PENANG ECONOMIC INDICATORS an extract from Penang Monthly January 2015 Issue 1.15 By Lim Kim-Hwa PENANG ECONOMIC OUTLOOK Penang Economic Outlook 2015 • The external macro environment, properties within the George Town Nevertheless, as Penang’s economy in particular the crude oil price, the Unesco World Heritage Site is likely to matures, domestically driven timing on the start of the rise in US provide support to prices. economic activities will become interest rates and its ensuing impact on • Penang’s manufacturing, especially increasingly important economic financial capital flows, will introduce the electrical and electronics (E&E) drivers in the years ahead. higher volatility to Malaysia’s economy, sector, is likely to benefit from the • Employment growth is likely to including the risk of twin deficits. US recovery. With investments in the remain stable, with labour shortages Nevertheless, Penang is expected to services sector such as the Penang continuing to be an issue. continue to contribute trade surpluses International Technology Park, it will • Plans are in progress to improve in 2015 due to the weakening of mean higher degree of convergence Penang’s connectivity. The the Ringgit, and the state budget is between the manufacturing and implementation of the Penang Master expected to remain in surplus. services sectors, thus enhancing the Transport Plan through the Request • At the same time, Malaysia’s domestic cluster effect in Penang. for Proposal of the RM27bil project environment will become more • Penang’s tourism and medical tourism is underway; DHL is investing challenging given the introduction sectors are well placed to continue to additionally in Penang’s airport, and of the GST from April 1, 2015 and the benefit from the rising middle income double-tracking of the rail service sensitivity of Malaysian households to class in Asia as well as an ageing to Ipoh and KL from Butterworth is any interest rate hike due to their high population. The rejuvenation and scheduled for completion in 2015. debt levels. addition of several tourism attractions • The introduction of the Asean • The combined effects are likely to will continue to reinvigorate Penang’s Economic Community from dampen the housing market, thus giving appeal. December 31, 2015 offers Penang some first time buyers opportunities to • FDI will continue to push Penang’s opportunities to cement its role as an climb on the property ladder. However, economy ahead. Penang has received intelligent and international city, and higher building costs will insulate about 13% of Malaysia’s total with better connectivity, poising it as a prices. Furthermore, limited supply of investment between 2008 and 2013. hub in the region. January 2015 | 1 The global economic outlook for Malaysia and Penang. While property ladder will surely welcome this deteriorated significantly at the end of some quarters still harbour hope that turn of events. 2014. A combination of factors, such with sufficient lobbying, the federal as the Ukraine crisis, the slowdown in government may delay the introduction 2015 will likely be a volatile and Chinese growth, the success of shale of the GST, the collapse in oil price challenging year for Penang and oil in the US and the determination has practically ensured that it will be Malaysia. Nevertheless, looking beyond of the Organization of the Petroleum introduced as scheduled from April 2015, there are several positive factors Exporting Countries (Opec) to defend 1, 2015. Domestic consumption will including the achievement of the Asean its market share, has all contributed to be significantly dented, especially for Economic Community on December the collapse of the price of crude oil. middle income households, which 31, 2015. This is expected to have a profound according to our research will neither impact on Malaysia given the huge receive BR1M nor benefit from This economic briefing will begin contribution made by Petronas to sufficient income tax cuts to ameliorate by looking at the overall nature of government coffers, and will certainly the payment of GST. Penang’s economy, focusing on the affect the ability of the government to manufacturing sector and the property reduce the fiscal With rising market. It includes an external deficit. 2015 will likely be a volatile inflation (through perspective of Malaysia and Penang and challenging year for the introduction from the Malaysian-German Chamber On the other hand, Penang and Malaysia. of the GST and of Commerce. recovery in the US via imported economy will be Nevertheless, looking beyond inflation due to positive for global 2015, there are several the fall in Ringgit), growth and for positive factors including the the cost of living Penang, given how will increase highly exposed to achievement of the Asean significantly. the E&E sector it Economic Community on With stagnant is. Nevertheless, wages, more Malaysia is December 31, 2015. households will vulnerable to feel the strain and the withdrawal of foreign capital once potentially suffer some negative social US interest rates increase. Should ramifications. Although payments of Bank Negara raise interest rates in that regular BR1Ms will provide a constant situation in order to defend the Ringgit, infusion of cash to the economy, there domestic consumption will be negatively will be more cries to increase the affected, due to Malaysia’s high amount of BR1M as compression in household debts (87% of GDP in 2013). living standards increases. This will certainly test the government’s political Although the US economy is will to implement fiscal reforms, for recovering, EU economies remain fear that sustained government cash mired in recession. With the Ukraine handouts will encourage a dependency crisis unlikely to be settled in the near culture. term, the sanctions against Russia will remain and thus continue to exert a The impact on Penang will no doubt be negative drag on EU economies. This mixed. Having matured over the years, exposes Malaysia’s economy to strong its economy is less dependent on FDI. exports headwinds. With falling current Growth in the services sector, especially account surplus, Malaysia risks ending in medical tourism and support services up facing twin deficits (fiscal and outsourcing, will boost the overall current account) as early as the first economy. The overall stability and good quarter of 2015. This would be negative infrastructure in Penang will continue from an external macro point of view as to make it the preferred choice for Lim Kim-Hwa, PhD, is CEO and the factor that has kept Malaysia from investors. head of Economics at the Penang being lumped together with the Fragile Institute, fellow in Finance & Financial Fives has been its strong trade and On the other hand, the property market Reporting at the University of current account figures. in Penang is likely to be stagnant at best Cambridge and associate chartered and may even fall should the sentiment accountant of the Institute of Therefore, the overall external picture deteriorate. While some will view this as Chartered Accountants in England & has turned somewhat more challenging a negative, others wanting to climb the Wales. 2 | January 2015 By Ong Wooi Leng PENANG ECONOMIC OUTLOOK Ripples from global events threaten local economy Recent economic events, particularly the fall in oil price, are predicted to significantly shade the economic outlook for Penang and for Malaysia at large. The economy of Malaysia – and of demand in emerging market and Malaysia, on the other hand, is predicted Penang – depends to a significant degree developing countries. to have grown at 5.9% in 2014 and will on global trends, since both are highly grow by 5.2% in 2015, outpacing the exposed to externalities nowadays. Figure 1 shows the GDP growth for overall projected growth in emerging The October 2014 Economic Outlook selected economies in the world vis-à- market and developing countries. Update published by the International vis Malaysia. As can be seen, the growth Monetary Fund (IMF) stated that in emerging market and developing The prospects remain uneven across world output growth is estimated to countries surpassed the growth in countries within the groups. Among have remained unchanged for 2014. advanced economies. While advanced the advanced countries, growth is This is due to a mix of accommodative economies are anticipated to have estimated to have picked up in the Euro measures and negative forces, including grown by 1.8% in 2014 and will expand area in 2014, with a positive expansion uneven growth in the Euro area, weaker 2.3% in 2015, the growth in world output of 0.8%, and in the US, with 2.2%, but activity in China, continued strife in the is projected to have remained at 3.3% to have been slower by 0.6 percentage Middle East, and geopolitical tensions in 2014, and it is expected to grow by point in Japan (Figure 2). However, between Ukraine and Russia. However, 0.5 percentage point in 2015. Likewise, growth in Japan may have been weaker the growth is likely to be reckoned by it is estimated that growth in emerging than expected as the Japanese economy stronger employment growth and a market countries had continued to shrank at a 1.6% annual pace in the third healthier housing market in the US, expand but at a slower rate of 4.4% in quarter of 2014, leaving the country in improved lending conditions in the 2014 compared to 4.7% in 2013 due to a technical recession. Among major Euro zone, and sturdier domestic weaker residential investment in China. emerging markets, growth is projected January 2015 | 3 to have remained strong in emerging Asia, with a moderate slowdown in Figure 1: GDP growth forecasts by selected economies China and a steady pickup in India and vis-à-vis Malaysia Malaysia. 10 The Malaysian economy in 2015 8 The outlook in Malaysia shows a 6 neutralised drift.