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The Star
14-05-2025
- Business
- The Star
Malaysia still prime location for supply chain diversification
PETALING JAYA: Malaysia is still in the sweet spot to benefit from the China+1 strategy despite the United States and China reaching a truce and de-escalating from their trade war that has caused much volatility in the capital markets and caused much worry for the global trade system. The tariff de-escalation between the two economic powerhouses earlier in the week had thrown the China+1 diversification strategy in question as some have questioned whether the temporary truce may become permanent and reduce the need or urgency among businesses, both Chinese and foreign-owned, to diversify their supply chains out of China. Nonetheless, experts said businesses are not expected to reconfigure their supply chain and investment decisions anytime soon. They may instead ramp up diversification efforts through the China+1 strategy given the lingering risks of uncertainties. iFAST Capital research analyst Kevin Khaw Khai Sheng said it may be 'quite difficult' for the United States and China to reach a concrete consensus following the 90-day period. 'While there is a 90-day grace period, we expect tariff levels to remain elevated over the next couple of years ultimately. The possibility of returning to pre-trade war tariff levels is quite tough. Hence, the China+1 strategy still remains relevant for the multi national corporations (MNCs),' he told StarBiz. On Monday, both countries agreed to suspend most tariffs on each other's goods for 90 days, reducing reciprocal tariffs between the two nations to 10% from 125%. The United States, however, would maintain its 20% duties on Chinese imports relating to fentanyl, keeping total tariffs on China at 30%. Khaw said there was a similar phase of optimism during US president Donald Trump's first stint in the White House, when the United States and China called a truce in the trade war during the Group of 20 summit in Argentina in 2018, before trade negotiations broke down the following year. 'It quickly became evident that it was very difficult for both sides to finalise a lasting deal, as each had wanted to maintain a dominant position in negotiations. While the current 90-day pause is a good start for markets, the time frame is too short for the United States and China to achieve a lasting agreement,' he said. Malaysia's strategic geographical location, a relatively weak ringgit and affordable labour makes the country an attractive destination for MNCs looking to diversify their operations, Khaw noted. He said foreign direct investment (FDI) inflows to Malaysia may be volatile over the next few quarters due to prevailing uncertainties. However, over the longer term of three to five years, he expects FDI to remain on a positive trajectory, as the benefits from the China+1 strategy begin to materialise. 'FDI levels in the country may see some declines this year. Although the official FDI data for the first quarter of financial year 2025 (1Q25) is not released yet, it is expected to register a softer figure, as companies remain cautious on their expansion plans. 'For 2Q25, while the 90-day grace period provides some breathing room, businesses are still awaiting clearer signals from both the United States and China. As a result, most are likely to hold back on aggressive spending in the near term,' Khaw said. UOB senior economist Julia Goh also concurred that while the recent US-China tariff de-escalation paves the way for further negotiations and more durable agreements, it is nowhere near certain. As such, firms would still consider diversifying to other markets to mitigate risks in supply chains. Nevertheless, Goh pointed out that while Malaysia remains a compelling FDI destination, external headwinds and tariff uncertainties would weigh on the growth and investment outlook this year. 'There are signs that Malaysia could benefit from front-loading activities, broadening of supply chains, shifts to lower-tariff nations, and efforts to boost intra-regional trade. 'Cumulative FDI inflows from the United States at RM219bil since 2018 is a testament of Malaysia's compelling advantages for US companies. Some of these could be part of the US+1 strategy or broader regional supply chain,' she said. But experts doubt that the shifting of production back to the United States as part of Trump's push to bring manufacturing back remains a significant feat and would not take place in the foreseeable future. 'Some companies have taken steps to move certain operations to the United States. For instance, Taiwan Semiconductor Manufacturing Co Ltd has set up a chip fabrication plant in Arizona, which is more of a political move. 'However, most companies are adopting a wait-and-see approach especially in sectors like semiconductor and healthcare, as relocating manufacturing back to the United States does not make much sense from a cost and operational perspective,' Khaw said. On the other hand, Tradeview Capital chief investment officer Nixon Wong said the impact on Malaysia's FDI would depend on the confirmed tariff rates imposed on Putrajaya. Only then companies can assess whether the benefits of setting up operations here outweigh the costs of operating in the United States or other countries. 'Should Malaysia be slapped with a higher tariff, (which we do not see as the base case), then FDI may slow as MNCs may consider other markets as their China +1. 'For now, we still think FDI remains healthy as there are more local supportive policies to attract inflows or interest among firms to set up their plants here,' he said. Looking ahead, Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Dr Mohd Afzanizam Abdul Rashid said regardless of the outcome after the 90-day period, factors like improving access to global trade, deeper integration with the global supply chain and enhancing competitiveness would remain key considerations for effective global trades. 'I doubt there will be a sudden change in how businesses would reconfigure their supply chain and investment decisions. 'I believe they have learnt their lesson well and recognise the need to diversify their supply chain and procurement sources. 'The positive takeaway from the current developments is that perhaps the situation would be less hostile and would facilitate global trade. 'Hopefully, global trade would be based on the rules as stipulated and enshrined within the World Trade Organisation purview,' he said.
The Star
25-04-2025
- Business
- The Star
Fiscal deficit target poser
PETALING JAYA: Malaysia may not achieve a lower fiscal deficit target of 3.8% of gross domestic product (GDP) this year versus 4.1% in 2024, warn analysts, as the economy faces risks of slower growth this year. As of December 2024, Malaysia's debt-to-GDP ratio stood at 64.6%, amounting to RM1.25 trillion, according to the Finance Ministry's quarterly report for the fourth quarter of 2024. iFAST Capital research analyst Kevin Khaw Khai Sheng said slower economic growth resulting from US tariffs is the main concern that could derail the government's ability to achieve its target. 'This year may not be the ideal year to achieve the 3.8% target due to looming uncertainties. We may probably need to wait until next year to reach it,' he told StarBiz. On Wednesday, the International Monetary Fund (IMF) in its latest Fiscal Monitor report warned that global public debt could climb above Covid-19 pandemic-era levels, hitting nearly 100% of global GDP by decade's end. The IMF said this is due to economic pressures from steep new US tariffs which may lead to slower growth and trade, potentially putting a strain on government budgets. For 2025, the IMF expects global public debt to rise by 2.8 percentage points to 95.1% of global GDP. However, Khaw said the country's debt levels are not likely to rise to alarming levels, given Malaysia's ability to maintain fiscal stability without relying too much on external debt. 'For instance, the country can still continue to collect dividends from Petroliam Nasional Bhd (PETRONAS). Our tax revenue is still healthy. 'Therefore, I do not expect there to be any significant negative impact on our debt levels. 'While the expected slowdown in growth may slightly delay progress, we will eventually meet the target,' he said. Sunway University economics professor Yeah Kim Leng concurred that the government's ability to achieve the fiscal deficit target may be 'slightly' derailed given the lower revenue collection and possibly higher-than-budgeted government stimulus spending. In contrast, economist Geoffrey Williams, however, said the government's deficit target is still achievable even though slower growth puts pressure on fiscal consolidation and debt reduction. Earlier this week, the IMF downgraded its real GDP growth forecast for Malaysia to 4.1% for 2025 from its January estimate of 4.7%. 'The economic growth downgrade is a consequence of the US tariffs and assumes reciprocal tariffs will be introduced in full. It would be equivalent to RM11.6bil for 2025. 'This is the economic cost if Malaysia fails to get a positive negotiated deal with the United States. 'This is why it is imperative to negotiate a good deal during the current 90-day pause,' Williams said. He is referring to the broad 90-day pause instituted by US President Donald Trump, except for China, on the implementation of tariffs announced on April 2 to allow for negotiations to take place with other countries. Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid opined that IMF's warning on Wednesday is a cautionary note that global public debt levels would rise due to possible pump priming measures by fiscal authorities. 'I suppose it is a fair comment considering the degree of uncertainties brought by the Trump administration, especially in areas relating to import tariffs,' he said. Meanwhile, UCSI University Malaysia finance associate professor and CME research fellow Liew Chee Yoong said the risks outlined by the IMF are 'real and significant'. But Malaysia still has time and policy options available to respond effectively. While Malaysia's debt exposure is currently manageable, Liew said sovereign debt vulnerability assessments by the Asian Development Bank indicated that it is highly sensitive to external shocks such as oil price volatility and capital outflows. 'Malaysia currently retains its investment-grade credit ratings from agencies such as S&P Global Ratings and Fitch Ratings, but they have also cautioned about Malaysia's rising public debt levels and off-budget liabilities,' Liew said. Even so, he noted that an immediate credit rating downgrade for Malaysia is unlikely, as long as Malaysia maintains its current fiscal discipline and economic fundamentals remain intact. 'In terms of policy options, Malaysia has a range of tools at its disposal to address rising debt levels and strengthen fiscal sustainability. A primary area of reform lies in the country's taxation system,' Liew said. Specifically, the reintroduction of the goods and services tax (GST) could help Malaysia broaden its revenue base significantly. Coupled with improved tax compliance and reductions in tax evasion, these measures could enhance government revenue without drastically raising tax rates, he said. Liew's other recommendations include rationalisation of public spending, particularly subsidies, improving debt transparency and management, accelerating economic transformation through investments in specific areas, and export diversification. Further, economists pointed out that there will be an increased need for counter-cyclical fiscal and monetary policies to shore up demand and mitigate a slowing economy caused by Trump's tariffs and ongoing trade wars. This means that cutting public spending such as on infrastructure projects could be counterproductive. OCBC Senior Asean Economist Lavanya Venkateswaran said while reducing capital or infrastructure spending will help balance the fiscal position in the short-term, this will produce less than ideal outcomes over the medium-term. 'More fundamentally, bolstering reforms through national economic plans for the industry and semiconductor sector and diversifying trade and investment partners will help keep the economy in good stead over the medium-term,' she said. Meanwhile, Yeah said a temporary fiscal loosening will be less damaging to the economy as long as the medium term debt trajectory is on a downward trend and government spending increase is shown to be productive, temporary and targeted. 'These justifications for anti-cyclical government spending however do detract from the need for the government to reduce spending that are not critical or postponing large public projects that can be delayed without jeopardising overall economic efficiency. 'These actions should kick in to avert deficit and debt surges that shake confidence and alarm investors and rating agencies,' he said.
