Despite global economic turmoil, Malaysia’s trade with the world remains positive according to Tan Sri Muhyiddin

Since this interview was conducted, the world economic scene has been changing at an alarming rate. It is possible that the information contained here could be redundant or altered upon publication. Nevertheless Malaysia continues to grow, and although its GDP growth rate won’t be as high as 2007 (7.1 percent), it is still forecasted to be around 4 percent.

Question: Malaysia has had a relatively good economic year in 2007, despite a decline in industrial exports. The forecast for 2008 remains promising. Do you have any reason to believe that due to the current economic “slowdowns” in both the USA, and to a lesser extent Europe, the forecast may have to be revised?

Tan Sri Muhyiddin: In 2007, Malaysia’s economy expanded by 6.3 percent compared with 5.9 percent in 2006. The positive performance was attributed to the continued growth of the manufacturing and services sectors. The manufacturing sector grew by 3.1 percent in 2007, while the services sector grew by 9.7 percent.

Malaysia continued to maintain its position as the world’s 19th largest exporter in 2007. Last year, Malaysia’s total trade increased by 3.8 percent to RM1.11 trillion, from RM1.07 trillion in 2006. Exports grew by 2.7 percent to RM605.2 billion, from RM589 billion in 2006, while imports recorded an increase of 5 percent to RM504.8 billion, compared with RM480.8 billion in 2006.

Malaysia’s total trade for the period of January to June 2008 grew by 12.2 percent to RM586.21 billion, compared with the corresponding period of 2007. Exports increased by 15.5 percent to RM326.9 billion, while imports expanded by 8.3 percent to RM259.31 billion. A trade surplus of RM67.59 billion was recorded for the period of January toJune 2008. Malaysia’s top export market in the period was Singapore, which accounted for 15.1 percent share, valued at RM49.2 billion. This was followed by the USA (13 percent share, RM42.4 billion), Japan (9.9 percent, RM32.5 billion), China (9.4 percent, RM30.8 billion) and Thailand (5.1 percent, RM16.7 billion). Collectively, these countries accounted for 53 percent of Malaysia’s total exports.

Once again, Malaysia’s total trade is expected to continue to surpass RM1 trillion in 2008. The projections as related in the Bank Negara (Central Bank) Annual Report 2007 are that Malaysia’s export is expected to increase to RM617 billion in 2008, while imports, to RM485.9 billion.

For the first quarter of 2008, Malaysia’s economy registered a strong GDP growth of 7.1 percent. The growth was broad-based with strong growth recorded in all sectors. The manufacturing sector expanded by 6.9 percent, registering growth in both export and domestic-oriented industries.

One of the strategies used to enhance export growth for Malaysian products and services is through further diversification of markets. Efforts to enhance awareness and introduce Malaysian companies to new markets have been carried out continuously and intensified by the Ministry of International Trade and Industry jointly with its agency, the Malaysia External Trade Development Corporation (MATRADE), the country’s Trade Promotion Agency.

Malaysian companies had been undertaking efforts to advance their competitive advantage in new and emerging markets by investing in technology and know-how to enhance their productivity as well as move up the value chain. Malaysian exporters will have to contend with increased competition from low-cost producing countries such as China, India and Vietnam.

Despite challenges to the global economy in 2008, particularly high oil and commodity prices, Malaysia continued to attract strong investment inflows, hence reflecting the country’s competitiveness as a manufacturing and export base. The favourable economic performance was achieved despite a slowdown in the global economy. Domestic demand grew by 10.5 percent in 2007, compared with 7 percent in 2006.

Q: The cutting of the corporate tax rate by 1 percent in 2008 and another 1 percent in 2009 should be a big boost for Malaysia’s real estate and construction sectors. Do you see these actions as having a positive “ripple down” effect on the country as a whole. Do you see this reduction in corporate tax benefiting foreign companies as well?

Tan Sri Muhyiddin: The lower tax rate would certainly spur the growth of foreign and domestic investments into the real estate and construction sectors as it helps to ease the financial burden of companies as a result of higher inflation following price increases of fuel, energy and construction-related materials.

The real estate and construction sectors are important sectors for the Malaysian economy as a whole, due to their strong intra-linkages as well as linkages with other sectors. According to the Real Estate and Housing Developers Association more than 140 industries and 2.5 million people are involved, either directly or indirectly, in the real estate and construction sectors.

The property market recorded 309,455 transactions in 2007 (2006: 283,897 transactions) valued at RM77.14 billion (2006: RM61.60 billion), with the transaction volume recording a 9 percent increase whilst value grew by 25.2 percent as compared to 2006. Residential property sub-sector remained the most dominant sub-sector comprising 64.5 percent of the total volume and 47.3 percent of the value of transactions. Agricultural property was the second most active, forming 19.4 percent of the market share. Commercial property, development land and industrial property sub-sectors followed at 9 percent, 4.5 percent and 2.6 percent of the total transactions respectively.

The government’s “off-budget” measure to suspend the real property capital gains tax in April 2007, coupled with initiatives to attract foreign direct investments, which, among other factors, includes the relaxation of foreign ownership regulations (where foreigners can now purchase residential properties valued above RM250,000 per unit without the Foreign Investment Committee’s approval) as well as initiatives to cut red tape in processing development plans and building permits by the local authorities, have contributed to the increase in real estate transactions.

In addition, the development of the economic corridors by the government, in which both the real estate and construction sectors have a large role to play, will further promote these sectors.

Q: The United States and Malaysia continue to have excellent trade relations despite the fact that there has been no “finality” on an FTA agreement. You could say, “Both countries need each other.” How confident are you that an FTA can be concluded on your mandate? And once achieved, what concrete advantages do you see it bringing to the table for Malaysia? For the United States?

Tan Sri Muhyiddin: While Malaysia remains committed to the multilateral trading system, it expects to benefit from bilateral and regional trading arrangements. An FTA with the U.S. presents several benefits to Malaysia.

The U.S.A. has been Malaysia’s largest trading partner for many years. In 2007, it ranked top with Malaysia’s total bilateral trade with the U.S. at US$43.4 billion accounting for 13.4 percent of Malaysia’s global trade.

Malaysia’s exports facing tariff peaks, such as textiles, wood, ceramics, rubber, and agriculture products, will be able to gain better market access. Malaysia’s exports face competition from similar products from other developing country suppliers who enjoy duty-free tariff preference under the U.S. General System of Preferences (GSP). The binding of preferential tariff concessions under the FTA would place Malaysian exporters on better footing.

The reduction and elimination of Malaysia’s tariffs will help manufacturers in Malaysia to source raw materials or components from the U.S., which can be used as inputs for Malaysia’s exports not only to the U.S. but also to the Asia Pacific region. This will also spur investments from the U.S. companies that are trying to enhance their competitiveness. The other plus is that U.S. companies can expand their business in various services sectors and help transfer know-how and help strengthen capacity- building in Malaysia.

The FTA with the U.S. will further enhance investment especially in new areas of growth in manufacturing and services, which Malaysia is promoting. This would enhance Malaysia’s position as a base for manufacturing and services to supply markets in ASEAN and the Asia-Pacific region. U.S. companies located in Malaysia will enjoy the originating status under the FTA’s rules of origin for exports of goods to the U.S., thus contributing to further trade expansion and investment flows.

Q: The economic corridors (Iskandar in Johor Bahru, Score in Sarawak, etc.) or “corridors of power” as they are sometimes referred to, are bursting with investment opportunities for American corporations keen to have a foothold in Southeast Asia. Of particular interest are Iskandar in Johor Bahru and Score in Sarawak. Both have different agendas and are highly ambitious projects for different reasons. Apart from Iskandar’s obvious proximity to Singapore, what other advantages would you like to promote to Washington on why Iskandar should be supported?

Tan Sri Muhyiddin: The main pull factors for investors to the regional development corridors are:

1. fiscal and non-fiscal incentives and specialized incentive packages for investors in each corridor;

2. the firm commitment of the Malaysian government towards the success of these corridors;

3. availability of green-field sites for new development opportunities;

4. liberal policies and transparent procedures that facilitate trade and investment;

5. business-friendly environment with English widely spoken and a legal system based on the British legal system;

6.world-class infrastructure including energy, transportation and communications;

7. well-connected by air and sea;

8. free from natural calamities; and

9. offers a good quality of life.

In addition, the Iskandar Malaysia leverages on the location to the proximity of not only Singapore, but West Sumatra and other regions as well. Thus there is excellent potential for economic competitiveness, integration and growth through comparative exploitation, economies of scale and productivity linkages. Its unique location at the intersection of the main East-West trade lanes is suitable to service the Indian and Chinese markets. Investments in this region have high potential compared to more developed areas within Malaysia and the region.

In terms of fiscal incentives, IDR-status companies can enjoy exemption from income tax for a period of ten years from commencement of operations in respect of income from qualifying activities carried out within the approved areas. The companies also enjoy exemption from withholding tax on payments for services and royalties made to non-residents for a period of ten years from commencement of operations of such companies.

Iskandar Malaysia also offers attractive packages for developers such as tax exemption on income generated from the sales and rental of properties until 2015 or 2020. Approved development managers will enjoy exemption from payment of income tax from the provision of management, supervisory, or marketing services until the year of assessment, 2020, and are also exempted from withholding tax on payments made to non-residents for services until 2015.

Currently, many infrastructure projects in Iskandar Malaysia, such as the Skudai Interchange and Outer Ring Road, have been completed, while construction works in Node 1 area in Nusajaya, the interchange at Johor Bahru/Kota Tinggi/Pasir Gudang and Perling and Coastal Highway are currently under construction.

As of July 2008, Iskandar Malaysia has attracted investments valued at RM36.6 billion. This constitutes over 74 percent of the targeted investment amount of RM49.0 billion for the corridor for the Ninth Malaysia Plan (9MP) period, from 2006 to 2010.

Several American companies have shown interest to invest in sub-sectors such as tourism, healthcare, infrastructure.

Q: Why would you recommend American companies should come and invest in Malaysia?

Tan Sri Muhyiddin: Naturally Malaysia continues to attract substantial amount of investments in the manufacturing sector from the U.S. In 2007 Malaysia approved investment worth RM3.0 billion from the U.S. in the manufacturing sector, compared to RM2.5 billon in 2006, an increase of 20 percent. For the period, January to June 2008, Malaysia has already approved RM 2.7 billion in investment from U.S. The continued interest shown by American investors is due to a variety of pull factors, such as:

Political and economic stability

Well-developed infrastructure to meet the needs of the industry

Pro-business government; transparent and business-friendly policies

English language widely spoken and a good legal system

Trainable and educated work force

Harmonious industrial relations between management and employees

Quality of life, i.e. education, housing and recreational amenities

Policy of welcome attitude to foreigners

Malaysia has a highly-skilled, and trainable workforce. Under the Ninth Malaysia Plan (2006-2010), investment in human capital development is given greater emphasis as a measure to sustain the country’s economic growth and move the economy up the value chain. This is done in collaboration between the public and the private sectors. During the Plan period, the government has allocated a sum of US$13.3 billion or 23 percent of the total budget for education and training.