GDP growth at risk with foreign worker freeze, industry analyst says

Putrajaya's decision to freeze the intake of foreign workers presents risks to the country's real GDP (gross development product) growth forecast of 4.5% this year, says BMI Research. The freeze, which was announced on February 19, would make it difficult for businesses to obtain cheap labour and this would affect manufacturing and agriculture sectors, potentially undermining the government's own construction projects, the research outfit said in a report released today. "While the lack of access to cheap labour can lead to productivity improvements over the longer term as producers turn to mechanisation to increase their productivity, we note that the risks to this policy change are firmly weighted to the downside." Malaysia's export-oriented manufacturing economic model requires a large supply of inexpensive foreign labour to keep its products competitive in the international arena, particularly in the labour-intensive agricultural and lower-end manufacturing sectors, BMI wrote. "Accordingly, the government's decision to impose a hiring freeze on foreign labour presents downside risks to our 2016 real GDP growth forecast of 4.5% as difficulties in obtaining labour will weigh on production and undermine profit margins in these sectors. "Furthermore, the lack of labour in the construction sector could weigh on long-term growth, hampering the government's infrastructure development programmes." The freeze would also be negative for the manufacturing sector, which was the largest employer of foreign labour, resulting in possible manpower shortages while raising the cost of inputs, it added. "The manufacturing sector is a key pillar of Malaysia's economy, contributing 24.6% to GDP in 2014. To date, Malaysian exports have remained fairly resilient due to the weaker ringgit and the fall in oil prices, which has lowered the cost of production in non-oil export-oriented sectors. "However, we expect exports to face considerable headwinds over the coming quarters due to the slowdown in China's economy (with China being Malaysia's largest trade partner)." In labour-intensive sectors such as palm oil, increasing labour shortages and rising personnel costs have already been a serious challenge over recent years, with labour costs accounting for around 40% to 60% of palm oil production costs and on the uptrend. "As such, the freeze on new intake of foreign workers, or any other policy aimed at limiting the employability of foreign workers, will exacerbate the ongoing cost inflation for palm oil and rubber companies. "Indeed, as many as 76% of all workers at the plantation level in Malaysia are foreigners, according to Malaysian Palm Oil Board (MPOB). The lack of workers leads to revenue loss and lower palm oil production, as some fruit bunches are not harvested." BMI Research said MPOB had previously estimated that the shortage for harvesters and collectors reached 12,500 persons in 2012, compared with 506,000 persons employed in Malaysian plantations that year, which entailed a loss of around 5.6 million tonnes FFB and 1.1 million tonnes of palm oil production. Most of foreign workers in Malaysia are in the manufacturing sector (36.1%), followed by the agriculture (23.5%) and construction (19.9%) sectors. Most foreigners employed in Malaysia are from Indonesia (39.4%), Nepal (23.6%), and Bangladesh (14.3%), it said. BMI Research, which provides macroeconomic, industry and financial market analysis, said small and medium enterprises (SMEs) would likely face greater impact from higher labour costs than larger businesses due to their narrower profit margins. It said the policy change by the government had led to many complaints by SMEs, which were already affected by the goods and services tax introduced since last April. "However, the effects of the freeze will take some time to trickle through the sector due to the presence of existing contracts, suggesting that the impact on economic growth is unlikely to be felt until the second half of this year." In the construction sector, BMI Research said the freeze could lead to delays if it were prolonged, higher building costs, and foreign companies to pursue relatively more attractive project opportunities elsewhere in the region, such as Indonesia, Vietnam, Thailand and the Philippines. There was not enough being done to encourage greater automation and less labour-intensive work in the sector, it added. "In particular, no reduction of import duties for heavy construction machinery makes the overall cost of operating in a labour-intensive manner cheaper than shifting to the Industrialised Building System, which would increase productivity." BMI Research said it saw the hiring freeze as a response mainly to Putrajaya's announcement in June 2015 that it would bring in 1.5 million Bangladeshi workers over three years. The news brought a strong backlash from businesses that felt existing illegal foreign workers should be legalised first. "In response, the government announced a hiring freeze and launched the Rehiring Programme for Illegal Workers ending December 31 to legalise undocumented foreign workers and to fulfil the need for labour. "However, the failure of the government to fully articulate the exact details of the hiring freeze has led to a considerable amount of uncertainty which will be negative for the business environment and all the affected sectors," the report said. – March 1, 2016.]]>