Consistent policies, reliable execution and effective communication are vital for aligning govt goals with business and public needs 

by HIDAYATH HISHAM & SHAUQI WAHAB 

MALAYSIA has rapidly enhanced its business competitiveness through strategic economic reforms and robust policy initiatives, positioning itself as an attractive destination for global investors. 

But so have its neighbouring countries. 

Growth Trend 

MIDF Amanah Investment Bank Bhd economist Abdul Mui’zz Morhalim provided comprehensive insights into Malaysia’s business competitiveness vis-a-vis other major economies in the Asean region like Vietnam, Indonesia and Singapore. 

Highlighting its strong positioning, he said Malaysia is ranked second after Singapore among Asean countries. 

Meanwhile, Indonesia had made “a stark improvement”, with the archipelago nation jumping 10 places to 34th in the International Institute for Management Development (IMD) 2023 World Competitiveness Ranking, on the back of improved business efficiency and economic performance. 

“Malaysia’s business environment has recently improved on the back of a more stable political environment and the government’s aspiration to boost investment and development in the country,” Abdul Mui’zz told The Malaysian Reserve (TMR). 

He cited the benchmark FTSE Bursa Malaysia KLCI’s (FBM KLCI) breach of the key 1,600 level on May 7 as a tangible sign of this improving sentiment and confidence in the economy’s trajectory. 

“Since April 29, Malaysia’s equity market recorded US$200 million (RM952 million) in net foreign purchases in contrast to total net outflows of nearly US$900 million in March and April,” he added. 

In contrast, the investment climate seemed more muted in other Asean economies, according to Abdul Mui’zz’s assessment. 

“In comparison, Indonesia continued to register more outflows in early May in addition to the large net foreign fund outflows of -US$1 billion in April 2024. Vietnam also recorded more foreign outflows in early May, after a cumulative net outflow of -US$810 million in the past three months,” he stated. 

On the other hand, explaining the investment patterns shaping Asean’s economic landscape, Abdul Mui’zz said companies relocated their production to Vietnam due to its strategic location, closer to China. 

He said Vietnam has been one of the countries benefitting from the China+1 strategy, which companies adopted to minimise the risk to supply chain stability from the US-China trade war. 

Vietnam’s proximity to China’s industrial hubs made it an opportune alternative investment destination for such relocated supply chains and facilities. 

On the macroeconomic front, Abdul Mui’zz said Malaysia’s growth outlook was improving after a period of sluggishness driven by external demand headwinds. 

At the same time, the faster-growing developing economies like Indonesia and Vietnam continued to be buoyed by robust domestic consumption and investment demand. “Although Indonesia also reported slight moderation in GDP growth last year, the pace was sustained around +5% underpinned by the growing domestic demand, while Malaysia’s GDP growth picked up to +3.9% year-on-year (YoY) in the first quarter of 2024 (1Q24). 

“Singapore and Indonesia also recorded stronger growth at +2.7% and +5.1% YoY respectively in the same quarter. However, Vietnam’s GDP growth moderated to +5.7% after a very strong growth of +6.7% YoY in 4Q23,” he said. 

In terms of the pace of growth, as developing economies with younger demographic profiles, Abdul Mui’zz elaborated that growth in Indonesia and Vietnam has been relatively faster given the strength in domestic spending on consumption and investment. 

In contrast, growth in Singapore and Malaysia is relatively more moderate, reflecting a more matured economic growth trajectory as seen in most developed nations. 

Inflation and Unemployment 

On crucial inflation, he pointed out the diverging trajectory across Asean. 

“Although inflation has moderated from the recent peaks in the post-pandemic period, which was previously caused by supply chain disruptions and fluctuations in the global commodity prices, inflation in Indonesia and Vietnam started to trend higher again.

“Bank Indonesia raised its benchmark interest rate last month to support the rupiah and help contain inflation pressures, which reaccelerated to +3% YoY in March and April,” he added.
In contrast, Malaysia and Singapore’s inflation remained relatively low and under control, hovering around +1.7% and +3% YoY respectively in 1Q24. 

The moderate inflationary pressures gave policymakers in these economies more monetary policy breathing room. 

On employment, Abdul Mui’zz’s assessment was broadly positive across most major Asean economies. 

“In Malaysia, employment continued to grow and reached a new high of 16.5 million in February. The unemployment rate also remained low at 3.3% on the back of sustained economic growth,” he said. 

He made similar upbeat observations about Indonesia, saying the positive labour market conditions also resulted in the unemployment rate in Indonesia falling further to 4.8% in 1Q24, the lowest level since 4Q97. 

For Singapore’s advanced economy, Abdul Mui’zz said although its unemployment rate increased marginally to 2.1% in 1Q24, the rate is still low and within the normal levels as seen during the pre-pandemic period. 

“Singapore’s perennially tight labour market was holding up despite economic headwinds,” he said. 

Vietnam’s labour market conditions were also robust. According to Abdul Mui’zz, the growing employment and business activities also led to the unemployment rate declining to 2.3% in 4Q23, reflecting sustained jobs growth. 

Good Infrastructure and Govt Incentives

Abdul Mui’zz also mentioned that well-developed infrastructure remained a key factor attracting investment into Asean’s more economically advanced nations, with Singapore leading the pack. 

“According to the World Bank, Singapore has more well-developed trade-and transport-related infrastructure with a very high score of 4.6 out of 5 in 2022. In contrast, Malaysia and Indonesia have lower scores at 3.6 and 2.9 respectively,” he said.

He added that these infrastructure quality gaps were reflected in the latest competitiveness rankings. 

“Malaysia’s improvement in the IMD World Competitiveness Ranking was partly supported by the improved ranking in the score for infrastructure quality, which was ranked 35th in 2023, up from 37th in 2022,” he said. 

However, he said Singapore’s more globally competitive infrastructure was ranked ninth in terms of quality (2022: 12th). IMD also ranked Indonesia lower at 51st in terms of infrastructure. 

Robust infrastructure forms the backbone for attracting investment into an economy’s manufacturing and export sectors. 

Abdul Mui’zz also weighed in on the key investment incentives utilised by Asean governments to attract foreign direct investment (FDI) into their economies. 

He said in general, incentives to promote foreign investment can be in the form of tax incentives, involving partial tax relief or full exemption for a number of years, or non-tax incentives such as the ease to get business licence, owning of property or special immigration treatment. 

Abdul Mui’zz also elaborated on Vietnam’s incentive structures. For example, corporate income tax exemptions can extend up to four years for foreign enterprises. 

“Depending on locations, if the investment is located in extremely disadvantaged areas, the 50% tax reduction may be extended to the ninth year of operations,” he said. 

Meanwhile in Indonesia, businesses that bring investment between 100 billion rupiah to 500 billion rupiah (RM146.59 million) will get five years of 50% tax reduction while larger investments of more than 500 billion rupiah will be given tax exemption from five to 20 years. 

Abdul Mui’zz also mentioned additional non-tax incentives in Indonesia targeted at special economic zones (SEZs). 

He added that Indonesia offered foreign workers residency incentives. Other non-tax incentives include temporary resident status for foreign workers in SEZs, with the right to obtain permanent residency if these workers own property in the SEZs. 

Turning to Singapore’s incentive frameworks, he said various incentives are also available to foreign investors. 

These include Progressive Wage Credit Scheme, industry-specific tax incentives, start-up tax exemption scheme, partial tax exemptions, various loan schemes and double tax deduction for internationalisation. 

Locally, Malaysia also offers various tax incentives in the form of partial or full tax reliefs or allowances. 

The treatment will also vary depending on sectors. High technology companies, for example, will be exempted from income tax for five years, while companies that are involved in strategic projects of national importance will get 100% income tax exemption for 10 years. 

Abdul Mui’zz stressed that despite these varied incentives across Asean, factors like infrastructure readiness and overall ease of doing business remain crucial considerations for foreign investors. 

This will typically be the determining factor for investment decisions, taking into account the readiness and availability of infrastructure. 

Digitalisation for SMEs 

He also weighed in on recent government initiatives in Malaysia aimed at improving the country’s business competitiveness and attractiveness for investment. 

“As part of the initiatives to improve business competitiveness, the government has allocated RM100 million in digitalisation grants for small and medium enterprises (SMEs) and RM900 million loan funds for SMEs to adopt automation and digitalisation to enhance productivity,” he said. 

This close partnership with the industry will create competitive Malaysian companies involved in emerging sectors such as electric vehicles (EV), renewable energy, artificial intelligence and smart factories. 

Abdul Mui’zz viewed the formation of the high-level National Investment Council (NIC), chaired by Prime Minister Datuk Seri Anwar Ibrahim, as a positive step to lead and shape the overall national investment agenda. 

Looking ahead, he was optimistic about Malaysia’s ability to stay competitive regionally. He said the government’s push for digital and ICT development aims to position Malaysia as a regional player, adding that the set-up of new data centres and the new large FDI by Microsoft Corp will further enhance competitiveness in the local ICT industry.

“The initiative to promote closer economic cooperation and integration and more seamless mobility between Johor and Singapore will also create a more positive spillover to Malaysia’s business outlook,” he said.

In general, Abdul Mui’zz foresees Malaysia’s economic growth to strengthen to +4.7% this year, backed by recovery in external demand as well as sustained growth in domestic spending.

“On that note, we expect the increased demand will also contribute positively to the local business outlook,” he said. 

Malaysia as Competitive Alternative

Meanwhile, Taylor’s University banking and finance lecturer Dr Kelvin Lee said Malaysia is increasingly recognised as an attractive business hub, particularly as a cost-effective alternative to Singapore, due to its robust infrastructure and efficient logistics. 

He said the country is strategically enhancing its administrative and investment policies to attract more foreign businesses, positioning it favourably against regional competitors such as Vietnam and Indonesia. 

However, he noted the market size in Vietnam is three times larger than Malaysia’s, while Indonesia’s market is nine times larger. 

He said businesses often choose Vietnam over Malaysia due to lower labour and operational costs, which are particularly attractive for labour-intensive industries. 

“Vietnam also offers a large, growing consumer market and strategic trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and European Union-Vietnam Free Trade Agreement (EVFTA), enhancing access to major markets,” he said to TMR. 

Additionally, Vietnam’s government provides various incentives and has made significant efforts to streamline regulatory processes to attract foreign investment. 

Meanwhile, Singapore offers a highly developed, efficient and open business environment, making it a top choice for international investments. 

Malaysia, on the other hand, provides a competitive alternative with strong infrastructure and strategic improvements in trade policies, attracting foreign businesses. 

“Indonesia and Vietnam offer growing markets with increasing openness to foreign investment, though they face challenges in infrastructure and regulatory environments, uniquely positioning each country in Asean for different types of investments,” he said. 

Providing specific numbers, he cited the Asian Development Bank that Indonesia and Vietnam are estimated to show strong GDP growth, with Indonesia at around 5% and Vietnam peaking at 6% in 2024. 

“They are followed by Malaysia at 4.5% and Singapore, which is expected to grow at the slower rate of approximately 2.4%. Inflation is higher in Vietnam at 4%, followed by Singapore at 3%, Indonesia at 2.8% and Malaysia at 2.6%,” he said. 

According to the International Monetary Fund (IMF), Singapore and Vietnam have the lowest unemployment rates at about 1.9% and 2.1%, respectively, followed by Malaysia at 3.5% and Indonesia at 5.2%. 

Future Initiatives 

Lee also commented on the impact of infrastructure quality, praising Singapore for having great infrastructure with good transport and Internet, making it a prime spot for businesses. 

He said Malaysia and Vietnam are improving their transport and digital set-ups to better compete and draw in investments, while Indonesia is also upgrading but struggles with uneven infrastructure across its many islands, which can affect business efficiency and investments in far-off places. 

He added that Singapore is known for its very stable and welcoming investment climate, characterised by robust legal protections, straightforward regulatory frameworks and attractive tax incentives that draw in multinational corporations. 

Meanwhile, Malaysia and Vietnam offer competitive tax incentives and are actively improving their regulatory frameworks to attract more foreign investment, with Malaysia being notable for its relatively simpler business set-up processes. 

However, Indonesia, while improving, faces more variability in its regulatory environment, which can pose challenges for foreign investors, though it also offers considerable tax holidays and incentives to attract investments in specific sectors like digital economy and oil and gas refinery. 

Lee said Singapore attracts FDI due to its high economic stability, strategic location as a global financial centre and strong legal framework, making it very appealing for high-tech and financial services sectors. 

Malaysia and Vietnam attract FDI through competitive labour costs, growing markets and government incentives aimed at specific industries like manufacturing and energy, although Vietnam is perceived as having a slightly more complex regulatory environment. 

In terms of initiatives, he shared that the Malaysian government has launched several key initiatives aimed at enhancing the country’s business competitiveness, particularly focusing on the digital economy and sustainable growth. 

“The 2024 budget includes measures to boost SME digitisation by providing grants and programmes like Shop Malaysia Online to support small entrepreneurs. 

“Additionally, the government is encouraging investment in green technology and high-value industries by offering tax incentives and establishing frameworks like the Madani Economy Framework to support these sectors,” he said. 

Looking into the future, Lee said Malaysia’s competitiveness will be influenced by its focus on digital transformation, enhancing businesses with new technology and improving online systems. 

The country is also advocating for sustainable development, establishing incentives for businesses to embrace green technologies, potentially distinguishing it from neighbouring nations. 

“Malaysia might adjust its trade and investment rules to attract more foreign businesses, aiming to match Singapore’s appeal and surpass Vietnam and Indonesia in attracting high-value investments,” he said. 

Showing Results 

Bank Muamalat (M) Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said Malaysia has consistently fostered a pro-business environment while the private sector’s role in driving investment and fostering growth was expected to become increasingly prominent. 

He said the efforts are beginning to show results, according to the IMD World Competitiveness Ranking 2023 where Malaysia has climbed five spots to 27th. 

“The country’s position was better than Thailand (30th), Indonesia (34th) and the Philippines (52nd), but remains far from Singapore (fourth),” he told TMR. 

Throughout the previous year, several economic blueprints were unveiled, encompassing initiatives such as the Madani Economy, the Mid-term Review of the 12th Malaysian Plan, the New Energy Transformation Roadmap (NETR) and the New Industrial Master Plan 3 (NIMP3). 

Mohd Afzanizam noted that these documents would serve as guiding principles for effectively implementing transformational initiatives aimed at enhancing productivity, increasing income and elevating living standards. 

In a nutshell, he said, Malaysia has what it takes to attract foreign investors. 

He noted that the basic infrastructures and tax policies are the key strength for Malaysia, but areas in business legislation, education and societal framework require further improvement. 

Moreover, he said consistent policy-making and reliable execution, along with effective communication strategies are essential for aligning the government’s objectives with the expectations of businesses and the public. 

---

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