The New Johor-Singapore Economic Zone is a Catalyst for Convergence

The long-standing linkages between the southern Malaysian state of Johor and Singapore reached another milestone on January 7, with the official launch of the Johor-Singapore Special Economic Zone (JS-SEZ).

The key features announced so far look promising, according to Nomura analysis. The allocated land area in Johor is quadruple the size of Singapore, and divided into nine flagship zones focusing on 11 sectors, particularly higher value-add manufacturing and logistics. The target is 50 projects in the first five years and 100 in a decade. The zone will also enhance labor mobility and cross-border flow of goods and services. Authorities expect JS-SEZ to generate 20,000 skilled jobs for workers from both Malaysia and Singapore. Despite its fiscal consolidation agenda, Malaysia unveiled attractive tax incentives such as a 15-year 5% corporate tax rate and a 10-year 15% personal income tax rate. A number of complementary infrastructure projects to increase connectivity are also underway, some of them nearing completion.

At least three key ingredients for success are already in place:

1. Malaysia stands out in various ease of doing business metrics across a list of emerging market peers
2. The JS-SEZ is designed to build on both countries’ comparative advantages
3. An SEZ tends to be sustainable if it is integrated within a long-term economic transformation plan of the host country, which is arguably true for Malaysia.

The economic impact of the JS-SEZ could be substantial, based on the experiences of successful SEZs globally. Foreign direct investment inflows may rise, which could generate more jobs and boost export growth.

The most significant potential impact is that JS-SEZ could be a catalyst for convergence. In Shenzhen, for instance, per capita income growth has surged in the first decade or so after the establishment of its SEZ. Shenzhen’s per capita income is now around half of Hong Kong’s, up from only one-eighth in the 1990s.

We see a relatively high likelihood of success of the JS-SEZ, which would be a win-win situation for Malaysia and Singapore. Both countries could increasingly benefit from supply-chain shifts in the region, which could be facilitated further by the JS-SEZ. This could help build resilience against rising global trade protectionism. Over the longer term, business operating costs for Singapore will likely decline, so Singapore can sharpen its focus to become more of a knowledge-based economy. For Malaysia, the JS-SEZ reinforces a sustained investment-led growth pickup that could lift its potential growth to around 5.4%, with greater contributions from higher-productivity growth.

For equity markets, the JS-SEZ may benefit multiple sectors. For Malaysia, landbank owners such as property companies and plantations should benefit, along with construction, utilities and infrastructure players who will participate in setting up industries. Additionally, select sectors such as logistics, petrochemicals and financials can reap benefits from the flow of goods and capital. Beneficiaries in Singapore include logistics and financials sectors.

For more on the special economic zone, read our full report.