COVID-19 & Global Economic Turmoil: Any Emerging Foreign Direct Investment Opportunities?
June 24, 2020
The infectious coronavirus has brought about a global economic crisis like no other. Investors across the world have decided to hold back further investments and halt on-going projects amidst the financial uncertainties that lie ahead. This is reflected in the estimation by the United Nations Conference on Trade and Development (UNCTAD) that global Foreign Direct Investment (FDI) flow will face a dramatic drop of up to 40% in year 2020, accompanied by a further decline of 5 – 10% in year 2021.
In Malaysia, the Central Bank forecasted the country’s GDP growth in year 2020 to be between -2.0% to 0.5%, marking a sharp decline from 4.3% in year 2019. Notwithstanding the current economic climate, given the country’s strategic location, efficient logistic network, skilled multilingual workforce coupled with the recently launched countercyclical fiscal policy, Malaysia remains an ideal investment destination among the countries in Southeast Asia.
This alert outlines various economic recovery strategies and measures implemented by the Malaysian government in retaining business confidence and sustaining the country’s competitive investment ecosystem.
PENJANA Economic Recovery Plan
Along with the resumption of business activities, the Malaysian government has unveiled the RM35 billion National Economic Recovery Plan (PENJANA) to, inter alia, stimulate the economy by retaining existing investors and attracting new potential investors.
Measures introduced in this respect are as follows:
a) 0% tax rate for 10 years for companies in the manufacturing sector with capital investments in fixed assets between RM 300 million and RM 500 million, provided that the companies relocate and commence operation in Malaysia within one year from the date of approval of the incentive and the investment amount is made within three years;
b) 0% tax rate tax rate for 15 years for companies in the manufacturing sector with capital investments in fixed assets exceeding RM 500 million, provided that the companies relocate and commence operation in Malaysia within one year from the date of approval of the incentive and the investment amount is made within three years;
c) 100% investment tax allowance for three years for an existing company in Malaysia that will relocate its overseas facilities into the country with capital investment above RM300 million;
d) Special reinvestment allowance for selected manufacturing and agricultural activities for the year of assessment (YA) 2020 to YA 2021;
e) Additional operating expenditure for Malaysian Investment Development Authority (MIDA) to undertake marketing and promotional activities;
f) Establishment of Project Acceleration & Coordination Unit (PACU) at MIDA;
g) Enhancement of Domestic Investment Strategic Fund; and
h) Manufacturing License approval for non-sensitive industry within 2 working days.
MIDA: Facilitating implementation of projects
In their effort to implement the PENJANA Economic Recovery Plan, MIDA has played its part by setting up a new unit called the PACU to facilitate all necessary approvals required at the federal, state and local authorities’ levels. Under the Unit, the manufacturing licence approval process for non-sensitive industries will be shortened to just two business days. This allows speedy implementation of new manufacturing projects and projects which have been stalled due to the COVID-19 pandemic, cutting time and expenditure for foreign corporations.
MIDA: Malaysia’s Lighthouse Project
MIDA had launched Malaysia’s ‘Lighthouse Project’, modelled after the ‘Global Lighthouse Network’ initiative launched by the World Economic Forum in collaboration with McKinsey & Company and invited companies to be onboard by participating in the Lighthouse Project, which encompasses industry players that have taken Smart Manufacturing Technology from pilot to integration at scale. The term “lighthouse” denotes that these factories will act as beacons to guide their supply chain and others that are still looking to apply technologies in upgrading existing production systems.
Undoubtedly, the COVID-19 outbreak has spurred the rate of digitalization, prompting business owners to take the leap forward to embrace digital technologies and transformation. In this regard, foreign multinational companies seeking to adopt digital manufacturing in their business model and equip their production system with artificial intelligence, additive manufacturing and advanced analytics are able to participate in the Lighthouse Model under the ‘Lighthouse Project’. They stand to gain significant financial and operational benefits as they venture into Malaysian market.
MIDA: Memorandum of Understanding entered into with Standard Chartered
MIDA has inked a memorandum of understanding (MoU) with the Standard Chartered Bank Malaysia Bhd to attract foreign investments as the country recovers from the adverse effect of the COVID-19 pandemic.
The MoU, through Standard Chartered Malaysia’s local expertise and global reach, enables potential foreign investors to gain access to banking services and foreign direct investment advisory in Malaysia. In addition, the bank will also complement MIDA’s marketing and trade exchange initiatives in organizing trade and investment missions, conferences, roundtable meetings, and series of webinars to connect with international investors.
Value of industrial property and commercial rental
The COVID-19 pandemic has forced businesses to downsize and companies to postpone real estate decisions as they seek to optimize cash flow and maintain business continuity. Thus, it was predicted that the property market will witness a price reduction in the value of industrial properties and commercial rental.
Further, in an effort to boost financing activities, the Monetary Policy Committee (MPC) of Bank Negara Malaysia has decided to reduce the Overnight Policy Rate (OPR) by 50 basis points to 2.00%, making it the lowest interest rate in the past decade.
Collectively, foreign multinational companies may purchase commercial properties at an attractive price with a lower bank interest rate or negotiate a lease of such properties with affordable rental payments as they seek to expand or relocate their businesses to Malaysia.
Conclusion
With the economic disruptions caused by the COVID-19 outbreak and the unprecedented challenges that lies ahead, it is inevitable that Malaysia will see a dip in FDI inflow this year. However, it remains positive to see more foreign investors being brought into the fold and corporations who have already spread their wings here to enhance their existing operations following the fiscal policy announced by the Malaysian government and the Central Bank to stimulate economic growth of the country as it steadily recovers from the devastating effect of the pandemic.