Cautiously but surely, Penang's growth continues

loading The KL skyline. Malaysia’s GDP continued to grow strong with a growth rate of 5.6% in the first quarter of 2015.

It’s been a trying start to the year, but Penang remains resilient.

Penang’s economy is dependent on national and global economic conditions; the US economic recovery, lower oil prices, the Asean Economic Community (AEC) and the implementation of GST in Malaysia are likely to change consumers’ spending and producers’ output, as well as business strategies. These factors are also likely to affect Malaysia’s and Penang’s economic performance.

Figure 1: GDP annual growth rate in Malaysia and Penang, 2006-2015 

Source: Department of Statistics and 11th Malaysia Plan 2016-2020 (11MP).
Note: Growth rates for 2006-2010 are based on 2005 constant prices, while growth rates for 2011-2015* are based on 2010 constant prices.
*Projection

Table 1: Projected GDP for Malaysia and Penang, 2014 and 2015* (2010 prices) 

Source: 11MP. Note: Numbers have been rounded up.
*Projection

The situation in Malaysia
Malaysia’s GDP grew substantially at six per cent in 2014 – an increase of 1.3% from 2013 (Figure 1). This was due to resilient domestic demand and improved external demand. Malaysia’s GDP continued to grow strong with a growth rate of 5.6% in the first quarter of 2015; this made the projection for Malaysia grow at an optimistic rate of five per cent, which is higher than the IMF estimate of 4.8%, despite a projected weak private consumption from April-June 2015.

Private consumption expanded at 8.8% (in Q1 2015) compared to 7.6% in the fourth quarter of 2014 due to a stable labour market, flood relief efforts and the front-loading of household spending prior to the implementation of the GST. Likewise, private investment recorded a stronger growth of 11.7% in Q1 2015, underpinned by capital expenditure in the manufacturing and services sectors and a growth of 0.5% in public investment1.

Meanwhile, favourable external demand also contributed to the higher rate of growth in Malaysia’s GDP; export of goods and services expanded by 5.1%, surpassing the growth of the import of goods and services (3.9% in 2014). This was primarily due to the weakening of the ringgit vis-à-vis currencies in most advanced economies, where goods and services produced domestically were relatively cheaper.

Oil prices dipped to as low as US$52 per barrel at the end of 2014 and plunged further to below US$50 per barrel, putting the Malaysian fiscal account in a difficult position. Industry players are beginning to feel the impact of the plunge in global crude oil prices; Petronas has initiated cost-cutting measures through salary reductions, retrenchment or redeploying manpower2. Penang is insulated from this as it has no oil and gas sector.

To reduce budget deficit, there is a need to cut government spending. This measure was reflected in the projection made in the 11th Malaysia Plan (11MP), where public consumption is expected to contract by 1.1% in 2015. Penang is expected to be less affected because revenue made from oil and gas does not play a role in its economy.

 

Spotlight Penang
Due to Penang’s reliance on the US’s economic recovery, its GDP is expected to grow moderately in 2015, outperforming Malaysia’s. On top of that, the core economic sectors of Penang are anticipated to expand at a faster pace than that of Malaysia. Although Penang contributed only 6.6% of the national GDP, its manufacturing activities accounted for 13.2% of the national manufacturing output in 2014. This trend will continue to grow to as high as 14.4% in 2020.

Manufacturing still bullish
Penang’s manufacturing sector recorded a steady growth rate at 8.2% in 2014; it is predicted to increase by 6.8% in 2015 (Table 1). Its approved manufacturing investments escalated by more than 100% to RM8.2bil in 2014, compared to RM3.9bil in 2013 (Figure 2). Of these, about 63% was contributed by foreign companies; the remaining 37% was made by domestic investors.

Figure 2: Penang’s approved manufacturing investments, 2005-2014 

Source: Malaysian Investment Development Authority (Mida).

This shows that Penang remains an attractive place for MNCs to invest new manufacturing activities or expand existing high value-adding manufacturing operations. Intel is one such example: with an initial investment of US$1.6mil in 1972, it has intensified to US$4bil as of 2014. With the presence of human capital and sound infrastructure, Intel has built one of the largest silicon design centres in Penang and has transformed its operations from a traditional manufacturer of chipsets, microprocessors and motherboards to design and development as well as global shared services. The Internet of Things (IoT) – the integration of computing into devices and connecting them to the Internet through cloud data – has also emerged to be the main focus of Intel Penang now; IoT significantly contributes to world digital evolution, turning Penang into a “3Is” economy – International, Intelligent and Innovative.

Figure 3: Major approved manufacturing investments by industry in Penang, 2014.
Source: Mida.

An enhanced innovation ecosystem is crucial to increase the efficiency and productivity level of the manufacturing sector. As underlined in the 11MP, innovation raises productivity through new or improved processes, technologies and business models; it creates additional sources of revenue through differentiated products and services. Penang’s manufacturing activities have been moving up the value chain as the global industrial landscape innovates

Figure 4: Major approved manufacturing investments by country in Penang, 2014.
Source: Mida.

In terms of industry, electronics & electrical products (E&E) remains the backbone of Penang’s investment frontier, accounting for nearly 60% of Penang’s total capital investment in 2014 (Figure 3)3. Out of RM4.8bil generated by the E&E industry, about 87% was recorded to be investments by foreign companies (see Table 2 in Statistics).

Penang is predicted to see greater trade activities with Singapore in the coming years4. Singapore Aerospace Manufacturing (SAM) has invested RM200mil in a plant at the Penang Science Park to manufacture precision machining for aerospace and front-end semiconductor equipment; it plans to expand and manufacture aerospace machined parts in the next five years, doubling its employment from the current 700 headcount. Economic Development Innovations Singapore (Edis), Temasek Holdings and Penang Development Corporation (PDC) have signed a Memorandum of Understanding in May 2014 to develop the Penang International Technology Park and the Business Process Outsourcing Prime, with a gross development value worth RM11.3bil, over of the next few years.

Figure 5: Unemployment rate in Penang, Q1 2004-Q3 2014 

Source: Labour Force Survey, Department of Statistics Malaysia.

Penang will continue to attract investments from abroad. According to investPenang, four public-listed MNCs were recorded to have invested RM5bil worth of electronic manufacturing activities in Penang5. Penang anticipates a larger investment inflow into the industries of renewable energy, electronics and information communication technology (ICT), and life sciences.

 

Historically low unemployment rate
Penang’s labour force participation rate of 70.6% achieved a new record in the last quarter of 2014. Out of 829,300 workers aged 15-64, 98.8% are employed – an increase of 4.1% on a year-on-year basis (y-o-y) in the fourth quarter of 2014. The percentage of unemployed people in Penang dropped drastically by 29.2% y-o-y in Q4 2014. Penang’s historic low unemployment rate of 1.2% (Figure 5) indicates that job employment in Penang is higher than in OECD countries, which have an 8.1% unemployment rate.

The services sector continues to show resilience in Penang’s employment market. In the last quarter of 2014, the share of employed persons in this sector expanded marginally to 61.4% from 60.5% in the previous quarter (Figure 6). In the same quarter, there was a rise in the share of employed persons in the education sector – 7.1% of Penang’s entire workforce – compared to 5.2%-5.5% in the first three quarters of 2014 (Table 2). This upsurge of nearly 40% shows that there are now more teachers in the workforce.

Figure 6: Total employed persons by sectors in Penang, Q4 2014.
Source: Labour Force Survey, Department of Statistics Malaysia.

In April 2015 the Penang state government initiated the Penang Future Foundation scholarship – worth RM20mil from 2015-2016 with RM10mil each year – to lure outstanding students to contribute in Penang’s workforce. On the whole, the number of professionals, technicians and associate professionals in all economic sectors grew noticeably at a rate of 9.7% in Q4 2014 compared to the same quarter in 2013.

Given the economic recovery in the US, and over four decades of industrial experience, Penang’s labour market is expected to remain at full employment position, with an unemployment rate of not more than four per cent. Penang’s unemployment rate is anticipated to be much lower than what is projected in the 11MP, which is 2.9% in 2015.

Table 2: Share of employed persons in services sub-industries in Penang, Q1-Q4 2014 (%) 

Source: Labour Force Survey, Department of Statistics Malaysia.

Conclusion
Penang’s GDP is predicted to continue growing at a moderate pace. It is estimated that more capital investment from abroad is likely to persist and more employment opportunities are to be made available due to the opening of the Batu Kawan Industrial Park. Greater capital investment could also mean higher acceleration in the trade of goods and services.

Penang’s export is expected to see resilient growth in Q2 2015 due to the depreciation of the Ringgit; export in machinery and transport equipment6 takes up 72% of Penang’s total exports, growing substantially at 15% in Q1 2015 (RM33.2bil) compared to RM28.9bil in Q1 2014. Penang’s external demand in electronics is estimated to expand at a healthy level, supported by inference from the Q1 2015 Malaysian Institute of Economic Research’s (Mier)

Business Conditions Survey where the manufacturing sector exhibited an increase in domestic orders, export orders and production. Similarly, Semi’s book-to-bill ratio saw strong global demand in semiconductor equipment in the first three months of 2015 where more orders were received for every US$100 of products being billed (see Figure 3 in Statistics).

Ringgit depreciation is also projected to benefit the tourism industry in Penang. Flight tickets, food, medical fees and accommodations are now relatively cheaper. On top of the cheaper Ringgit, Penang’s tourism industry is expected to meet a larger pool of tourist arrivals in Q2 2015 due to the mid-year school holidays in June 2015, generating higher tourism revenue for local traders and the city council.

 

Penang’s domestic demand is predicted to consistently grow with the economic performance at national level. While the GST may have temporarily affected private consumption from April-June 2015, things may pick up in the second half of the year after consumers cautiously assess their present expenditure pattern.



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