Johor-Singapore Special Economic Zone: Déjà vu or different this time?

Malaysia and Singapore signed a Memorandum of Understanding (MOU) on 11 January 2024 to work on a Johor-Singapore Special Economic Zone (JS-SEZ) that would pave the way for increased cross-border trade and investments, as well as stronger economic connectivity between Johor and Singapore. The agreement to finalise the establishment of the JS-SEZ will be signed by the end of this year.

The JS-SEZ was initiated in 2023 after leaders from both countries agreed to set up a special task force to study the establishment of the special economic zone. This special economic zone is also expected to improve the business ecosystems of both the Iskandar Malaysia region and Singapore. Among the sectors that the zone is targeting are electronics, financial services, business‑related services and healthcare.

The signing of the JS-SEZ MOU showcases yet again the deepening cooperation among ASEAN member states amidst a world that is increasingly fragmented, confrontational, and distrustful. Other examples of such ASEAN cooperation include the entering into force of the Regional Comprehensive Economic Partnership (RCEP) in January 2022, and the ongoing project of the ASEAN Economic Community (AEC), among others.

A sense of déjà vu

The excitement about Johor is not new, and rings back to 2013 during former Prime Minister Najib Razak’s tenure (2009-2018), when the Iskandar Region project was established. There was similarly much anticipation then about Johor and the Iskandar Region, which was touted as the “Shenzhen of Malaysia”. However, the buzz cooled off in subsequent years, followed by the termination of the Kuala Lumpur-Singapore High Speed Rail (HSR) in January 2021, after both sides failed to agree on proposed changes by Malaysia, which paid nearly S$102.8 million to Singapore to settle the cancellation.

The five flagship zones in Iskandar Malaysia. Source: Iskandar Regional Development Authority

What is different this time

1. Strong support and proactive governments

There have been several working visits by the country officials as bilateral relations between Singapore and Malaysia scale to its highest point. In addition, unlike the Iskandar Malaysia corridor, the current JS-SEZ was signed by both Governments, increasing the likelihood of more concrete follow-up actions. In early 2023, both countries also signed an MOU to cooperate in the field of personal data protection, cybersecurity and digital economy.

Since then, a committee, co-chaired by Malaysia’s Economic Minister Rafizi Ramli and Singapore’s Minister for National Development Desmond Lee, have proposed several areas for cooperation, including industrial development, tourism activities, innovation facilitation and improved connectivity.

In addition, the SEZ and HSR also receive high-level support from the current King who hails from Johor, as these landmark projects would further elevate the state in terms of economic activity, investments, and development.

2. Improved infrastructure connectivity

The Rapid Transit System (RTS) linking Johor Bahru and Singapore will be completed by December 2026, that would enhance economic activity between Johor and Singapore by enabling more seamless connectivity.

It should be noted that the Singapore-Malaysia land border crossing is one of the busiest in the world, with an estimated 400,000 travellers per day before COVID-19, using all modes of transport including 90,000 motorcycles, 70,000 cars, and about 7,000 each of lorries and buses. Post-COVID, the number of travellers has returned to an average of 350,000 per day. The RTS, once completed, will go a long way in providing an additional mode of transport, alleviating the congestion, and increasing connectivity between both sides.

The revival of the Kuala Lumpur-Singapore High-Speed Rail (KL-SG HSR) connecting Kuala Lumpur and Singapore would further enhance transport connectivity, economic development, and bilateral relations. There is strong interest and high-level of support with seven consortia (comprising 31 companies) having submitted concept proposals to build the KL-SG HSR. One of the key considerations is the project cost and for the HSR to be largely financed by the private sector. This is to ensure its viability and completion, given that the Malaysian Government axed the project back in 2021 due to its high cost and burden to the government’s balance sheet.

3. Tide of investment flows

Malaysia has clearly benefitted from the trend of supply chain diversification since 2016. In particular, Johor has been one of the key recipients given its geographical location, vast land, connectivity, and resources that make it a viable option as a Singapore or China (Plus One) strategy. The state government is embarking on its “Maju Johor 2030 – Powering Johor into the New Economy” initiative to elevate the state on a new growth trajectory. The Invest Malaysia Facilitation Centre (IMFC) in Johor is expected to be established this year, aimed at attracting new investors.

The Johor state government is expecting MYR60 billion in additional investments at the Pengerang Integrated Petroleum Complex (PIPC) in Pengerang, Kota Tinggi, involving the third phase of development from 2026 to 2031, in line with the PIPC Master Plan. Various projects are expected to be realised during the third phase of the PIPC, including the construction of solar farms, bio-refineries and facilities producing nitrile-related products.

In addition, Johor has become Malaysia’s new data centre hub, and the state will see some MYR17 billion in new investments in 2024. As a case in point, the Ministry of Investment, Trade and Industry’s (MITI) one-day investment mission to Singapore in January 2024 has yielded MYR2.8 billion of committed foreign direct investments (FDI) from two companies.

Johor was ranked as the fifth largest investment destination in Malaysia last year (January-September 2023), garnering MYR20.0 billion in investment after Wilayah Persekutuan Kuala Lumpur (MYR48.9 billion), Pulau Pinang (MYR44.9 billion), Selangor (MYR41.6 billion) and Kedah (MYR22.6 billion).

Seamless travel for people and goods

For now, the government has not identified the boundary of the JS-SEZ as more details will only be known by year-end. Successful implementation of seamless connectivity will be critical for the SEZ’s success. A key requisite is to implement passport-free travel between Johor and Singapore and digitised processes for cargo clearance, which would be a game changer.

Other potential areas to explore include enhanced corporate connections in common areas of interest such as ESG, smart city cooperation and innovations, sandboxes for new technology applications in Johor, joint pitches for large-scale strategic foreign investments, expanding the elderly care ecosystem, co-organising tourism events, and the establishment of a Johor-Singapore Chamber of Commerce to connect companies with cross-border investments.

Replicating the success of Shenzhen

It is possible to draw parallels with China’s first four SEZs that were created in 1980 – in particular, the project involving Shenzhen. The city functions as a link between Hong Kong and the Mainland, where the former provided capital, logistical support, access to world markets and management know-how, amongst others. Since then, Shenzhen has developed into an important transport hub on China’s southern coast and is considered an important economic base for high-tech industries, financial services, exports, and maritime transport services.

The development of Shenzhen SEZ came at a time when China was opening up to the world while Hong Kong, Macau and Taiwan were upgrading their industrial structures. The SEZ became a major platform to attract foreign investment, capital, technologies and talent. One of the key strengths of the SEZs is that they have a high concentration of skilled labour, including many R&D personnel. As a result, they have become centres of knowledge and technology generation, adaptation, diffusion and innovation. The innovative culture driven by a large migrant population in Shenzhen is unique, which also contributed to its success.

Thus, well-designed policies and effective policy execution would make it more conducive for FDI to flow into Johor. This is especially in the case of the JS-SEZ where two countries are involved. Infrastructure and incentives to attract FDI and skilled labour must be present.

Facts about Johor’s economy and infrastructure: An economic powerhouse in its own right

Johor contributed 9.4 per cent to Malaysia’s overall GDP in 2022, becoming the third top state contributor after Selangor and Kuala Lumpur.

In 2022, Johor was the top state that attracted the highest approved investments in Malaysia, accounting for around MYR70.6 billion or 26.7 per cent of overall approved investments in the country.

In 2023, Johor ranked second highest in terms of total trade at around MYR753 billion (exports: MYR414 billion, imports: MYR339 billion) or 29 per cent of the country’s total trade.

Malaysia-Singapore’s trade volume, 2018-2023. Source: Macrobond, UOB Global Economics & Markets Research

Johor’s trade volume, 2018-2023. Source: CEIC, UOB Global Economics & Markets Research

Johor’s economy is mainly dominated by services and manufacturing activities. Manufacturing accounts for 30.2 per cent share of Johor’s economy with significant activities in electronics and petroleum/chemicals sectors, while services’ share is about 53.3 per cent. Johor is earmarked to be one of the high performing states under the 12th Malaysia Plan Mid-Term Review (MTR) with targeted growth of 5.5 per cent, which is on the upper end of the national growth targets of 5.0-5.5 per cent for 2023-2025.

Reflecting the close business relations between the two sides over the years, total trade between Malaysia and Singapore has expanded 60.3 per cent between 2019 and 2023, to MYR363 billion, with an annual growth rate of 13 per cent during the same period.

Sources of foreign manufacturing investment approvals into Malaysia. Source: MIDA, CEIC, UOB Global Economics & Markets Research

Leveraging on Singapore’s position as the regional financial, investment and technology hub, a successful implementation of the JS-SEZ will be a “win-win” for both sides in a case of 1+1>2, as it complements the strengths of both Singapore and Malaysia and therefore elevates their economic potential. The successful Shenzhen-Hong Kong SEZ will be one prime example that both sides can aim for.

The full report, ASEAN: Levelling up cooperation via Johor-Singapore Special Economic Zone (JS-SEZ), was first published on 28 February 2024 by UOB Global Economics & Markets Research.

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