A historic slump in Malaysia’s exports has been attributed to the coronavirus sweeping across the region. But the fall is indicative of a deeper, structural weakness in the economy.
Tham Siew Yean
29 June 2020
Malaysia’s April 2020 trade figures have caused an uproar. Released in June, the data showed that Malaysia’s registered its first trade deficit in 22 years. The deficit was attributed to a sharp drop in gross exports, which fell 23.8 per cent year-on-year, compared to a small drop of 8.0 per cent for imports compared to April 2019. The fall occurred despite the depreciation of the ringgit in 2019, which should have boosted exports over imports.
On a month-on-month basis, gross exports declined by 19.0 per cent to RM 64.9 billion. Imports expanded 0.9 per to RM68.4 billion, leading to a deficit of RM3.5 billion in April 2020 (See Figure 1).
The Covid-19-fuelled shutdown imposed in Malaysia in March 2020 as well as in other countries was highlighted as the main contributory factor for the steep drop. In other words, it was an unexpected and unprecedented exogenous shock. Unsurprisingly, the obverse should be true: that is, the subsequent re-opening of the Malaysian economy and that of other countries will restore the trade balance in due time.
The gross export figures, however, belie the underlying malaise in Malaysia’s export performance. This can be traced to the increasing importance of re-exports. Re-exports, as defined by the Department of Statistics Malaysia (DOSM), are goods which are taken out of the country in the same form as they are imported without any transformation (this does not include processes such as repacking, sorting or grading). Re-export is calculated as the difference between gross and domestic exports.
The average re-exports to gross exports ratio from 1990-2017 was 6 per cent. The ratio has been on upward trend since the Global Financial Crisis (GFC) in 2009 and escalated significantly from 2013 onwards. In that year, the share of re-exports to gross exports was 12.8 per cent. It increased to 17.4 per cent in 2019. In 2020, re-exports increased from RM16.2 billion to RM18.6 billion while the share of re-exports to gross exports rose from 19.4 per cent to 28.4 per cent in the first four months of the year.
Re-exports are largely fuelled by machinery and transport equipment re-exports due to transhipment and redistribution activities mostly based in Penang. The latter is contributed by Malaysia’s drive to attract Foreign Direct Investment (FDI) with incentives for the establishment of Regional Distribution Centres (RDCs) and International Procurement Centres (IPCs) since 2003. Some foreign manufacturers in Malaysia have also established RDCs or IPCs.
To revive domestic exports, Malaysia should leverage on the realignment of global and regional value chains arising from the Sino-US trade conflict as well as the on-going pandemic to rejuvenate manufacturing activities.
These centres contribute towards inflows of FDI and the creation of employment, albeit of the lower-skilled variety such as managing warehouses in free trade zones and port activities. But there is little value added to the domestic economy. Instead, these investments are fleet footed: they can easily relocate to another host economy which offers similar or even more attractive incentives.
In turn, the increasing share of re-exports in gross export performance masks the weakening performance of domestic exports. Domestic exports, which are exports from domestic production activities, have hardly grown in the last three years from 2017 to 2019. They have hovered around the RM800 billion mark (Figure 2). This stagnation indicates a lack of competitiveness in manufacturing activities, which have continued to focus on low value-added activities with the use of cheap foreign labour inputs since the 1990s.
Malaysia’s domestic exports is also dependent on imported inputs. According to the Central Bank, the import content of its exports averaged 43 per cent from 2001 to 2012, which was amongst the highest in the region compared to Indonesia, the Philippines, Singapore, Thailand and Vietnam. World Trade Organization (WTO) data indicates that the foreign value added content of Malaysia’s exports has fallen from 45 per cent in 2005 to 37 per cent in 2015. But it has remained high at 56 per cent for Malaysia’s main manufactured export, namely computer and electronics products.
To revive domestic exports, Malaysia should leverage on the realignment of global and regional value chains arising from the Sino-US trade conflict as well as the on-going pandemic to rejuvenate manufacturing activities, especially in the high value-added sectors as long aspired by the country. Malaysia needs to embrace greater trade and investment liberalisation, particularly at a time when protectionism is on the rise. Ratifying the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), that was shelved under the Mahathir administration, will send a positive signal to investors on the credo of the current Muhyiddin administration. Likewise, ratifying the Regional Comprehensive Economic Cooperation Agreement (RCEP) quickly, which is expected to be signed by this year, will also enhance Malaysia’s attractiveness as a host economy for investors that are scouting around for alternative host economies to China.
A full-bore thrust into greater trade liberalisation is far better than depending only on the unilateral use of more fiscal incentives, such as the 10-year zero per cent tax rate on new investments in the manufacturing sector with fixed-income investments of between RM300 million and RM500 million. But of far greater importance is the need to maintain political and macro-economic stability as Malaysia navigates it way out of the double quagmire of a health and political crisis. More than merely dealing with the malaise of Malaysian exports, domestic and foreign investors value stability above all else.
Professor Tham Siew Yean is a Visiting Senior Fellow at the ISEAS – Yusof Ishak Institute and Professor Emeritus, Universiti Kebangsaan Malaysia.
ISEAS Commentary — 2020/87
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