KUALA LUMPUR (April 19): Maintaining Malaysia’s current account surplus and foreign investments over the long term hinges on the country’s ability to upgrade its goods and services production, said Malaysian Rating Corp Bhd (MARC).

“A country with a consistent current account surplus, a sign of external strength, earns more foreign currency than it spends, thereby supporting the relative value of its exchange rate,” MARC said in a statement on Friday.

Malaysia has regularly posted a current account surplus, but it has trended downwards from 15.9% of gross domestic product (GDP) in 1999 to 1.2% in 2023, falling short of the official projection of 3.3%, according to MARC.

“The decline in current account surpluses over the decades is driven by a shift from exports-oriented growth to domestic-led strategies,” it said.

Malaysia’s exports as a share of GDP halved to 68.4% in 2023 as compared to 119.8% in 2000, MARC noted.

The rating agency also expressed concern about Malaysia’s semiconductor exports, as the local players are primarily engaged in assembly and testing, which poses risks.

“These back-end activities are exposed to substitution risk, as companies seek cheaper options and diversify their supply chain amid uncertainties in the geopolitical landscape.

“Furthermore, low-cost exporters within the Asean region are capitalising on cheap labour and gaining market share of global semiconductor exports,” it said.

Notably, Malaysia’s medium and high-tech exports as a share of total manufacturing exports declined to 62% in 2021 from 76.4% in 2000, due to regional competition. 

However, the New Industrial Master Plan 2030 (NIMP 2030) is expected to attract more foreign investments, attaining net benefits from external collaborations towards higher value-added exports.

Meanwhile, Malaysia has demonstrated its ability to turn approvals into actual investments, with as much as 78.7% of the total approved investment for the period from 2018 to June 2023 realised.

"The materialisation of foreign investments over time will raise Malaysia’s net foreign direct investment [FDI] inflows-to-GDP ratio, which, at 3.6% as of 2022, is ahead of most of its peers in the region," it said.

On the services component, Malaysia is potentially could improve its current account surplus driven by the travel sector.

“While tourist arrivals are projected to normalise in 2024, ongoing initiatives such as tax incentives and visa waivers to promote tourism should persist with a focus on emerging sectors such as the medical and cultural sectors as well as eco-tourism," it added.