Political stability crucial to lure investors

Politics most important element in attracting investments as it gives clarity on economy direction and a sign of clear commitment


ANALYSTS believed that Malaysia needs to maintain a stable and corrupt-free political environment, as well as a solid economic system to remain an appealing proposition for foreign direct investments (FDIs).

Malaysia University of Science and Technology professor and economist Dr Geoffrey Williams said investors are very aware of changes in the political landscape, and this is common in all countries around the world.

He added that although changes in government do not concern investors as much as people think, it is crucial that there is a clean, clear and stable economic system in which there is good governance and a rule of law so that investment returns are secure and can be predicted.

“For example, investors are not attracted by a stable but corrupt political environment in which leading figures are charged or convicted of corruption. They are also not attracted by a political environment in which the leading figures are fighting each other within their own party for control of the government.

“They are certainly not attracted by an ineffective or corrupt legal system in which contracts cannot be enforced or where laws are arbitrary or unclear,” he told The Malaysian Reserve (TMR) when contacted recently.

He stressed that one must not confuse political stability with attractive investment opportunities and we must not assume that a change of government will scare investors away.

He noted that in Malaysia, many investors — whether Malaysian or foreign — would be happy to see the government change if it meant less corruption.

Commenting on what Malaysia can do in terms of becoming an attractive investment destination, he pointed out that there must be a “better than the others” approach to FDI investment incentives on grants, regulations, buildings, ownership rules, tax exemptions and working visas.

Therefore, he said whatever is offered elsewhere, Malaysia must compete by offering better terms.

“Malaysia is a smaller market but can be an entry point to Asean with the right policies. The ‘look and feel’ of Malaysia as a home for FDI must be improved with long-term visas, opportunities for permanent residency and above all a more welcoming attitude to foreigners,” he noted.

Additionally, he also highlighted that Malaysia must look for “Blue Ocean” opportunities for FDI that make other countries irrelevant as competitors.

“This can be new offers in underserved industries such as healthcare, wellness and creative industries that use technologies but do not replace people with technologies,” he said.

Meanwhile, Centre for Market Education CEO Dr Carmelo Ferlito said political stability is one of the most important elements in attracting investments, as it gives clarity about the political economy direction and a sign of clear commitment.

“Obviously, in case that direction is perceived as wrong for the economy, investors will not jump in. Investors need signals of stability, but also of commitment to a reformist agenda aimed at creating the right ecosystem for them in terms of regulation, access to the financial system and the labour market,” he told TMR.

Ferlito said currently the debate is focused on elections and this is impeding a necessary debate on the hard decisions needed in terms of the policy.

He opined that what is probably keeping investors at bay is not instability, but the lack of a clear economic agenda and the lack of vision.

“I am an advocate for early elections because, at the very least, the parties would be forced ‘to show their cards’, to expose their manifesto for the future of Malaysia. On that basis, voters could make their choice,” he said.

Ferlito said in the last few years, the investment ecosystem deteriorated due to a series of reasons.

For example, he said, procedures applied on the ground by the banking system just to open a bank account have become extremely lengthy and can take up to six months.

He also noted that too much discretion is given to officials regarding the employment of expatriates, where the labour legislation becomes too restrictive.

“The government’s heavy hand on the economy increased with measures such as price ceilings. I think we really need a U-turn in terms of strategy and vision,” he said.

Good Perception Vital

Putra Business School Associate Prof Dr Ahmed Razman Abdul Latiff said in addition to corruption perception, it is also important for investors to have a perception of political stability before they decide to invest in any country — Malaysia is no exception.

He added that not having a fixed date for the general election does not create such stability.

“However, the introduction of the Anti-Hopping Bill will definitely reduce some uncertainties on the formation of the new government, at least at the individual level,” he told TMR.

Ahmed Razman said the current instability in Malaysia’s politics is not that serious compared to other countries like Sri Lanka, Myanmar and Pakistan.

Therefore, he said Malaysia still receives a much higher FDI value in the first half of the year.

“However, other factors have come into play in driving investors away from equity and bond markets such as the strong US dollar. Nevertheless, an outcome after the 15th General Election that produces a hung government will definitely cause the investors to stay away from the Malaysian market,” he said.

Ahmed Razman said there are many factors that can bring back investors and the recent ratification of the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership and Regional Comprehensive Economic Partnership will encourage more FDI into Malaysia.

He highlighted that the weak ringgit can also encourage more FDI as it will be cheaper to invest here.

Global Uncertainty Rising

Universiti Teknologi Mara Faculty of Business and Management senior lecturer Dr Keshminder Singh said global economic uncertainty is surging with the rise in geopolitical tension, climate change, pandemics and severe recession expectations.

He said in turbulent times like now, investors are looking for countries that are expected to retain or at least marginally increase the value of their investments.

“However, if governments are already dealing with global catastrophic events and facing political instability, there is no hope for businesses to survive. This will indefinitely (scare) the investors away,” he said.

Keshminder added that political stability leads to less business-friendly policies, primarily related to business taxation and regulation.

He noted that if this happens, investors are in a fix, unable to put forward future business plans, afraid of rising costs in the future affecting their production, sales and marketing.

In terms of attracting more FDI, he said Malaysia must instil confidence among investors that there is scope for sustainable economic growth in the country.

“To do so, Malaysia must aggressively encourage the environmental, social and governance principles in its business environment, monitor domestic inflation and place greater importance on structural reform.”

Previously, former Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said the government will intensify efforts to improve foreign investor sentiment towards Malaysia by implementing policies that can spur its attraction as an exciting investment destination.

During a question-and-answer session in the Dewan Rakyat on Oct 4, he said the government will give more focus on encouraging investments into emerging industries, as well as implementing the National Investment Aspirations framework to attract high-quality investments.

He noted that the external corporate credit risks remain manageable, adding that there is no easy or quick fix for the ringgit’s weakness against the US dollar.

RM123.3b Approved Investments in 1H22

To recap, Malaysia attracted a total of RM123.3 billion worth of approved investments in the manufacturing, services and primary sectors involving 1,714 projects for the period of January to June 2022 (1H22), according to Malaysian Investment Development Authority (Mida).

FDI remains the major contributor for the total approved investments at 70.9% or RM87.4 billion, while investments from domestic sources contributed 29.1% amounting to RM35.9 billion.

The approved investments for this period will generate 57,771 new jobs in the country.

The services sector assumed a significant role towards driving the country’s economic recovery, securing projects worth RM78 billion for the 1H22, compared to the RM52.4 billion it gained in 1H21, a sizeable increase of 48.8%.

This is followed by the manufacturing sector at RM43.1 billion or 34.9% and the primary sector at RM2.2 billion or 1.8%.

Out of the RM87.4 billion FDI recorded, China dominated with investments totalling RM48.6 billion, followed by Germany (RM9 billion), Singapore (RM6 billion), Brunei (RM5.1 billion) and Netherlands (RM4.1 billion).

For projects approved by state, five major states — namely Johor, Selangor, Sabah, Kedah and Penang — contributed RM103.5 billion or 83.9% of the total investments approved in the 1H22.

According to Mida, Malaysia remains steadfast in its fundamentals as the pre-eminent preferred investment destination in the region and set to catapult the nation to stage its most robust recovery as it enters the stage of endemicity.

“As we forge ahead on the path of economic revitalisation supported by ongoing policy reforms and accelerated digitalisation, the government remains committed to prioritising the needs of our people and businesses.”

As of August 2022, there are 276 projects with proposed investments of RM25.1 billion within Mida’s pipeline; 198 projects are from the services sector (RM13.7 billion), while 78 projects are from the manufacturing sector (RM11.4 billion).

Moving forward, the International Trade and Industry Ministry and Mida aspire to continue the momentum in securing new sustainable and inclusive investments to drive Malaysia’s economic growth.

  • This article first appeared in The Malaysian Reserve weekly print edition