Will 2017 Crow or Croak?


While the outlook may be promising, unexpected events in 2016 will have negative lingering effects for the year ahead, for both Malaysia and Penang.


2016 has been a year of surprises and shocks. Uncertainty became the new normal, as a combination of factors – Brexit, Trump's White House victory, the rise of populism around the world, and the development of the oil price and ringgit – affected the country, including Penang.

Penang, like Malaysia, is an open economy, and plays a part in global supply chains and international business integration. Penang has benefitted significantly from globalisation, and has transformed itself into one of the country’s most important international manufacturing centres. It therefore goes without saying that Penang is significantly exposed to global economic developments, especially since tourism is one of its major industries.

The Global Economy

The International Monetary Fund (IMF) maintained the global growth projection for 2016 at 3.1% in its latest release, and 3.4% for 2017, after cutting its outlook for five straight quarters. The IMF did not change its 2017 forecast for both advanced and emerging markets, which are projected to grow at 1.8% and 4.6% respectively.

As a trading nation, Malaysia remains affected by the global slowdown, largely in terms of demand for its exports. According to Affin Hwang Capital, 2017 is likely to see a modest pace of growth – Malaysia’s real GDP growth is projected to recover gradually from 4.1% year-on-year (yoy) in 1H16 to around 4.3% in 2H16, with an estimated average of 4.2% for 2016, compared to 5% in 2015. Against a backdrop of modest but healthy growth in the global economy, Affin Hwang expects the country’s real GDP growth to improve to 4.4% in 2017, supported by domestic demand, especially from private consumption and investment.

However, as a highly open and tradedependent economy, Malaysia’s real GDP growth and external demand will likely be influenced by the health of the global economy in 2017. The IMF expects some improvement in the global economy, with global GDP growth of 3.4% yoy in 2017, higher than its forecast of 3.1% in 2016 (3.2% in 2015).

However, the global economy is still clouded by uncertainty from the Brexit vote and the sustainability of China’s economic growth, as well as tensions in the US political scene, with much anti-trade sentiment being expressed by the new US administration. Subsequently, the downside risk to global growth will continue.

Affin Hwang expects the Malaysian government’s fiscal deficit to improve to 3% of GDP in 2017. Based on the assumption that the revenue target is attainable, an improvement in the budget fiscal deficit from -3.1% of GDP in 2016, to the -3.0% of GDP projected by the government for 2017 can be achieved. Government revenue is projected to increase from the collection of direct taxation, mainly from the Goods and Services Tax (GST) and oil-related revenue.

Following a referendum held in June 2016, the UK voted to leave the EU.

In accordance with the recently announced 2017 Budget, it is likely that private consumption remains supportive of economic growth. Consumer spending should be largely supported by initiatives such as BR1M for low-income household groups. A boost to private investment growth will come from ongoing infrastructure projects, such as the Pan Borneo Highway, Rapid and MRT Line 2, as well as the new East Coast Railway Line (ECRL) project connecting Klang Valley to the East Coast, all of which were announced in Budget 2017.

According to Affin Hwang, 2017 export growth is expected to pick up from 0.1% yoy in 2016 to 2.5%, while import growth should rise from 1.4% to 2.7% over the same period, with the trade balance improving slightly to RM83.4bil in 2017 (RM82.7bil in 2016E).

As Penang is a significant contributor to the Malaysian balance of trade, the positive effects of this will surely be felt in the state. The current account surplus is expected to narrow to 1% of GNI from 1.3% of GNI in 2016. The sustainability of Malaysia’s current account surplus position should be determined mainly by the trade surplus, as both a services deficit and an income deficit will likely persist in the quarters ahead.

The Catalan bid for independence in 2014. With Brexit, other countries or sub-states such as Catalonia will face pressure to follow the UK vote.


On June 23, the UK voted to leave the EU. Apart from the inevitable plunge in GBP and drop in appetite for risk assets, there were other economic implications for Penang and Malaysia. Firstly, the UK economy defied expectations, and did not head into a short-term recession. Nevertheless, until today, it remains unclear how the British government will proceed with Brexit negotiations with the EU.

Although the UK and Malaysia have a long trading relationship, bilateral trade between the two countries of late have not been large. According to the Department of Statistics (DOSM), exports to the UK range between RM10.5bil (2004) to RM9.3bil (2015), and imports range between RM6.6bil (2004) to RM7.1bil (2015). Thus, a trade balance of RM3.9bil (2004) to RM2.2bil (2015) has been in Malaysia’s favour. Collectively, the UK’s trade with Malaysia ranges between 3.6% and 8.8% of Malaysia’s total trade.

For Penang, and in the year up to November 2014, exports to the UK were at RM156mil, with imports worth RM88mil, thus generating a positive balance of trade of RM68mil in Penang’s favour. Therefore, while the UK is an important trading partner, it is not a dominant one.

Besides, inwards FDI from the UK in the manufacturing sector has not been extensive. For example, according to the Malaysian Investment Development Authority (Mida), FDI from the UK into Malaysia was between RM15.4bil (2008) to RM20bil (2014). Likewise, FDI from the UK into Penang was only RM389,280 out of RM5.1bil in 2014, which amounts to between 4.2% and 6.1% of Malaysia’s total FDI.

However, Malaysia’s direct investment in the UK is higher and has been rising steadily since 2008. For example, direct investment into the UK was RM8.2bil in 2008, and rose to RM21.3bil in 2014. This investment has also generated publicity, in particular in the properties sector. For example, SP Setia and the Employees’ Provident Fund (EPF) have been leading a multi-billion pound redevelopment of the Battersea Power Station in London. Therefore, the trade and investment impact on Penang and Malaysia from Brexit is likely to be indirect, via the fall in confidence in the global economy which affects the appetite for risk assets, such as Malaysian equities and bonds.

Secondly, the impact on Malaysian households should be generally positive. For most Malaysians, a holiday to the UK would be more affordable. However, due to strong education and investment links – as seen in the popularity of the Battersea Power Station redevelopment among Malaysian households – some households and institutions will be affected by a fall in GBP. On the other hand, there are thousands of Malaysians studying in the UK; hence, a weaker pound would help the affordability of their education costs.

Thirdly, as part of diversification, several government-linked investment companies and the EPF have invested in the UK, predominantly in London properties. With the desirability of London as an international city potentially affected by Brexit, there could be risk of property prices falling. The impact on these institutions might be compounded as the pound has depreciated as well.

Lastly, Brexit would have broader political and strategic implications, with the most obvious being the fate of the European project and the rise in nationalist sentiment among some EU members. Other countries or sub-states such as Catalonia will face pressure to follow the UK vote (or re-join the EU, as the case may be for Scotland). Some Dutch politicians have already called for a Dutch referendum. However, exit would be much more complicated for those that are members of the Eurozone. The results might not be immediate, but if the UK fares well outside the EU then other countries might be tempted to follow suit, which will create global lingering uncertainty.

The economic consequences of Brexit are likely to be indirect through aversion to risk assets or reduction in confidence. However, the depreciation of the GBP might affect Malaysian investors in the UK. A wider impact is likely on the political aspect of the EU project, which will be sorely tested in the French and German elections in 2017.


Donald Trump.

On November 8, Donald Trump’s unexpected election victory emitted global shockwaves. There remains considerable ambiguity about Trump’s actual policies, but based on his rhetoric during the campaign, there will be mixed positive demand and negative supply elements. Without concrete knowledge at the time of writing, it is hard to extrapolate what future US policies will be. Nevertheless, three scenarios could arise: the positive, the negative, and the neutral.The positive scenario is where after years of sub-par growth, the US economy finally grows, further boosted by Trump’s fiscal thrust and big deregulation. The negative case is one in which the US recovery slows down, Trump reflates the economy through fiscal policy and imposes stiff tariffs on imported goods to protect US jobs. The consequences of these would be more inflation than growth, slower global trade as well as possible trade wars. The neutral case, meanwhile, refers to moderate fiscal expansion without too much inflation being triggered, and sufficient deregulation is introduced to unshackle the US economy. Global trade remains static or expands due to US consumers getting richer and buying more overseas goods.

As we move into 2017, there will be heightened market uncertainty with several key risk events. Trump and Brexit have unleashed many into thinking that the unthinkable can really happen. Before Trump’s policies are implemented, there will be greater uncertainties in the market. This will not be conducive to FDI in non-US countries as US corporates might be incentivised to repatriate their overseas income.

Economists will be watching Trump’s key appointments as he unveils his economic policies. The US Federal Reserve is likely to hike rates for a second time in December 2016, which has been priced into the markets as a near certainty. Gradual US interest rates increases will have less negative impact on emerging markets asset pricing.

However, one pertinent trend that has developed post-Trump is reflation. Since 2014, deflationary pressures have been dissipating. In fact, inflationary pressures were already building up even before Trump’s election win, but the potential of more stimulus from Trump has pushed inflationary expectations markedly higher. Should this prompt the Federal Reserve to be more aggressive in hiking interest rates, Malaysia will be impacted negatively, predominantly through ringgit depreciation versus the dollar.

2017 will include several key political events such as the German and French elections. Should a Brexit-type of outcome prevail, the EU project will be put into serious doubt, with ensuing economic uncertainty. The implications for institutional investors from populist wins are ample, but in general, reduced stock market returns, sector-related differences, increasing interest rates and a weaker Euro are all likely outcomes.

Tourism in Penang

Parasailing at Batu Ferringhi. The beach is one of the top five destinations most visited by domestic tourists.
Songkran festival at Wat Chayamangkalaram in Pulau Tikus. Festivals are one of the reasons tourists flock to Penang.

Penang’s tourism sector is one of the major sources of income generation in the state, second only to manufacturing. International visitors arriving at Penang International Airport (PIA) increased by 8.1% annually from 2008 to 2015. As one of Malaysia’s leading tourist destinations, Penang has plenty to offer tourists. According to a survey conducted by Penang Global Tourism in March 2016, the three main purposes for visiting Penang are for leisure (65.3%), culture and heritage (14.2%), and visiting friends or relatives (9.2%). About 46% of international visitors and 52% of domestic visitors stated that their visit met their expectations, and around 98.3% of visitors are willing to recommend Penang to others.Penang’s aviation industry plays an important role in the state’s tourism sector performance. PIA is Malaysia’s third busiest airport after Kuala Lumpur International Airport and Kota Kinabalu International Airport in terms of passenger movements. In 2015 the number of domestic passengers arriving at PIA increased by 7.8%, while the number of international passengers declined by 1.8% compared to 2014 (Figures 1 and 2).  

Tourist flow in the state differs seasonally. In 2015, the number of visitors grew during January-March, April-July and October- December. Different factors could affect variations in tourism demand such as weather, holidays, events and festivals, as well as a host of other sociological and economic factors. For instance, the regional perennial haze in late 2015 negatively

affected the number of travellers to Malaysia and Penang. In addition, the decline in the number of visitors, particularly domestic visitors, in the middle of 2015 coincided with the introduction of GST, which reduced consumer spending.

The influx of domestic and international visitors corresponds with regular events and festivals held in Penang. For example, related to the increase in total arrivals in May 2015 was the Penang International Dragon Boat Festival, and in December, the Penang Island Jazz Festival. In 2015 Penang held 325 events including festivals, exhibitions and conventions, which increased to about 357 in 2016.[1] In fact, Penang’s well-established hospitality industry – with its mixture of various Asian cultures, prized heritage and good facilities – have made the state conducive as a meetings, incentives, conventions and exhibitions (Mice) destination.


Although the total number of visitors arriving at PIA increased by 3.6%, the average occupancy rates (AOR) of hotels in the state dropped by 14.3% in 2015, compared to 2014 (Figure 3). This decline significantly affected local businesses and sales. AOR slightly increased to 55.7% in the first quarter of 2016 compared to 53.2% in the last quarter of 2015, but it is still lower than the AOR of the same period in 2015.As presented in Table 1, the top 10 countries of origin of international visitors at PIA in 2015 were Indonesia (43.6%), Singapore (23.4%), China (10.1%), Japan (4.9%), Australia (3.6%), Taiwan (3.6%), US (3.6%), UK (3.1%), Thailand (2.9%) and Germany (1.2%). Among these countries, tourist arrivals from Australia and Taiwan registered positive growth, with an increase of 10.3% and 4.4% respectively, while the rest had negative growth in 2015 compared to 2014. Although Indonesia continued to be the largest contributor of tourist arrivals in 2015, the number still fell significantly (8.8%) compared to 2014. This phenomenon probably corresponded to the reduction in Indonesian medical tourists.  

As recorded by the DOSM, the top five states for Penang’s domestic visitors in 2015 were Selangor (25%), Kedah (25%), KL(15%), Perak (12%) and Kelantan (5%). In 2015 the top five destinations most visited by domestic visitors in Penang were Batu Ferringhi, Persiaran Gurney, Fort Cornwallis, Bukit Bendera and Komtar.


Malaysia is ranked among the top medical tourism destinations in the world, mainly due to the availability and affordability of high-quality medical treatment. In addition, the decline in the ringgit’s value made services offered by private hospitals in the country cheap to foreigners. According to the Malaysia Healthcare Travel Council (MHTC), about 850,000 medical tourists travelled to Malaysia in 2015, a 3.6% drop compared to the 882,000 in 2014. In spite of this decline, income earned through health tourism by hospitals increased by 17%.In 2015 around 80% of Malaysia’s medical tourists came from neighbouring countries, namely Indonesia, Thailand and Singapore[2]; however, in recent years, the number of Indonesian patients has dropped, probably because of the National Health Insurance Programme (JKN) launched in January 2014 in Indonesia.

Source: Immigration Department of Malaysia.

Penang receives around 60% of medical tourists that come to the country[3]. According to MHTC, the number of health tourists increased by 2% from 2014 to 2015, contributing revenue to the state; health tourism revenue in Penang grew significantly in 2015 to about RM407mil, an increase of 40% from RM292mil in 2014, mainly because of the implementation of GST, which caused the cost of medical services to increase across the private healthcare sector. On the other hand, rising healthcare revenue would encourage investors, which may increase job opportunities.Although the depreciation of the ringgit made Malaysia and Penang an attractively priced destination, especially for international travellers, the slower demand – as a result of the slowdown of the Chinese economy, the lingering impact from the disappearance of flight MH370 and the downing of flight MH17, the restructuring of Malaysia Airlines, and the regional haze from forest fires in Indonesia – led to the slowdown in the tourism industry in 2015. However, Penang’s AOR of hotels showed signs of recovery for the first quarter of 2016.  

In spite different obstacles, the tourism industry in Penang has remained resilient, and continues to boost the overall economy. Penang’s good facilities and its affordability will continue to make it the preferred destination for domestic and international travellers.

The upward trend for Penang’s tourism industry over the past 10 years, except 2015, indicates that this sector will continue to grow. However, tourism needs to be a sustainable and dynamic industry. As demand and expectations of travellers rapidly increase, the tourism sector must be ready to react.

  • [1]“Events,” MyPenang., accessed November 11, 2016, http://mypenang.gov.my/events.aspx.
  • [2]“Malaysia… Challenging Perceptions in Health Tourism,” Malaysia Healthcare Travel Council, July 11, 2016, https://www.mhtc.org.my/malaysiachallenging- perceptions-in-health-tourism/.
  • [3]“Health Tourism,” MyPenang, May 30, 2016, http://mypenang.gov.my/pagefull-68-health_tourism.pgt.
Tim-Niklas Schoepp is COO and visiting analyst in Economics at Penang Institute.  
Negin Vaghefi is a senior analyst at Penang Institute. She holds a Ph.D. in Environmental Economics. Her research interests include agri-environmental economics, climate change, green economics, poverty and income inequality, and policy analysis.

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