Transcript
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Speaker: Hello and welcome to Under Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist here at HSBC.
Speaker: Today we're putting a spotlight on Southeast Asian neighbors Malaysia and Singapore.
Speaker: Growth is bouncing back in both economies and cooperation is high on the agenda.
Speaker: Southeast Asia Economist Yuen Liu joins me in a Hong Kong studio.
Speaker: Let's get the conversation started Under the Banyan Tree.
Speaker: A few stats to set the scene before we kick off.
Speaker: Malaysia's economy is roaring, up more than 5% year-over-year in the first half of 2024.
Speaker: It's been a broad recovery led by electronics, trade and manufacturing.
Speaker: And that's also been a key theme for Singapore, where actually growth in the third quarter of this year was above 4% year-over-year, a very respectable rate of growth for the city-state.
Speaker: Both economies are now looking to expand further with the creation of a special economic zone.
Speaker: Let's bring in Yun Liu for more on this relationship.
Speaker: Yun, welcome to the podcast.
Speaker: Thank you for having me, Brad.
Speaker: So, Yun, you cover a number of the Southeast Asian economies, but we really want to focus on Singapore and Malaysia today, the growing ties, of course, and growing prospects for economic growth.
Speaker: But before we talk about the interrelationship between Singapore and Malaysia, let's
Speaker: Let's just take stock of where we are in terms of the post-COVID recovery in both of these economies.
Speaker: How will you characterize, for example, Singapore's recovery through COVID-19 and after that?
Speaker: Well, actually, we saw quite a lot of good momentum just post-COVID in 2022.
Speaker: That was the first year when most of Southeast Asian countries started to open up.
Speaker: So 2022 growth was very nice to everyone.
Speaker: But in 2023, we saw this severe downturn in the global trade cycle, which dragged growth quite significantly in a lot of the exploratory economies.
Speaker: So Singapore included, Malaysia included as well.
Speaker: But this year, for the past six months, we really see those two economies roaring back, riding on the back of this trade upturn again.
Speaker: So focusing on Singapore, we had growth above 4% actually in the third quarter.
Speaker: That is for an economy of Singapore's development level, a very, very strong number indeed.
Speaker: What's been driving that growth?
Speaker: Yeah, so for a DM economy to grow above 4% on a year-year basis is quite decent, but it's almost entirely driven by the manufacturing revival.
Speaker: I mean, really, we saw two quarters of outright declines in manufacturing activity.
Speaker: And finally, Singapore's manufacturing sector swung back to decent growth, and we're talking about almost 10% in just one quarter.
Speaker: 10% growth for manufacturing.
Speaker: Now that's a good reminder because it suggests that when you think about Singapore, you think about services, financial services, very big financial services, of course, but tourism is very big, retail is very big, medical services very big.
Speaker: But what you're saying is that actually manufacturing is still an important part of the Singaporean economy.
Speaker: Exactly, yeah.
Speaker: So for Singapore, actually, manufacturing accounts for over 20% of its GDP.
Speaker: And as you said, you know, it's actually a well-diversified economy, not only within manufacturing, but also within services as well.
Speaker: So I think for the semiconductor story, Singapore has been slightly lagging behind peers like, you know, Taiwan or Korea, but now it's really finally picking up.
Speaker: So you're saying semiconductors are part of the Singaporean manufacturing story.
Speaker: What other sectors in terms of manufacturing does Singapore still have a presence in?
Speaker: Because it's such a small economy and it's such a developed city-state.
Speaker: And what other manufacturing actually still happens in Singapore?
Speaker: It is actually quite a well-diversified picture.
Speaker: We're talking about pharmaceutical manufacturing.
Speaker: We're talking about precision engineering.
Speaker: So it's a lot of those capital intensive, you know, at the very much high end part of manufacturing.
Speaker: It doesn't really consume too much land, but a lot of it, it's high tech.
Speaker: Now, last question on Singapore.
Speaker: It's a very geographically very small economy, and there's probably a risk that we're hitting growth constraints, isn't there?
Speaker: I mean, is there, you know, there's a limited amount of people in Singapore, and of course, there have been
Speaker: Also trying to regulate a little bit the immigration inflow because it needs to be sustainable.
Speaker: We've seen obviously lack of land, there's water resources.
Speaker: How much is Singapore bumping against its natural constraints there?
Speaker: Well, I mean, there are definitely that concerns, but Singapore has been trying to cooperate with its regional neighbors to mitigate the efforts.
Speaker: Like, you know, in terms of, say, for example, the data centers, actually Singapore has a lot of data centers.
Speaker: But given that constraint, now Singapore is actually looking just across its causeway to its neighbor for more cooperation.
Speaker: And just now, you know, we've been talking about this manufacturing story.
Speaker: So a large part of it actually doesn't consume that much land and labor.
Speaker: It's very capital intensive.
Speaker: So it's, you know, the value add of the sector.
Speaker: So very efficient use of land.
Speaker: And of course, efficiency is sort of a byword for Singapore's economy.
Speaker: That's been the watchword for the government to drive efficiency.
Speaker: But you hint at really the connectivity to other economies in the region, which is very important.
Speaker: Singapore being one of the most connected economies, of course, in the world.
Speaker: But before we talk about the connectivity specifically, let's talk about Malaysia.
Speaker: How has the Malaysian economy done since COVID-19 and how has it done over the last few quarters?
Speaker: Yeah, so for Malaysia, I mean, 2022, Malaysia's economy was actually the best performer in ASEAN.
Speaker: But in 2023, it decelerated quite hugely, you know, precisely because of that drag in the trade cycle.
Speaker: But we are finally seeing Malaysia's economy roaring back again now for the first half of the year.
Speaker: And we expect that momentum to continue.
Speaker: So the trade part, I think, is very much important for Malaysia, but there's actually quite a lot of good momentum in the services part, in private consumption.
Speaker: Tourism-related stuff is actually a bright spot in Malaysia's economy.
Speaker: So it's also a well-diversified economy.
Speaker: Yeah, we don't tend to think of Malaysia as a tourism destination, but tourism is a huge part of the Malaysian economy.
Speaker: When people think about tourism, they think about Thailand, for example, the Bali beaches.
Speaker: But Malaysia, a big tourist destination, and they now have
Speaker: Visa-free access, I think, for Chinese tourists, which is really driving arrivals.
Speaker: That's right.
Speaker: I think the visa-free program is very much the game changer this year.
Speaker: So if we look at the recovery rate of mainland Chinese tourists back in ASEAN, actually Malaysia is number one within ASEAN.
Speaker: And one visa waiver, I think it very much changes people's mentality.
Speaker: It makes the Chinese tourists feel comfortable.
Speaker: easier and closer to come to Malaysia.
Speaker: And the other one, I think Malaysia also provides a lot of its niche products.
Speaker: And here we're talking about durian.
Speaker: I was just waiting to when you bring in the durian story.
Speaker: So...
Speaker: You're saying Chinese are flocking to Malaysia, not just because it's visa-free, but also because it has allegedly the most delicious durian in Southeast Asia?
Speaker: Exactly, exactly.
Speaker: I have to confess that I am a big fan of Malaysia's Musa and King durian.
Speaker: But obviously, there are a lot more varieties than that.
Speaker: But I think it's something that Chinese consumers are looking out for.
Speaker: Now, before you write in, dear listeners, we're not taking a view of which durian is the most delicious.
Speaker: I know there are intense national rivalries in terms of who breeds the best durian.
Speaker: You know, we're just saying they all are good durians and Malaysia is among the good ones.
Speaker: But maybe this is a good time to take a quick break.
Speaker: And when we come back, let's hone in a little bit on the manufacturing recovery story in Malaysia and look at how that really ties into Durian.
Speaker: Singapore, and how the two are starting to cooperate more.
Speaker: So, before the break, we talked about, you know, Malaysian economy doing quite well, and we hone a little bit on services, tourism, for example.
Speaker: But, of course, manufacturing is a big part of the Malaysian story as well.
Speaker: What are some of the sectors there that you see continuing to do well, and what's driving that?
Speaker: I think the electronics sector definitely is one of the bright spots here.
Speaker: And actually, not a lot of people know that Malaysia holds quite a significant part in this global tech supply chain.
Speaker: Well, I mean, it's still relatively labor intensive.
Speaker: But if you look at its global share, it holds about the world 13% of what we call ATP, so assembly testing and packaging.
Speaker: You know, in terms of the tech recovery, it's still lagging behind everyone else because it doesn't have direct exposure to the AI-powered chips.
Speaker: But as demand for global consumer electronics are picking up gradually, and we expect that trend to benefit Malaysia in the second half of this year.
Speaker: So semiconductors, you said ATP, which is assembly testing and packaging, which is an important part of the semiconductor supply chain.
Speaker: So some of the semiconductors are being produced in Korea or Taiwan or even Singapore brought across the border for ATP types of activity, which is actually very important.
Speaker: And Malaysia has a good footprint in that.
Speaker: But outside of semiconductors, what are some of the other manufacturing sectors that are still doing well in Malaysia?
Speaker: Or is it mostly electronics?
Speaker: I think for now, this story, it's still very much limited to the electronic story.
Speaker: The other thing that Malaysia is known for is being a net commodity exporter.
Speaker: But, you know, in today's world, it probably doesn't really help it as much as, say, back in 2022.
Speaker: But what I see, I mean, especially, you know, in terms of all these FDI relocations or FDI commitments coming to Malaysia, data center is one, you know, very much a rising topic or quite a hot topic in recent months.
Speaker: And the other one is the green transition, green sectors here.
Speaker: And a lot of the FDI actually comes from China.
Speaker: That's interesting.
Speaker: So green technology, of course, even though Malaysia is traditionally an oil and gas exporter, but is now starting to pivot into green technology for assembly and production, but also in terms of its own energy transition, I think Malaysia has developed
Speaker: ambitious plants here.
Speaker: And part of that is related to the other thing you mentioned, which is data centers, which are very, very power hungry.
Speaker: So Malaysia is facing a bit of a requirement to invest heavily in electricity.
Speaker: Talk to us about the data center business and what it means for Malaysia.
Speaker: Yeah, I think, I mean, for Malaysia, you know, in terms of the semiconductor part, we're mainly talking about Penang, which is in the north.
Speaker: But then when it comes to data centers, we're mainly talking about Jehovah Ru, which is right next to Singapore.
Speaker: And for now, we see quite a lot of commitments from the big giants.
Speaker: We're talking in the video, talking about Google and Amazon.
Speaker: So I think the idea here is really, you know, to set up that Johor, Singapore, or SEZ, Special Economic Zone.
Speaker: And, you know, Singapore has the technology, but it lacks in its natural resources.
Speaker: And that's exactly what Malaysia has.
Speaker: And in particular, Johor holds a very significant and strategic position to that.
Speaker: So in terms of abundance of land here, in terms of power, in terms of electricity, that's all very significant for tech giants to move.
Speaker: So this is a great example then of the complementarity of Malaysia and Singapore's economy where we mentioned in the first segment that Singapore has a lack of land, obviously it's a geographically fairly small area.
Speaker: Data centers need land, they need energy, they need water.
Speaker: and that is in relatively greater abundance in Malaysia.
Speaker: And so we're seeing really this data intensive industry of Singapore basically relying on southern Malaysia for that data center provision.
Speaker: But you mentioned the word there, special economic zone.
Speaker: Tell us more about this.
Speaker: Is this an economic zone between Singapore and Malaysia?
Speaker: Where are we at in terms of negotiations and what does this encompass?
Speaker: Well, I mean, it's called the Zhehou Singapore SEZ Special Economic Zone.
Speaker: So you can sort of think about it as the same idea as, you know, how Hong Kong and Shenzhen, sort of greater Bay Area, that kind of concept.
Speaker: And the negotiations are still ongoing.
Speaker: We'd probably expect, you know, to hear some news by the end of this year.
Speaker: But I think the concept here is really, you know, the two economies are very much complementary to each other.
Speaker: So it's like, you know,
Speaker: each of them doing what they're best and trying to capitalize or set up an ecosystem around that area.
Speaker: So we're witnessing in real time really here the emergence of a regional economy, sort of more integrated.
Speaker: Presumably, there's a lot in there for Singapore because it's hitting a little bit its natural growth boundaries in certain sectors that allow Singaporean economy to expand, to use, to outsource more to Malaysia and help it to grow.
Speaker: What's in there for Malaysia?
Speaker: I think for Malaysia, I mean, if, you know, the SEZ can materialize anytime soon, it very much serves as a gateway to ASEAN.
Speaker: And not only for, you know, Singapore, say, FDI coming to Malaysia, but also to attract more FDI from outside of the region.
Speaker: And then when they decide where to invest, you know, they see the potential in that SEZ.
Speaker: So,
Speaker: I think that's easy if we play the cards right and if implementation comes timely, then it very much increases the attractiveness of Malaysia as an FDI designation here.
Speaker: So that's very promising.
Speaker: I think a reminder that when we think about Asia, we think about the big economies of India emerging.
Speaker: We think about, of course, mainland China is still there.
Speaker: But here there is these micro stories, Singapore and Johor, which is across the border.
Speaker: That's a huge economic engine itself.
Speaker: And we're seeing in real time really that integration happening.
Speaker: That's all a positive story.
Speaker: Are you concerned?
Speaker: Are there some concerns we should be aware of in the near term?
Speaker: I mean, both are very highly trade-dependent economies.
Speaker: So, yes, even if structurally this is positive, are you worried about a bit of dark clouds on the horizon a little bit when it comes to trade?
Speaker: Yes, I do, actually, because, you know, when we talk about the trade tensions, the two biggest beneficiaries here in ASEAN, one is Vietnam and the other is in Malaysia.
Speaker: So by the same token, if there's any material change to that trade policy, not only on China, but also on ASEAN in particular, you know, after the U.S. election, I think it very much poses some uncertainty there.
Speaker: I mean, it's pretty much the same coin, but both sides.
Speaker: There are upside, but then at the same time, there are also a lot of downside rates as well.
Speaker: Yeah, of course.
Speaker: You know, an economy that is built on, you know, more trade and more investment, cross-border investment, which these two economies really are.
Speaker: They're sort of the, I think, this poster child, if you will, for globally open economies.
Speaker: Of course, anything that upsets, you know, the past was great at global integration is a bit of a worry.
Speaker: But it's interesting that they're responding also with their own structural reforms domestically.
Speaker: Exactly.
Speaker: And integration to unleash some of those efficiency gains to stay in the game.
Speaker: Yes, that's right.
Speaker: Well, thank you very much, Jun.
Speaker: I think we'll have you back to see how this special economic zone then comes into being and what the effect will be.
Speaker: And we'll certainly keep a close eye on the Singaporean and Malaysian economies here under the Banyan tree.
Speaker: So thank you, Jun.
Speaker: Thank you for having me.
Speaker: And that's a wrap for another week here under the Banyan Tree.
Speaker: Many thanks for joining us.
Speaker: And a quick word to those of you who are HSBC clients.
Speaker: HSBC Global Research is taking part this year in the Extel Asia Survey for 2025.
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Speaker: For now, take care and talk to you again very soon.
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