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The Emerging Four
Sectors of Growth

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by IBR Malaysia
01 October 2015
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Malaysia celebrates 58 years of independence on the 31st of August this year, and those who remember what life was like during the immediate post-Merdeka period would testify to the seismic changes that have taken place since then. The country moved from one based on agriculture and commodities, such as rubber and tin, to being more focused on manufacturing, and since the late 1990s; the onus has fallen on the services sector to be the driver of the economy. With Malaysia moving towards its target of becoming a developed economy by the year 2020, International Business Review Malaysia takes a look at some up and coming sectors.

Old Habits Die Hard

In some ways, the Malaysian economy is still very much based on traditional industries. For instance, the main contributor to GDP and to export revenue is none other than the oil and gas sector. In 2014, it accounted for 17% of the economy and around 22% of exports, inclusive of a combination of petroleum, petroleum products and LNG.

The decline in oil and gas prices which started late last year has caused some concerns because at least 30% of government revenue comes from there. Although longterm policy calls for the reduction of that figure to below 30%, it was supposed to be a gradual, unforced adjustment. The question therefore is, which of the other economic sectors can pick up the slack?

Perhaps the best thing is that no single sector or industry should dominate the economy. Malaysia only needs to look at states in the oil-rich Persian Gulf region for sufficient warning, as the dependency on hydrocarbons there have left countries with a lopsided economy. The exceptions being Dubai and, to a certain extent, Qatar. Therefore, rather than one major industry, Malaysia has been gearing itself to have several key ones. Among those that are emerging (or in some cases re-emerging) are agriculture, retail, tourism and construction.

Sustaining the Future

Agriculture is an interesting addition, especially when the overall aim is to become a highlyadvanced industrialised nation, and agriculture is perceived to be the anti-thesis of modern. However, the Malaysian government aims to bring the sector up-to-date with the help of modern farming practices and agro-technology.

This was mentioned by Prime Minister Datuk Seri Najib Tun Razak during the Malaysian Agricultural, Horticultural and Agro-Tourism (MAHA) Exhibition 2014 in November last year. Highlighting how the Netherlands (which he described as being “the same size as the state of Pahang”) is the second largest producer of food in the world, he said, “It’s not because of the size of the country, but because they are skilled in using technology, are innovative and capable of dominating the global food chain.”

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The contrast can be seen in statistics which show that last year, the Netherlands received Euro80b (RM335b) from agriculture exports, even though the sector makes up only 2% of the Dutch economy. Agriculture in Malaysia accounts for 7% of the GDP, and yet its contribution to export revenue is negligible.

More than just being another source of revenue, enhancing the agriculture sector will also significantly boost food security in Malaysia. For instance, rice is the primary staple of most Malaysians, yet the country only produces enough to meet 80% of demand. With Malaysia’s population expanding, it is vital that efforts are made to ensure that we are able to produce enough (and maybe even more) without having to rely on costly imports.

Boosting Consumption

Enhanced food production will also have a knock-on effect on domestic trade. The legendary economist Adam Smith once called Britain, “a nation of shopkeepers”, in allusion to how commerce influenced government policy. It would not be wrong to call Malaysia “a nation of shoppers” as domestic consumption accounts for 60% of the country’s GDP.

As such, the wholesale and retail sector is poised for growth. Already, it contributes approximately 13% to the national economy, making it the second-biggest economic sector after oil and gas. According to the government’s Economic Transformation Programme (ETP), wholesale and retail is expected to help increase gross national income by RM156b and create more than 450,000 jobs by the year 2020.

In 2015, the wholesale and retail sector is expected to increase by 7.7%. However, several factors may negatively affect domestic consumption, one of which is the 6% Goods & Services Tax (GST) that was introduced in April this year. Addressing the issue of the GST in the ETP Report Card 2014, then
Domestic Trade, Cooperatives and Consumerism Minister Datuk Hasan Malek said, “While a shortterm slowdown in consumption may emerge as consumers adjust to the new tax regime, we do not expect domestic consumption to remain suppressed over the longer term… We therefore do not foresee any disruption to wholesale and retail business.”

But even if GST does not keep shoppers away, the weak ringgit might do just that. Since August 2014, the Malaysian currency has fallen from around RM3.16 to US$1 to RM4.25 to US$1 – the lowest it has been since the US dollar peg (which set the rate at RM3.8 to US$1) was removed in 2005.

The ringgit’s slide is resulting in costlier imports, of both raw materials and finished products. While a glib answer will be to encourage people to buy local, the fact is Malaysia is not 100% self-sufficient, even for necessities such as food.

Luring Visitors

Yet, the fall of the ringgit may have some positive effects, especially since it makes Malaysia a more attractive destination for tourists. Already the tourism sector contributes 5% of the GDP, and this is only considering direct tourism revenue such as takings from hotels and tourist sites. When combined with non-direct tourism revenue such as healthcare (in the case of health tourism), the figure would be much higher.

The wholesale and retail sector has every opportunity to benefit from this. Malaysia’s retail sector already enjoys a strong reputation, with research firm AT Kearney placing the country in 9th place in its 2014 Global Retail Development Index. Additionally, in 2013 CNN Travel named Kuala Lumpur as the 4th best shopping destination in the world.

Thus, there are those who are not shedding any tears over the ringgit’s depreciation. These include in-bound tour operators, hoteliers and the Tourism Minister Datuk Seri Nazri Aziz who was reported to have said, “One of the few people who are happy that the ringgit has gone down is me because when the ringgit is low, tourists can really stretch their euros, their pounds, and things become cheaper here.”

All in all, Malaysia expects for tourism to contribute RM66b to the GNI by the year 2020, during which time the number of tourist arrivals is expected to average 36 million a year, resulting in an average annual intake of RM168b.

Strengthening Infrastructure

In order to truly enhance tourism, infrastructure needs to be improved, a course of action which will have huge positive benefits for every sector. The construction sector already contributes nearly 10% to the GDP and grew by 11% in 2014, and is expected to continue to thrive in 2015 and beyond. This is because approximately RM250b worth of construction and infrastructure projects have been scheduled under the 11th Malaysia Plan.

Aside from the continuation of the Mass Rapid Transit (MRT) line, other major infrastructure projects in the pipeline include the Pan Borneo Highway, Central Spine Road (CSR), Kota Bahru-Kuala Krai Highway, West Coast Highway and the Pengerang Integrated Petroleum Complex road network.

Also, in the process of commencing is the construction of the high-speed raillink (HSR) between Kuala Lumpur and Singapore. This will reduce the time taken to travel between these two cities from 8 hours (by train), 4 hours by car and bus, to 90 minutes by HSR.

Aside from transport infrastructure, commercial development of the Klang Valley, particularly the Kuala Lumpur city centre will be an important boost for the construction industry. As the main tourist attraction of the country, the capital city is also the focus of high-end development projects such as shopping malls and hotels.

Granted that the aforementioned are not the only sectors that will contribute to Malaysia’s economic growth in the coming years, they are the ones we at International Business Review Malaysia believe to be the must-watch. That being said, no one sector can stand entirely on its own and each will require the other to be strong. And that is a good thing, because it will result in a more holistic and mature economy.

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