Penang Poised to Grow Despite General Uncertainties

By Ong Wooi Leng

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PENANG’S ECONOMIC RECOVERY is estimated to remain cautiously buoyant, with the reopening of economic activities, continued external demand especially for semiconductor products, and further improvement in labour market conditions. These were partially offset by weak consumer-related activities in the first nine months of 2021 and by marked uncertainties in combating new Covid variants of concern (VOC); both of which have also introduced heightened policy challenges.

Manufacturing and tourism activities are the main drivers of the state’s GDP. However, in 2020, weighed down by the construction sector (-15.5%), as well as the wholesale and retail trade, food and beverage, and accommodation (-9.5%) sectors, Penang’s GDP contracted by 2.1%. It was counterpoised by manufacturing activities, particularly in electrical and electronics (E&E) and optical products (+6.4%), which constituted 30.8% of the entire state GDP.

Going forward, the manufacturing sector will continue to strengthen with solid growth in manufacturing purchasing managers’ index (PMI) and industrial production. Despite mediocre economic conditions (a pandemic-related effect) affecting the inflow of manufacturing projects, the approved manufacturing investment is presently driven by domestic investment.

Of the RM1.29bil in investments in the first half of 2021, 54.4% were from domestic sources and 45.6% from foreign ones. Fabricated metal products topped investments at 34.3%, followed by machinery and equipment (22.2%) and E&E (12.8%).

Penang’s capital investment has been strongly projected to increase in the second half of 2021, with Intel announcing plans to invest USD7bil in advanced semiconductor packaging facility, and Simmtech to funnel RM508mil worth of semiconductor equipment into its manufacturing facility at the Batu Kawan Industrial Park. Three large local companies, Greatech, Pentamaster and UW, were also set to expand their machinery and equipment (M&E) and automation segments worth RM520mil at the Batu Kawan Industrial Park, this is expected to create new employment opportunities and generate spillover effects within the local supply chains.

Domestic Tourism on the Rise

Coinciding with the school holiday season, domestic tourism-related activities were expected to pick up in December 2021, as with spikes in hotel bookings, especially for Penang’s mid-range beach hotels. In the event that an Air-Vaccinated Travel Lane between Singapore and Penang is implemented, the tourism sector in the state is expected to rise sharply.

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In 2020, total domestic tourism receipts had fallen by nearly 64% to RM2.3bil in light of the number of domestic visitors going down by 42%.1 These visitors largely spent on shopping (52.5%), followed by food and beverage (18.4%) and fuel (9.3%). The top visited destinations were Penang Hill, the Batu Ferringhi beach, and the malls Gurney Plaza, Queensbay and Prangin.

Growth for the construction sector is projected to be sluggish. Its recovery should gradually pick up in the medium term following the relaxation of restrictions but the rise in price of construction materials is expected to increase total construction costs, which will then largely be transferred to house buyers.

However, more construction works have also been completed now that more workers are fully inoculated. The value of completed construction works surpassed that of pre-pandemic times in Q3 of 2021, at about RM1.63bil compared to RM1.56bil in Q4 of 2019. Construction of non-residential buildings made up 42.5% of these, followed by residential buildings (23%), special trades activities (17.6%) and civil engineering (17%).

External Demand Leading to Solid Expansion

Penang continued to register a trade surplus of about RM82bil between January and October 2021. This indicates that the state’s export of goods was valued higher than its import, constituting about 28.6% of Malaysia’s exports, the highest for all states. The Bayan Lepas International Airport also continued to be the country’s main export hub, accounting for 23.7% of Malaysia’s export value. It grew 6% in the first 10 months of 2021 compared to the same period in 2020.

Penang’s E&E products remained the primary export commodity. Of the RM312.4bil worth of total export registered in 2020, the majority were electronic integrated circuits (41.3%) and other E&E products (12.5%).

China is Penang’s major trading partner with positive net exports, followed by the U. S. and Singapore. In contrast, Penang imports more goods from Taiwan, Japan and the Philippines, with a negative net export.

However, the discovery of new Covid strains has resulted in supply chain disruptions for the semiconductor industry. Labour shortage and mobility restrictions have caused a global chip shortage and delayed the complete production of automobile parts and accessories, home appliances and consumer electronics.

On the local front, supply chain operations were equally disrupted by the different phases of economic reopening measures. This resulted in production stoppage despite increased demand in manufacturing products.

Inflation Rises as Containment Measures Ease

Global logistics disruptions from raised logistics costs and import prices have also affected the price of goods and services. A shortage of raw materials has increased production costs, with customers having to pay more to own new vehicles and properties.

As Malaysia transitions to its Covid endemic phase, there is worry of how the prices of goods and services will eat into paychecks if salaries are slower to grow than the hike in living costs.

Penang’s consumer price index went up by 2.5% in October 2021 year-on-year; this is lower than the national average of 2.9%, and was largely due to the rise in transportation costs. The ceiling price of RON95 was set at RM2.05 per litre in March 2021, and in October 2021, the average RON97 price was at RM2.84. In October 2020, their prices averaged RM1.67 and RM1.97, respectively.

Housing, water, electricity, gas and other fuels experienced the second biggest price rise, registering an increase of 3.6% in October 2021 year-on-year (Figure 1); these were likely affected by the price of recently constructed properties.

Furnishings, household equipment and routine household maintenance followed at 1.7%, and food and non-alcoholic beverages at 1%.

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Although prices for recreation services and culture, restaurants and hotels, and clothing and footwear saw a marginal decrease, these were expected to surge in demand in December 2021, again coinciding with the school holidays.

On the whole, the price levels of raw materials are predicted to increase in 2022. Examples can already be seen in the price of food items, which is further aggravated by the Ringgit’s depreciation.

Steady Growth in Demand for Workers

The employment outlook is estimated to be stable in 2022, with active hiring activities for technical positions. The labour force participation rate was estimated to increase to above 70% in 2021 compared to 68% in 2020, while the rate of unemployment was projected to linger above 3% in 2021, following the wider reopening of economic activities in Q4 of 2021. The principal statistics of labour force from Q1 2020-Q3 2021 are presented in Table 1.

In 2020, Penang’s employment rate shrank marginally by 0.3% to 832,900 people, with activities from the manufacturing, accommodation and food services sectors registering the highest reduced number of workforce. But their employment size swelled again during the first nine months of 2021, following high vaccination rates underpinned by the collaborative efforts of Penang’s industry players.

Meanwhile, the information and communication industry saw a significant increase in employment, growing at 36.2% from 4,700 people in 2019 to 6,400 people in 2020. This was followed by human health and social work (+30.3%), and administrative and support services (+29.4%).

Despite the prolonged lockdown in 2021, the number of registered loss of employment improved significantly compared to 2020. It is recorded that as of November 26, 2021, about 3,325 individuals lost their employment, compared to the 10,465 in 2020. One third of the employment loss was in the manufacturing sector, with wholesale and retail trade, real estate and accommodation, and food and beverage trailing behind.

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Surprisingly, it is the high-skill workforce that has been most affected by job losses (58.3%). This is despite longstanding concerns over talent shortages in the state. At the same time, a case study by Penang Institute observed a high percentage of retrenched workers being rehired, especially those with technical STEM backgrounds such as engineering and IT.


Penang’s economic outlook for 2022 remains uncertain due to factors ranging from the spread of mutated Covid variants and high inflation to supply chain bottlenecks and potential misalignments of policy measures. The overnight policy rate is expected to remain low as a monetary measure to spur domestic consumption; this should stimulate economic growth but push up the inflation rate.

While the State Budget and the National Budget 2022 may be important for short-term economic recovery, it is the 12th Malaysia Plan that is required to set policy measures to reform and strengthen economic growth for the next stage of national recovery.

Ong Wooi Leng

heads the Socioeconomics and Statistics Programme at Penang Institute. Her work lies in labour market analysis and socio-economic development.