A Rocky Road to Economic Recovery

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DISCUSSIONS AT THE Penang Economic Outlook 2021 webinar organised by Penang Institute on January 27, 2021 made it clear that industrialists and think tankers are under no illusion that the economy as a whole will return to pre-pandemic levels within the year. Penang’s industries have taken a hard hit in 2020, and these scars will take time to heal.

Manufacturing

Head of the Socioeconomics and Statistics Programme at Penang Institute Ong Wooi Leng observes that Penang will see uneven recovery across its sectors in 2021. Some sectors such as the manufacturing industry will see growth, as imposition on production capacity are loosened. The tourism and agricultural sectors, however, will continue to stagnate or deteriorate.

Penang’s manufacturing hub specialises in electrical and electronics (E&E) and medical devices and these were among the fortunate few to have rebounded quickly in 2020, due to a surge in global demand for health equipment and rapid digitalisation. Its spring-like recovery is not isolated from the US-China trade war, and fears of supply chain disruptions from the escalating trade war prompted many customers to stock up on semi-finished components, even filling up the book orders of some local technology companies.

Moving forward, the manufacturing sector is expected to rise on the back of improving external demand, realised investments, and potential new committed foreign and domestic investments. Investor sentiments for Penang’s manufacturing sector remained positive throughout 2020.

As of Q3 of 2020, 63.6% of the approved investments are for new projects; and their sights are unsurprisingly set on winners of the pandemic. Seventy percent of the total is earmarked for machinery and equipment, as well as E&E subsectors. “Penang remains highly attractive as a manufacturing hub. Seven out of 11 high quality investments in Malaysia are located in Penang,” says Matin Ng, the deputy group CEO of UWC Bhd.1

Nevertheless, the majority of Penang’s sectors will not escape the pandemic unscathed. “Delays in construction projects, uncertainty among buyers and the rise of online shopping platforms will negatively impact the construction sector,” says Ong, adding that the agricultural sector will likely continue to face some headwinds and post flat growth at best, owing to the sudden shortage of agricultural labourers and global supply chain disruptions.

Services: SMEs and Tourism

One of Penang’s largest economic drivers is its services sector and this too, has suffered unprecedented decline. With 88% of establishments in the services sector comprising SMEs, the effects of Covid-19 are profoundly felt. “Only 25% of SMEs in Malaysia feel optimistic about business performance in 2021,” says Yeoh Seng Hooi of the Small and Medium Enterprises Association (SAMENTA).

For many SMEs, cash flow is being decimated from two ends. On one end, sales revenue has declined not simply due to poorer demand, but because SMEs without a digital presence are finding themselves cut off from markets when customers abruptly switched to digital shopping platforms.

On the other end, business owners are experiencing higher input costs from rising fuel and logistics prices. The weakened Ringgit last year made matters worse for importing SMEs. At the moment, with expectations of inflation and rumours of raised US interest rates hovering in the air, global conditions are set for another round of Ringgit depreciation against the US Dollar.

But there are silver linings for these SMEs. Yeoh views the signing of the Regional Comprehensive Economic Partnership last November as an opportunity for wider market access, and is working to help SMEs take advantage of it. The government’s accommodative monetary policy and liquidity measures will likewise continue to support investments and enhance resilience.

Another core facet of Penang’s services sector is tourism. The livelihoods of workers in this sector evaporated almost overnight when one after another, countries announced lockdowns and border closures. Raj Kumar, the general manager of Light Hotel in Penang, expresses significant worry for the industry. “Most of the hotels are now surviving on minimum room occupancy and food takeaways.”

He foresees 2021 to be just as uncertain as 2020. “There is a lot of caution, a lot of waiting and seeing. Many cancellations have happened. I have a client who cancelled his wedding for the fourth time; at this point, I’ve no idea if he’ll ever get married,” Raj says with a wry smile.

He is, however, optimistic that recovery will happen over the next couple of years. The first ones to recover will be midrange hotels given that those are the mainstay of domestic travellers, while hotels by the beach and resorts will be among the last to bounce back. There is still a lot of uncertainty as to when international tourists will return. Held back by large revenue losses over the multiple lockdown periods, hotels that typically rely on events for income will find it difficult to recover, compared to those that are dependent on accommodations.

Yet, even in dire times, the tourism industry is anxious to hold on to its talent and to avoid a situation whereby the loss of skills hampers the ability to recover. “Many hotel owners are forking out their own money to retain staff. They are really in the red zone.”

Industrialists and think tankers are under no illusion that the economy as a whole will return to pre-pandemic levels within the year.

Raj, who is also Chairman of the Malaysia Association of Hotels (Penang Chapter), advocates for travel bubble initiatives. He calls for greater support from the government. On his list are tax revisions for the next 12-18 months, a new action plan from the Ministry of Tourism to revive domestic tourism and a 50% wage support instead of the RM600 subsidy. These measures may seem drastic, but they are telling of the tourism industry’s desperation to keep above water. To compare, Singapore rolled out such a wage subsidy scheme for its aviation sector last February.2

Talent Shortages

The contracting pool of talents is not unique to Penang’s tourism sector alone. Ng is particularly worried about Penang’s ability to develop new and existing industries without the right skillsets. “The critical factor of finding talent is something that SMEs are acutely facing,” Yeoh concurs.

Using the solar industry as an example, Ng explains, “From a macro perspective, green energy is the future and it is worth investing in. Malaysia was the largest solar panel manufacturer in the world a few years ago, and that is our comparative advantage – we have the experience. But the fundamental issue lies in whether or not we have engineering programmes to train engineers for our solar industry to gain in strength. That is the big question.”

Source: Malaysian Investment Development Authority, Penang.

While Ng believes the Malaysian education system is a root cause of talent woes, employers should not be easily let off the hook either. “There is more that employers can do to prepare engineers for the workforce.”

Unfortunately, the issue of a skills mismatch in Malaysia is likely to grow over the pandemic. Ong points out that the graduate unemployment rate jumped from 13.8% in 2019 to 25% in 2020. If not reskilled now, these unemployed or underemployed fresh graduates may experience skills decay or find their skills irrelevant when the labour market eventually improves.

Tech Solutions

Collectively, the panellists have no doubt that Penang’s businesses urgently need to adopt digital solutions. Ong expands on the example of food security. When Malaysia found itself suddenly facing a shortage of foreign workers last year, it created severe disruptions in food production. “Increased automation in agricultural supply chains would help us decrease reliance on foreign workers.” While not a panacea for all ills, the panellists also agreed that digitalisation is essential for the future to address key issues like market access, productivity and supply chain risk management.

It would, however, be misguided to adopt digital solutions indiscriminately without consideration of underlying business needs. “SMEs should not be too caught up with the word ‘digitalisation’,” Yeoh cautions, “that is just the beginning. It is transformation we’re looking at. SMEs may need to transform their business models to stay relevant for the digital economy.”

The Element of Uncertainty

Uncertainty in itself is the greatest challenge industries are bracing themselves against, e.g. uncertainty of the size and timing of future income flows, the manner in which businesses can be conducted and of geopolitical risks.

If not reskilled now, these unemployed or underemployed fresh graduates may experience skills decay or find their skills irrelevant when the labour market eventually improves.

Households are postponing large ticket purchases like acquiring homes and cars because they are unsure of future income streams. Businesses are deferring investments, especially those with high upfront payments and long payoff horizons as in the field of research; cutting down on expenditure to build up precautionary savings; and are less willing to take risks. For most, the return to business normalcy hinges primarily on Malaysia’s vaccination programme – in particular, its speed, effectiveness and coverage. The government expects to vaccinate 80% of the population by February 2022, but there is ambiguity arising from the arrival of new Covid-19 strains, and the actual efficacy of some vaccine brands. In the interim, effective control of the pandemic would allow more economic activities to operate.

The political upheavals that Malaysia is grappling with also add a significant level of volatility into the mix. For better or worse, hyperglobalisation of past decades has made individuals keenly aware and susceptible to events happening outside their countries’ borders. The effects that the US-China trade war have on manufacturers best illustrate this, as is the impact of capital flight to safe havens on Penang’s importers. Even in predicting inflation, Bank Negara Malaysia has stated that monetary policy will “continue to be determined by new data and information”,3 suggesting that the world has become a much more unpredictable place.

With volatility here to stay, elements of creativity and transformation are crucial going forward. And the best advice for industries? “Pivot.”

1 https://www.mida.gov.my/2020-announcements-of-high-value-investments-in-malaysia/
2 https://www.channelnewsasia.com/news/singapore/aviation-support-package-wage-support-budget-2021-870-million-14217586 
3 https://www.bnm.gov.my/-/mps-4-mar-2021

Jo-yee is a research analyst at Penang Institute whose interests range from development issues to behavioural economics. Her latest goal is to bake the perfect sourdough loaf.



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