KUALA LUMPUR: RHB Research expects a pick up in construction activity with the resumption of the East Coast Rail Link (ECRL) and Bandar Malaysia projects will have multiplier effects while an improvement in exports growth will see the economy picking up in the second half of 2019.
It said on Monday the revival of these projects signals that, after almost a year in power, the Pakatan Harapan Government is ready to restart part of its fiscal-spending engine to help support the economy.
“In addition, we believe the Government’s review of its other projects – to ensure that costs are reasonable – is likely to have been completed as well, and the disbursement of development spending should gradually pick up pace.
“This is in line with our expectations, after having seen 10 years ago how the Selangor and Penang Pakatan Harapan state governments jumped-started their construction activities a year after gaining power in these two states,” it said.
RHB Research said as a result, it expects construction activity to gradually pick up momentum in 2H19 after it slowed to 2.6% in 4Q18 from 6.7% in 2017. This is expected to bring up activity in the production of construction-related building materials as well.
“This, together with a likely improvement in the country’s exports in the 2H of the year, suggests that economic growth in Malaysia will likely pick up pace during this period, in our view.
“As a result, we expect real GDP growth to inch up to 4.8% YoY in 2H from 4.5% in 1H, bringing the full-year 2019 growth to 4.6% before improving further to 4.8% in 2020,” it said.
RHB Research said although the revival of the ECRL will be at a significant lower cost of RM44bil – when compared with its earlier cost of RM65.5bil – we believe its impact to the domestic economy is unlikely to be reduced. This is because the multiplier effect will likely be greater due to a more efficient way of costing and spending.
As for the direct government debt, the research house pointed out that it has since risen slightly to 51.8% of GDP in 2018 and is expected to increase to 52.1% of GDP in 2019.
The direct debt, however, is projected to ease back to 51.9% of GDP in 2020, as the Government reduces its fiscal deficit to 3% of GDP during the year from a projected 3.4% in 2019.
Meanwhile, according to the statutory debt limit stipulated under the Loan (Local) Act 1959 [Act 637] and Government Funding Act 1983 [Act 275], the Government should not borrow more than 55% of GDP.
The limit is confined to outstanding Malaysian Government Securities, Malaysian Government Investment Issues, and Malaysian Islamic Treasury Bills instruments.
As at end-2018, the outstanding amount of these instruments was lower – at 48% of GDP – according to the Ministry of Finance.
Based on the data published by Bank Negara Malaysia (BNM), the Government’s guarantee debt, on the other hand, rose to 18.6% of GDP in 2018 from 17.6% of GDP in 2017 – the Pakatan Harapan Government’s adjusted figure was around 14.6%.
“We are not sure how much the ECRL, MRT Line 2 (MRT2) and Light Rail Transit Line 3’s (LRT3) project costs have been included in the government debt guarantee. The three put together is expected to add about RM91bil, or 6% of GDP, to the Government’s debt guarantee. This could push the level to 23.5% of GDP in 2019.
“Using the Government debt guarantee published by BNM and the latest reported PPP lease payments of MYR184.9bn as at end-Jun 2018, the Government’s debt and liability commitments may increase to 87.8% of GDP in 2019 from 83.4% in 2018 and 83.2% in 2017.
“This is based on our calculations after imputing the full amount of debt guarantees for the three projects – ECRL, MRT2, and LRT3 – mentioned above.
“Our projection has yet to take into account the aids provided by the Government to Tabung Haji and FELDA, as well as the potential sale of assets by Tun Dr Mahathir Mohamad’s administration to repay its debt and liability commitments,” it said.
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