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Growth risks mount in Malaysia as Mahathir marks 100 days

Political transition had an impact on the economy last quarter, with public sector investment contracting 9.8 per cent

Gulf News

KUALA LUMPUR: Malaysian Prime Minister Mahathir Mohamad marks his 100 days in office with risks mounting against the economy.

Gross domestic product grew at its slowest pace in more than a year in the second quarter, the current-account surplus narrowed sharply and the currency is facing pressure as an emerging-market rout worsens.

After a shock election victory in May, 93-year-old Mahathir has moved quickly to deliver on promises to fight corruption, review Chinese-funded projects and cut consumption taxes. He’s cancelled and postponed infrastructure projects backed by China including the $20 billion-East Coast Rail Link and energy pipelines as he tries to negotiate better terms.

The political transition had an impact on the economy last quarter, with public sector investment contracting 9.8 per cent from a year ago, dragging down overall government expenditure by 1.4 per cent.

Domestic demand remained strong and was buoyed by the government’s scrapping of a 6 per cent goods-and-services tax soon after Mahathir took office. Private consumption climbed 8 per cent last quarter from a year ago, while investment surged 6.1 per cent.

“The bigger picture we see going forward, private consumption will be modest as many Malaysians probably front-loaded their purchases ahead of the sales tax coming in September, so it’s hard to see how that’s sustained,” said Brian Tan, an economist at Nomura Holdings Inc. in Singapore.

“At the same time, you are getting all these sharp spending cuts from the government which have already shown up in June,” he said. “Overall, the growth picture for Malaysia looks quite challenging.”

Lowered forecast

Central bank Governor Nor Shamsiah Mohd Yunus, who announced the GDP numbers at her first media briefing since being named to the post in June, said the economy will probably expand about 5 per cent this year, lower than the previous government’s projection of 5.5 per cent to 6 per cent.

The drop in public sector spending was related to the government’s transition and is expected to be temporary, she said.

The slowdown last quarter comes against the backdrop of heightened global financial market volatility and the escalation of trade tensions. While the currency has been relatively sheltered from the worst of the emerging-market rout that’s hit countries like Indonesia and India, the ringgit weakened to an eight-month low against the dollar this week.

The currency was little changed at 4.1048 against the dollar as of 1:10pm in Kuala Lumpur.

Nor Shamsiah said the direct effect of the trade tensions will be minimal, but if they escalate to include more countries and goods, then Malaysia would also be affected.

“Given recent market developments, escalating trade tensions and tighter fiscal finances, risks are skewed to the downside,” said Julia Goh, an economist at United Overseas Bank Ltd. in Kuala Lumpur. “We expect growth to average 4.7 per cent in the second half of 2018, bringing full-year growth to 4.8 per cent.”

The governor led policymakers in holding the benchmark interest rate at 3.25 per cent last month, extending a pause since the monetary authority raised borrowing costs in January. Inflation is subdued, easing to 0.8 per cent in June, the slowest pace since 2015.

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