Matthews Asia Perspectives

Spotlight on Malaysia and Singapore

26 July 2018

An investor's view of the latest developments among two ASEAN neighbors.

Read the article, Spotlight on Malaysia and Singapore

What changes in Malaysia are emerging now that its new government has been in place since May?

So far, changes include a shift in growth focus from the public sector to the private sector by boosting consumption through fiscal transfers ranging from fuel subsidies to increased payments to lower-income groups and the abolition of the Goods and Services Tax (GST). As well, the new government is revamping the political economy left behind by the old government, as seen in the departures of government-linked company (GLC) leaders, and investigations into deals and projects made by the previous administration.

Another change is a potential return to Prime Minister Mahathir Mohamad's former “Look East” policy that focused on building closer ties with Japan. This could help to secure potential Japanese soft loans to reduce public interest expenses and rebalance the debt mix, while tilting away from the previous government's close embrace of China.

In what direction will Malaysia's relations with Singapore develop under the new government of Prime Minister Mahathir?

The past relationship between Prime Minister Mahathir and Singapore was somewhat contentious and this is likely to continue. Indeed, Mahathir's recent comments regarding review of a water supply agreement with Singapore (Malaysia supplies a significant proportion of Singapore's water requirements) and the planned cancellation of the Kuala Lumpur—Singapore high speed rail project may be indicative of this. Despite intermittent threats, however, the water supply to Singapore historically has never been cut off.

One possible interpretation of the recent rhetoric is that Malaysia is looking to build a bargaining position prior to initiating further negotiations with Singapore on a wide range of issues.

Singapore took center stage at the summit meeting between North Korean leader Kim Jong Un and U.S. President Donald Trump. What did this indicate about Singapore's importance?

While the summit burnished Singapore's diplomatic credentials on the global stage, Singapore enjoys a special relationship as a close U.S. ally in Asia and, as such, was a likely candidate to host the summit. Further, Singapore holds the chair of the Association of Southeast Asian Nations (ASEAN) in 2018, and thus also acted as the bloc's representative in providing a neutral venue for the summit.

The relationship between ASEAN states is considered by some to be difficult. Can this loose alliance form an economic counterweight to China?

I would disagree that the relationship among the ASEAN states is difficult. Unlike the European Union, ASEAN is a loose alliance by design, as the diversity of ethnicities, religions, languages, and cultures has made maintenance of individual sovereignty extremely important. This emphasis on individual sovereignty often leads to disagreements among member states, and is why the ethos of ASEAN is based on consensus decision-making.

Given that the region collectively comprises 630 million people compared to China's 1.3 billion, it is difficult to view the region as an economic counterweight to China. Rather, ASEAN aims to take advantage of its geographic proximity to China to build opportunities stemming from its dynamic demographics, growing workforce, rising productivity and urbanization. These are enhanced by increasing regional integration.

Will Malaysia be affected by the Trump tariffs on China?

As a key Southeast Asian member of China's manufacturing supply chain, I believe Malaysia will likely face some impact on its export volumes. Potential opportunities may arise, however, as products that compete directly with Chinese products affected by U.S. tariffs could gain market share. One example is the shift that has been occurring since 2011 in solar panel manufacturing capacity by large Chinese manufacturers to countries like Malaysia and Vietnam in efforts to avoid U.S. tariffs and EU quotas. This led to a pickup in market share for Malaysia, making it the largest source of solar panel imports into the U.S. in 2017.

How attractive are Singapore and Malaysia from an investor's perspective?

As highly open but relatively small economies, Singapore and Malaysia tend to fare well when global demand conditions are expansive. Singapore's status as a regional financial center and its high level of connectivity positions it to benefit from the growth of its less developed and more populous neighbors (such as Indonesia). Malaysia, as a significant commodity exporter (palm oil and crude oil), also benefits from cyclical upswings that drive energy demand. From a more structural perspective, Malaysia's youthful demographics and high education levels position it for sustained growth over the next decade.

Sriyan Pietersz
Investment Strategist
Matthews Asia

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