AFLOAT AND AGILE: Its Broad Base Bodes Well for Penang’s Economy

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While manufacturing remains robust, contributions from other sectors are significant. 

Bayan Lepas Industrial Park.

Having an open, export-driven economy means that Penang’s development is directly impacted by world events.

Uncertainties like the new US administration, tensions between oil-exporting countries in the Middle East, elections in Europe and a changing Chinese economy, to name just a few, will affect Penang, and not always in predictable ways. Having an open and diversified economy gives it resilience.

Global Developments

According to the International Monetary Fund’s annual consultation report, the Malaysian economy has done decently well over the past year despite a challenging global economic environment. It is likely to grow 4.5% in 2017, and 4.7% in 2018 on domestic demand development and as exports improve.

The resilience of the Malaysian economy is reportedly due to its diversified production and export base, its strong balance sheet position, its flexible exchange rate, responsive macroeconomic policies and deep financial markets: “While real gross domestic product (GDP) growth slowed down, Malaysia is still among the fastest growing economies among its peers. The challenging global macroeconomic and financial environment puts premium on continued diligence and requires careful calibration of policies, going forward.”

Additionally, federal account debt and contingent liabilities were classified as relatively high, which limits policy solutions to respond to global shockwaves. The IMF alleged that risks to the economy originate from both external and domestic sources.

Although the implementation of the goods and services tax (GST) has mitigated the drop in national revenue caused by lower global oil prices, continuous low commodity prices makes the achieving of medium-term fiscal targets difficult.

Consequently, the country is susceptible to increased global financial pressure and related capital flows outside the country. The recent dispute between Qatar and its neighbouring countries could raise oil and gas prices; any political tension between major Middle Eastern energy-producing nations usually leads to a spike in global oil prices.

As the spat between Qatar and neighbouring countries escalates, traders in the world’s gas markets will be on high alert as well. Malaysia is one of the biggest exporters of liquefied natural gas (LNG) and will be therefore directly affected by these events.

Meanwhile, while the country’s household debt-to-GDP ratio is expected to drop, household debt remains high (in comparison with other Asean and Asian countries), with debt servicing capability rising only reasonably.

The IMF declares further: “While Malaysia’s economic growth is expected to continue in 2017, weaker-than-expected growth in key advanced and emerging economies, or a global retreat from cross-border integration, could weigh on the domestic economy”. Therefore it urged attention and persistent determination to toughen policy buffers and improve long-term economic progression.

It is projected that consumer price inflation will increase at an average of 2.7% y-o-y in 2017 as a result of growing global oil prices and the rationalisation of subsidies on cooking oil. The present account surplus should be principally unaffected, as impacts from an improved global economic outlook and increased commodity prices may be offset by the strength of imports on the back of resilient domestic demand.

Malaysia’s present monetary policy position is appropriate, and going forward, Bank Negara should carefully regulate its monetary policy to support economic growth while being careful of financial environments. The banking sector is generally sound and financial sector risks look controlled. However, potential exposures must be monitored.

The authorities’ commitment to keep the exchange rate as the key stress absorber is well considered as the IMF recommends that reserves be accumulated as opportunities occur, and be deployed in the event of disordered market conditions.

President of Argentina Mauricio Macri meeting with Emir of Qatar Sheikh Tamim bin Hamad Al Thani.

Export-orientated Penang to Benefit

As a major contributor to Malaysia’s economy, Penang has maintained its position as one of the biggest receivers of both foreign and local investments. The manufacturing sector continues to be a key contributor to Penang’s economic performance, supported by the electronics and electrical (E&E) industry in the sector's global supply chain, which looks to be robust and resilient.

According to the Malaysian Investment Development Authority (Mida), the E&E industry in Malaysia focuses on the deepening and strengthening of three major ecosystems: semiconductors, solar and LED technologies. The growth of the semiconductor sector will endure and lead the growth of the E&E industry; the sector has profited from the increased global demand for mobile devices (e.g. smartphones and tablets), storage devices (e.g. cloud computing and data centres), optoelectronics (e.g. photonics, fibre optics or LEDs) and embedded technology.

E&E manufacturers in the state have continued to move up the value chain to produce higher value-added products. These include strengthening R&D efforts and outsourcing non-core activities domestically. Given Penang’s participation in the global E&E value chain, E&E exports are expected to trend higher following the projection of a turnaround in the worldwide semiconductor market. The World Semiconductor Trade Statistics (WSTS) organisation expects global semiconductor sales to improve to US$331bil in 2017 (2% higher than 2016’s US$325bil), supported by increases from the Americas and the Asia Pacific markets.

Mida’s 2016 report on investment performance listed Penang second after KL in investments for Global Establishments for Services, or “Principal Hub”, with an investment value of RM4.1bil. In May this year, Chief Minister Lim Guan Eng announced that about 3,000 jobs will be created with the opening of a RM200mil high-end global business services (GBS) complex in Bayan Lepas by 2020. Called “GBS by the Sea”, the complex will be housed in two buildings – eight-storey and nine-storey high, respectively – with a total floor space of 411,000 sq ft and 2,500 parking lots. They will be developed by the Penang Development Corporation, the state’s development agency.

Penang’s intensive efforts to increase the GBS infrastructure will result in higher-value jobs. The state aims to play a leading role in Malaysia’s Industry 4.0 transformation, which spins around big data analytics, e-commerce, crowdsourcing, cloud computing and the Internet of Things. GBS by the Sea is likely to attract key international players. According to PDC’s general manager Datuk Rosli Jaafar, GBS by the Sea is envisioned as a centre for tech and R&D companies. “It will be an MSC Malaysia cyber-centre-standard building incorporating retail and food outlets,” he says.

The industry’s association, Outsourcing Malaysia, expects the country’s GBS sector to meet an annual growth rate of 10-15% over the next three years. According to the Malaysia Digital Economy Corporation, GBS companies with MSC Malaysia status recorded revenues of RM18.4bil in 2016. With this new setup, Penang is on track to benefit from the sector’s growth.

Agriculture Rising

Considering Penang’s highly industrialised nature and limited land size, the agriculture sector (including crop, aquaculture and livestock sub-sectors) contributes very little to Penang’s GDP. Yet, the sector remains an important supplier of raw materials to resource-based industries. It also plays an essential role in ensuring food security and access to adequate, safe and nutritious food for the growing population.

The agriculture sector is one of the important economic pillars of the Northern Economic Corridor Region (agriculture, manufacturing and tourism) and plays an important role in overall growth and poverty reduction through linkages with the manufacturing sector and connecting the poor along the agri-supply chain.

In spite of challenges such as resource constraints (land and labour), heavy dependence on imported raw materials and vulnerability to climate change and disease, the agriculture sector has demonstrated positive growth trends in economic value generated in the state (Figure 1). Penang recorded a growth of 1.8% in 2015 compared to 2014. However, its contribution to Penang’s GDP in 2015 did not see many changes compared to previous years (Table 1).

Although Penang’s labour market has been performing at a healthy level over the past few years, the agriculture sector has experienced diminished employment contribution over the years (Figure 2). This is possibly due to the increased use of labour-saving technologies as well as labour movement to other economic sectors, such as manufacturing, for higher wages.

Food security is the highest priority for Malaysia’s agriculture sector in Malaysia, as the country still relies on imports for its staple food requirements, especially rice. In 2016 the national food import bill was RM46.7bil, with exports of RM30.2bil, leaving a deficit of RM16.5bil. For the same period, Penang imported approximately RM7bil worth of food, while its exports were only RM2.5bil.1

Available data show that the overall crop production in Penang (excluding rubber and palm oil) increased by about 2.4% for the period of 2011 to 2015 (Table 2). While paddy-planting areas in Penang have remained constant since 2005, rice yield grew by 4.1% per year from 2005 to 2015.

Penang’s rice yield may be the second highest in the country after Selangor, but its rice production has not met its own demand. Self-sufficiency level (SSL) plays an essential role in food security. Based on the national per capita rice consumption of about 78kg per year and with a total population of 1.6 million,2 Penang’s rice needs are estimated to be around 132,124.2 metric tonnes per year.

With a total rice production of 89,880 metric tonnes in 2015, Penang’s rice SSL is calculated to be roughly 68%; the remainder is imported. Nevertheless, with the increase in per capita income and changes in consumption patterns and lifestyles, it is expected that rice consumption will drop in the future.

Fishy Business

The aquaculture sector is an important sub-sector in Penang. The national per capita consumption of fish as a popular source of protein has increased by 8.5% from 52.4% in 2013 to 56.9% in 2014.

In 2015 the food fish sector, which consists of marine capture fisheries, aquaculture fisheries and inland fisheries, produced 108,550.01 metric tonnes worth RM1,573.6mil,3 signifying a decrease of 4.7% and 3% in terms of quantity and value respectively, compared to 2014. Yet, Penang’s food fish production reached the second highest wholesale value in the country.

Aquaculture farm for oysters. Penang is the second largest producer of aquaculture products in the country.

Fishery resources in the west coast of Peninsular Malaysia are claimed to be overexploited as a result of rapid development and the expansion of the trawlers.4 To control overfishing, the government restricted the issuance of fishing vessel licenses, and this has affected the overall fish production in the country.

Penang is the second largest producer of aquaculture products in the country after Sabah. In 2015, its aquaculture production gained the highest wholesale value at around RM1,090mil. Aquaculture fisheries from brackish water have been contributing nearly 50% of the total fish production and about 69% of its value in Penang. The industry is the major income earner of Penang’s fisheries sector, followed by marine-captured fish products.

Brackish water ponds and cages constitute the majority of Penang’s aquaculture and have the highest number of culturists. In addition, Penang is the third-largest cockle producer in the country, trailing behind Perak and Selangor. However, the production of cockles dropped dramatically by nearly 78% in 2015 – most probably due to water pollution which resulted in the high mortality of cockles, and the El Nino phenomenon. The 2015/16 El Nino weather phenomenon, which was the strongest since 1997/98, not only affected the aquaculture sector but also crop production – especially paddy – in the country. In 2017 the agriculture sector is expected to rebound though, as yields recover from El Nino.

Other Sectors in Agriculture

The livestock industry supplies the largest source of protein in Malaysia. Although the total livestock production has dropped by about 5% annually since 2010, its value increased by 1.6%.

The sector is divided into two categories: ruminants and non-ruminants. In 2016 Penang’s ruminant sub-sector, which includes cattle, sheep, goats and buffaloes, produced about 2,997.33 metric tonnes of meat and 689,980 litres of fresh milk, worth RM41.43mil and RM4.22mil respectively.5 Yet, the SSL for ruminants is still less than 40%.

In contrast, the non-ruminants industry in Penang encompassing chickens, ducks, pigs and eggs is very progressive. In fact, the livestock industry in Penang is dominated by poultry and swine production. In 2015, Penang achieved a 265% and 119% SSL in poultry meat and pork, respectively.6 However, the overall non-ruminant production dropped slightly by about 0.8% in 2016 compared to 2015. The main issues facing the non-ruminant sector are the heavy dependence on imported feed which makes it very costly to maintain the import level to sustain the poultry and swine industries especially during the currency crisis; and the environmental pollution resulting from the rearing system and high concentration of animals within certain areas.

Agribusiness: Adding Value to the Industry

Penang has great potential in the agribusiness in areas such as modern farming, supply chain management and the halal industry. It is poised to become a hub for food and agricultural products, since manufacturing and services activities are Penang’s main economic drivers.

Poultry seller at a wet market. Livestock production has dropped by 5% annually since 2010, although its value has increased by 1.6%.

Because of its closeness to the Indian Ocean and its well-developed port and airport cargo transport facilities, Penang is considered a suitable place for the exporting of agricultural products. According to Dr Afif Bahardin, state executive councillor of agriculture and agro-based industry, health and rural development, “Most of the agro-based industries in Penang are able to produce high-quality and high-standard products which are marketable not only in Penang, but all over the country and, to a certain extent, globally. Being a major transportation and logistics hubs in the northern region and the Indonesia-Thailand-Malaysia triangle, Penang has potential to promote its products beyond its borders. The state government has plans to come up with its own international brand and hopes to achieve it within this year.

“The state government is trying to reduce the dependence on middlemen in the marketing of agricultural products to ensure that farmers get a return equivalent to the efforts that have been put in,” says Afif. This is important if one is to motivate more individuals to go into the field of agriculture— a field that has been ignored, particularly by the young. Entrepreneurship in agribusiness is essential to the transform of the agricultural sector into a high-value industry.

Moving the Industry Forward

In line with the objectives of the National Agro-food Policy (NAP) 2011-2020, food security, income of farmers and sustainability are the main objectives of agro-food development in Penang. The state government has put in great effort in various ways to raise the agriculture and food economy to a higher level. Over the past few years, much has been focused on introducing new technology and using biochemistry and biotechnology to the industry players.

In addition, the state has initiated several funding and incentive schemes to assist farmers with developing technology and maintaining infrastructure, and to raise agricultural inputs. In 2017 the state government allocated a total of RM3.29mil for development programmes and RM300,000 to create human capital under development services.7

To ensure the sustainable growth of the agriculture sector, a number of agricultural programmes have been launched, such as permanent food production parks, Aquaculture Industrial Zones (AIZs) and Young Agro Entrepreneurs Fund. All the AIZs and food production zones in the state have been capitalised as strategic locations and high productive areas to ensure food security. “A new agro park is going to be opened in Permatang Pauh, covering an area of 22 acres, mainly aimed at introducing organic farming.”

“The local community is also involved in projects called ‘community farming’ in urban areas to capitalise on the usage of empty lands and to support communities and individuals to move towards urban farming,” adds Afif.

To a certain degree, the agriculture industry is not attractive to the younger generation. This led to the Young Agro Entrepreneurs Fund microcredit scheme being established, to provide financial assistance in the form of an interest-free loan of RM5,000 to young entrepreneurs aged below 40 who are involved in agriculture, livestock and fisheries activities, to venture into agro-based industries. Encouraging the participation of more individuals in the agricultural sector not only brings good returns to farmers, but also helps the government promote a better and stronger agricultural sector.

Interview with Daniel Bernbeck, Executive Director of the Malaysian-German Chamber of Commerce and Industry (MGCC)

Daniel Bernbeck.

How would you describe the current economic situation in Malaysia?
Daniel Bernbeck: My perception is that the economic situation is relatively stable. Nevertheless, for some companies, especially government-linked companies (GLCs), the situation seems to be quite challenging due to declining returns, depreciation of the ringgit and increasing competition. For others – many of them private SMEs including German investments in Malaysia that have built up a local production – the conditions prove to be positive. Following their decision to react flexibly to the dynamic market conditions, they continue to reap the benefits of being a manufacturer based in Malaysia.

In the next five years, where do you see the greatest strengths of the Malaysian economy, and what are the biggest challenges for companies in 2017?
The strengths have to be seen in the geostrategic position of Malaysia in South-East Asia. Being in the Asean Economic Community as well as a core country in the One-Belt, One-Road (OBOR) strategy of China, Malaysia has a lot of advantages in the coming years.

The challenge, not surprisingly, lies in the same area where I have allocated Malaysia’s strengths. Depending too much on external effects is tempting, but can be extremely risky, as can be seen in Sri Lanka’s deep sea port of Hambantota, where strong dependency on China’s investments led to a severe economic and even political crisis. My belief is that Malaysia should concentrate on its inner strengths and potentials rather than leering at the big money offered. As there is no such thing as a “free lunch”, the overall concept of OBOR needs to be properly considered. Thus, aiming at truly sustainable targets, strengthening Malaysia’s existing resources, promoting organic growth and following a comprehensive development strategy will be the most promising factors.

What are your thoughts on the challenges companies operating in Penang currently face?
I perceived the biggest challenge to be infrastructure. The Penang Transport Master Plan is aiming at the right spots and seems to be offering the necessary solutions. The business community will now be hoping for the straightforward implementation of the most important elements of the plan, e.g. the LRT and Monorail system encompassing Seberang Perai, the extension of highways across the island and etc.

Of course, there are also a few federal issues that are challenging to the companies, e.g. the Foreign Exchange Administration Ruling (FEAR), the sudden change in Withholding Tax regulations for services by non-resident taxpayers as well as regular changes in foreign workers policies. Here, the primary cause of concern is not the mere fact that these rules were implemented; the more important elements are the unpredictability of the changes to business people, the absence of detailed administrative instructions for many complexities of practice and the lack of consultation prior to enactment. Especially for SMEs that are investing their private earnings in Malaysia, the dependability and predictability of the given legal and commercial environment is of the utmost importance. Therefore, we hope that in the near future we will not face more of such swift changes in regulations.

 

Sources:

1 Department of Statistics, Malaysia.
2 Department of Statistics, Malaysia.
3 www.dof.gov.my/index.php/pages/view/2614.
4 Sin, M. S., Yew, T. S. and Noh, K. M. (2016). Controlling Over-Capacity of West Coast of Peninsular Malaysia Zone B Trawlers with Different Level of Licenses Issuing Policy. World Applied Sciences Journal, 34 (8): 1129-1138.
5 Department of Veterinary Services Penang.
6 Ibid.
7 Dr Afif Bahardin’s office.

Tim Niklas Schoepp is visiting analyst in Economics at Penang Institute.
Negin Vaghe 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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