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Nikkei Markets

Malaysian economy slows even as uncertainties build

New government scraps GST, raising concerns about policies

Malaysia has benefited from rising demand for electronics and electrical items that account for more than a third of monthly shipments.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia's economy grew at a slower pace in the first quarter as compared to the previous three-month period, adding to the challenges that are growing after the unexpected change in government.

Gross domestic product grew 5.4% year on year between January and March, the central bank said. That is slightly below the estimate of 5.6% in a Nikkei Markets poll.

It was the second consecutive quarter of deceleration. The economy grew 5.9% in the fourth quarter of last year and 6.2% in the third.

Nevertheless, Bank Negara Malaysia Governor Muhammad Ibrahim told a press briefing that growth is expected to remain favorable. "The positive growth momentum will be driven by domestic and external demand," he said.

Economists said the latest data suggest that economic growth may have peaked and that the pace of inflation will likely moderate amid doubts surrounding the new government's fiscal policy.

Southeast Asia's third-largest economy has largely relied on resilient domestic demand but now faces the risk of a slowdown, including in investment, as uncertainties pile up after the first change in government in more than six decades.

The country has benefited from rising demand for electronics and electrical items that account for more than a third of monthly shipments. While services account for the bulk of its economic output, the pick-up in the global economy has kept factories humming in the trade-reliant nation.

"Last week's shock election result makes the outlook for the economy much more uncertain," said Capital Economics Analyst Alex Holmes. "The new government's decision to effectively abolish the goods and service tax from the start of next month should provide a boost to the economy," he said.

On the supply side, the services sector, which accounts for more than half of economic output, grew 6.5% in the first quarter. Manufacturing gained 5.3%.

As for demand, private consumption and investment rose 6.9% and 0.5% respectively, slowing from 7.0% and 9.2% in the preceding quarter. Net exports of goods and services surged 62.4% on year in the first three months.

The government said it would reintroduce the sales and services tax after scrapping GST from June. Higher oil prices would help cushion the loss of revenue and provide fiscal room in the near term, the Ministry of Finance said in a statement.

Prime Minister Mahathir Mohammed, the 92-year-old who wrested power from the National Front coalition in a historic electoral upset on May 9, has also promised to reintroduce some populist measures, such as fuel subsidies.

"To some extent, slowing investment may be compensated by higher consumption arising from the removal of GST and proposed reinstatement of targeted fuel subsidies," Australia and New Zealand Banking Group economists Radhika Piplani and Sanjay Mathur said in a note to clients.

The central bank governor said the current monetary policy is consistent with its stance to ensure steady growth. Inflation, meanwhile, is expected to moderate in 2018 due to softer global cost factors, he noted. Malaysia's central bank held its key policy rate at 3.25% earlier this month.

Mahathir has already set up a special team called the "council of eminent persons" to advise the new government. Its members include former central bank governor Zeti Akhtar Aziz.

"This is a window of opportunity that we should seize" to further boost the economy, said Governor Muhammad. "We don't look at the current period as a period of uncertainties."

--Jason Ng

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