Malaysia: Industrial production up

Growth in Malaysia’s industrial production has so far been above expectations, suggesting that the manufacturing sector is supported by domestic expansion and reorientation toward the region even though demand in traditional export markets in the US and Europe look uncertain.

Industrial production grew by 4.9% in the first nine months of 2012, according to official data. Manufacturing output rose by 5.2% year-on-year (y-o-y), while the other indices included in industrial production – mining and electricity – rose by 5.9%.

Within the manufacturing sector, production of non-metallic minerals, as well as basic and fabricated metal products, grew by 17.7% over the first three quarters of the year; petroleum, chemical, rubber and plastics increased by 1.9%; and electrical and electronic (E&E) products by 4.4%.

Manufacturing is a vital economic driver for Malaysia, accounting for 35% of GDP when combined with the mining sector. The sector currently employs around 1.02m people, according to the Department of Statistics. The better than expected figures suggest that the regional economic slowdown is easing, supported by government spending, higher domestic consumption and a favourable interest environment. The manufacturing sector’s performance is particularly impressive, given the impact of the eurozone crisis and the slow recovery in the US, both of which have affected global growth this year. Indeed, Malaysia’s nominal exports fell 2% in the third quarter of 2012, bringing y-o-y GDP growth down to 4.9% from 5.4% in the second quarter.

However, the industrial sector may have received a boost from domestic and regional sales, offsetting broader international effects. The government’s investments in infrastructure, higher transfers to public employees, and inflows of foreign capital from investors seeking a haven from turbulent or slow-growing developed markets, have all played a role in keeping the Malaysian economy moving at an impressive pace.

In November, during a visit to Kuala Lumpur, Christine Lagarde, the managing director of the IMF, said she expected the Malaysian economy to grow by 4-5% this year, in line with the government’s target. Low and steady interest rates have helped in this regard. On November 8, Bank Negara Malaysia (BNM), the central bank, opted to keep its key overnight policy rate at 3%, where it has stood since July 2011, to support expansion. Interest rates are particularly important for the capital-intensive manufacturing sector, making it cheaper for industrial firms to borrow to invest, and easier for them to service existing debt.

However, Lee Heng Guie, the head of economic research at CIMB Investment Bank, sounded a note of caution over a possible slowdown in the fourth quarter, with a slowdown in China adding to the effect on Malaysia’s manufacturers.

Lee said that regional purchasing manager indices (PMI) were still in negative territory, and that Malaysia’s export-oriented electrical and electronics (E&E) segment could be affected by external factors. He added that industrial performance would continue to be linked to the strength of domestic consumption and investment.

Anthony Dass, the chief economist at MIDF Amanah Investment Bank, an Islamic investment and advisory services firm, said he expects the picture to be mixed, with some industrial segments performing better than others. He did suggest, however, that exports of primary industrial products, including chemicals, timber and timber goods, should hold up. Dass added that the construction materials industry would continue to benefit from the government’s investments through its long-term Economic Transformation Programme (ETP).

The ETP is a wide-ranging programme of investment and reform that aims to shift Malaysia’s economy up a gear to achieve the long-anticipated goal of “developed nation status” by 2020. Its impact on the manufacturing sector is significant, as the programme seeks to increase value-added across the economy. In the industrial sector, this entails leveraging Malaysia’s competitive advantages, including its ample natural resources, geographical position and existing strengths in certain segments.

Malaysia is also hoping to develop higher-value, higher-margin business, such as increasing its export of petrochemicals to taper down reliance on crude oil; expanding sectors such as biotechnology and medical equipment; and nurturing high-tech, knowledge-intensive businesses.

“Under the New Economic Model, growth areas that are being targeted in the manufacturing sector include biotechnology, advanced electronics, optics and photonics, renewable energy, aviation, pharmaceuticals and medical devices,” Mustapa Mohamed, the minister of international trade and industry, told OBG.

This cannot be done without capital and expertise, and, as a result, Malaysia is trying to bring in greater foreign investment through agencies such as the Malaysian Investment Development Authority (MIDA). In 2011, 61% of the $18.1bn worth of approved manufacturing projects were foreign, according to the MIDA. The development of value-added industry also goes hand-in-hand with Malaysia’s strong emphasis on improving and expanding its education system.

Malaysian manufacturers have benefitted from the relatively benign domestic climate this year, good news for a country that is rebalancing towards local consumption. The ETP is already having an effect on demand; in the coming years the challenge will be securing the investment that can drive industry up the value chain.