In Malaysia's investment landscape, two distinct types of investments often come under the spotlight: portfolio investments and gross fixed capital formation (GFCF). Each plays a unique role in shaping the nation's economic trajectory, yet they are driven by different forces and yield varied impacts.
Portfolio investments, which typically involve buying and selling stocks on the Kuala Lumpur Stock Exchange (KLSE) or investing in debt securities, are known for their liquidity and short-term focus. Often referred to as "hot money," these investments are prone to speculative trading, contributing to market volatility. While they can drive quick profits for asset managers and wealthy investors, their role in generating real economic growth is limited. These short-term capital flows tend to benefit the few rather than fostering widespread development, infrastructure enhancement, or job creation.
On the other hand, Gross Fixed Capital Formation (GFCF) represents investments in physical assets such as infrastructure, machinery, and buildings, which are vital for expanding the economy's productive capacity. GFCF has a more profound and direct impact on economic development, as it fuels long-term growth through the improvement of infrastructure and industrial efficiency. However, realising the benefits of GFCF requires sustained commitment from both the public and private sectors, demanding a longer-term vision and considerable resources.
Malaysian Investment Development Authority (MIDA)
The Malaysian Investment Development Authority (MIDA) has long been a central player in promoting and reporting investment flows into the country. However, there is an important distinction to be made between the investments MIDA reports as "approved" and those that are actually realised or materialized. When MIDA announces investment approvals, these figures represent commitments—pledges by companies and investors to inject capital into Malaysia's economy, often aimed at key sectors like manufacturing, technology, and infrastructure. But approval does not necessarily mean that these investments will ever come to fruition in the form of actual projects, factories, or job creation.
The journey from an approved investment to a realised investment is fraught with challenges. Bureaucratic hurdles, regulatory delays, shifting market conditions, and unforeseen financial constraints can slow or even halt projects before they ever take off. This creates a gap between the optimistic numbers reported by MIDA and the real economic impact felt on the ground. In essence, investments approved represent potential, a promise of future growth, but without a clear path to materialisation, that promise remains unfulfilled.
This gap is significant because it influences how we perceive economic progress. Policymakers and analysts may celebrate large-scale investment approvals, but unless these commitments turn into tangible assets—new factories, jobs, infrastructure improvements—they do little to contribute to long-term economic development. Malaysia, like many emerging economies, must grapple with this challenge. It needs to ensure that the investment environment is not only attractive on paper but also conducive to turning approved investments into real economic drivers that benefit the broader society. In this sense, MIDA's reports serve as both an indicator of potential growth and a reminder of the work still required to turn that potential into reality.
Looking Forward
As we look toward the latter half of 2024, Malaysia's economic trajectory presents a compelling case study in how a nation can leverage private sector dynamism to drive growth. With the economy expanding by 5.9% in the second quarter, buoyed by robust household spending, export strength, rising tourist revenues, and increased private investments, Malaysia has proven its economic vitality. This positive performance underscores the benefits of minimal government intervention and highlights how the right conditions can stimulate private sector-led growth.
Malaysia's allure to foreign investors, particularly in the technology sector, has been notable. The influx of foreign direct investment (FDI) into high-energy-demand sectors like data centres speaks to Malaysia's strategic advantages, such as its abundant and inexpensive energy resources. The National Energy Transition Roadmap (NETR) promises to bolster renewable energy, aligning with global net-zero goals and making Malaysia a more attractive location for tech investments.
Despite volatility in the ringgit, Malaysia's currency has strengthened, reaching a 16-month high against the US dollar. As of August 20, 2024, it had appreciated by 4.85% and is approaching a fair value range of RM4.30 to RM4.40 to the dollar. This improvement, driven by external factors and clearer policy rate directions from major economies, contrasts with the relative weakness of other regional currencies.
Looking forward, while the GDP data is promising, Malaysia's economic growth remains susceptible to global headwinds and internal dynamics. The post-Covid-19 era has seen fluctuating growth rates, and while 2023's forecasted growth was 4% to 5%, the actual result was 3.6%. Presently, growth is exceeding underlying trends, but if it reverts to its normal trajectory, it may settle around 4% to 4.5%.
Global headwinds have significantly strained trade dynamics, as the balance between imports and exports has shifted unfavorably. Imports outpace exports, leading to a declining contribution from net trade. Fortunately, domestic factors like Akaun Fleksibel withdrawals have provided some consumer demand support; their impact has been less than anticipated.
Inflation remains manageable at around 2%, but if the economy continues to grow beyond its potential, future inflationary pressures could emerge, potentially leading to higher interest rates.
Conclusion
Given the current favourable growth and inflation outlook, Malaysia is well-positioned to focus on structural reforms that could enhance economic competitiveness. The priority should be to maintain price stability and avoid overheating, creating an optimal environment for long-term economic health.
While portfolio investments often dominate financial headlines due to their effect on stock prices and market sentiment, their contributions to the broader economy are often criticised as superficial. In contrast, GFCF lays the foundation for sustainable growth, equipping industries with the necessary tools and infrastructure to boost productivity. The real challenge for Malaysia lies in finding a balance between these two investment types. While portfolio investments can introduce much-needed capital and liquidity into the financial system, they must be complemented by robust GFCF to ensure long-lasting economic advancement.
Ultimately, although the allure of quick financial returns from the stock market can be tempting, Malaysia must prioritise investments in physical capital and infrastructure. These are the true engines of genuine economic progress, driving not only growth but also improving the overall welfare of society.
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Economist Samirul Ariff Othman is an international relations analyst and a senior consultant with Global Asia Consulting (GAC). Samirul has background as a senior researcher at the Malaysian Institute of Economic Research. The viewpoints articulated are solely those of the author.