Economic growth steady despite slowdown


MALAYSIA’S economic growth has so far remained steady this year in the face of rising trade tensions, turmoil in emerging markets (EMs) and ongoing political shifts at home.

While GDP for the first two quarters fell under par at 5.4% and 4.5% respectively, improved labour market conditions and low levels of inflation have boosted consumer optimism to a 21-year high at 132.9 points following the May 9 election.

Market confidence appears to be on the rise too as the pace of foreign outflows weakened to a four-month low of RM97.4 million in August.

Experts said the new government’s pragmatic approach in prioritising financial stability over aggressive growth has given investors renewed confidence on the country after the post-election sell-off.

The local benchmark index is one of the best performers to-date in Asia Pacific with a slight increase of 0.13% as of Sept 7.

In comparison, the Singapore Straits Times Index and the Nikkei 225 Index decreased by 8.29% and 1.72% over the same period.

Prime Minister Tun Dr Mahathir Mohamad has wasted no time to instil budgetary discipline since he took office — slashing government expenditure, scrapping infrastructure projects, forming a smaller Cabinet and a team of eminent persons to advise his administration.

Several key decisions have been made including abolishing the Goods and Services Tax and stabilising fuel prices to reduce living costs. This has spurred spending on selected big-ticket items such as cars, but have failed to inspire the retail segment.

Despite the removal of the unpopular tax, the new government has reaffirmed that the 2.8% fiscal deficit target can be achieved this year.

On revenue, the reintroduction of the Sales and Services Tax and higher oil prices are expected to lift corporate taxes and dividends.

As for expenditure, the government has embarked on a cost rationalisation exercise including cutting Cabinet ministers’ salaries by 10%, terminating contracts of political appointees and reviewing the East Coast Rail Link and other procurement projects. The Ministry of Finance estimates total cost savings at RM10 billion this year.

Meanwhile, the ringgit has taken a hit from the EM rout in recent weeks, depreciating by 2.6% against the US dollar since the start of the year.

However, the local unit remains as one of the most resilient in the region on low inflation and large account surpluses.

Despite the decline, the ringgit has held steady throughout the year as other EM currencies such as the Argentine peso, Turkish lira, Indonesian rupiah and Indian rupee plunged to record lows.

Analysts are optimistic and expect the ringgit to reacquire its status as an Asian outperformer once uncertainties from the US-China trade war and the US dollar strength subside.

Higher oil prices and a wider trade surplus will offer stability to the local currency.

Acknowledging external headwinds and the underperformance of the GDP in the first two quarters, Bank Negara Malaysia had lowered its 2018 full-year GDP forecast to 5%, below its projection 5.5% to 6% this year.

The central bank governor Datuk Nor Shamsiah Mohd Yunus (picture) said the forecast takes into account the ongoing US-China trade tension and the potential 50 basis points (bps) reduction in global growth by 2020 as a result of the trade war, as projected by the International Monetary Fund.

A prolonged disruption of oil and gas production and weak crude palm oil production have also been identified as factors that will continue to constrain growth.