Is Malaysia’s Gross Fixed Capital Formation (“GFCF”) Slow?

 Investments in Malaysian fixed assets are below pre-pandemic levels but also underperforming against neighbouring countries like Singapore and Indonesia in 2022.

With the economy expected to hit a soft patch, fixed asset investments or gross fixed capital formation (GFCF) could potentially grow slower in 2023 following a 6.8% expansion in 2022.

The country’s Leading Index (LI) has remained in the negative territory, registering a decline of 2.7% in April and 1.1% in May. The LI is a predictive tool used to anticipate economic upturns and downturns in an average of four to six months ahead.

Source: https://www.businesstoday.com.my

The private sector, which contributes almost 78% of the GFCF, is affected by the high cost of doing business and the weak export performance. Private investments are likely to grow moderately by 4% to 5% in 2023.

The country recorded approved FDIs of RM208.6bil and RM163.3bil in 2021 and 2022 respectively. The Statistics Department reported recently that Malaysia’s GFCF was at RM297.82bil at constant prices, marking a 6.8% increase from RM278.98bil in 2021. In pre-pandemic 2019, the value of Malaysia’s GFCF stood at RM328.54bil.

For comparison, Indonesia’s GFCF grew by 9% in 2022, while Singapore recorded a growth of 8.7%. Fixed asset investment in Thailand increased by 6.8%.

GFCF remained the second largest component of the country’s GDP, with a share of 19.7% of the total economy. The private sector was the major contributor to the GFCF with a share of 77.8%, registering an expansion of 7.2% as compared to the preceding year. In addition, investments by the public sector also increased by 5.3% as compared to a decline of 11.1% in 2021.

The services and manufacturing activities were the main contributors to the GFCF of the private sector. The share of services activity jumped to 63.6%. Manufacturing activity upholds its position as the second largest contributor with a share of 22.8% as compared to 22.1% in the previous year.

Meanwhile, positive growth in fixed assets in the manufacturing sector at 9.9% was led by strong performance in the food, beverages and tobacco (2022: 14.1%) and non-metallic mineral products, basic metal and fabricated metal (2022: 13.9%) sub-sectors. Investments into the sub-sector of electrical, electronic, optical products and transport equipment also increased to 9.4%.

Against the above backdrop, some believe Malaysia’s economy has “somewhat come out of the woods”. This optimism is based on confidence, governance, engagement and IMF’s forecast for global growth of 3% in 2023. But international trade and indicators of demand and production in manufacturing point to further weakness (IMF). The other issue is inflation – war, climate change and supply disruption could elevate inflation and further risk rate hike! So, we need to be cautiously optimistic and tailor policies and procedures for GFCF to improve!

Reference:

Fixed-asset investments fall short, Ganeshwaran Kana, The Star, 26 July 2023