KUALA LUMPUR: Malaysia now faces the challenge of maintaining its competitive edge against both ends of the value chain namely low-wage countries on one side and advanced and more innovative countries on the other, said Moody's Analytics.
Moody's Analytics said Malaysia ranks as the third richest country in Southeast Asia, successfully transforming its economy from an agricultural-based one to a manufacturing hub with one of the busiest ports in the world.
"Income inequality has been a growing issue between Malaysian states, particularly the richer manufacturing hubs and states that rely on agriculture and other natural resources like palm oil and mining.
"Malaysia has struggled to move up the value chain, and there are concerns of the country being stuck in the middle-income trap, unable to sustain high rates of growth to reach high-income status," it said in a report today.
While manufacturing continues to drive economic growth, Malaysia is moving towards diversifying its economy through services such as tourism and Islamic banking.
"Prevailing demographic and human capital trends, however, indicate that urbanised areas would disproportionately benefit from this change in industry composition, widening the income gap between states," it added.
Besides that, Moody's Analytics said there had also been concerns over the country's relatively low foreign direct investment (FDI) to gross domestic product (GDP) ratio hampering its economic potential.
"While Malaysia ranked above most Asean countries as well as China and India in 1990, it had struggled to maintain its FDI lead of the past 10 years," it said.
Moody's Analytics said moving forward, as a longer-term projection, Malaysia needs to adapt to broader trends.
As a net exporter of petroleum and palm oil, Malaysia is heavily dependent on volatile commodity prices and changes in global demand.
"Although crude oil as a share of exports has decreased steadily from a high of 6.5 per cent in 2008 to 3.7 per cent in 2018, palm oil has increased from 3.6 per cent in 2005 to a peak of 8.5 per cent in 2011, before falling back to 3.9 per cent in 2018."
There has also been a move from Malaysia's key trading partners towards more environmentally friendly products.
"The EU, for instance, is looking at imposing new limits on food contaminants in refined fats and oils, including palm oil. The crude oil industry is also challenged by demand for cleaner energy," it said.
Source: New Straits Times