World Bank sees slower growth for Malaysia but fiscal deficit narrowing

Malaysia remained at the top of the emerging-market list, thanks to its current-account surplus, relatively stable economic growth outlook and valuations.

KUALA LUMPUR: The World Bank sees Malaysia’s economy growing at a slower pace from this year up to 2020 but it also expects the fiscal deficit to narrow, depending on the economic growth.

In its outlook report issued on Thursday, it expected growth to moderate to 4.9% this year and 4.7% next year and at 4.6% in 2020. In 2017, the economy grew at 5.9%.

As for the fiscal deficit, it sees its narrowing from 2.9% this year to 2.8% next year and 2.5% in 2020.

“Malaysia’s economic growth is expected to moderate in the near term, growing at 4.9% in 2018, underpinned by continued strong growth in private consumption.

“The stronger outlook for household spending primarily reflects the three-month tax holiday following the zero rating of the GST, and one-off payouts to civil servants and pensioners,” it said.

The World Bank said Malaysia’s gross fixed capital formation is expected to expand modestly, with lower public capital expenditure than previously projected, dampening growth prospects.

However, tthe external sector will continue to benefit from the rebound in global investment and manufacturing activity, although this cycle is beginning to mature. 

As for the fiscal deficit target of 2.8% of GDP, it pointed out this was subject to the economy growing above 5%; otherwise, the government may elect to run a slightly larger fiscal deficit.

“Higher subsidy expenditures and the revenue shortfall from the removal of GST are expected to be counterbalanced by higher oil-related revenues, as well as reduced outlays for non-priority current expenditure and deferment of capital expenditures,” it said.

It expect Malaysia to achieve high-income country status at some point between 2020 and 2024.

“As a highly open economy, Malaysia will continue to face substantial risks relating to uncertainty in the external environment. Heightened financial market volatility either triggered by shifting monetary policy expectations in advanced economies or crisis in other regions could spread across emerging economies including Malaysia, through capital outflows and pressures on exchange rates. 

“Another key risk relates to the escalation in protectionist tendencies and trade tensions in some major economies which could have an adverse impact on Malaysia, given its high level of integration with global markets and its dependence on global value chains as a source of growth. 

“On the domestic front, implementation of several election pledges will require careful management of potential risks. The change from GST back to SST and the adjustment to the fuel pricing mechanism -- in the absence of adequate compensatory measures -- would constrain the fiscal policy space, and place greater reliance on less stable direct taxation and oil-related revenue,”  it said. 

The World Bank said the reassessment of several planned large infrastructure projects increases uncertainty on the outlook for investment, and subsequently growth.

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.

“Addressing the stock of public-sector debt will require careful tradeoffs, including expenditure consolidation and a review of new sources of revenue,”  it said.