A significant growth engine: JS-SEZ

The Johor-Singapore Special Economic Zone (JS-SEZ) plays a significant role within the Malaysian government's growth plans. We think the SEZ contains most of the key factors required to succeed and should be able to replicate the success of some other SEZs. If executed as promised, and with bold synergies, we estimate it could add up to 50-80bps pa to Malaysia's nominal GDP growth over the next 10 years.

What is the Johor-Singapore Special Economic Zone?

The JS-SEZ is an integrated zone for business and investment to ease the movement of people and goods across the border. Both the Singapore and Malaysia governments signed a memorandum of understanding in January 2024 with the expectation that the SEZ will lure new investment into Johor and Singapore, spur cross-border trade and generate employment opportunities. Officially announced in October 2023 during Malaysian Prime Minister Anwar Ibrahim's visit to Singapore for the 10th leaders' retreat, the SEZ is likely to cover Iskandar Malaysia and Pengerang, spanning 3,505sqkm across southern Johor. Target sectors for the JS-SEZ include electronics, healthcare, financial services and business-related services. To increase the ease of doing business in the JS-SEZ, the aim is to create a one-stop business service centre and potentially passport-free travel between the two regions.

We address three key investor questions:

  1. Does the JS-SEZ have what it takes to succeed?
  2. How will it likely be implemented?
  3. What might be the impact on Malaysia's economy and equity market?

Does it have what it takes to succeed?

The JS-SEZ presents an opportunity for Johor to capitalise on its existing scale, leverage its proximity to Singapore and build on its long-standing symbiotic relationship with the island city-state. After evaluating three case studies—Shenzhen, Penang and Iskandar Johor — we believe the SEZ possesses some key success factors similar to those observed in Shenzhen and Penang, such as its unique value proposition, geographical location and alignment with national development goals, albeit not without some challenges.

How will JS-SEZ likely be implemented?

We present three scenarios:

  • Scenario 1 ('status quo') is where we expect a new swathe of DC investment commitments to materialise;
  • Scenario 2 ('as promised') is where the SEZ boosts Johor's position as a hub for manufacturing and FDI, increases its transport and logistics efficiency, and attracts tourism inflows;
  • Scenario 3 ('bold synergies') is where in addition to the realised gains in scenario 2, there is elimination of regulatory barriers for cross-border flows of goods, people and investment together with an industry-clustering effect due to Johor attracting the right kind of investments with scale. Our base case is for the implementation of scenario 2 ('as promised').

How could it impact the Malaysian economy and equity market?

Depending on our scenarios and the degree of implementation, we think Johor may experience increases in foreign direct investment, manufacturing activity and tourism, especially in scenarios 2 and 3. Hence, we see faster economic growth in Johor adding 20-80bps to national GDP over the next two to 10 years. As a result of the better GDP growth and increased inflows into Malaysia, we forecast equity market capitalisation growth of 0.6-3.5ppts above its own trend growth over the next 2 to 10 years.