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Nikkei Markets

Malaysia expects consumption and commodities upturn to drive growth

Finance minister bets on budget incentives to reverse tepid domestic investments

Malaysia is grappling with a persistent decline in domestic investment, but its finance minister is hopeful this will change.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia is banking on resilient private spending and fiscal incentives to reverse sagging domestic investments and help perk up economic growth next year, the federal finance minister said.

A rebound in commodity prices as well as oil and gas production recovery will also help lift gross domestic product growth pace to 4.8% in 2020 from the projected 4.7% this year, Lim Guan Eng told Nikkei Markets in an interview. The government has fiscal space to implement contingency measures if economic conditions worsen, he said.

"There's a downturn in manufacturing sector, and that will also pick up," Lim said. "Investments coming in will take time to come onstream and there's a time lag."

The third-largest Southeast Asian economy is attracting investments as foreign companies are shifting their global supply chains tracking prolonged U.S.-China trade tensions. But despite foreigners pledging record sums, Malaysia is grappling with persistent decline in domestic investments.

Domestic direct investments fell 17% to 121.1 billion ringgit ($28.8 billion) in 2018, while foreign direct investments surged 48% to 80.5 billion ringgit. The trend continued through the first six months of 2019, with foreign investments nearly doubling to 49.5 billion ringgit from a year earlier, while domestic investments slipped further to 42.5 billion ringgit.

Lim hoped that some of the measures announced in last week's budget, such as incentives for the country's most promising companies to become the so-called regional and global champions in exports, could help shrink the "jarring" gap.

Malaysia is hoping that faster economic growth could help to narrow its budget deficit to 3.2% of GDP next year from an estimated 3.4% this year. The government has committed to fiscal consolidation efforts after running a deficit for every year since the 1997 Asian Financial Crisis.

"If there is no trade war, we should be able to balance our budget within five years," Lim said. Economic growth would have also been faster than the 4.7% recorded in 2018 in absence of a trade war, he said.

The recently-proposed higher tax rate of 30% on top-income earners, a move that will affect about 2,000 individuals earning above 2 million ringgit, will help the government raise an estimated 100 million ringgit in additional revenue next year, Lim said. Malaysia has no immediate plan to further raise the tax rate, he added.

The government has also issued a request-for-proposal to banks to pitch for a role in advising the issuance of samurai bonds, Lim said. Talks with Japan is still ongoing, he said, without elaborating. Malaysia plans to issue samurai bonds early next year after the issuance size is determined after further discussions with the Japan Bank for International Cooperation. Samurai bonds refer to bond denominated in yen and issued in Japan by non-Japanese entities.

Meanwhile, the government has finalized the Bandar Malaysia project and the relevant agreements should be signed by this year-end, Lim said.

Bandar Malaysia refers to a government-backed real estate development that apart from housing commercial and residential facilities will also host the terminus for a proposed high-speed rail road linking Singapore. Malaysia has secured a two-year suspension from Singapore on the high speed rail project.

In April, the Mahathir Mohamad-administration said it decided to revive the Bandar Malaysia project that the previous government had terminated in 2017 and said will reinstate the consortium of Iskandar Waterfront Housing-China Railway Engineering Corporation as the developer.

"The announcement will be made in due course. This is a follow up from the memorandum signing that was witnessed by the prime minister in China," Lim said.

--Jason Ng and Sarah Nadlin Rohim

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