Trade Gains amid Supply-Chain Diversions and Pandemic – Part Three

By Julia Goh & Loke Siew Ting Senior Economist & Economist UOB Bank julia.gohml@uob.com.my / jasrine.lokeST@uob.com.my

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Going forward, a recovery of global macro conditions will be the prime driver of actualised investments over the next 2-3 years. Other potential catalysts include the technology upcycle with the rollout of 5G network and accelerated digital transformation. Malaysia has (on 19th Feb) launched its Digital Economy Blueprint 2021-2030 that targets to roll out 5G deployment by end-2021 and aims to attract MYR70bn investments in digitalisation to lift the digital economy to 22.6% of GDP. Malaysia is also part of the Regional Comprehensive Economic Partnership (RCEP) that is targeted to be in force by 1Q22 after it has been ratified by at least six ASEAN countries and three non-ASEAN signatory countries. This trade pact will establish the largest regional supply chain in the world with the growing role of intra-regional economic activity.

Based on our stimulations assuming the absence of any major economic and financial shocks, the export contribution by RCEP countries to the rest of the world is expected to rise by more than 3.0% points to around 32.5% of global exports by 2025 (vs. 29.0% in 2019). This is equivalent to ~USD6.0tr-7.0tr of world exports by 2025 (vs. USD5.5tr in 2019). This would elevate RCEP to become the largest contributor to global exports by 2025, overtaking EU-28.

As such, domestic policies should also be aligned to shifting global trends and ensure Malaysia remains a competitive investment destination given strong competition from neighbouring countries like Vietnam and Thailand. In addition, we think a holistic investment plan that engages investors to understand the issues hindering investments, improve investor services, and enhance the administration of investment incentives would further improve the investment climate. Several countries have made crucial reforms and undertaken short-term policy changes to better position themselves from the current geopolitical tensions. Malaysia announced several initiatives under the PENJANA stimulus plan and Budget 2021 to attract investments including:

  • Tax incentives for companies relocating to Malaysia with 0% tax rate for 10 years for new investment in manufacturing sectors with capital investment between RM300m-500m or for 15 years if above RM500m, and 100% investment tax allowance for 3 years for existing companies in Malaysia relocating overseas facilities into Malaysia with capital investment above RM300m;
  • A RM1bn special incentive package for high value-added technology projects including R&D investments in aerospace and electronic clusters;
  • Income tax rate of 0% up to 10% for the first 10 years and 10% for the subsequent period of 10 years to manufacturers of pharmaceutical products including vaccines;
  • A 10% income tax rate for a period of 5 years and renewable for another 5 years for Global Trading Centres;
  • An extension of the Principal Hub, Industrialised Building System components manufacturing, and shipbuilding and ship repairing industry incentives’ application period; and
  • Expansion of the scope of special tax rates to selected manufacturing companies which relocate their businesses into Malaysia or undertake new investments, to include selected high-technology services sectors.

The Malaysian Investment Development Authority (MIDA) has also:

  • Set up the Project Acceleration and Coordination Unit (PACU) to provide end-to-end facilitation for all projects approved to enable the timely implementation of investments in the country;
  • Introduced online modules namely e-Manufacturing Licence (e-ML), e-Incentive, and JPC Online Application to accelerate the necessary approvals for manufacturing licenses, incentives, and exemption of customs duties to expedite the execution of projects; and
  • Established a One-Stop-Centre (OSC) to evaluate applications of eligible business travelers to enter Malaysia for trade and investment purposes