Malaysia sees favourable growth outlook as policy risks mount

Bank Negara Malaysia says GDP growth is expected to remain favourable going forward.

KUALA LUMPUR: Malaysia’s central bank said economic growth remains favourable even though policy risks after last week’s unexpected election win by Dr Mahathir Mohamad clouds the outlook.

Growth of 5.4% in the first quarter was lower than the 5.6% median estimate in a Bloomberg survey of economists, and down from 5.9% in the previous three months.

“While the growth of 5.4% recorded in the first quarter of 2018 is slightly lower than the official range of 5.5% to 6%, Malaysia’s GDP growth is expected to remain favourable going forward,” Bank Negara Malaysia governor Muhammad Ibrahim told reporters in Kuala Lumpur today.

Expansion for the rest of the year will depend on a number of policies that Mahathir must still lay out. Key among those are how the government will offset a slump in tax revenue after eliminating the 6% goods and services tax (GST), plans to reintroduce fuel subsidies, and details on which infrastructure projects will be reviewed.

Malaysia was riding an economic boom before the election, underpinned by strong domestic spending and a rebound in exports, with economists forecasting 5.4% growth for 2018.

The government yesterday scrapped the 6% GST rate, setting it at zero percent from June 1, meeting a pledge made by Mahathir’s coalition on the campaign trail. That’s set to curb inflation and give a boost to spending. Oxford Economics has estimated that scrapping the GST and implementing other populist spending measures will add 0.2 to 0.4 percentage points to GDP.

The GST move will leave a hole in the budget, which the government hasn’t said yet how it will fill.

The finance ministry said today the move would be “cushioned by specific revenue and expenditures that shall be announced soon”, with plans also to re-introduce a sales and services tax.

The fiscal deficit eased to 3% of GDP last year and Oxford Economics sees that widening to an average of 3.3% over 2018-19.

 

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