By Farhan Kamarulzaman

The measures announced in Budget 2021 in driving investments into Malaysia so as to make the manufacturing sector more vibrant are indeed timely as the purchasing managers’ index (PMI) – an indicator of the economic health for the manufacturing sector – has started to come down, from 49.0 in September 2020 to 48.5 in October 2020.

This happened after the PMI had shown a positive development in July, whereby the reading reached the 50-mark threshold before it started to drop again below 50.

Undeniably, the latest figure of PMI was not a good sign for the country as it gives the image of the contraction experienced by the manufacturing sector as a result of the decline in demand during the crisis. To represent an expansion of the sector, it should cross more than the 50-mark threshold.

Surge of COVID-19 cases

Chief Business Economist of IHS Markit, Chris Williamson, reported that the surge of COVID-19 cases had generated concerns for manufacturers over further restriction measures that would affect supply and demand and also decrease the business confidence.

Both output and new orders also slowed further in October compared to the previous month, which is expected to remain until November, or even in the subsequent months if COVID-19 infection in the country is not improving.

It appears difficult for the country as well to secure any good news for the next PMI figures in November and so on, depending on how the pandemic virus plays out next year.

Previously, the implementation of the Recovery Movement Control Order became the saviour of the situation because the PMI for June and July was well above the readings recorded during the COVID-19 downturn of 49.0 on average.

But the third wave of COVID-19 infection has begun to hit the manufacturing sector back due to restriction measures to curb the COVID-19 spread, specifically by the implementation of Conditional Movement Control Order and Enhanced Movement Control Order.

The IHS Markit also proved that the extension and reintroduction of restrictions to curb the spread of COVID-19 was allegedly a key factor behind the worsening market demand and the scaling back of production.

As a result, it could be prolonged across the year due to the continuous record of three-digit COVID-19 infections and even four-digit daily cases for a couple of times.

Despite the pessimistic view and development, Budget 2021 measures will undoubtedly secure a great deal of protection and assistance for the sake of the sector’s survival in facing the severe impact from the pandemic.

Development spending

As stated by the President of the Federation of Malaysian Manufacturers (FMM) Tan Sri Soh Thian Lai, the RM69 billion development spending under the 2021 Budget was commendable.

Budget 2021, which comprises initiatives and incentives towards facilitating greater access to financing and small-and-medium-sized enterprises (SMEs) development, will also bring new hope to the manufacturing sector as a saviour during the crisis.

As mentioned by AmBank Research, the economic recovery in 2021 will be supported by measures under Budget 2021; the RM305 billion stimulus packages announced previously and an anticipated improvement in global trade, among others.

Protecting the manufacturing sector will not only ensure its significant contribution to job security and national income during the crisis, but will also help the nation to bounce back the economy.

The share of employment in the sector is the second-highest after the services sector, at 17.8% in 2019 – a notable contribution of the manufacturing sector to employment.

The latest report by the Department of Statistics also revealed that the increase in the number of employed persons by 0.3% month-on-month (m-o-m) in September to 15.19 million persons was mainly due to the manufacturing and services sector.

The high contribution of the manufacturing sector to the country’s economy has also been indicated in a joint study by KPMG and The Manufacturing Institute in the US that Malaysia is ranked fourth among 17 economies in an assessment comparing economic competitiveness as a manufacturing hub.

It is believed that Budget 2021 could help mitigate the COVID-19 impact on the manufacturing sector and retain high economic competitiveness as a manufacturing hub, specifically through the allocation of RM1 billion for high technology and high value-added investment incentive packages in Budget 2021.

InvestKL also significantly illustrates one of the good examples of efforts to protect the manufacturing sector, as the agency’s CEO Muhammad Azmi Zulkifli confirmed that they were consistent in supporting investments in Malaysia, even now through virtual activities.

Thus, it can be inferred that a clear picture of the main emphasis now should be on strengthening our economy and, in this case, more towards the manufacturing industry.

-- BERNAMA

Farhan Kamarulzaman is Research Assistant at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.