AS MALAYSIA prepares for Budget 2025, the manufacturing sector stands at a critical juncture, anticipating both opportunities and challenges amid a stabilising ringgit.
Companies are eager to see reforms that could enhance competitiveness without burdening them further with taxes.
While recent economic indicators show mixed signals, including a slight dip in the Purchasing Managers’ Index (PMI), economists are optimistic, highlighting the potential benefits of increased domestic demand and China’s stimulus measures.
However, as the ringgit stabilises at 4.2933 against the US dollar on Oct 10, will businesses find the support they need, or are they facing yet another disappointment in a landscape marked by rising costs and global uncertainties?
Adapting to Global Trade Dynamics
Economist Dr Nungsari Ahmad Radhi said Malaysia’s manufacturing sector, a trade backbone, is performing well, depending on the state of global trade and growth.
He said global trade has been affected by the US-China trade tensions. However, for 2024, trade has been doing well, contributing to overall growth.
“One of the fundamental drivers of the exchange rate is exports and robust exports have contributed to the strengthening of the ringgit,” he told The Malaysian Reserve (TMR).
He added that Malaysia cannot influence global trade, as the country is on the receiving end of its ups and downs. Government policy and domestic firms must ensure that domestic companies remain competitive in this changing environment.
“The manufacturing sector does not require fiscal support. Firms should not expect government resources to be competitive, especially multinational corporations (MNCs).
“What businesses need from the government is clarity of policy regarding foreign labour and addressing skilled labour shortages, particularly engineers and improving Science, Technology, Engineering and Mathematics (STEM) education in schools and universities,” he stressed.
Moreover, Nungsari mentioned that tax breaks, like pioneer status (not paying taxes for a period), are no longer applicable.
“We have to build our competitiveness on productivity, not costs. Competing on costs has made us a low-wage economy. Blanket subsidies that the government can no longer afford have kept costs down,” he added.
He said the ongoing US-China trade tension is concerning because it affects global trade. However, the reorganisation of global supply chains can create opportunities.
Malaysia can compete as a location for relocated supply chains due to its logistical advantages, provided it addresses human capital issues and reduces bureaucracy.
Nungsari added that certain subsectors within manufacturing, such as electrical and electronics (E&E), hold significant potential for growth.
“E&E is not just Malaysia’s largest manufacturing sector; it is wholly a tradable sector. Global shifts in supply chains are occurring in E&E, and firms need clarity of policy and policies that address talent shortages and ease of doing business,” he said.
Fostering Economic Resilience Through Fiscal Strategies
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said Malaysia’s PMI would revolve around tax incentives on investment, such as tax allowances, grants for automation, soft loans from development financial institutions, financial guarantees from credit guarantee institutions and training.
“There is a sense of a feel-good factor judging from the appreciation of the ringgit and the inflows of foreign investors in the country following positive reviews from credit rating agencies (CRAs) and some major global investment banks.
“In that sense, Budget 2025 would facilitate business through a combination of direct allocation and the involvement of various government agencies,” he told TMR.
He said the government has initiated several efforts to improve its fiscal position, including the introduction of a low-value goods tax, higher excise duties for sugared beverages, higher services tax rate, rationalisation of diesel subsidies, electricity and water tariff adjustments and e-invoicing.
“On that note, it should alleviate fiscal space, allowing the government to invest more in productive areas such as capacity building and education. Risks revolve around the cost of doing business as tariffs impact international trade,” he added.
Mohd Afzanizam explained that the trade conflict creates anxiety, focusing on the importance for companies to understand Malaysia’s bilateral and multilateral trade agreements to gain cost advantages.
“Awareness of these agreements and how much they have been utilised by our firms is crucial.”
He said trade missions, promotions by relevant agencies and ongoing engagement sessions would help position the country favourably among international traders and customers.
“It should be positive, especially with expectations of external sector resilience. We have seen China implementing stabilisation policies through monetary measures to support its property sector,” he added.
Mohd Afzanizam said the latest job markets in the US suggest its economy should achieve a soft landing, which would positively impact Malaysia’s manufacturing sector.
“The wild card is the military conflict in the Middle East and Ukraine, as well as the incoming US president and their stance on increasingly protectionist international trade policies,” he explained.
Top Glove Hopes for Manufacturing, Automation Boost
Among Top Glove Crop Bhd’s proposals for Budget 2025 is the reintroduction of the Goods and Services Tax (GST) at a reasonable rate, with a focus on establishing a robust refund system.
The glove manufacturer also highlighted the need for more incentives for automation and digitalisation in the industry.
“For example, an additional 60% of capital expenditure (capex) as a tax-deductible incentive on top of the Accelerated Capital Allowance (ACA),” Top Glove told TMR.
Additionally, the company hoped for better support for e-invoicing systems, which were recently implemented in Malaysia.
“The implementation of the e-invoicing system in Malaysia has been an important and welcome development, as it can reduce potential errors, fraud and tax evasion.
“Government departments should also offer guidance and concessions for taxpayers during the transition period,” it added.
Top Glove also called for the abolishment of the 10-year limit on carrying forward business losses, citing ongoing global challenges and the pandemic’s lingering effects.
Proton Expects Budget 2025 to Drive Malaysia’s Automotive Future
National carmaker Proton Holdings Bhd are hoping for government incentives for original equipment manufacturers (OEMs) to encourage new investments in capacity expansion, capability upgrading and research and development (R&D) initiatives.
It also expressed the need to stimulate electric vehicle (EV) industrialisation without compromising the existing automotive ecosystem.
Proton also added the importance of support for emerging technologies, highlighting the need for manpower and vendor development.
“We seek to reintroduce a special fund to assist local suppliers in investing in local R&D, facilitating technology transfer and establishing manufacturing capabilities towards next-generation critical components, focusing on high-voltage battery and system repair,” Proton told TMR.
Additionally, it called for funds for training in EV technology and the establishment of EV training facilities, along with R&D grants for developing critical EV components.
Regarding policy recommendations, Proton urged for a scrapping policy, also known as End-of-Life (EOL), to encourage the replacement of older vehicles with newer, more environmentally friendly models.
The national carmaker proposed a rebate for exchanging internal combustion engine (ICE) cars for EVs, specifically for affordable EVs priced below RM80,000.
“We recommend that OEMs locally assem- ble EVs to meet national car standards.
“We also advocate for government EV fleet purchase requirements to focus on locally assembled cars and propose a reduction of corporate tax for the rental, leasing, or purchase of national EVs,” Proton said.
Impacts on Manufacturing During Palestine Crisis
Boycott, Divestment and Sanctions (BDS) Malaysia chairman Prof Dr Mohd Nazari Ismail said the government is uncertain whether the conflict in West Asia will escalate.
“If it does, the price of oil may rise drastically, adding to inflation and worsening the cost of living for many people, especially low-income workers,” he told TMR.
Mohd Nazari, who is also an honorary professor at Universiti Malaya (UM) Faculty of Business and Economics, explained that rising oil prices would likely impact nearly all sectors.
“The government can only be expected to support some sectors,” he said, highlighting that the food and agricultural sectors will need additional backing.
Furthermore, he proposed that the government ensure contracts with government-linked companies (GLCs) exclude businesses complicit in Israeli crimes against Palestinians.
“The government and GLCs’ contracts and business dealings should exclude companies mentioned in a United Nations (UN) report issued on June 20, 2024, as being involved in human rights violations in Gaza.”
Mohd Nazari added the Malaysian manufacturing sector can play a significant role in opposing the genocide in Palestine.
“For instance, Fanuc sells its robots and provides maintenance and inspection services to Israeli military companies such as Elbit Systems. Therefore, Fanuc should be excluded from contracts by Malaysian companies,” he said.
Enhancing Labour Protections in Manufacturing
Malaysian human rights NGO Tenaganita ED Glorene Das said the upcoming budget presents a crucial opportunity to improve the protection and welfare of migrant workers, refugees and women in Malaysia’s manufacturing sector.
“To prevent exploitation and improve working conditions, specific budgetary measures should focus on strengthening enforcement of labour laws with more labour inspectors ensuring better workplace safety and establishing accessible complaint mechanisms for workers.
“Allocating funds to boost the capacity of labour inspectors and provide training for employers can help uphold standards in the sector,” she said.
Glorene added that combating forced labour, human trafficking and other forms of exploitation will require targeted funding for enforcement agencies, along with partnerships between the government and NGOs which work on rescuing victims and advocating for worker rights.
“Budgetary provisions for victim rehabilitation, legal aid and reintegration programmes will be essential in helping those affected by trafficking and forced labour,” she said.
Ensuring fair wages and social protections for women and migrant workers, particularly in low-wage roles, should be a priority.
She suggested the government allocate funds for revising minimum wage policies, expanding social protections such as the Social Security Organisation and Employees Provident Fund and ensuring all workers are covered, including migrants.
She added that gender inclusivity must also be promoted through budget support for maternity rights, workplace safety and initiatives to prevent gender-based violence and harassment.
“Programmes that address these concerns will empower women workers and promote a fairer working environment,” she stressed.
Glorene expressed the budget should also allocate resources for legal and social support systems that protect migrant workers from discrimination and abuse.
“This includes funding legal assistance programmes and establishing a social welfare safety net to support workers who face abuse, ensuring they have access to healthcare, housing and justice while navigating complex legal challenges.
“There is also a need for a budget to support shelters for victims seeking redress beyond the national referral mechanism,” she said.
Source: https://themalaysianreserve.com/2024/10/15/mixed-economic-indicators-to-challenge-manufacturing-upside/