Penang’s economy in 2015: Growth continues, but more slowly

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Penang’s GDP has been growing over the last five years. Following the recent release of data on Malaysia’s GDP growth for 2014 by Bank Negara Malaysia, the state GDP has improved to 5.9%, posting a 0.2 percentage point higher than that of the previous projection made in January 2015 (Figure 1)1. In view of the adjustment made for Malaysia’s 2015 GDP growth projection, the 2015 state GDP is also altered. The state GDP growth is expected to slow down by one percentage point to 4.9% in 2015. This is a drop of 0.5 percentage points from the previous forecast made by Penang Institute.

On the supply side, all economic sectors were estimated to grow at positive rates in 2014. Table 1 estimates that although Penang’s mining and quarrying sector registered the highest growth of 14.5% in 2014, the sector’s share in Penang constituted merely less than one per cent of Penang’s total GDP.

In 2015, all economic sectors will experience slower expansion compared to the previous year. The construction sector may experience a negative growth as miniscule as 0.2%; however, this will not give any adverse impact for the industry. It is believed that property developers may stay cautious with the arrival of GST in April 2015, which is likely to change consumer spending patterns.

Having contributed about 14% of its manufacturing output at the national level, Penang’s services sector is projected to marginally surpass its manufacturing share by less than one per cent in 2015, while its shares for other economic sectors are anticipated to relatively plateau (Table 1). This trend could be an encouraging sign, and it can perhaps be attributed to greater support services activities, such as business processing outsourcing (BPO), flowing into Penang.

Stable capital inflow despite smaller domestic investment

A total of 169 projects were approved in Penang for 2014. Being ranked as the third highest investment recipient in Malaysia, Penang contributed about 11.4% of total investment in 2014 – four per cent more than 2013. Total capital investment reached RM8.16bil. Of this, domestic and foreign investments respectively made up RM3.05bil and RM5.11bil.

On average, total capital investment registered at RM48.3mil for a project in 2014, compared to RM32.9mil in 2013. The share of foreign investment has grown from about 15% in 2010 to over 60% in 2014 (Figure 2), while the share of domestic investments halved from about 85% in 2010 to nearly 40% in 2014.

Although the breakdown of the industry for domestic and foreign investments has not been made available by the Malaysia Investment Development Authority (Mida), a generic observation seems to suggest that the E&E industry experienced an upward trend. A number of MNCs had either planned to expand their existing plants or build new plants in Penang – one of them being Keysight Technologies (formerly Agilent Electronic Measurement Group), one of Penang’s “Eight Samurai”. It expanded its business processes worth RM500mil in Penang and hired about 500 new employees, especially R&D engineers3. (Keysight focuses on 5G communication, solutions for new Internet devices and sensor technology.) US-based MNC Seagate, on the other hand, bought another 30 acres of land in Batu Kawan and invested a sum of RM1.05bil to manufacture hard drives and provide data storage solutions4. Furthermore, SanDisk Corp is also setting up its flashmemory product manufacturing facility in Batu Kawan5.

Moderating external demand due to global events

Penang’s trading environment seems to portray a moderating trend in 2014 due to its timely pickup in exports in the last two months of 2014. Figure 3 shows the trade balance of Penang over the last two years; it is evident that trade balance fluctuated in the second half of 20146, experiencing double troughs in August and October 2014 compared to January-December 2013. This is mainly attributed to growth in import value of about 23% from January-August 2014, turning trade into deficit for the first time after the global financial crisis in 2009. The deficit dipped further in October 2014 due to an increase of about 25% month-on-month (m-o-m) basis in import value from RM2.3bil in September 2014.

Nevertheless, the value of commodity being imported softened in the last two months of 2014, dropping by 30.4% m-o-m basis from RM17.2bil in October 2014 to about RM12bil in November 2014, resulting in a surprisingly large trade surplus. This seems to suggest that the external demand could be in the midst of adjusting its trading activities to global economic events such as the fall in oil price and rise in the US interest rate (and hence a weakening Ringgit). A similar trend is predicted in the first half of 2015; it is interesting to note that the total commodity being traded (the sum of exports and imports) in Penang recorded an upward trend, constituting an increase of 9.2% in 2014 compared to 2013.

Unlike the fall in oil price, Penang’s external trade may be moderately affected by the plunging Ringgit. Theoretically, the fall in Ringgit favours the export of goods and services but it accelerates the price of imported goods, with the assumption that the volume of imported goods and services to be used as raw materials remains constant. This will eventually result in lower trade surplus. Furthermore, this scenario is likely seen to have a vicious cycle where the volume of export goods may then deteriorate if raw materials being used to produce final goods and services become expensive.

Commodity-wise, machinery and transport equipment remained the largest exported commodity in Penang; out of RM172.6bil, it contributed about 71% of total export in 2014, growing at 8.6% compared to 2013 (Figure 4a). The commodity’s import expanded considerably by 33.1% m-o-m basis while its export contracted by 12.3% m-o-m basis in October 2014. However, its exports made a significant turnaround of 10.4% and experienced a substantial slump in its import of about 40% m-o-m basis in November 2014. Meanwhile, miscellaneous manufactured articles and manufactured goods accounted for14.7% and 5.1% respectively (Figure 4a).

The structure of exported and imported commodities also suggests that over 90% of Penang’s commodities being exported comprise E&Erelated products, including electrical machinery, apparatus and appliances; professional and scientific instrument; and telecommunication, sound recording and apparatus. Likewise, Penang imported these commodities the most (Figure 4b).

Based on the percentage share of total trade, Penang’s five major trading partners are China (including Hong Kong), the US, Japan, the Euro zone and Singapore. These countries accounted for nearly 51% of Penang’s total trade in the first 11 months of 20147. Out of the five countries, while Penang recorded trade deficit with Japan and Singapore, the other three countries registered trade surpluses. Trailing behind Singapore, Thailand and Vietnam are Penang’s major trading partners within Asean.

Amid a stiff and competitive trading environment and the Ringgit’s depreciation, the full realisation of an Asean Economic Community (AEC) is foreseen to play an important role in pushing for greater trading activities but, at the same time, diverting business activities to a more profitable destination.

Steady growth in the tourism sector

Ever since George Town was recognised as a Unesco World Heritage Site in 2008, Penang’s tourism sector has been experiencing a growing trend. Penang’s international visitors expanded by 7.5% annually from 2008-2014, accounting for about 720,000 visitors arriving at Penang International Airport in 2014. This pattern varies seasonally, as depicted in Figure 6. Unlike 2013, foreign visitors exhibited three seasonal growth paths in 2014: first, the trend boomed from January-April 2014, followed by a smaller wave of growth from May-August 2014, and it is estimated to have grown from September-December 2014.

On a year-on-year (y-o-y) basis, international visitors increased in all months except June, September and December 2014, compared to 2013 – likely due to the fact that Penang and Malaysia at large were badly hit by haze from forest fires in Sumatra, Indonesia, which usually happens in June.

Figure 6 also indicates that Penang seems to have steady arrivals from abroad during the George Town Festival (GTF) in August every year. Based on Penang Global Tourism’s statistics, a total of about 220,000 visitors attended all types of events organised by GTF with a surge of 6.4% in 2014 compared to 20138.

AirAsia's counters at the Penang International Airport. Penang has been attracting a number of SSO companies to set up their business activities here, including AirAsia.

In relation to the rise in foreign arrivals for the last month of 2014, the Penang Island Jazz Festival (PIJF) is another popular two-day event held in early December every year. It has been continuously well received by international visitors: “When it started in 2004, the percentage share of attendees from Penang and outside Penang in the first few years was about 50% respectively,” says Paul Augustin, director of PIJF. However, a shift occurred in 2008: attendees from outside Penang went up to 60% and local Penang attendance dropped to 40%. The crowd in 2014 was estimated to reach over 5,000; attendees from outside Penang rose to 65%, while local Penang attendees shrank to 35%.

By destination, the three major countries of origin of Penang’s international visitors are Indonesia, Singapore and China, making up 78% of Penang’s total international visitors, as shown in Figure 7. Indonesia constituted over 40% of total international visitors. This result is somewhat consistent with statistics provided by the Penang Health Department, whereby nearly 97% of Penang’s total health tourists were recorded to be Indonesian in January- September 2014. Meanwhile, the number of visitors from China was found to have increased the most – about 21% in 2014 compared to 2013, despite the disappearance of flight MH370 in March 2014. In summary, we will still see a buoyant growth in the tourism sector in 2015.

Labour market stays robust

Penang’s labour force had been lingering at a stable growth, except in Q2 2014 (Table 2). In Q3 2014, the total labour force (defined as working age citizens ranging from 15-64 years) was recorded at 823,100. Of this, 810,800 were employed and only 12,400 were unemployed. Those outside the labour force remained at about 350,000 for the same quarter. These include students, housewives and prisoners.

It is interesting to note that while the unemployment rate in Q2 2014 was marginally higher, the labour force participation rate stayed at about 70% from Q1-Q3 2014. We may deduce that a frictional unemployment is observed in the second quarter of 2014; most job vacancies opened during this quarter to cater to new graduates as well as the existing workforce looking for career advancement opportunities.

By industry, the services sector made up the largest proportion of Penang’s total employment in Q3 2014, registering an increase of 1.1% of its share in the previous quarter (Figure 8). Manufacturing came second (30.6%) with a decline of about three per cent compared to the previous quarter.

Turning to employment in the services sub-sectors, not surprisingly, employment in wholesale and retail trade was found to form the greatest proportion of Penang’s services sector in Q3 2014 (Table 3). 59.7% persons worked in the services sector; about 24% of Penang’s total employed persons work as services and sales persons, recorded to be the largest workforce in Penang. It is anticipated that the employment market will keep flourishing in services sector, particularly in administrative and support service activities; Penang has been attracting a number of shared services outsourcing (SSO) companies to set up their business activities here, including AirAsia, IHS, Wilmar and Citigroup.

Figure 9 shows that the number of retrenched persons being reported to the Labour Department oscillated over five years. As can be seen, the number of retrenched workers rose drastically two years after the global financial crisis of 2009. While total retrenched workers significantly increased in 2014, Penang’s labour market remained resilient. As can be observed in Table 2, Penang’s unemployment rate stood at below two per cent from Q1-Q3 2014 (which is half of the full employment rate of four per cent), denoting that Penang continued to enjoy the state of full employment in 2014.

One of the reasons for having a high number of retrenched workers but a low unemployment rate is the employability of retrenched workers. Although data provided by Jobs Malaysia does not trace the employment status of these retrenched workers, the likelihood of job placement opportunities could be high. For example, Fairchild Semiconductor International closed down several ageing plants in a few locations including Penang, as reported in August last year9. Some 15% of its 9,000 workforce in the world were affected. However, InvestPenang, which assisted in offering job placement options to the affected staff, revealed that the employees’ relevant skill-sets could certainly be absorbed by other semiconductor companies in Penang. Hence, a full employment situation is predicted to persist in the first quarter of 2015.

Chung Ling School in 65, Macalister Road.

Conclusion

Output is expected to expand at a slower rate in 2015 compared to last year, and the manufacturing and services sectors are estimated to equally contribute an important share to Penang’s output growth. The value of external trade relies very much on external factors such as the price of crude oil and value of the Ringgit. A fall in the price of crude oil might not profoundly affect Penang’s economy; depreciation of Ringgit, however, might change the production chain of the industry. The employment market will remain resilient in 2015, wherein only a very small proportion of the labour force will be unemployed; workers might be looking for bright opportunities during the transition period.

References

1 Refer to Ong, W. L. (2015), “Ripples from global events threaten local economy” in Penang Economic Outlook 2015, Penang Monthly, January 2015.
2 The projection of GDP growth rate is calculated using the shift-share analysis, developed by David Creamer in early 1940s. The shift-share identity is presented as follows:- (ri-r)+(rij-ri )=(rij-r) where r = growth rate; i = national sector; and j = sector in state.
3 www.investpenang.gov.my/newsdetail. php?group=2014&sub_ group=November&pid=17
4www.thestar.com.my/Business/Business- News/2014/10/09/HP-to-invest-RM1b-in- Penang-Its-expected-to-sign-land-deal-withstate- govt-soon/?style=biz
5 www.thestar.com.my/Business/Business- News/2014/06/09/SanDisk-sets-up-Penangplant- RM12bil-manufacturing-facility-to-beoperational- in-March-2015/?style=biz
6According to the Department of Statistics, the export and import values are gathered at the entry and exit points of Penang Port and Penang International Airport via the Royal Customs Department of Malaysia. Therefore, the data is unable to track the origin/departure destination of commodities being transported to the Penang Port and Penang International Airport.
7 Since the Department of Statistics Malaysia does not provide the breakdown of exports and imports at country level beginning from December 2014, we are unable to report this data for the whole year of 2014.
8George Town Festival features a series of arts and cultural events in the month of August. This includes world-class performances, crosscultural creative collaborations, experimental art, traditional and contemporary performing arts, as well as local community initiatives.
9www.themalaymailonline.com/malaysia/ article/penang-job-market-resilient-despitemajor- plant-closure-soon-says-state-inv; www. thesundaily.my/news/1151961

Ong Wooi Leng is a senior analyst at Penang Institute. Her interest lies in industrial economics, consumer behaviour and public finance.



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