KUALA LUMPUR (Nikkei Markets) -- The World Bank Thursday sharply cut its 2018 economic growth forecast for Malaysia to 4.9% from 5.4% and said the expansion pace could steadily decelerate through 2020.
Gross fixed capital formation is expected to expand "modestly" with lower-than-expected public spending dampening growth prospects, the World Bank said in East Asia and Pacific Economic Update report. Exports growth rate will likely slow to 3.7% each in 2018 and 2019 from nearly 10% in 2017, it said.
"The external sector will continue to benefit from the rebound in global investment and manufacturing activity, although this cycle is beginning to mature," the World Bank said. "Malaysia will continue to face substantial risks relating to uncertainty in the external environment."
The World Bank is the latest to downgrade its economic growth projections of the trade-dependent Southeast Asian nation. Last month, Asian Development Bank downgraded its forecast to 5.0% for this year and 4.8% in 2019 citing risks of sluggish exports growth and subdued domestic investment.
In April, 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 three straight quarters and expanded 4.5% in April-June period. Finance Minister Lim Guan Eng has said the government is confident that the economy will likely grow about 5.0% this year.
Financial market volatility could hurt Malaysia through capital outflows and pressures on exchange rates, the World Bank cautioned. Further, trade tensions could also weigh on Malaysia due to its strong link to global markets and dependence on global value chains as a source of growth, it said.
A lower-than-expected government expenditure will dent growth prospects of the economy that faces "substantial" external risks, the multilateral agency said. It projects the economic growth to slow to 4.7% in 2019 and to 4.6% in 2020.
"Other notable risks include the relatively high public-sector debt due to the continued accumulation of fiscal deficits, and fiscal commitments from public-private partnerships," the World Bank said.
Since sweeping to power in a shock May 9 election, the new 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.
The government has also scrapped the unpopular goods-and-services tax that netted some $10 billion in revenue last year and re-introduced a single-tier sales and services tax. Officials said measures being considered include state-asset sales and refinancing existing debts to take some pressure off state finances.
Still, Malaysia is expected to achieve high-income status, a long-term goal of the previous administration, sometime between 2020 and 2024, the Word Bank said. A high-income economy is defined by the World Bank as one where the total annual income per citizen is $12,056 a year or more in 2019.
Malaysia's per capita gross national income was $9,650 in 2017, placing the Southeast Asian nation at par with economies such as Mexico and Thailand, which rank as upper-middle income countries.