Sabah Economic Outlook 2024-2025

SABAH ECONOMIC 2024-2025 OUTLOOK

i KERAJAAN NEGERI SABAH FINAL REPORT SABAH ECONOMIC OUTLOOK 2024-2025 NOVEMBER 2023 “SABAH MAJU JAYA”

ii Edisi 2023 Diterbitkan pada 30 November 2023 @ Hak Cipta Institute for Development Studies (Sabah) Hak cipta terpelihara, tiada mana-mana bahagian daripada buku Ini boleh diterbitkan semula, disimpan untuk pengeluaran atau Ditukar kepada apa-apa bentuk dengan sebarang cara sekalipun Tanpa izin daripada penerbit. Diterbitkan untuk: Institute for Development Studies (Sabah) Lot 2-5, Wisma SEDIA, Off Pintas, Penampang, 88300, Kota Kinabalu, Sabah. Locked Bag 127, 88994 Kota Kinabalu, Sabah, Malaysia. https://ids.org.my/main/ Dicetak oleh:

iii CONTENTS No Page 1. THE CONDUCT OF THE STUDY 1.1 Rational 1.1.1 Malaysia's Economy Scenario 1 1.1.2 Malaysia External Economies Position 2 1.1.3 Sabah and Its Important Macroeconomics Indicators 3 1.1.4 Comparison of Gross Output in Sabah and Other States, 2020 and 2021 4 1.2 Objectives 7 1.3 Scope 7 1.4 Methodology 7 1.4.1 Multiple Regression Analysis 7 1.4.2 Forecast Model 9 1.5 Timeline 11 2. EXTERNAL ECONOMIC SCENARIO 2.1 Global Economic Scenario 12 2.2 Regional Economic Perspective 13 2.3 Malaysian Major Trading Partners 15 2.4 Malaysia’s Major European Trading Partners 16 2.5 BRICS Economies 18 2.6 The Association of Southeast Asian Nations (ASEAN) 19 2.7 Special Economic Zone: BIMP-EAGA 21 2.8 Conclusion 23 3. SABAH’S SOCIOECONOMIC AND POLITICAL LANDSCAPE 3.1 Background of Sabah’s Socioeconomic 25 3.2 Sabah Population and Ethnic Landscape 25 3.3 Economy Landscape (Income, Skill of Manpower, Talents, Resources) 31 3.3.1 An overview of Sabah Economy 31 3.3.2 Household Income and Expenditure 32 3.4 Skill of Manpower 33 3.5 Geopolitical Changes 34 4. SABAH ECONOMY POSITION: ASSESSMENT OF MAJOR ECONOMIC INDICATORS 4.1 GDP by Sectors 38 4.2 GDP by the State in Malaysia 41 4.3 Export and Import by State 49 4.4 Inflation by State 57 4.5 Producer Price Index 62 4.6 Unemployment by State 63

iv 5. SIGNIFICANT INDUSTRY IN CONTRIBUTING TO SABAH’S GDP 5.1 Agricultural Sector 66 5.2 Mining and Quarrying 70 5.3 Manufacturing 73 5.3.1 Manufacturing and its sub-subsectors 77 5.4 Construction 81 5.5 Services 84 5.6 Background of Sabah’s GDP 89 6. INFLATION, UNEMPLOYMENT, POVERTY, AND STATE REVENUE 6.1 Inflation and Unemployment 93 6.2 Poverty 99 6.3 State Revenue 104 7. ADDRESSING STRUCTURAL WEAKNESS, TRANSFORMING POTENTIAL, AND UNCERTAINTIES INTO OPPORTUNITIES 7.0 Impact from Previous Development Target 107 7.1 Alignment of Sectors and Industries 108 7.2 Future Planning of the Economy 109 7.3 Scarring from the Pandemic 110 7.4 Employment Losses Relative to Pandemic and Other States 110 7.5 State Policy on Key Economic Drivers 112 7.6 Investment Uncertainties 114 7.7 New Emerging Trends in the Economy 115 7.8 Other Uncertainties 115 8. CONCLUSION 117 REFERENCES APPENDIX

v ACKNOWLEDGEMENT The Institute for Development Studies Sabah and UiTM Sabah branch sincerely appreciated all forms of support, cooperation, advisory services, guidance, and input contributed while preparing the Sabah Economic Outlook for 2024-2025. We also would like to express our sincere gratitude to the Sabah Chief Minister for supporting and allowing us to conduct this project. Therefore, we extend our highest appreciation and thanks to all parties, including the departments and agencies, leaders, and associations, whether directly or indirectly involved in making this study successful. We hope that this strong cooperation will continue as an initiative and effort to assist in providing more information and suggestions for the benefit of the Sabah State Government.

vi APPRECIATION Highest gratitude to those directly and indirectly involved in preparing the study Sabah Economic Outlook, 2024-2025. Jabatan Hal Ehwal Agama Islam Negeri Sabah Jabatan Hal Ehwal Wanita Negeri Sabah Jabatan Hidupan Liar Jabatan Kemajuan Perhutanan Negeri Sabah (SAFODA) Jabatan Kereta Api Negeri Sabah Jabatan Kerja Raya Jabatan Ketua Menteri Jabatan Mineral dan Geosains Malaysia Jabatan Pelabuhan dan Dermaga Sabah Jabatan Pembangunan Kemahiran Jabatan Pembangunan Perindustrian dan Penyelidikan Jabatan Pembangunan Sumber Manusia Jabatan Pengairan dan Saliran Jabatan Perangkaan Malaysia Jabatan Perhutanan Sabah Jabatan Perikanan Jabatan Perkhidmatan Awam Negeri Jabatan Perkhidmatan Komputer Negeri Sabah Jabatan Perkhidmatan Veterinar Sabah Jabatan Pertanian Sabah Jabatan Tanah dan Ukur Jabatan Tenaga Kerja Kemeneterian Pembangunan dan Perindustrian Kementerian Belia dan Sukan (Negeri Sabah) Kementerian Kerajaan Tempatan dan Perumahan Kementerian Kerja Raya Kementerian Kewangan Negeri Sabah Kementerian Pelancongan, Kebudayaan dan Alam Sekitar Kementerian Pembangunan Luar Bandar Sabah Kementerian Pembangunan Masyarakat dan Kesejahteraan Rakyat Kementerian Pertanian dan Perikanan Kementerian Sains, Teknologi dan Inovasi Kementerian Tugas-Tugas Khas dan Penyelarasan Koperasi Kemajuan Perikanan dan Nelayan Sabah (Ko-Nelayan) Koperasi Pembangunan Desa Lembaga Industri Getah Sabah Lembaga Kebudayaan negeri Sabah Lembaga Pelabuhan-Pelabuhan Negeri Sabah Lembaga Pelancongan Sabah Lembaga Pemegang Amanah Lembaga Sukan Negeri Sabah Pejabat PERKESO Negeri Sabah Perpustakaan Negeri Sabah Sabah Economic Development and Investment Authority (SEDIA) Sabah Energy Corporation Sdn. Bhd

vii Sabah Skills and Technology Centre Taman-Taman Sabah Unit Perancang Ekonomi Negeri Sabah Universiti Teknologi MARA (UiTM) East Malaysia Planters’ Association (EMPA)

viii TEAM MEMBERS OF THE STUDY ON SABAH ECONOMIC OUTLOOK, 2024- 2025 Project Advisor : Datuk Ts. Dr. Ramzah Dambul : Richard T. Koh Project Director : Juliana P. Ringgingon Project Manager : Nur Aslina Mustapa External Resource Person : Dr. Abdul Aziz Karia Dr. Taufik Abd Hakim Dr. Hylmee Matahir Herniza Roxanne Marcus Resource Person : Masmidah Arsah Secretariat : Sarah J. Marican Team Leader : Noralizah Halid Rizal Muslihin Roslina Gumpar Sophia Hong Steve W. Jay Member : Nur Fazila Jainal Alexander Palik Melanie Joanis Khairulazizan Safwan Faridah Suffian

ix LIST OF TABLES Table 1.0 Performance of Gross Output by Industry in Malaysia, 2020 and 2021 Table 1.1 Comparison of Performance of Gross Output in Sabah and Other States, 2020 and 2021 Table 1.2(a) Economic Industries in Sabah and Other States in 2021 Table 1.2(b) Economic Industries in Sabah and Other States in 2021 (Continued) Table 3.0 Number of Population and Yearly Population Growth of Sabah, 2020-2021 Table 3.1 Comparison of Population Growth in Sabah with Other States, 2021-2022 Table 3.2 Population of Sabah by Ethnic Group Table 3.3 Population by Gender and Administrative District, 2021 Table 3.4 Population Growth of Administrative Districts in Sabah, 2022 Table 3.5 Household Income in Sabah, 2019 & 2022 Table 3.6 Income Share by Sources of Income, 2019 & 2022 Table 3.7 Sabah’s Number of Workers Based on Skills, 2020 - 2022 Table 4.0(a) Table 4.0(a): GDP Malaysia by Sector, 2015 – 2023 at 2015 Constant Prices Table 4.0(b) GDP Malaysia by Sector, 2015 – 2023 at 2015 Constant Prices (Continued) Table 4.1 GDP in Sabah at Constant Prices 2015, 2015 – 2021 (RM million) Table 4.2 Share of GDP by Sectors in Each State, 2021 Table 4.3 Annual Percentage Change by Sector in Each State, 2021 Table 4.4 GDP Per Capita by State 2015 - 2021 Table 4.5(a) Export of Malaysia, 2017 – 2022 Table 4.5(b) Table 4.5(b): Import of Malaysia, 2017 – 2022 Table 4.6 External Trade and Percentage Change by State in 2021 and 2022 Table 4.7 External Trade in Sabah, 2017 – 2022 Table 4.8 Consumer Price Index (2010=100), Main Group by State, Percentage Change in May 2023 Table 4.9 Consumer Price Index (2010=100), Main Group in Sabah Table 4.10 Unemployment Rate by State, 2015 - 2021 Table 4.11 Employed Persons in Sabah by Sector, 2018 - 2021 Table 5.0 Sabah's Agriculture Sector Share of GDP and Forecast

x Table 5.1 Regression Results of Ordinary Least Squares (OLS) Estimations Dependent Variable: GDP at Purchasers' Price, 1992 – 2021 Table 5.2(a) Metallic Minerals Reserves of Malaysia 2021 Table 5.2(b) Coal Minerals Reserves of Malaysia 2021 Table 5.2(c) Industrial Minerals Reserves of Malaysia 2021 Table 5.3 Sabah's Mining and Quarrying Sector Share of GDP and Forecast Table 5.4 Correlation Matrix between Manufacturing, GDP, and Other Sectors in Sabah, from 1992 – 2021 Table 5.5 Percentage Share of GDP Growth and Forecast for the Manufacturing Sector. Table 5.6 Correlation Matrix for Manufacturing and its Sub-sectors in Sabah, 2015 – 2021 Table 5.7 Regression Results of Ordinary Least Squares (OLS) Estimations Dependent Variable: GDP at Purchasers' Price, 1992 – 2021 (Constant Prices) Table 5.8 Sabah's Construction Sector Share of GDP and Forecast Table 5.9 Performance of the Service Sector, Sabah 2020-2021 Table 5.10 Sabah's Services Sector Share of GDP and Forecast Table 5.11 Results of Ordinary Least Squares (OLS) between the Services Sector and Economic Growth Table 5.12 Correlation Matrix for Services and its Sub-sectors in Sabah, 2015 – 2021 Table 5.13 Yearly Historical and Forecast of Sabah’s GDP at Purchasers’ Price Table 5.14 Sabah's GDP at Purchasers' Price and Forecast Table 6.0 Malaysia Divergence – The Overnight Policy Rate Versus Core Inflation Table 6.1 Administrative District's Median Monthly Household Gross Income and Compounded Annual Growth Rate for Sabah in 2019 Table 6.2 Summary of Median Monthly Gross Income by Malaysia, Sabah, and Sarawak in 2019

xi LIST OF FIGURES Figure 1.0 Flow of Multiple Regression Analysis for the Impact of Main Industries on Economic Growth (GDP) in Sabah Figure 1.1 Essential Steps for the Exponential Smoothing Approach Figure 2.0 Selected World's Macroeconomic Indicators, 2017 - 2024 Figure 2.1 Selected Macroeconomic Indicators Based on Regional, 2012 - 2022 Figure 2.2 Selected Macroeconomic Indicator for Year 2022 and Estimated 2023 Figure 2.3 GDP Growth and Inflation Rate Among the Selected European Countries Figure 2.4 Unemployment Rate and Investment, 2018 - 2022 Figure 2.5 Total GDP, GDP Growth Rate, and Inflation Rate Among BRICS Member Countries, 2018 - 2022 Figure 2.6 GDP Growth Rate and Inflation among ASEAN Countries, 2020 - 2023 Figure 2.7 GDP Growth Rates at Current PPP$ in EAGA Figure 2.8 Foreign Visitors Arrival to EAGA (Million Visitors) and Annual Change, 2018 – 2021 Figure 2.9 Domestic Visitors' Arrival to EAGA (Million Visitors), 2018 – 2021, and Domestic and International Visitors to EAGA (Million Visitors), 2017 - 2021 Figure 3.0 Number of Population in Sabah, 2020 - 2022 Figure 3.1 Comparison of Population Growth by States in Malaysia Figure 3.2 Population by Ethnic Group in Sabah, 2021 - 2022 Figure 3.3 Population Growth in Sabah by District, 2022 Figure 3.4 Number of Population by Districts, 2022 Figure 3.5 Sabah’s Number of Workers Based on Skills, 2020 - 2022 Figure 4.0 GDP Malaysia by Main Sectors, 2015 – 2023 at Constant Prices Figure 4.1 Annual Percentage Change by Industry in Malaysia, 2015 – 2023 Figure 4.2 GDP & Annual Percentage Change in Malaysia, 2015 - 2023 Figure 4.3 Quarterly GDP and Percentage Change in Malaysia, 2019 - 2022 Figure 4.4 Share of GDP in 2022 and 2023 (Forecast) Figure 4.5 GDP, Percentage Share and Growth Rate by State 2020 – 2021 Figure 4.6 Annual Percentage Change by Sector in Sabah 2016 – 2021 Figure 4.7 Share of GDP in Sabah 2021 Figure 4.8 Percentage Share of GDP by Sector and State, 2021

xii Figure 4.9 GDP Per Capita by State and Annual Percentage Change, 2020 – 2021 Figure 4.10 Export of Malaysia and Percentage Change, 2021 – 2022 Figure 4.11 Import of Malaysia and Percentage Change, 2021 – 2022 Figure 4.12 Sabah's Export by Subsector and Percentage Change, 2021 – 2022 Figure 4.13 Sabah's Import by Subsector and Percentage Change, 2021 – 2022 Figure 4.14 Percentage Change of Inflation by State, April 2023 and May 2023 Figure 4.15 Consumer Price Index (2010=100), Main Group in Sabah, April 2023 and May 2023 Figure 4.16 PPI by Sector, April 2023 and May 2023 Figure 4.17 Growth and Average Index of PPI, Jan – May 2022 & Jan – May 2023 Figure 4.18 Unemployment Rate and Percentage Change by State, 2020 – 2021 Figure 4.19 Employed Persons and Percentage Change by Sector, 2020 – 2021 Figure 5.0 Share of GDP by Agriculture Sector and Forecast, 1992 - 2025 Figure 5.1 Employed Persons in Sabah's Agriculture Sector, 1992 – 2021 Figure 5.2 Scatter plots of GDP and Agriculture Sector in Sabah Figure 5.3 Share of GDP by Mining and Quarrying Sector and Forecast, 1992 - 2025 Figure 5.4 Figure 5.4: Scatter plots of GDP and Manufacturing Sector in Sabah Figure 5.5 Share of GDP by Manufacturing Sector and Forecast, 1992 - 2025 Figure 5.6 Correlation Matrix for Manufacturing and its Sub-sectors in Sabah, 2015 – 2021 Figure 5.7 Annual Percentage Change of Manufacturing and Its Sub-sectors, 2015 – 2021 Figure 5.8 Scatter Plot of Manufacturing and Its Sub Sector, 2015 – 2021 Figure 5.9 Annual Percentage Change between Manufacturing and GDP in Sabah, 1993 – 2021 Figure 5.10 Value of Work Done by Sub-sector in Sabah, Quarter 1 2023 Figure 5.11 Share of GDP by Mining and Quarrying Sector and Forecast, 1992 - 2025 Figure 5.12 Scatter Plots of GDP and Construction Sector in Sabah Figure 5.13 Total Tourist Arrivals to Sabah, 2002-2022 Figure 5.14 Share of GDP by Services Sector and Forecast, 1992 - 2025 Figure 5.15 Scatter Plot of the Relationship between Services and Sub-Services Figure 5.16 Yearly Historical and Forecast of Sabah's GDP at Purchasers' Price, 1997 - 2025

xiii Figure 6.0 The Percentage Growth of Gross Domestic Product and Consumer Price Index in Peninsular Malaysia, Sabah, and Sarawak. Figure 6.1 Inflation Driven by Food and Non-Alcoholic Beverages, Transport, and Restaurants and Hotels Figure 6.2 Monthly Scatter Plots of Inflations in Sabah Driven by Food and Non-Alcoholic Beverages, Transport, and Restaurants and Hotels Figure 6.3 Malaysia Divergence; Scatter Plots and Correlations of Overnight Policy Rate Versus Core Inflation Figure 6.4 Figure 6.4: Malaysia Divergence; (a) core inflation as a percentage year-on-year; (b) a percentage of unemployment to active registrants; (c) unemployment to vacancies ratio Figure 6.5 Figure 6.5: Monthly Inflation Density as Percentage Change Yearon-Year Figure 6.6 Scatter Plots of Sabah’s Compounded Annual Growth Rate Versus Median Monthly Household Gross Income in 2019. Figure 6.7 Scatter plots of the Distribution of Households (%) versus Households Groups (%) by Sabah Districts in 2019 Figure 6.8 Scatter Plots of the Distributions of Households (%) Versus Incidence of Poverty by Sabah Districts 2019 Figure 6.9 Figure 6.9: Malaysia Divergence: The Inequality Among the Frequency Distribution of Income by Gini Coefficient. Figure 6.10 Malaysia Divergence: Share of Total Revenue in 2021 Figure 6.11 Malaysia Divergence: Total Revenue, Operating, and Development Expenditure from 2017 to 2021 Figure 6.12 Malaysia Divergence: Percentage of Operating and Development Expenditures to Total Revenue

xiv LIST OF ABBREVIATIONS ADB Asia Development Bank ARG Agriculture ASEAN Association of Southeast Asian Nations BIMP-EAGA Special Economic Zone in East ASEAN BLUE Best Linear Unbiased Estimator BNM Central Bank of Malaysia BRICS Brazil, Russia, India, China, and South Africa CCA Commercial Collaboration Agreement CONS Construction CPI Consumer Price Index DDI Domestic Direct Investment DOSM Department of Statistics Malaysia EAP East Asian and Pacific ECA Europe and Central Asia EMDE Emerging Market Countries and Developing Economies EMPA East Malaysia Planters’ Association EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product GLC Government-Link Companies IDR Import Dependency Ratio IMF International Monetary Fund IMT Import duties IPTA Public Institutions of Higher Learning IPTS Private Institutions of Higher Learning ITIP Integrated Timber Industry Policy ITP Industrial Tree Plantation KKIP Kota Kinabalu Industrial Park KWSP Kumpulan Wang Simpanan Pekerja LAC Latin American and the Caribbean LRT3 Light Rail Transit Line 3 MA63 Malaysia Agreement 1963 MAFI Ministry of Agriculture and Food Industry MANU Manufacturing MAPE Mean Absolute Percentage Error MCMC Malaysia Communication and Multimedia Commission MCO Movement Control Order MDEC Malaysia Digital Economy Corporations MENA Middle East and North Africa MIDF Malaysian Industrial Development Finance MIN Mining and Quarrying MOF Ministry of Finance MRT3 Mass Rapid Transit Line 3 MSIC Malaysia Standard Industrial Classification 2000 NRP National Recovery Plan OLS Ordinary Least Squares OPR Overnight Policy Rate PLI Poverty Line Income

xv POIC Palm Oil Industrial Clusters PPI Producer Price Index PRN Pilihan Raya Negeri R&D Research and Development R2 Coefficient of Determination RMK10 Rancangan Malaysia Kesepuluh RMSE Root Mean Square Error RTS Rapid Transit System SA South Asia SAMUR Sabah Ammonia-Urea Plant SDC Sabah Development Corridor SDG Sustainable Development Goals SIAP Sabah Industrial Action Plan SME Small Medium Enterprises SMI Small Medium Industries SMJ Sabah Maju Jaya SOCSO Social Security Organization SOGT Sabah Oil and Gas Terminal SSA Sub-Saharan Africa SSR Self-Sufficiency Ratio SVS Services TVET Technical,Vocational, Education, and Training US United States VIF Variance Inflation Factor WP Wilayah Persekutuan

xvi EXECUTIVE SUMMARY The global economic scenario shows a slight recovery and could achieve a soft landing in 2023. The world's three largest economies, such as the United States, China, and the Euro area, are stalling, adding more consequences for the global outlook. Although the stubborn inflation is slowing down as central banks have raised interest rates and food and energy prices have come down, the addressed price pressure is proven rigidity, with tight labour markets in several economies. The complicacy of unfriendly policy rates is becoming apparent as banking sector vulnerabilities have come into focus and fears of economic damage have risen across the border financial sectors, which include bank and nonbank financial institutions— the need for global economies to take forceful actions to stabilise the system. The International Monetary Fund (IMF) predicts that the baseline forecast for growth will fall from 3.4 per cent in 2022 to 2.8 per cent in 2023. The downward trend continues specifically for advanced economies and is expected to pronounced a growth slowdown from 2.7 per cent in 2022 to 1.3 per cent in 2023. In parallel, this study predicted a one-year lagged effect of the pronounced growth slowdown to reach Sabah. This study projected that three of Sabah’s significant economic contributors will potentially have stagnant growth in 2024. Deep analysis of this study signalling that three of Sabah’s critical economic contributors, such as agriculture (0.38 per cent), mining and quarrying (0.49 per cent), and manufacturing (0.03 per cent) sectors, will potentially have stagnant growth in 2024. Sabah GDP at purchasers' price is expected to grow around 2.92 per cent in 2024. The pronounced growth slowdown fuels more persistent unemployment and under-employment, as well as an economy generally performing below its potential, resulting in the stagnation of the growth of Sabah's GDP for 2023 and 2024. The economic shock, such as the post-pandemic, Russia-Ukraine conflict, US-China trade war, and global food security and energy crisis, fuelled and potentially prolonged the stagnant growth in Sabah's GDP. Most concerning with the potential of prolonged stagnant GDP witnesses fewer gains in the stock market and mutual funds in investment activity. The standard of living is expected to decline in certain Sabah's socio-economic classes or geographic areas, resulting from higher unemployment and falling wages, making it difficult for individual workers to compete for jobs and wages. Despite experiencing stubborn inflation, Sabah’s households are facing the complicacy of an unfriendly policy rate, burdening one of Malaysia's lowest median monthly household gross income states. This study revealed strong positive correlations between the overnight policy rate (OPR) and core inflation. The side effect of the policy of harmonizing the OPR to all of Malaysia’s divergence is apparent, as it burdens the Sabah’s household income and standard of living. In defiance of the limited funds perception, the state government has a surplus budget of 26%. There is a possibility to utilise these surplus funds for various projects and initiatives. The efficiency of utilizing the funds is one of the efforts to tackle the persistent unemployment and poverty issues in Sabah. The study sees the manufacturing sector as a key to dealing with the persistent unemployment in Sabah. Expanding the manufacturing sector by transforming the intermediate to final goods from the agriculture, mining, and quarrying sectors will attract more foreign direct investment, which is vital to cushion the expected pronounced growth slowdown in 2024 for Sabah. The need for Sabah to implement a robust policy to rejuvenate the state's economy is expected to create more economic spin-offs. A higher implementation efficiency would mean more planned projects and policies are successfully executed and the yield desired.

1 CHAPTER 1 THE CONDUCT OF THE STUDY 1.1 RATIONAL 1.1.1 Malaysia's Economy Scenario Malaysia's economy has shown impressive growth as the gross domestic product (GDP) recorded 8.7 per cent for 2022. This encouraging growth aligns with the government's measures in dealing with the adverse effects of the health crisis that has hit most countries worldwide. While further strengthening the domestic economic base and healthy labour market conditions, reopening the country's borders has boosted the influx of tourists to Malaysia, creating a substantial economic impact on the year's growth. The performance of overall sectors in the fourth quarter is slightly slower than in the previous quarter. The services sector plays a major economic component—subsectors wholesale and retail trade, transportation and storage, food and beverage, and accommodation. Overall, its performance in the fourth quarter of 2022 expanded by 8.9 per cent. The growth of the manufacturing sectors was slower in the fourth quarter of 2022, which was 3.9 per cent compared to the previous quarter (Q3: 13.2 per cent). Despite the slower growth, this sector is supported by strong demand in sub-sectors of electrical and electronic components (E&E); petroleum, chemical, rubber and plastics products; and food, beverages and tobacco products. Meanwhile, the growth in the construction sector was recorded at 10.1 per cent in the final quarter of 2022. According to the Department of Statistics Malaysia, the growth of this sector is mainly supported by the non-residential construction projects and the civil engineering sub-sectors. Nonetheless, the focus of growth in this sector is more concentrated in the Klang Valley region (i.e., Kuala Lumpur and Selangor), Sarawak and Johor. In addition, expectations for the sector's growth performance will extend into the first quarter of 2023. Concerning the demand component, the entire component showed positive growth in the fourth quarter. For example, the private expenditure component grew 7.4 per cent, primarily supported by expenditure on transport, recreation services and culture, and housing sub-components. Meanwhile, private investment recorded an increase of 8.8 per cent, which was contributed mainly by private investment; government expenditure grew by a slight 2.4 per cent in line with austerity efforts that reduced spending on supplies and services, and the change in inventory was recorded as a marginal increase to 0.4 per cent. While all these expenditure components recorded a smaller growth compared to the percentage in the third quarter of 2022, the net exports component has grown by 23.4 per cent, higher than what was recorded in the previous quarter (Q3: 18.7 per cent). The inflation rate in Malaysia is seen to be under control. At the end of 2022, the inflation rate was 3.8 per cent. Meanwhile, in January 2023, the rate was slightly lower to 3.7 per cent. Consumer goods such as restaurants and hotels, food and nonalcoholic beverages, and transportation have notably increased in January 2023. The core inflation indicator also recorded a slower increase in January 2023 to 3.9 per cent. Malaysia recorded gross output value for all economic industries as RM3,211.9 billion in 2021 compared to RM2,904.3 billion in 2020, with an annual growth of 10.6

2 per cent, as shown in Table 1.0. The gradual reopening of the economy since August 2021 turned the Manufacturing industry into the main contributor, which managed to produce output amounting to RM1,609.3 billion (50.1% of total output), followed by Services with a value of RM1,174.5 billion (36.6% of total output). The Construction industry recorded RM170.8 billion (5.3% of total output). Mining and quarrying contributed RM156 billion (4.9% of total output), while the least contributor came from Agriculture, which contributed RM101.3 billion or only 3.2 per cent of total output in 2021. Table 1.0: Performance of Gross Output by Industry in Malaysia, 2020 and 2021 Industry Year Percentage 2020 2021 Change (RM million) (%) (RM million) (%) (%) Agriculture 82,227 2.8 101,316 3.2 23.2 Mining & Quarrying 121,921 4.2 155,964 4.9 27.9 Manufacturing 1,371,054 47.2 1,609,320 50.1 17.4 Construction 173,271 6.0 170,771 5.3 -1.4 Services 1,155,821 39.8 1,174,540 36.6 1.6 Total 2,904,294 3,211,910 10.6 Source: Department of Statistics, Malaysia 1.1.2 Malaysia External Economies Position In the external economic context, the economic performance of developed countries still shows a slower growth trend. Based on the World Bank report, the economic outlook for 2023 is predicted to experience growth at a slower pace, which is 0.5 per cent. This slow growth is mainly due to the effects of the geopolitical conflict between Russia and Ukraine, which has led to increases in energy prices and supply chain disruptions globally. Some of the world's major economies are experiencing a slowdown, including Malaysia's major trading partner, the United States (US). The US economic growth is expected to slow in 2022, which recorded about 1.6 per cent, while the deficit-to-GDP ratio was about 7 per cent. The increase in the general price levels due to external factors forced the Federal Reserve to tighten its monetary policy strategy with an expected increase in the federal funds rate to 4.5 per cent. China's economy, which experienced a slowdown in 2022, is expected to continue into 2023. The slowdown is due to the strict policies preventing coronavirus infection (COVID-19) and environmental factors, namely the drought phenomenon in the middle of 2022, which has disrupted its growth. The measures taken by the Chinese government in dealing with the slowdown in its real estate sector through fiscal and monetary measures only have a moderate impact on the real estate market. According to the World Bank, the expected growth in GDP is relatively slow for the year 2023, which is 4.3 per cent. Meanwhile, inflation is expected at 1.9 per cent for headline inflation and 2.0 for core inflation. The Association of Southeast Asian Nations or ASEAN shows moderate growth, where the expected increase in the region's economy is 4.4 per cent in 2023, compared to 5.6 per cent for 2022. The expected economic growth through GDP for 2023 is Vietnam (6.3%), the Philippines (6.0%), Indonesia (4.8%), Thailand (4.0%),

3 and Singapore (2.3%). In general, this region experienced relatively fast growth compared to the average world growth, which is the fundamental strength of its domestic economy. For example, Vietnam, Philippines, and Thailand, where the reopening of the countries' borders due to restrictions due to COVID-19 has led to the influx of tourists to countries, resulting in private consumption investment activities flourishing. However, Singapore's economic growth is expected to slow down following the global market uncertainty, impacting the country's economic performance. According to the Asia Development Bank (ADB) survey, ASEAN economic growth could be affected as global demand weakens. Regarding inflation, the increase in ASEAN economic growth also impacts the inflation rate. Overall, the inflation rate for ASEAN in 2022 is 5.1 per cent and is expected to grow moderately to 4.5 per cent. Nonetheless, the projection may change due to unexpected external factors such as the Russia-Ukraine conflict, the uncertainty of energy prices, and the supply of raw materials and food. These factors may cause an increase in import prices, leading to imported inflation. Countries like Indonesia recorded inflation of 4.2 per cent at the end of 2022, which exceeded the expectations of the country's central bank. In 2023, inflation is expected to rise to 5.0 per cent. Vietnam is expected to record an average percentage of 4.5 per cent for 2023 following the weakness of its currency. In comparison, Singapore registered expected inflation to an average of 5.5 per cent due to increased consumer utility costs and the tax burden of goods and services. Meanwhile, the Philippines recorded an average inflation expectation of 4.0 per cent for 2023, mainly due to increased food prices. 1.1.3 Sabah and Its Important Macroeconomics Indicators The Land Below the Wind, Sabah, is Malaysia's second-largest state, consisting of 13 states and three federal territories. With an area that spans 72,500 square kilometres and a coastline surrounded by the South China Sea in the West, the Sulu Sea in the Northeast and the Celebes Sea in the East, Sabah sits on the northern-most part of Borneo as the third largest island in the world. Blessed with abundant natural resources and the unimaginable beauty of its nature, Sabah is the melting pot of its people's unique and distinctive cultural identities and ethnicities. Since the formation of Malaysia in 1963, Sabah has made significant strides in economic development. Infrastructure has gotten better. Per capita income has increased many times over. Poverty has also been significantly reduced. Furthermore, Sabah has become one of Malaysia's largest producers of petroleum, rubber, and cocoa and a global palm oil producer. Sabah's economy has always relied heavily on exporting raw and minimally processed commodities. Aside from the usual lumber milling, agriculture, tourism, and Manufacturing are rapidly expanding, and they are quickly becoming the main source of revenue in Sabah. However, petroleum, palm oil, and cacao remained three of the state's most important exports. Because of the land's abundant natural resources, nearly one-seventh of the land in Sabah's surrounding areas is suitable for agricultural development. Sabah is Malaysia's sole producer of oil palm and cacao. Oil palm plantations covered over 700,000 hectares of Sabah's East Coast and contributed approximately 25% of the country's raw oil palm export. Traditionally, Sabah was heavily dependent on lumber-based exports, but with natural forest depletion increasing alarmingly,

4 ecological efforts to save the remaining natural rainforest areas were launched in early 1982. There are hundreds of small and medium industries (SMI) and small and medium enterprises (SMEs) in Sabah, with some becoming household names, such as Gardenia, Ken Chong, Cap Kuda, and many others. The expansion of the Manufacturing industry is more apparent with the growth of the Sepanggar area, such as Kota Kinabalu Industrial Park (KKIP) and Sepanggar Container Port Terminal. Such expansion is consistent with the Sabah government's agenda in pursuing industrialisation with the Sabah Development Corridor plan; Ecotourism is also one of the significant contributors to Sabah's economy. There is always something for everyone: white sandy beaches, lush green forests, exotic wildlife, fun adventure, succulent cuisine, or a rich cultural experience. Due to its rich ecosystem of marine life and wildlife habitats, Sabah is also home to one of the world's top dive sites, Sipadan Island, and a World Heritage Site, Kinabalu National Park. Department of Statistics Malaysia (DOSM) reported that the unemployment rate in Sabah was approximately 8.2 per cent in 2021, compared to 8.0 per cent in 2020. In 2021, approximately 165.5 thousand people were unemployed, compared to approximately 162.9 thousand in 2020. One of the reasons is most likely due to the restrictions imposed during the pandemic, which stopped the business. However, the labour participation rate had increased to 70.4 per cent in 2021, compared to only 70 per cent in 2020. Sabah recorded a 3.8 per cent change in the inflation rate in December 2022, the same as the national level. However, by January 2023, the percentage change had dropped to 3.3 per cent. Compared to other states, Sabah experienced a moderate change in the inflation rate. However, policymakers in the state should be aware of this change and cautious of economic uncertainties. According to Sabah's overall poverty statistics, 86,766 people in the state are hardcore poor, poor, or economically marginalised as of December 1, 2021. The Economic Planning Unit reported that the incidence of absolute poverty by state shows that Sabah recorded the highest percentage of 25.3 per cent in 2020, compared to 19.5 per cent in 2019. The COVID-19 pandemic may have forced us to postpone economic activities due to border restrictions within and outside the country. As a result of this postponement of economic activities, most of the businesses closed down, and a high unemployment rate was recorded. This record contributes to the higher poverty rate in Sabah. Due to the economy's recovery from the pandemic, total exports rose to RM 55,665 million in 2021 from RM 41,337 million in 2020. However, due to economic uncertainties, there is no guarantee that this figure will rise or drop. Nonetheless, the Sabah Maju Jaya Plan, which the state government implemented, has positively influenced our ability to attract more investment, grow exports, and record a trade surplus. 1.1.4 Comparison of Gross Output in Sabah and Other States, 2020 and 2021 Table 1.1 shows the performance of gross output for each state in Malaysia for 2020 and 2021. It can be shown that Sabah recorded an output value of RM140 billion (6th

5 place) in 2021, which contributed 4.4 per cent of the total gross output in 2021 as compared to RM118.2 billion in 2020. Selangor contributed the highest gross output, with the value of gross output amounting to RM844.1 billion, followed by Wilayah Persekutuan (RM544.5 billion) and Johor (RM362.1 billion). These three states encompass 26.3 per cent, 17.0 per cent and 11.3 per cent of the total gross output produced in Malaysia in 2021. Despite that, the growth rate in Sabah achieved a positive and the second-highest growth rate behind Sarawak (32.5%) with 18.4 per cent compared to 2020. This growth rate is beyond Malaysia's 10.6 per cent overall growth rate. Table 1.1: Comparison of Performance of Gross Output in Sabah and Other States, 2020 and 2021 State Year Share Growth 2020 2021 2021 Rate (RM billion) (RM billion) (%) (%) Selangor 756.7 844.1 26.3 11.6 Wilayah Persekutuan** 553.8 544.5 17.0 -1.7 Johor 326.9 362.1 11.3 10.8 Pulau Pinang 274.4 311.7 9.7 13.6 Sarawak 226.7 300.3 9.3 32.5 Sabah 118.2 140.0 4.4 18.4 Negeri Sembilan 108.8 128.7 4.0 18.3 Perak 112 126.5 3.9 12.9 Melaka 112.2 122.4 3.8 9.1 Kedah 100.9 106.2 3.3 5.3 Pahang 89.7 93.7 2.9 4.5 Terengganu 55.2 60.1 1.9 8.9 Kelantan 19.3 19.5 0.6 1.0 Perlis 6.8 7.2 0.2 5.9 Supra*** 42.6 45.0 1.4 5.6 Total 2904.30 3211.90 100.0 10.6 Source: Department of Statistics, Malaysia ** Includes Federal Territory of Kuala Lumpur, Labuan and Putrajaya. *** Comprises production activities beyond the centre of predominant economic interest for any state. The remainder of this proposal is structured as follows: Section 2 provides on World, European and Asian economic scenarios. Section 3 depicts a brief background on Sabah's socioeconomic and political landscape. Section 4 presents Sabah's economic position by assessing major economic indicators. Section 5 provides significant industry contributions to Sabah's GDP. Section 6 reveals the leading indicators of inflation, unemployment, poverty and state revenue. Section 7 addresses structural weaknesses, transforming potential and uncertainties into opportunities in Sabah. Section 8 is the recommendations and conclusion.

Table 1.2(a): Economic Industries in Sabah and Other States iIndustry Selangor Wilayah Persekutuan** Johor Value of Share Value of Share Value of Share Gross Output Gross Output Gross Output (RM million) (%) (RM million) (%) (RM million) (%) Agriculture 5,970 0.7 6 0.0 12,501 3.5 Mining & Quarrying 4,135 0.5 7,761 1.4 2,567 0.7 Manufacturing 432,682 51.3 28,134 5.2 256,664 70.9 Construction 55,705 6.6 31,226 5.7 17,050 4.7 Services 345,581 40.9 477,324 87.7 73,312 20.2 Total 844,073 100.0 544,451 100.0 362,094 100.0 Source: Department of Statistics, Malaysia ** Includes Federal Territory of Kuala Lumpur, Labuan and Putrajaya. Table 1.2(b): Economic Industries in Sabah and Other States iSource: Department of Statistics, Malaysia *** Comprises production activities beyond the centre of predominant economic interest foIndustry Perak Melaka Kedah PahanValue of Share Value of Share Value of Share Value of Gross Output Gross Output Gross Output Gross Output (RM million) (%) (RM million) (%) (RM million) (%) (RM million) Agriculture 7,593 6.0 6,055 4.9 1,830 1.7 7,320 Mining & Quarrying 927 0.7 190 0.2 109 0.1 1,991 Manufacturing 71,816 56.8 95,074 77.7 82,822 78.0 59,264 Construction 6,912 5.5 2,004 1.6 3,533 3.3 6,235 Services 39,221 31.0 19,091 15.6 17,884 16.8 18,939 Total 126,470 100.0 122,413 100.0 106,179 100.0 93,749

6 in 2021 Pulau Pinang Sarawak Sabah Negeri Sembilan Value of Share Value of Share Value of Share Value of Share Gross Output Gross Output Gross Output Gross Output (RM million) (%) (RM million) (%) (RM million) (%) (RM million) (%) 3,114 1.0 30,631 10.2 20,585 14.7 2,926 2.3 277 0.1 57,088 19.0 34,269 24.5 354 0.3 238,112 76.4 152,057 50.6 40,556 29.0 100,500 78.1 11,283 3.6 14,510 4.8 9,341 6.7 5,227 4.1 58,958 18.9 45,977 15.3 35,254 25.2 19,701 15.3 311,744 100.0 300,263 100.0 140,005 100.0 128,708 100.0 in 2021 (Continued) or any state. ng Terengganu Kelantan Perlis Supra*** Share Value of Share Value of Share Value of Share Value of Share Gross Output Gross Output Gross Output Gross Output (%) (RM million) (%) (RM million) (%) (RM million) (%) (RM million) (%) 7.8 1,488 2.5 1,151 5.9 145 2.0 - 0.0 2.1 561 0.9 726 3.7 51 0.7 44,960 100.0 63.2 42,993 71.6 5,115 26.3 3,530 48.8 - 0.0 6.7 4,845 8.1 2,584 13.3 316 4.4 - 0.0 20.2 10,202 17.0 9,909 50.9 3,188 44.1 - 0.0 100.0 60,088 100.0 19,485 100.0 7,230 100.0 44,960 100.0

7 1.2 OBJECTIVES The main objective of this study is to identify the significant contribution of Sabah's main industries towards its economic growth. Therefore, the specific objectives are as follows: i) To estimate the magnitude change of Sabah's main industries on its economic growth (regression). ii) To forecast Sabah's GDP and industrial output from 2023-2025. iii) To determine leading indicators of a slowing down of Sabah's GDP. 1.3 SCOPE The scope and limitations of the study are as follows: i) The sample is limited in estimating the magnitude of change in important macroeconomic variables to Sabah state GDP, mainly GDP at current and constant cost. ii) The study forecasts Sabah's GDP and industrial output from 2023-2025. The industry is based on the Malaysia Standard Industrial Classification (MSIC) 2000. iii) The study also determines the leading macroeconomic indicators of a slowing down to Sabah's GDP. 1.4 METHODOLOGY 1.4.1 Multiple Regression Analysis Concerning the importance of estimating the magnitude change (coefficient) of main industries in Sabah on its GDP, this study uses the time series ordinary least squares (OLS) estimation, which was developed for linear regression models will be applied for this study. Besides, the regression analysis can also predict the significance level and the relationship between explanatory variables (main industries) and a dependent variable (GDP). The empirical model relates the main industries and GDP in Sabah can be shown below: (1.0) Where is the GDP, is the magnitude change (coefficient), are the explanatory variables (main industries) at time (year), is the number of main industries involved in the calculation of GDP (supply or product) and is the error term. To estimate GDP in Sabah, this study will adopt the GDP at constant 2015 prices or GDP at purchasers' value (inflation-corrected), focusing more on the product (supply) approach. This calculation of GDP is a command method for most economic outlooks. Thus, the empirical model from equation (1.0) can be specified as below: (1.1) 01 2 ... t t t pt t y xx x = + + ++ + bb b b e t y b x t p e GDP ARG MIN MANU CONS SVS IMT t t t t t t tt =+ + + + + + + bb b b b b b e 01 2 3 4 5 6

8 Figure 1.0: Flow of Multiple Regression Analysis for the Impact of Main Industries on Economic Growth (GDP) in Sabah The main industries from equation (1.1) consist of five industries, namely agriculture (ARG), mining and Quarrying (MIN), Manufacturing (MANU), Construction (CONS) and Services (SVS). The import duties (IMT) will also be included in the empirical model to measure Sabah's GDP, which has been applied in Malaysia Economic Outlook 2023.

9 An effort to include the main industries as explanatory variables in the empirical model can lead to a multicollinearity problem. The so-called multicollinearity problem may lead to bias and inaccurate results. Therefore, the Variance Inflation Factor (VIF) test will be adopted to confirm that all explanatory variables are free from the multicollinearity problem. The diagnostic tests, such as autocorrelation (serial correlation) and heteroscedasticity, will be applied to ensure the proposed model estimation is the best linear unbiased estimator (BLUE). Figure 1.0 shows the flow of time series regression analysis. 1.4.2 Forecast Model The ES is the abbreviation for the exponential smoothing approach. The ES approach is considered a statistical forecasting technique for the moving-average model. The superiority of the ES model is that it is done based on the decreasing weight as an additional historical time series data at the time . Specifically, the ES shows the iterative estimation as reflecting the decreasing value of weights , which can be written as: (1.2) Figure 1.1 shows the basic steps for the ES approach. As mentioned, this study applies three ES models to forecast Sabah's GDP and industrial output from 2023- 2025. The models are single exponential smoothing (SES), double exponential smoothing (DES) and Holt-Winters with no seasonal exponential smoothing. Figure 1.1: Essential Steps for the Exponential Smoothing Approach t x t e ( ) xt xt xt xt n ee e e ( -- - - 1, 2, 3, ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) 2 1 1 1 2 ... 1 0 t e x t xt xt xt x = + aa a a - - é ù + - - + + - ë û Input Calculate the Parameter Values Calculating of the Forecasting Values Calculating of the Error Values Critical Comparison (Actual Vs. Predicted) Error Measures Can Model be Improved? Powerful Model No Yes

10 1.4.2.1 Forecast Evaluation Model Ensuring the robustness of the forecast model is important. Therefore, this study will employ three statistical evaluation criteria for forecasting performance. The three criteria are coefficient of determination , root mean square error , and mean absolute percentage error . (1.3) (1.4) (1.5) Where is denoted as observation, and are the forecasted and original series of external debt, respectively. The and represent the forecast values and original series of Sabah's GDP and industrial output from 2023-2025. ( ) 2 R (RMSE) (MAPE) ( )( ) ( ) ( ) 2 1 2 2 2 0 0 n f t f t i n n f t f t i i d d dd R d d dd = = = é ù - - ë û = é ùé ù - - ê úê ú ë ûë û å å å ( ) 2 0 1 n f t i RMSE d d n = é ù = - ê ú ë û å ( ) 0 1 100 n f t i t d d MAPE n = d - = å ´ n f d t d d f dt

1.5 TIMELINE RESEARCH PROJECT NAME PROJECT DURATION PROJECT START DATE PROJECT END DATE SNAPSHOT OF SABAH ECONOMY OUTLOOK, 2023-2035 156 20/02/2023 26/07/2023 1 Proposal Preparation 6 20/02/2023 26/02/2023 2 Mock Defense Research Proposal to IDS 6 27/02/2023 05/03/2023 3 Defense Research Proposal 1 06/03/2023 07/03/2023 4 30% Amend Defense Research Proposal 7 08/03/2023 15/03/2023 5 Final Report Writing - Chapter Two 7 16/03/2023 23/03/2023 6 Final Report Writing - Chapter Three 7 24/03/2023 31/03/2023 7 Final Report Writing - Chapter Four 7 01/04/2023 08/04/2023 8 Final Report Writing - Chapter Five 30 09/04/2023 09/05/2023 9 Final Report Writing - Chapter Six 10 10/05/2023 20/05/2023 10 Final Report Writing - Chapter Seven 20 21/05/2023 10/06/2023 11 Final Report Writing - Chapter Eight 5 11/06/2023 16/06/2023 12 Mock Final Presentation to IDS, Economic Cluster 6 17/06/2023 23/06/2023 13 Amend Final Presentation 7 24/06/2023 01/07/2023 14 35% Final Report Presentation 1 02/07/2023 03/07/2023 15 Stakeholder Engagement - Mini Colloqium 1 04/07/2023 05/07/2023 16 English Editing 10 06/07/2023 16/07/2023 17 Printing Final Report 7 17/07/2023 24/07/2023 18 35% Submission of Final Report 1 25/07/2023 26/07/2023 PROJECT AMOUNT RM48,702.94 No Start Date End Date Task Duration (Days) Task Description Payment Schedule

11 X X X X X X X X X X X X X X X X X X X X X X X 15/05/2023 22/05/2023 29/05/2023 05/06/2023 12/06/2023 19/06/2023 26/06/2023 03/07/2023 10/07/2023 17/07/2023 24/07/2023 31/07/2023 07/08/2023 14/08/2023 21/08/2023 6 MONTHS 20/02/2023 27/02/2023 06/03/2023 13/03/2023 20/03/2023 27/03/2023 03/04/2023 10/04/2023 17/04/2023 24/04/2023 01/05/2023 08/05/2023

12 CHAPTER 2 EXTERNAL ECONOMIC SCENARIO 2.1 GLOBAL ECONOMIC SCENARIO The global economic scenario shows a slight recovery, especially for 2023. The lingering effects of the pandemic, the Russian Federation's invasion of Ukraine, and the dramatic tightening of monetary policy in curbing excessive inflation have all contributed to the fragile status of the world economy. Nevertheless, China's economy opened faster than expected, and United States (U.S.) consumer demand remained resilient; growth in several major economies was more remarkable than anticipated at the beginning of the year (World Bank, 2023). Most countries still need help with external and internal economic challenges. The increase in the cost of living due to high inflation and financial and political instability in some countries leads to the overall expectation of global economic growth for 2023 becoming moderate. Global growth momentum has taken place after the pandemic hit the world. It can be seen in Figure 2.0 that the year 2020 recorded negative growth for the world economy (measured through real GDP) to -2.8 per cent compared to the previous year, which was 2.8 per cent in 2019. Following the proactive measures taken by most countries in dealing with the effects of the epidemic that hit the world and the positive market response to domestic demand, economic growth jumped to 6.3 per cent in 2021. Rapid growth was recorded by emerging market countries and developing economies (EMDE) to 6.9 per cent, exceeding global growth in the previous year. A significant decline in the global economy occurred the following year, which was 2.9 per cent smaller. The growth is projected to further decrease in 2023 and 2024. This reduction is a series of effects of the ongoing Russia-Ukraine geopolitical instability. As a result, disruptions in the supply of raw materials, trade chains, and foreign policy uncertainties affect global economic performance. In addition, the monetary policy that contracted to control the increase in inflation has moderated investment activities due to investors' lack of confidence and contributed to this small economic growth. Figure 2.0: Selected World's Macroeconomic Indicators, 2017 - 2024 The GDP growth pattern is in line with the world trade trend. Based on Figure 2.0, The trend of declining trade can be seen since 2017 and continues to decline,

13 recording negative growth in 2020, which is -7.8 per cent. The year 2021 saw the percentage of global trade higher than before the pandemic and was recorded at 10.6 per cent. Nonetheless, trade in the manufacturing sector is experiencing a slowdown due to the limited supply of resources following the pandemic's prolonged impact with restrictions on workers' physical contact and supply chain disruptions. The years after the pandemic, however, saw a significant decline in the growth of the trade sector, but it still maintained growth at a higher level than before the pandemic hit the world. The pandemic generally does not affect global inflation much. However, postpandemic has seen a rapid increase in the global inflation rate, which is 8.7 per cent in 2022, and then disinflation, 7.0 per cent the following year. A sharp increase in inflation, among others, results from market correction; increased demand for commodity goods has depressed the price. The increase in energy and food prices also increases the global inflation rate, where most countries, especially EMDE, allocate a large percentage to these two items. Central banks may be pushed to tighten monetary policy to curb rising price pressures more quickly than anticipated. As a result, it gives uncertainty to investors in deciding to make investments since most central banks decide to tighten their monetary policy to curb the price upsurge. The World Bank expects inflation to be moderate, but the basic factors underlying the increase in inflation will be more persistent. For example, the increase in the U.S. interest rates to counter the uptrend of inflation and geopolitical tensions will contribute to the uncertainty of inflation rates in most countries. Another macroeconomic indicator to be discussed is unemployment. The global unemployment rate is in the range of 5 per cent. 2020 and 2021 recorded the highest global unemployment rates of 6.9 and 6.1 per cent, respectively. The percentage continues to fall to 5.8 per cent due to the rising labour participation rate. Most countries have taken important steps to address the increase in the unemployment rate due to the health crisis. Policies such as wage subsidies and job retention have reflected the negative effects of the health crisis. In addition, the active role of policymakers in the job market, such as job matching, reskilling, and on-the-job assistance. The World Bank projects that the unemployment rate will remain stagnant until 2024 and slightly higher than before the pandemic. 2.2 REGIONAL ECONOMIC PERSPECTIVE In terms of economic performance at a regional level, economic growth before the pandemic showed a relatively consistent performance even though, in terms of growth spurts in most regions, it was constant. South Asia (SA), Europe and Central Asia (ECA) showed positive growth until 2016, then the percentage of GDP decreased towards 2019. In comparison, the East Asia and Pacific (EAP) region is at a growth rate of 5 to 6 per cent. Meanwhile, the Middle East and North Africa (MENA) region experienced fluctuating economic performance, with relatively high growth recorded in 2016 (4.4%) compared to the past three years. The high growth is largely attributed to economic improvement in oil-exporting countries. Latin America and the Caribbean (LAC) experienced slower economic growth until 2016 due to slower growth due to lack of external demand in major LAC countries, especially Brazil and Venezuela. Despite the signs of recovery after 2016, the economic performance of some countries still needs to be entirely out of the recession. The pandemic's outbreak has impacted economic growth for all regions where GDP growth declined to a negative percentage.

14 The lowest growth is the LAC region (-6.5%), followed by ECA (-5.6%), SA (-4.7%), MENA (-3.8%), SSA (-2.0), and EAP (-0.1%). The economy is rebounding relatively quickly in line with the measures to control the spread of the Covid-19 pandemic. Moreover, reopening domestic economic sectors, increased tourism flows, and growing external demand enhanced most economies' economic performance. Yet, the tension of the Russia-Ukraine geopolitical conflict has given a great challenge to the recovery of the global economy. Furthermore, discovering a new variant of COVID-19 (omicron) has further increased the precautions in most countries to control the new variant. Overall, the positive reflection of the economy in 2021 is short-lasting, as it is expected to experience a slight decrease in percentage in 2022 and is expected to contract in 2023. Even so, most regions recorded a slightly higher percentage of GDP than before the pandemic. Figure 2.1: Selected Macroeconomic Indicators Based on Regional, 2012 - 2022 The effects of the Russia-Ukraine conflict have increased oil and food costs, which affects food stocks in SSA because 20 per cent of food sources are imported (GEP, June 2022). In SA, the indirect effects of this conflict are felt by the slowdown in external demand, the increase in commodity prices, internal political uncertainty, and exchange rate management, which are expected to impact economic survival in the SA region. In MENA, rising oil prices benefit oil-exporting economies. However, rising raw material and food costs have harmed economic growth in MENA countries. In addition, the internal political crisis, such as in Yemen, also affected the economic growth of oil exporters in the region. In addition, the worst drought in Morocco affected agricultural output, while fiscal management and administrative policies in Tunisia could dampen the country's economic growth. Meanwhile, the economic performance of the EAP region is encouraging following the economic correction in China with the wide opening of the service sector. Countries other than China also show positive momentum, with an expected growth in GDP to record 4.8 per cent (GEP, June 2022). However, the spillover effect from the Russia-Ukraine crisis can be seen through the increased price of imported commodities in most EAP countries. Furthermore, economic contraction is also expected to occur in most LAC countries in 2023. Several factors contribute to the economic contraction, including decreased investment due to increased interest rates, a slowdown in demand for agricultural exports, and the withdrawal of stimulus-related fiscal policies. For the ECA region, the direct impact can be seen through the negative

15 growth of Ukraine with the closure of some war-related access to its main export routes in the Black Sea. In addition, the Russian oil export embargo is expected to slow down the Russian economy for longer. The economic growth rate is expected to be slower for 2022, which is 1.2 per cent. The regional inflation trend shows a general and stable decline (Figure 2.1). Comparatively, the inflation rate for SA and SSA is higher from 2012 to 2021. However, post-pandemic saw a rather drastic increase in the inflation rate for other regions, especially the ECA region, where the increase is very significant. This situation necessarily encourages the implementation of central banks' instruments in the face of price increases. In 2021, the ECA inflation rate was recorded at 3.2 per cent and was expected to increase to 10.8 per cent in 2022. The country of Türkiye is the country with the highest inflation rate in the region. The demand that exceeds the supply in the Russian domestic market also increases the country's inflation percentage. Political stability also overshadowed the increase in inflation in several Central Asian countries. Meanwhile, the inflation rate in the SSA region is estimated to be high in 2022, exceeding the rate before the pandemic. The increase in private consumption and the increase in the cost of imports in most countries in the region contribute to the increase in the rate. LAC, EAP, and MENA are also estimated to have higher inflation rates than before the pandemic. Meanwhile, SA's inflation rate is estimated to increase moderately in 2022 following the central banks' several monetary policy tightening measures. The International Monetary Fund's (IMF) assistance to Sri Lanka in supporting its policies and economic reforms has reduced inflation in the country. 2.3 MALAYSIAN MAJOR TRADING PARTNERS In the external economic context, the economic performance of developed countries still shows a slower growth trend. Based on the World Bank report, the economic outlook for 2023 is predicted to experience growth at a slower pace, which is 0.5 per cent. The slower growth is mainly due to the effects of the geopolitical conflict between Russia and Ukraine, which has led to increases in energy prices and supply chain disruptions globally. Some of the world's major economies are experiencing a slowdown, including the US. The US economic growth is expected to slow in 2022, which recorded about 1.6 per cent, while the deficit-to-GDP ratio was about 7 per cent. The increase in the general price levels due to external factors forced the Federal Reserve to tighten its monetary policy strategy with an expected increase in the federal funds rate to 4.5 per cent. The expected growth of the U.S. economy in 2023 is 1 per cent, which is lower than in 2022 at 1.6 per cent. Trade volume for exports and imports is expected to continue to decrease. Imports of goods and services experienced negative growth for 2023, i.e., -1.2 per cent, while exports experienced relatively slow growth, i.e., 1.8 per cent. The percentage of this change is small compared to the year 2022, which recorded growth of 8.9 per cent and 5.7 per cent. China's economy, which experienced a slowdown in 2022, is expected to continue into 2023. The slowdown is due to the strict policies preventing coronavirus infection (COVID-19) and environmental factors, namely the drought phenomenon in the middle of 2022, which has disrupted its growth. The measures taken by the Chinese government in dealing with the slowdown in its real estate sector through

16 fiscal and monetary measures only have a moderate impact on the real estate market. According to the World Bank, the expected growth in GDP is relatively slow for the year 2023, which is 4.4 per cent. Meanwhile, inflation is expected at 1.9 per cent for headline inflation and 2.0 for core inflation. Figure 2.2: Selected Macroeconomic Indicator for Year 2022 and Estimated 2023 Japan's economic growth is slower for 2022, which is to grow by 1.7 per cent, and a more negligible growth is expected, which is 1.6 per cent for 2023. External factors, such as tightening monetary policy in most developed countries, also contribute to this moderate economic increase. Relatively slow external demand is expected to reduce the percentage of exports, while the exchange rate uncertainty also affects the volume of imports of goods and services. For 2022, the percentage change in exports and imports of goods and services is 4.4 per cent and 4.9 per cent, respectively. In comparison, the percentage of exports and imports is expected to shrink to 3.6 per cent and 2.0 per cent for the year 2023. 2.4 MALAYSIA'S MAJOR EUROPEAN TRADING PARTNERS Overall, the economic growth trend in Malaysia's major trading countries in Europe also experienced the pressure of external economic instability, mainly due to the spread of the COVID-19 pandemic. In Figure 2.3, all major trading partners share negative growth except Türkiye. However, strong economic growth is recorded in 2021 in line with the various preventive measures these countries are taking to curb the spread of the pandemic. Nonetheless, it shows the growth decreased in 2022 concerning supply disruption in the final quarter of 2021, tightening monetary policy to curb the pressure on the inflation rate. The cost of fossil fuel has further accelerated the inflationary pressure in this region. As seen in the Figure, the inflation rate in 2022 with a sharp increase for Türkiye was recorded to 73.13 per cent, as opposed to 19.60 per cent. It follows the Netherlands (11.98%), Belgium (9.47%), the United Kingdom (9.12%), Italy (8.74%), Germany (8.46%), and France (5.81%). Year 2022 Year 2023, Estimated

17 Figure 2.3: GDP Growth and Inflation Rate Among the Selected European Countries The reopening of the economy after the pandemic has reinvigorated the demand for labour. However, this development has a mixed effect on the percentage of unemployment among Malaysia's trading partners in Europe. Türkiye and France have shown a downward trend since 2019, while the impact of the pandemic on Belgium and Italy on the unemployment rate can be seen in 2021 before a slight decrease in 2022, which was recorded at about 5.4 and 8.8 per cent, respectively. In contrast, the unemployment rate in Germany and the Netherlands experienced an increase. In 2020, it follows a rapid labour force absorption where the number of job vacancies exceeds the number of unemployed for the post-COVID period.

18 Figure 2.4: Unemployment Rate and Investment, 2018 - 2022 Following extensive vaccination activities in curbing the spread of COVID-19, most of the EU countries and the UK could open their economies widely. Rebound investments in Türkiye, France, and Italy were recorded. Meanwhile, the UK, Belgium, and the Netherlands experienced relatively stable percentages before or after the pandemic. A supply bottleneck in the Netherlands has affected investment in the country. 2.5 BRICS ECONOMIES BRICS is a group of major developing countries comprising Brazil, Russia, India, China and South Africa. BRICS contributes about 32 per cent of the global GDP, and its expected growth will increase to 50 per cent in 2030. Concerning the individual countries' economic performance, it can be found that the GDP growth generally has a similar trend between 2018 to 2022. As depicted in Figure 2.5, Russia and India experienced negative growth from 2018 to 2020 before recording positive performance for 2021 and 2022. Conversely, there are clear ups and downs in China's economy. Figure 1.6 shows that China's growth performance has experienced a slower pace in 2019 and 2020 to record 2.9 and 3.6 per cent, respectively. However, there was a significant hike in China's GDP growth (19.4%) in 2021 before a sluggish growth was recorded to 3.2 per cent in 2022. The growth percentage shows that China is cautious in reopening its economy while COVID-19 lockdowns impacted services and private consumption sectors and only recovered gradually. Meanwhile, South Africa's economic growth trend recorded a downward trend from 2018 to 2020 before rebounding to achieve 24.1 per cent in 2021, which mostly contributed to the strong demand in the early quarters of 2021. Nonetheless, various external factors impacted the growth performance of the Sub-

19 Saharan region, including South Africa, such as energy fluctuation and global financial conditions. These scenarios have a prolonged impact towards a sharp decline in the economic performance in 2022, which is -1.8. Figure 2.5: Total GDP, GDP Growth Rate, and Inflation Rate Among BRICS Member Countries, 2018 - 2022 The global inflation situation also has a side effect on the BRICS countries. In general, there is significant inflationary pressure, especially after 2020. For example, Brazil and Russia recorded inflation growth at 8.3 and 6.3 per cent in 2021 and continue to increase to 9.4 and 13.8 per cent in 2022, considering several circumstances, such as the increase in fuel costs and the increase in commodity prices, which have increased the percentage of inflation in Brazil. However, apart from those two countries, the inflation situation of the BRICS countries is stable. Moreover, China's inflation rate has been the lowest compared to the other BRICS countries. Based on Figure 2.5, the inflation percentage is 1 to 3.6 per cent between 2018 and 2022. Low inflationary pressure means there was a lack of spending among household and private investments because of economic uncertainty. 2.6 THE ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN) The Association of Southeast Asian Nations, or ASEAN, has shown moderate growth after an economic slump in 2020 due to a health crisis. As shown in Figure 2.6, most ASEAN countries experienced negative growth, except for Brunei, Myanmar, and

20 Vietnam. Nevertheless, in 2021, Myanmar and Brunei experienced negative growth of 18 and 2 per cent, respectively. An upward trend in growth takes place for the majority of ASEAN countries. The region's economy is projected to grow about 4.4 per cent in 2023, compared to 5.6 per cent in 2022. Concerning the individual countries, the expected GDP growth for Vietnam is estimated to increase by 6.2 per cent, the Philippines (5.0%), Indonesia (5.0%), Thailand (4.0%), Singapore (2.3%), Lao P.D.R. (3.1%), Myanmar (3.3%), Brunei (3.3%), and Cambodia (6.2%). In general, this region experienced relatively fast growth compared to the average world growth is the fundamental strength of its domestic economy, such as Vietnam, Philippines, and Thailand, where the reopening of the countries' borders due to restrictions due to COVID-19 has led to the influx of tourists to the countries, an increase in private consumption as well as private investment activities that have begun to flourish. However, Singapore's economic growth is expected to slow down following the global market uncertainty, impacting the country's economic performance. According to the Asia Development Bank (ADB) survey, ASEAN economic growth could be affected as global demand weakens. Figure 2.6: GDP Growth Rate and Inflation among ASEAN Countries, 2020 - 2023 Regarding inflation, the increase in ASEAN economic growth also impacts the inflation rate. Overall, the inflation rate for ASEAN in 2022 is 5.1 per cent and is expected to grow moderately to 4.5 per cent. Nonetheless, the projection may change due to unexpected external factors such as the Russia-Ukraine conflict, the uncertainty of energy prices, and the supply of raw materials and food. These factors may cause an increase in import prices, leading to imported inflation. Indonesia recorded an inflation rate surge of as high as 4.6 per cent at the end of 2022 compared to the previous year (2021, 1.5%), which exceeded the expectations of the Indonesian central bank. In 2023, inflation is expected to rise to 5.5 per cent. Vietnam is expected to record an average percentage of 4.5 per cent for 2023 following the weakness of its national currency. In comparison, Singapore registered expected inflation to an average of 5.5 per cent due to increased consumer utility costs and the tax burden of goods and services. In comparison, the Philippines recorded an average inflation expectation of 4.0 per cent for 2023, mainly due to increased food prices.

21 2.7 SPECIAL ECONOMIC ZONE: BIMP-EAGA The special economic zone in the East ASEAN consists of Brunei Darussalam, Indonesia, Malaysia, and the Philippines, or BIMP-EAGA, and was established in 1994. The establishment of BIMP-EAGA intends to minimise the development gap among ASEAN member countries and within them by accelerating the socio-economic development of underdeveloped, marginalised, and geographically inaccessible areas in these member countries. Resource complementarities exist despite the BIMP-EAGA economies' very similar economic systems, which provide potential resource aggregation. According to the Asian Development Bank, each country in the EAGA region has unique resources. Brunei Darussalam has developed a sizable production capacity for processing oil and gas. The East Malaysia region supports the oil and gas industry in EAGA. Sarawak and Sabah complement Brunei Darussalam's energy resources. Figure 2.7: GDP Growth Rates at Current PPP$ in EAGA Moreover, Sabah dan Sarawak is also abundant in palm oil and timber. Also, there have been initiatives to support high-value-added businesses like biotechnology, halal goods, renewable energy, R&D in Sarawak, and the automotive and aerospace industries in Sabah. Labuan complements Brunei Darussalam in the banking sector. Contrarily, I-EAGA has abundant agricultural, fishery, forestry, and mineral resources (including oil and gas, aluminium, nickel, gold, and copper). P-EAGA is primarily focused on and is a leading exporter of fisheries and several high-value plantation products, such as coffee, coconuts, and fruits. Caraga has many mineral resources, whereas Davao has been established as an ICT centre (Asian Development Bank, 2022). The growth corridor is not exempt from external economic uncertainty, especially in the pandemic era, where the amount of intra-BIMP-EAGA trade also experienced a fall. According to a statistical brief provided by BIMP-EAGA, the GDP of EAGA at the current price was US$359.7 billion. Under the overall BIMP-EAGA, the

22 GDP at the current price was PPP$1,970.4 billion. In EAGA, Indonesia is the leading force for the economy as the country accounted for GDP at the current PPP$628.2 billion in 2021, followed by the Philippines (PPP$180.8b), Malaysia (PPP$171.4b), and Brunei Darussalam (PPP$29.4b). Regarding GDP growth, EAGA member countries experienced resilient growth in 2018 (Figure 2.7), whereas The Philippines, Indonesia, and Malaysia registered 7 to 9 per cent growth in 2018. Nonetheless, the declining trend started taking place in 2019 and 2020. Figure 2.8: Foreign Visitors Arrival to EAGA (Million Visitors) and Annual Change, 2018 – 2021 Uncertain external economic conditions also affect the tourism sector. In general, the arrival of international visitors for all four EAGA member countries shows a downward trend, especially in 2019 when the world was shocked by the discovery of the new coronavirus, COVID-19. Most countries have taken the initial step by closing their borders from accepting the entry of foreign visitors from countries that have been severely affected by the virus. Later, border closures became widespread, causing the arrival of foreign visitors to record a very significant drop. In Brunei, the arrival of foreign visitors to the country was only 62,325 in 2020, an 81 per cent drop from the previous year. While Indonesia recorded a decrease of 93 per cent (29,215 visitors), Malaysia experienced a decline of 84 per cent (570,984), and the Philippines plunged 82 per cent (214,591). However, following the discovery of the vaccine and the widespread vaccination activities carried out by the member countries, the prospect of the arrival of foreign visitors in the following years is more positive. In addition, the arrival of domestic visitors to EAGA also experienced a drop following the measures to prevent the spread of COVID-19. The positive increasing trend from 2018 to 2019 has shifted to a decreasing trend from 2019 to 2021. Only

23 Indonesia recorded an increase in the arrival of domestic visitors in 2021, which was 34 million, compared to the previous year, which was 19.8 million. However, Malaysia and the Philippines, which are still opening their economies slowly for two years, experienced a continuous downward trend. In 2021, Malaysia recorded 10.4 million domestic visitor arrivals, 9.4 million less than the previous year. While the Philippines, which recorded domestic arrivals of 3.1 million, experienced a decrease to 2.8 million visitors for 2021. It cannot be denied that the tourism sector has experienced a rather severe drop in terms of tourist arrivals to EAGA. It is proven by the Figure, which shows the trend of visitor arrivals falling by 41 per cent, or about 53 million visitors in 2020, compared to 90 million visitors in the previous year. It can also be seen that the arrival trend is ahead of the pandemic. The number of visitors continues to decrease, but slower in 2021 -10.8 per cent or about 47 million visitors. By comparison, domestic arrival is an important income source for EAGA. Between 2017 and 2021, the number of domestic visitor arrivals to EAGA is higher than international visitors, which is more than 90 per cent of all visitors. Figure 2.9: Domestic Visitors' Arrival to EAGA (Million Visitors), 2018 – 2021, and Domestic and International Visitors to EAGA (Million Visitors), 2017 - 2021 Following the discovery of vaccines and vaccination activities that member countries have widely carried out, tourism activities are expected to contribute to EAGA's economic results by opening the borders of member countries. The activities give the prospect of the arrival of foreign and domestic visitors in the following years more positive. Nonetheless, the risks remain in place among the EAGA due to the potential threat of a relatively new COVID-19 variant. 2.8 CONCLUSION This chapter provides economic scenarios, focusing on selected macroeconomic indicators from 2018 to 2022. It starts with the global economic performance and discussion about the economic scenario based on regional, ASEAN perspective, the economic performance of Malaysia's major trading partners, the BRICS economy, and the regional growth area involving the countries of Brunei Darussalam, Indonesia, Malaysia and the Philippines, namely BIMP-EAGA. Post-pandemic economic growth, i.e., after 2020, is quite challenging. It is further compounded by Russia's invasion of Domestic Visitors Arrival to EAGA Domestic and International Visitors

24 Ukraine, which has not yet ended, also affecting the global economic scenario and political stability in some countries. Based on the expectations made by the World Bank, global economic growth will slow for the years 2023 to 2025. EMDE countries partly contributed to the main driver of the world economy in those years. In contrast, developed countries' economies (especially the U.S., Japan and Euro areas) are slow. From an economic regional perspective, SA (primarily India and Bangladesh) has the potential to achieve a higher growth rate than other regions. This growth target depends on the current economic scenario. The rapid increase in inflation will give a blow to central banks in managing their policy monetary instruments more carefully because it will affect the performance of investment, international trade and the survival of financial institutions.

25 CHAPTER 3 SABAH’S SOCIOECONOMIC AND POLITICAL LANDSCAPE 3.1 BACKGROUND OF SABAH’S SOCIOECONOMIC The land below the wind, or SABAH, is the second-largest state in Malaysia, consisting of thirteen states and three federal territories. Sabah is situated on the northernmost section of Borneo, the world's third largest island, with an area of 73,621 square kilometers and a coastline bordered by the South China Sea to the west, the Sulu Sea to the northeast, and the Celebes Sea to the east. Sabah is a melting cauldron of distinctive and diverse cultural identities and ethnicities of its people, endowed with an abundance of natural resources and breathtaking natural beauty. Sabah shares a southern frontier with East Kalimantan of Indonesia and Sarawak. The state's landscape includes mountainous regions, coastlines, and tropical rainforests. The Crocker Range, one of the most prominent ranges in the heartland of Sabah, contains several mountains ranging in height from approximately 1,000 meters to 4,000 meters. Mount Kinabalu, at 4,095 meters (13,435 feet) above sea level, is the highest point of this range and one of the highest mountains in Southeast Asia. The Crocker Mountain range runs north to south, separating the mountainous region on the west from the plains on the east. The Kinabatangan River has a length of 560 kilometers and travels from the Crocker Mountain Range to the Sulu Sea to the east of Sandakan, making it the longest river in Sabah. As with the state's dense tropical forests, the Kinabatangan River is home to an abundance of fascinating wildlife and habitats distinct to this region. 3.2 SABAH POPULATION AND ETHNIC LANDSCAPE Sabah comprises 33 indigenous communities with over 50 languages and 80 ethnic dialects. The Kadazan-Dusun are the most populous ethnic community in Sabah, comprising nearly 30 per cent of the population. The Bajaus, also known as the "Cowboys of the East", and the Muruts, the hill people and former head hunters are the second and third largest ethnic groups in Sabah, respectively. Other indigenous clans include the Bisaya, the Brunei Malay, the Bugis, the Kedayan, the Lotud, the Lundayeh, the Rungus, the Suluk, the Minokok, the Bonggi, and the Ida'an. In addition, the Chinese constitute the largest non-indigenous population group. In this section, this report will show the population of Sabah, a comparison of population growth between Sabah and other states in Malaysia, the population of ethnic groups of citizens in Sabah, the population of each administrative district in Sabah with the yearly population growth of each district in Sabah. The Population of Sabah remained at 3.4 million in 2021 and 2020, with a negative growth rate of 0.2%, according to the Socioeconomic Report for Sabah 2021. Locals make up about 77.2 per cent of the total population. In comparison, the gender ratio of the Sabah population maintained from 2020 to 2021, which is 109 men over 100 women. In 2022, according to the Socioeconomic Report for Sabah.

26 Table 3.0 Number of Population and Yearly Population Growth of Sabah, 2020- 2021 Population 2020 2021 2022 Number of Population (‘000) 3418.8 3412.6 3414.9 Source: Socioeconomic Report for Sabah, 2021 Figure 3.0: Number of Population in Sabah, 2020 - 2022 Table 3.1 Comparison of Population Growth in Sabah with Other States, 2021- 2022 State Population Growth 2021 2022 Sabah -0.2 0.1 Johor 0.3 0.2 Kedah 0.9 0.5 Kelantan 1.1 1.0 Melaka 0.6 0.4 Negeri Sembilan 0.3 0.3 Pahang 0.6 0.8 Perak 0.8 -0.1 Perlis 0.9 0.7 Pulau Pinang -0.0 0.1 Sarawak 0.5 0.3 Selangor 0.3 0.5 Terengganu 1.8 1.4 Wilayah Persekutuan (W.P.) Kuala Lumpur -0.9 -0.1 Wilayah Persekutuan Labuan 0.9 0.9 Wilayah Persekutuan Putrajaya 5.4 1.5 Source : Anggaran Penduduk Semasa (Current Population Estimates) Malaysia, 2023 The table above shows the Population of Sabah from 2020 to 2022. The population shows a decreasing trend from 2020 to 2021, maybe because of the 3409 3410 3411 3412 3413 3414 3415 3416 3417 3418 3419 3420 2020 2021 2022

27 pandemic, but it increased again in 2022 after the pandemic. The population is expected to increase further in 2023, according to the Department of Statistics Malaysia (DOSM). The table above is transformed into a graphical figure below. Table 3.1 compares population growth between Sabah and the states in Malaysia. Based on the table, the population growth for Sabah was -0.2 per cent in 2021 and increased to 0.1 per cent in 2022. Compared to Wilayah Persekutuan Labuan, which is closer to Sabah, the population growth shows a positive value of 0.9 for 2021 and 2022, higher than Sabah. The density and size of the state in Sabah and Wilayah Persekutuan Labuan explained the phenomena. Compared to Sarawak, the population growth also shows a positive value for 2021 and 2022. Sabah and Pulau Pinang shared the same population growth value in 2022, although the size of the state is different. In 2021, Wilayah Persekutuan (W.P.) Putrajaya showed the highest population growth (5.4 per cent), above the national level (0.4 per cent), but in 2022, W.P. Putrajaya recorded a lower population growth. The lowest population growth was recorded for W.P. Kuala Lumpur in 2021 and 2022. Sabah shows a slower rate of population growth than other states. However, this growth is anticipated to pick up in 2023. Meanwhile, Figure 3.1 depicts the further comparison of graphical figures for Sabah and other states. Figure 3.1: Comparison of Population Growth by States in Malaysia In 2021, the percentage of Bumiputera increased to 88.9 per cent. The percentage of Chinese also decreased to 9.3 per cent of other ethnic groups, and Indians remained at 1.6 per cent and 0.2 per cent, respectively. This information will be shown in Table 3.2 and Figure 3.2 below. -2 -1 0 1 2 3 4 5 6 Sabah Johor Kedah Kelantan Melaka Negeri Sembilan Pahang Perak Perlis Pulau Pinang Sarawak Selangor Terengganu Wilayah Persekutuan (W.P.) Kuala Lumpur Wilayah Persekutuan Labuan Wilayah Persekutuan Putrajaya Population Growth 2022 Population Growth 2021

28 Table 3.2 Population of Sabah by Ethnic Group Ethnic group 2021 2022 Bumiputera 88.8 88.9 Chinese 9.4 9.3 Indian 0.2 0.2 Other ethnics 1.6 1.6 Figure 3.2: Population by Ethnic Group in Sabah, 2021 - 2022 Table 3.3 Population by Gender and Administrative District, 2021 Administrative District Number of Population (‘000) Male Female Total Kota Kinabalu 254.6 241.8 496.4 Sandakan 222.3 209.8 432.1 Tawau 195.0 178.9 374.0 Lahad Datu 124.0 109.2 233.2 Semporna 82.2 78.2 160.4 Penampang 87.9 77.6 165.5 Keningau 78.1 73.1 151.2 Papar 80.6 70.7 151.3 Kinabatangan 75.3 60.1 135.4 Tuaran 69.4 67.1 136.5 Kota Belud 54.6 53.9 108.5 Kudat 43.7 42.3 85.9 Ranau 44.7 41.7 86.4 Beluran 43.6 36.9 80.5 Beaufort 39.6 36.8 76.5 Kota Marudu 36.1 34.2 70.3 Kunak 36.1 30.9 67.0 Putatan 36.3 32.9 69.2 Tenom 26.5 25.1 51.6 0 10 20 30 40 50 60 70 80 90 100 Bumiputera Chinese Indian Other ethnics 2021 2022

29 Kalabakan 27.7 22.6 50.2 Tongod 22.8 19.4 42.2 Sipitang 19.5 18.0 37.5 Pitas 19.2 18.0 37.1 Tambunan 16.2 15.6 31.7 Telupid 16.2 13.4 29.6 Nabawan 15.2 13.5 28.7 Kuala Penyu 12.0 11.7 23.6 Source: Sabah Socioeconomic Report 2022 Table 3.3 depicts the total population by gender and administrative district in Sabah in 2021. The table shows that Kota Kinabalu has the highest population, and Kuala Penyu has the lowest population in Sabah. Kota Kinabalu, the state capital of Sabah, and all of the administrative centers or central authorities in Kota Kinabalu explained such situations. Table 3.4 Population Growth of Administrative Districts in Sabah, 2022 District No.of the population (thousand) Yearly population growth (%) District No.of the population (thousand) Yearly population growth (%) Kota Kinabalu 489.8 -1.3 Beaufort 76.8 0.5 Sandakan 427.4 -1.1 Kota Marudu 70.9 0.8 Tawau 360.4 -3.7 Putatan 69.2 0.0 Lahad Datu 223.2 -4.4 Kunak 66.5 -0.7 Penampang 164.2 -0.8 Kalabakan 53.0 5.4 Semporna 157.2 -2.0 Tenom 51.7 0.2 Papar 151.4 0.7 Tongod 41.3 -2.2 Keningau 151.4 0.1 Pitas 37.4 0.8 Kinabatangan 144.5 6.5 Sipitang 37.3 -0.6 Tuaran 136.3 -0.1 Tambunan 32.0 0.8 Kota Belud 108.6 0.1 Telupid 30.1 1.5 Ranau 86.6 0.2 Nabawan 29.0 1.1 Kudat 85.6 -0.4 Kuala Penyu 23.5 -0.6 Beluran 84.7 5.1 Source: Sabah Socioeconomic Report 2022

30 Figure 3.3: Population Growth in Sabah by District, 2022 Figure 3.4: Number of Population by Districts, 2022 From the table and figures above, in 2022, it is shown that Kota Kinabalu is still the highest and Kuala Penyu is still the lowest Population in Sabah. In terms of growth, Kinabatangan shows the highest percentage of 6.5, followed by Kalabakan (5.4) and Beluran (5.1). Twelve districts in Sabah show a negative in population growth. There are Kota Kinabalu, Sandakan, Tawau, Lahad Datu, Penampang, Semporna, Tuaran, Kunak, Tongod, Sipitang, Kudat and Kuala Penyu. Other remaining administrative districts possess positive growth respectively. -1.3 -1.1 -3.7 -4.4 -0.8 -2 0.7 0.1 6.5 -0.1 0.10.2 -0.4 5.1 0.50.8 0 -0.7 5.4 0.2 -2.2 0.8 -0.6 0.8 1.5 1.1 -0.6 KOTA KINABALU SANDAKAN TAWAU LAHAD DATU PENAMPANG SEMPORNA PAPAR KENINGAU KINABATANGAN TUARAN KOTA BELUD RANAU KUDAT BELURAN BEAUFORT KOTA MARUDU PUTATAN KUNAK KALABAKAN TENOM TONGOD PITAS SIPITANG TAMBUNAN TELUPID NABAWAN KUALA PENYU 0 100 200 300 400 500 600 Kota Kinabalu Sandakan Tawau Lahad Datu Penampang Semporna Papar Keningau Kinabatangan Tuaran Kota Belud Ranau Kudat Beluran Beaufort Kota Marudu Putatan Kunak Kalabakan Tenom Tongod Pitas Sipitang Tambunan Telupid Nabawan Kuala Penyu

31 3.3 ECONOMY LANDSCAPE (INCOME, SKILL OF MANPOWER, TALENTS, RESOURCES) 3.3.1 An Overview of Sabah Economy In the year 2022, the GDP of Sabah has recorded RM81.93 billion compared to RM78.7 billion in 2021. In terms of growth, it increased by 3.7 per cent compared to 2021. This observation indicates a positive indication of economic recovery for Sabah after the era of pandemic. While in terms of GDP per capita, Sabah has recorded about RM36020 million compared to RM30022 in 2021. Although the number is increasing, it is still below Malaysia’s national GDP Per Capita (RM54,863 million). The Sabah economy has great potential to continue to compete in the global arena. With the wealth of resources and labour available, if Sabah continues to focus on advancing key sectors, we will succeed in achieving sustainable economic growth. Sabah also has a diverse economy with a combination of sectors contributing to its economic landscape. Various industries drive the state's economy, including agriculture, manufacturing, tourism, and services. Agriculture: Agriculture plays a significant role in Sabah's economy, contributing to domestic and international markets. The state produces palm oil, rubber, cocoa, and tropical fruits such as pineapples, bananas, and papayas. Fishing and aquaculture are also important sectors, with Sabah having a rich marine ecosystem. Manufacturing: The manufacturing sector in Sabah focuses on resource-based industries, including palm oil processing, wood-based industries, and agro-processing. Palm oil mills and refineries are prominent, given the region's significant palm oil production. Additionally, timber processing, furniture production, and other value-added wood products contribute to manufacturing. Tourism: Sabah is a popular tourist destination due to its natural beauty, biodiversity, and cultural heritage. The state is home to Mount Kinabalu, one of the highest peaks in Southeast Asia, as well as stunning tropical islands, pristine rainforests, and wildlife reserves. Tourists visit Sabah for diving, wildlife spotting, eco-tourism, and cultural experiences. The tourism industry significantly impacts Sabah's economy, generating revenue and providing employment opportunities. Services: The services sector is a vital component of Sabah's economy. It encompasses various activities, including finance, real estate, transportation, education, healthcare, and retail. Kota Kinabalu, the state capital, is a hub for commercial and financial activities, attracting businesses and investments.