election fever is in full swing in Malaysia as it prepares to head to the polls on november 19th, one of the hot button, economic issues and how will the outcome of the vote affect investor confidence. I'm Sona Ramesh from the management team. This is five things you need to know about the Malaysian elections joining me today. Ser Jaime Elia's chief economist at Maybank Investment Banking group, kevin chang, senior research officer at the ISIS use of
ISHA Institute in ceo of click through Malaysia. Now that's a digital consultancy in Kuala Lumpur. Let's start off with one of the key issues on voters minds as Malaysia prepares to vote.
It's interesting because if you see Malaysia and especially from abroad, it seems a lot of issues concerning race, religion in Malaysia. But actually, if you look at the survey done by medical center, which is arguably the most reputable polling agency Malaysia, actually the biggest issue in Malaysia among the voters actually economic concerns. And this probably is the most important factor double or three compared to what respondents mentioned as being a political instability
or even like race religion issue. So in other words, economic concerns is, I would say the universal issue that all Malaysians across all ethnic and racial groups are thinking about rather than even political instability, which actually don't factor
so much into the everyday life of ordinary Malaysians. It depends on which group of voters or urban, lower income and rural households is pretty much the common folks, socio economic concerns and issues like inflation cost of living income, basic infrastructure, education, health care, but at the same time, this election is about youth Or young voters given the lowering of the eligible voting
age to 18 years from 21 years old. So for this group of voters, I presume it's about their future job security, better pay affordable housing as well as aspects of quality of life and sustainable development like equality, inclusivity and environment. The other key voting segment is the urban high end groups while sipping their coffees and dining at posh places like era. It will be governance, corruption, integrity, democratic and
institutional reforms. The stuff that you can afford to ponder and demand when you don't have to worry about income jobs, inflation, putting food on the
table. Now, according to a recent World Bank report, there's no easy fix for Malaysia's economic challenges. So what do you think are the biggest red flags ahead?
The key thing that's mentioned is that Malaysia is facing structural issues such as declining FBI. Over the last 10 to 15 years. Of course, there was a search in FBI 2021 partly because of the trade wars between us china and a lot of the diversion investments to Vietnam and Malaysia in particular. So therefore there was abnormally in 2021.
But if you take 2021 aside, even for this year, there's the declining FBI Guy growth has been really like consistent and you can see that each year there's been almost like a reduction in FBI growth itself. So I think it's definitely one of the key factors because without FBI that Malaysia is very dependent or it will be difficult for the country to
get more foreign investment to propel growth. And I think the other factor is also highlighted by World Bank, other economic reports that Malaysia has been performing about 5% GDP growth per year for the last about 10 years or even longer. But actually Malaysia potential could be done
much higher than 5%. But of course we do understand that especially related to labor regulations, foreign immigration, these are the parts where Malaysia has been delaying some of the very necessary forms and because of that slowing down its economic potential, even though it is still growing at about 5%. The biggest economic concern heading into the next general election
is worry about global economic outlook. Given this environment of high inflation, high interest rates and how this will affect Malaysia, we are seeing signs of media western economies, especially europe
facing this situation already. Given the search and info caused by the fallout from Russia Ukraine war in terms of commodity, especially energy supply and price shocks that in turn push up inflation prompted central banks to be hawkish and aggressively raise interest rates, there's also uncertainty surrounding china's
economic prospects. These major economies, US europe china Malaysia key export markets, accounting for Around one third of total exports and at the same time nearly 1/5 of Malaysia's GDP are exposed to the final demand from us, Europe and China. I guess there will be a long list to do as far as the next government is concerned among others. And speaking in general terms, perhaps I can sort of rattle off eight areas that I think are important.
First address voter concern on the cost of living issue, especially on necessities like food security, affordable housing. Second, improve the quality and delivery of essential public services namely education, health care and public transport. Third would be to bring about a more balanced growth and equitable development across the country, especially for the less developed poorer states so that no part of the country will be left behind.
Fourth continue and enhance policy support to the economically important smes to address the critical issues of human capital development, especially on talent and skilled force to aid the recovery of the tourism ecosystem as well as strengthen the Social Security and safety net
For the vulnerable segment of the Society. five, I think the government knows they have to undertake economic reforms and restructuring to strengthen Malaysia's competitiveness, attractiveness and value proposition to invent too much show political
will to tackle issues of governance, corruption integrity. Seven remain committed to medium term fiscal consolidation to avoid what I call UK style physical missteps that hit market and currency and jeopardize sovereign credit rating and one more thing is maybe over the longer term stay the cost on addressing climate change. Not only in terms of realizing commitments to lower emissions but also assist and guide communities and smes for a just transition towards sustainability
And for more that sme perspective, let's bring in he's the ceo of click through Malaysia, a digital marketing consultancy in Kuala Lumpur. What's on the top of your wish list?
I don't think so. There will be a lot of changes besides wanting a more stable government and the entire system needed to be said not only for sme I will say that the entire system for example in education sme to take care of the business mall, the policy need to reset. The mindset in the reset is actually more people friendly and business friendly as well and investor friendly. Whoever that is going to be elected to the government right.
They have to have a mindset of doing all this reset and if they actually maintaining the status quo is just changing on the top, which is the minister helming the department without more robot mindset and resetting is going to be the same. It's going to be no different for us who is going to be elected to be a government.
Could you tell us a bit more of that type of reset that you'd like to see, for example, the U.
N. C. Your government put up a lot of effort there 100 over grants available for sme to like but they're not in touch with the market, the intention is good, they're helping. But the main issue now with sme is they are facing problem let's say in finance Wise and all that and they need help. But you are giving out a grant that you need to apply. The grant is actually a 50,000 cash one off for starting a new business and then you need to do
a projection while it's good. Yeah it actually has to be available since without even pandemic but on pandemic it's actually those smes facing problem which is cash flow problem and wrong material, increased price from these are the problems that they are really facing it and what help they need. They don't need all these I. D. Card you know the kind where you need to go and apply and do
projection for them. This is actually starting a business to help sme is actually to grant them more people friendly policy. Like for example one of help in text. These are the things that actually helping them instead of you asking them to go and apply for you know and then do a forecast for them and then your cash flow is it okay or not? Okay then only approve your loan and all that kind of stuff. This
is not so friendly. Well it's very interesting that comes from smes leaders typically I would say the most resistance to change but I think when it comes to reset maybe a few things first and foremost continue to support sme in terms of adoption of technology in terms of digitalization, mechanization automation to help them address one key issue right now, which is a shortage of workers, especially foreign workers. And I think shortage of workers is part and parcel
of this global, global phenomenon of shortage economy. So I think that can help them in terms of addressing the issue as well as boost their productivity and efficiency as well as competitiveness. Second, I guess continue to have them in terms of funding because I think in this environment of rising interest rates, certainly they're going to be a big challenge. So I suppose the special schemes by the government will continue to be rolling in as far as sme is concerned.
I think the budget 2023 that was announced recently have one particularly good news for the smes, which is the lowering of the preferential corporate income tax rate paid by smes earlier, they were paying 17% against the standard corporate tax rate of 24%. But in budget 2023, it was proposed for that income tax rate to be lowered to 15%.
Here's what we've discussed so far with three political coalitions vying for votes Malaysia's 15th, general elections on November 19 are likely to be closely fought cost of living issues are the top of the minds of many voters and sorting out the economy will be a key priority for the incoming government businesses are calling for more support to stay competitive, particularly given a worsening labor crunch in the country. So we heard earlier that call from a business owner to reset
the system so that it becomes more investor friendly. So I mean, how do you think that Malaysia can boost its value proposition to investors?
We need to have the kind of long term narrative as far as where the economy is heading. I think that's lacking over the last few years and for that matter, perhaps not very clear after G14, the last general election because we have too much politicking, it's not so much policy making that create a bit of uncertainty clouding the long term outlook for the economy. So I think that is something that needs to be done going forward to have that
kind of narrative. Of course it will come along with a lot of reforms structuring it will be tied to stuff like fiscal consolidation because I think one thing that can happen when you have fiscal consolidation is that the government perhaps can afford to lower corporate income tax rates to attract F. D. I. S. To boost domestic investment because it is really a competition, a beauty contest among
regional economies. We have seen over the past few years, some of the Asean economies like Indonesia and Philippines taking steps to lower the corporate income tax rate, I believe right now, our corporate income tax rate is among the highest in Asean, I'm not mistaken at 24%. So I think those are
among the things that need to be addressed. We really really need to address the issue of human capital development, especially the talent and skill workforce because the good thing that's going on for Malaysia right now, FBI is not bad.
It's coming in, we do benefit from, for example, the geopolitical race, the geo economic tensions between us and china, for example, since 2018, because of the US china trade war and now expanding into tech war, we do see benefits to Malaysia in terms of the relocation FBI to resilience in supply chain. But from my conversation with companies in the electronics sectors, the issue is skilled workforce and talent. So these are the kind of things that we need to see.
One of the key things that Malaysia really needs to reform is how does it regulates the foreign labor sector? As most of us are where Malaysia has two million of legalized foreign workers and maybe about two or even three million of illegal foreign workers, which we are unsure because of the nature of undocumented labor. So the thing is Malaysia needs to be able to move away from the low productivity that has been taking Malaysia for the last 20 years or even longer.
And because of the influx of foreign labor, you do have trends West Ministry in the manufacturing sector, the wages for the local Malaysians are depressed right Because they're competing with people from Indonesia Bangladesh and Malaysia needs to lean off its reliance of cheap foreign labor or basically just massive foreign labor in order to increase the productivity output for each of its Malaysian workers rather than increasing just the number of workers per se.
And now, because post pandemic, many of the foreign workers has not returned back to pre pandemic levels. Therefore, especially labor incentive sectors like smes in the food and beverage sector or even manufacturing are facing a very serious labor shortfall. So I would say that this is maybe a timely opportunity for Malaysia to considering moving its economy towards less being dependent on manpower by towards greater productivity.
It's not all bad news. What bright spots do you see in the economy?
One is we expect the tail winds from full economic opening this year rolling into next year, which also include the opening of the country's international borders. That is leading to the revival of tourism sector. Of course not complete recovery, gradual slow process to return to the pre covid 19
levels in terms of international tourist arrivals. But when you have recovery and tourism sector, it will also lift tourism related industries like F and B. Accommodation, transport, especial aviation, recreation and entertainment whose real GDP right now are still below the pre covid level because they were the others hit during the pandemic and currently still lagging in recovery.
So I think that's one area of bright sparks in the economy secondly, as I mentioned earlier about Malaysia benefiting from FBI. There's encouraging signal for FBI outlook. Taking cue from 2021 there was this 200 plus percent third in approved FBI to a record value of over 200 billion after the
pandemic trigger decline in 2020. And the momentum actually continued into the first half of this year, where the approved FBI amount of 87 billion just for the first six months of this year is higher than the historical pre 2021 annual or fully approved FBI value. So it shows sustained momentum of strong approved FBI since last year. So we have this positive outlook in terms of realized FBI because of the search and the proof of the other.
We believe this reflects the situation where Malaysia is benefiting from relocation FBI for supply chain resilience and security in the wake of the geopolitical and geo economic risk I mentioned earlier. And unsurprisingly, the bulk of the approved FBI in tech related sectors where over half of the total approved FBI last year and first half of this year, were in electronic sectors.
And there's another, I think 16% of the total in the telco sector and when I dig deeper, it is largely approved FBI in data centers because bright sparks in Malaysia economy is that Malaysia inflation is actually one of the lowest in the asean region effect, if not maybe even in the Asia pacific the East AsIA pacific region. So the low inflation is providing a lot more kind of stability, especially
in terms of cost of living issues. But of course, all these are contingent about continued government subsidies and also price control, which we may not be certain that it will definitely be continued under the new government post election. The other bright sparks of the economy is also that
comedy prices. I mean, of course, there's been some of the decline commodity prices in the first half of this year, but compared to pre pandemic commodity prices are still much higher compared to 2019 or 2018, for example, palm oil prices, petroleum prices. The Malaysian government budget estimates is based on $90 per gallon for crude oil. So definitely with high commodity prices, Malaysia economy is going to benefit because it is ultimately a net fuel exporter and also exports a
lot of the pump oil. But will say that this Resource export has been driving the Malaysia growth for the last 30 years. And we have seen during COVID, when you have a sharp drop in commodity prices, how badly your markets can be affected. So you might be doing in Malaysia's favor for now, but we can't take for certain case in 3-5 years.
And what are some opportunities investors should be looking out for
in view of the macro challenges from your political tensions, high inflation, high interest rates, environment recessions that raised globally as well as I suppose some overhang on domestic politics pending the outcome of the general elections. Our equity research team, basically advocating to maintain a balanced growth value portfolio positioning that is overlaid with E. S. G. And yield themes assuming budget 2023 will be eventually passed after the election without me,
minimal changes. It will be good for three particular sectors. The measures like income tax cuts for the middle income taxpayers and the continued tax handouts for lower income households
will be positive for consumer staples. Talk the technology and renewable energy sectors we think will benefit from the supportive tax and investment incentives and at the same time the additional exemption and incentives for accelerating electric vehicle adoptions and development of national charging infrastructure is favorable for automotive sectors.
So it all adds up to a daunting in trade for Malaysia's next government as the clock ticks down to the November 19 election. After the politicking of the past few years. Many voters are hoping that the outcome of these elections will be a stable government. So having that long term certainty could help Malaysia live up to its economic growth potential with foreign direct investment growth slowing down. That could also help Malaysia compete with other up and coming asian economies.
It could also be a good time for a reset to the country's labor ecosystem so that it can turn out better skills and more productive workers. Finally, investors can expect some bright spots from post pandemic opening from commodity prices and the renewable energy sector. Those are the five things you need to know about
the Malaysian elections and the economy. My thanks to my guest today, Amelia's chief economist at Maybank Investment Banking Group, Kevin Tang, senior research officer at the I. C. S. Use of institute and ceo of click to Malaysia money mind as every saturday at 10:30 p.m. On mediacorp c n a. You can also catch us online at CNN dot asia on youtube.