M'sia's hidden gem - the service sector

15 April 2010 , By Business Times Singapore

The country needs to exploit its strategic location and position itself as a service hub for emerging Asian middle classes

MALAYSIA'S long-awaited New Economic Model (NEM) has been rolled out, beginning with Prime Minister Najib Razak's March 30 speech. Unfortunately, the timidity of what is merely a framework for future action has underwhelmed the private sector.

Still, the NEM has been brutally honest in its assessments of Malaysia's structural weaknesses - principally the market-distorting economic policies favouring the Malay-Muslim majority.

Nonetheless, the failure to outline how the government will address these issues to escape the 'middle-income trap' is a major flaw.

Moreover, it has not halted worrying capital outflows as local businessmen - seeing the ringgit's mounting strength - are voting with their feet by searching for higher returns elsewhere.

While Mr Najib mentioned several key sectors ranging from oil and gas, electronic and electrical manufacturing, tourism, agriculture and financial services, there has been no indication as to how higher growth would be wrung from them.

At the same time, Mr Najib - as with all would-be reformers - is facing a chorus of critics. The most vociferous attacks are not from the Anwar Ibrahim-led Pakatan Rakyat.

Instead, Malaysia's iconic former leader Mahathir Mohamad has once again emerged to drive policy with his customary single-mindedness.

Under his 'patronage', the ultraconservative Malay pressure group Perkasa has attacked all attempts at liberalisation, to the consternation of the business community.

The combination of a dramatically altered global economic landscape (with China dominating the industrial sector) and a well-organised anti-reform movement at home is in danger of trapping the premier. In order to succeed, Mr Najib needs to be both courageous and decisive, neither of which has been his forte.

However, all is not lost. There is a hidden gem - Malaysia's service sector - that may well lead to future prosperity.

The challenge will lie in coordinating its development and overcoming resistance. More importantly, Malaysia needs to lock itself into the great Asian players - China, India and, lately, Indonesia.

Service-sector growth can leverage on Asia-Pacific's momentum while also keeping jobs and capital at home.

Malaysia needs to exploit its strategic South China Sea location and position itself as a service hub for the emerging Asian middle classes - the so-called 'Air Asia game-plan'.

In essence, this would also be duplicating Singapore's Economic Development Board-crafted strategy of the 1980s and 1990s.

However, times have changed and with the Lion City's focus on the super-wealthy - condominiums start at S$600,000 - Singapore has become too pricey for an enormous pool of prosperous middle classes across the region.

This then is a historic opportunity for Malaysia's healthcare, hospitality, retail, housing and banking sectors. For example, landed properties in Malaysia can be acquired by foreigners for only S$217,000. And in Iskandar Malaysia in Southern Johor (because of special federal government dispensation), the floor price is an astonishing S$110,000.

Singapore businessmen are well aware of these arbitrage opportunities as costs spiral domestically. On my recent trip, one well-connected player said: 'Singapore has to leverage on Iskandar. The logic is inescapable. The private sector will lead the way - we'll make the really big money. The GLCs (government-linked companies) are waiting for a political sign and that will take a long time.'

Alongside the inevitable relocation of industry and business from Singapore, a burgeoning Indonesia represents the biggest and most obvious opportunity for Malaysia's service sector.

Indonesia's middle classes are expanding at a rapid clip. According to AC Nielsen (using US$4,450 per annum as a benchmark), there are now an estimated 30-35 million in this category and the figure should double by 2015. Furthermore, Indonesia's GDP growth since 2006 has consistently surpassed both Malaysia's and Singapore's.

As it is, there are already some 15,000 Indonesian students in Malaysia, tripling the 2002 figure of 4,700. Furthermore, it is estimated that some one million Indonesians seek medical treatment overseas every year, spending US$600 million. While a large chunk visit Singapore (370,000), a growing number are descending on Malaysia (250,000).

Malaysia can drive its growth by providing services to Indonesians. Moreover, this strategy can benefit the entire country, with Sabah and Sarawak drawing on Kalimantan's coal-mining and plantation boom while Penang and Melaka benefiting from North Sumatra and Riau's plantation and oil and gas wealth.

Interestingly, the province of East Kalimantan (with its twin cities of Samarinda and Balikpapan) enjoys an average GDP per capita of US$10,720 - many times over the national level. Just imagine the impact of all that demand on Kota Kinabalu's currently over-built property sector.

This process could well turn into a deluge when in 2011, Indonesia removes its exit-tax (better known as Fiskal), currently an onerous 2.5 million rupiah (S$386).

South Johor's Iskandar will inevitably draw on Indonesian demand as well as the spillover from Singapore. Indeed, healthcare giant Pantai is building a 400-bed hospital in the region. Also, the EduCity project in Nusajaya anticipated in 2018 will boast campuses of elite institutions such as Newcastle University and Marlborough College.

However, as Malaysia seeks to tap Indonesian demand, the country's conservative bureaucracy will have to come to terms with new realities. Malaysians have long viewed Indonesians as mere labourers and domestics.

Such prejudice will have to change quickly. There is too much at stake, especially when the country's service sector attempts to harness the even larger Indian and Chinese markets in time to come.

Other questions remain: Will Dr Mahathir approve? Can Malaysians, especially the Malay community, deal with a future where they will have to serve Indonesians, Chinese and Indians? How will this sit with the bumiputra policy?

In Malaysia, economics remains political at heart. Mr Najib has his work cut out for him.

The writer is a freelance columnist who specialises on South-east Asian politics and business