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Nikkei Markets

World Bank cuts Malaysia's 2018 growth forecast

External headwinds, limited fiscal room risks to near-term economic expansion

Malaysia’s economic growth rate has decelerated for four straight quarters and expanded 4.4% in July-to-September.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- The World Bank Tuesday trimmed its 2018 economic growth forecast for Malaysia to 4.7% from 4.9% citing external headwinds arising from the U.S.-China trade tension and volatile commodity prices.

The multilateral agency, which forecasts the economy to expand at the same pace next year in its Malaysia Economic Monitor report, expects private consumption to drive growth through 2019, while exports growth rate is expected to stay modest at 3.0% next year compared with an estimated 2.8% in 2018.

"We revised down (the economic growth forecast) due to two developments: lower government spending and investments," World Bank's Malaysia Economist Shakira Teh Sharifyddin said at a news conference.

Since sweeping to power in a shock May 9 election, the new Alliance of Hope coalition government has scrapped several costly infrastructure projects and put others on review as Prime Minister Mahathir Mohamad seeks to mend Malaysia's finances amid mounting government debt.

Gross fixed capital formation, a proxy for investment, is expected to expand modestly with lower-than-expected public spending dampening growth prospects, the World Bank said in its East Asia and Pacific Economic Update report. It projects gross fixed capital growth to decelerate sharply to 2.1% this year from 6.2% in 2017.

The World Bank is the latest to downgrade its economic growth projections for the trade-dependent Southeast Asian nation. In September, the Asian Development Bank lowered its Malaysian economic growth forecast to 5.0% for this year and 4.8% in 2019 citing risks of sluggish exports growth and subdued domestic investment.

The recent downgrades mark a sharp turnaround from April when the World Bank had raised its forecast for Malaysia's economic growth to 5.4% this year from a previous projection of 5.0% but had cautioned risks from shifts in external demand and financial market conditions.

Malaysia's economic growth rate has decelerated for four straight quarters and expanded 4.4% in July-to-September. The central bank has said it is confident that the economy will likely grow 4.8% this year.

"With Malaysia's economy tightly integrated with the global economy through financial and trade linkages, increased uncertainty in the external environment poses downside risks in the near term future," the multilateral agency said. The country's heavy reliance on oil-related revenue also pose challenge to the fiscal space in cases of price or supply shocks, it added.

The crude exporting Southeast Asian country counts hefty dividend from state-run oil explorer Petroliam Nasional, or Petronas to boost its non-tax revenue that is crucial for meeting budget deficit targets.

Still, the World Bank is "encouraged to see the Malaysian government taking measures to both preserve growth, restore fiscal buffers, and improve governance," said Mara Warwick, World Bank's Country Director for Brunei, Malaysia, Philippines and Thailand. "Such reforms will pay dividends over time, with efforts to improve not just the quantity of economic growth, but also of the quality of economic growth."

The government has scrapped an unpopular but remunerative goods-and-services tax that netted some $10 billion in revenue last year and re-introduced a single-tier sales and services tax. It also plans to tax foreign service providers and adopt a more targeted fuel subsidy scheme to fix its strained finances. Still a narrower revenue base and dependence on fickle oil-related income could limit its flexibility to make fiscal adjustments against future macroeconomic shocks, the World Bank said.

--Gan Pei Ling

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