist Wellian Wiranto in a research note yesterday.

“Malaysia has been winning its share of FDI in a quiet but confident manner in the past year, especially into the technology cluster around the Penang area.

“It could have enjoyed continued resurgence in that field, but the recent political drama surrounding the two friends-then-enemies-then-friends-and-now-perhaps-enemies again could dampen things,” he added.

OCBC Bank recently slashed Malaysia’s 2020 GDP forecast from the already-conservative 4.2% year-on-year to 4%.

He said the fourth quarter of 2019 (4Q19) was already signalling slowing momentum, as such 1Q20 is expected to be especially challenged at just 3.5%.

“If the economic momentum was already slowing even before the Covid-19 outbreak, what chance do we have of a pickup if the current scare drags on and on in the coming weeks?” he noted.

In terms of policy action, Wellian said having surprised the market with its “preemptive” cut last month, there is a distinct possibility for Bank Negara Malaysia to cut rates again, and soon, in the next meeting in March.

“This will be especially so, if the commodities production does not pick up. Needless to say, much will depend on how the Covid-19 outbreak develops as well, be it contagion of the viral sorts or the economic variety,” he said.

Wellian said Malaysia looks more diversified in their production goods suppliers.

“In the case of Malaysia, outside of the nearly 20% dependence on China, shares of other supplying partners are all in single digits. The first half of the total is supplied by up to six trading partners, for instance, signalling a more well-diversified base,” he said.

Wellian said in any case, Vietnam again comes out on top of the list of concentration risk, with a score of over 1,500 or so.

“Looking into the details, this is not too surprising. The big China’s share aside, the second-largest source, Korea, also has a large share of Vietnam’s intermediate goods imports at 15%, followed by nearly 8% from Japan.

“If anything happens to the top three suppliers, half of Vietnam’s intermediate goods imports will be disrupted (due to Covid-19 outbreak),” he said.

He added, in the immediate term, those countries which depend less on China, such as Singapore, would be less impacted directly in terms of shortage of production inputs in their factories.

“The impact is still going to be there, for sure, but on a relative basis, less badly so. And, if you worry about the virus spreading beyond the shores enough to cause ructions in supply chains outside of China too, then the Herfindahl-Hirschman Index (HHI) concentration risk provides a broader indicative impact,” said Wellian.

The countries with a lower HHI score can plausibly find more alternative suppliers, courtesy of their wider supplier base.

He added, although these are just indicative, it largely depends on individual factory linking up with a specific supplier in a particular factory.