(Sept 2): Singapore and Malaysia are two countries with two systems — unlike China and Hong Kong, which are one country with two systems. But, 54 years after Singapore and Malaysia went their separate ways, the umbilical cord that links both countries has stayed in place. The 1.06km Johor-Singapore Causeway is the world’s busiest overland border crossing — 300,000 people cross it daily (or 109.5 million yearly). This puts it ahead of San Ysidro, the biggest border crossing in the Western Hemisphere, with around 50,000 vehicles and 25,000 pedestrians heading into the US each day.

No surprise, then, that economic ties between the two nations remain close, with almost a free flow of goods and services. There have, of course, been occasional hiccups over sand, water, a crooked bridge and airspace. 

Of Singapore’s total volume of merchandise trade (which aggregates the amount of both exports and imports) of $1,055.9 billion in 2018, 11.2%, or $118.3 billion, was with Malaysia, data from the Singapore Department of Statistics shows. This makes Malaysia Singapore’s third-largest trading partner by volume. Its largest trading partner is China, with whom it logged a trade volume of $135 billion, and its second is the European Union ($114.7 billion).

Malaysia, too, considers Singapore a key trading partner. According to the Malaysia External Trade Development Corporation (Matrade), Singapore remained the nation’s largest export market in Asean, with the region making up 48.8% of its total exports of RM998.01 billion ($328.9 billion) in 2018. Matrade data also shows that Malaysia’s exports to Singapore stood at RM139.12 billion, with key exports including water, and other commodities such as F&B, electrical machinery, oil, rubber and plastics. Malaysia’s next-largest trading partners are Hong Kong (with a trade volume of RM27.9 billion) and China (RM23.4 billion).

Given this high volume of trade, both countries have a strong, interdependent relationship, making them vulnerable to developments in either country. Sian Fenner, chief Asia economist at think tank BIS Oxford Economics, acknowledges this point, adding that Singapore, in particular, is more susceptible to economic and political changes in Malaysia because of this close relationship. “While the ongoing US-China trade war and the slowdown in the Chinese economy will have a greater impact on Singapore, since China is its largest trading partner, [developments] in Malaysia will have some impact on Singapore,” she tells The Edge Singapore. 

Mid-single-digit GDP growth for Malaysia

Economists warn that after logging a 2Q2019 growth of 0.1%, according to the Ministry of Trade and Industry’s advance estimate, Singapore is headed into a technical recession, following the adverse effects the trade war has had on its export-oriented economy.

Malaysia, on the other hand, has not been as affected. In 2Q2019, its GDP grew 4.9% y-o-y on the back of stronger domestic demand and a rebound in commodity prices. This is up from the 4.5% recorded in 1Q2019 and higher than the median estimate of 4.7% by the 22 economists polled by Bloomberg. Asean+3 Macroeconomic Research Office (AMRO) is projecting 4.5% growth for 2019.

Mohd Uzir Mahidin, chief statistician at the Department of Statistics Malaysia, notes that private consumption in terms of goods, services and properties “remained the main anchor to the economy”, and also led to a loan growth of 6.3% in June.

The country continues to see sliding exports, however, with May’s exports — the most recent data available — growing 2.5%, below the 3.6% expected by economists polled by Reuters. This comes on the back of a 15.3% surge in agricultural exports following higher shipments of palm oil. The drag came from a 10.9% drop in exports of mining goods, following lower volumes of crude oil and liquefied natural gas.

For now, Nor Shamsiah Mohd Yunus, governor of Bank Negara Malaysia, expects a full-year GDP growth of 4.3% to 4.8%, in line with her previous estimate. She also says the central bank will take steps to improve market liquidity, ahead of a review by FTSE Russell in September that will decide whether to keep ringgit bonds in its index. Finance Minister Lim Guan Eng is also preparing a “contingency package” in the 2020 Budget to insulate the country from the ill effects of the trade war.

AMRO notes that Malaysia should “focus on sustaining fiscal consolidation efforts while safeguarding financial and external stability”. It acknowledges that fiscal consolidation has been continued under the new Pakatan Harapan government (which came to power in May 2018) through the imposition of tax-free holidays that have had a significant effect on boosting consumption. It adds that a medium-term fiscal consolidation in the areas of governance, expenditure and revenue is key to improving tax buoyancy and further ensuring sustained and increasing domestic consumption.

Close ties

One way Singapore benefits from Malaysia’s growth is through two of its listed banks, Oversea-Chinese Banking Corp and United Overseas Bank. Both have long histories and roots in Malaysia. In June, OCBC’s private banking unit, Bank of Singapore, agreed to buy Pacific Mutual Fund for RM35.6 million, expanding its presence in Malaysia. OCBC already owns OCBC-Al Amin, an Islamic bank in Malaysia. 

Both banks are likely to benefit if foreign direct investment (FDI) pours into Malaysia as a fallout from the trade war, and this is indeed materialising. “Malaysia is seen as one of the beneficiaries from trade diversion, particularly in the electrical and electronics and commodity sectors,” UOB Economic Research says, referring to the US-China trade war.

UOB Economic Research estimates that investment approvals rose 7.6% y-o-y to RM92 billion in 1HCY2019, led by approvals in services (RM55 billion), manufacturing (RM33.2 billion) and the primary sector (RM3.9 billion). Year-to-date cumulative investment approvals reached 46% of the government’s full-year target of RM200 billion.

“A potential sign of Malaysia’s benefiting from the trade diversion was evident from approved foreign manufacturing investments, which surged 80.4% y-o-y to RM25.1 billion, with rising interest from the US (RM11.7 billion), China (RM4.8 billion), Singapore (RM3.2 billion) and Japan (RM2.1 billion). Notable projects mentioned include a large-scale solar project in Kedah, monocrystalline solar cell project in Kuching from China, and American semiconductor projects,” UOB says.

UOB, which has 45 branches in Malaysia and plans to launch its standalone digital bank TMRW in the country, expects total investment approvals to reach RM195 billion this year, down 4.6% y-o-y. 

In addition to FDI, a global synchronised easing in monetary policy will also benefit Malaysia, note both AMRO and Fenner, as such a move will further boost the country’s growth potential in terms of exports and services such as tourism, as well create opportunities for cross-border connectivity both in Asean and abroad.

High-speed collaboration

Malaysia’s progress and its march towards developed nation status have implications for Singapore. For instance, it creates opportunities for infrastructure collaborations between the neighbours. Apart from increasing transport nodes through the ongoing construction of the Thompson East-Coast Line that links East Singapore and Johor Bahru, and the possible re-initiation of the Kuala Lumpur-Singapore High Speed Rail, the two countries can leverage infrastructure developments to boost their growth.

This is in line with Singapore Senior Minister Teo Chee Hean’s thoughts on how collaborative infrastructure developments will unlock Asia’s potential through a “more inclusive and sustainable economic growth [platform] to bring about a future of lasting peace and stability”. Teo had delivered the keynote address at the fifth Singapore Regional Business Forum on Aug 15.

AMRO’s economists agree, saying that regional connectivity — between Malaysia and Singapore, as well as throughout the other Asean countries — will be instrumental in creating economic benefit across the region, especially as the countries reel from global uncertainty. Singapore and Malaysia inked an agreement to address climate change, manage plastic and packaging waste as well as tackle industrial pollution and radiation safety in September 2018. This indicates the potential for such collaborations.

For now, Singapore and Malaysia can also work together on technological developments, as they move towards becoming “a smart nation”. Such a collaboration will allow them to leverage each other’s capabilities and know-how, as well as enable a fruitful exchange of ideas. 

Links to endure 

The demographic trends in both countries are slightly different. Singapore’s birth rate continues to fall (-1.5% y-o-y in 2018) while its death rate continues to rise (+1.8% y-o-y in 2018). Malaysia’s birthrate is significantly higher than Singapore’s, which is one of the world’s lowest. Meanwhile, both countries have a growing greying population and middle-income class and can thus collaborate on sustainable, digital solutions to improve not only the transport system but also healthcare services and utilities adoption, especially as Singapore-headquartered hospitals such as Thompson Medical set up base in Malaysia.

 As human capital becomes more mobile, there is an increasing need for countries to forge stronger collaborations, particularly in digital and physical infrastructure. And as both Singapore and Malaysia celebrate their birthdays and look towards new opportunities to enhance their economic growth, such collaborations could not be more timely. 

No surprise, then, that the Causeway is set to retain its top spot as the world’s busiest overland crossing for years to come.