Malaysia Finance Minister cuts growth projection to about 5%

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KUALA LUMPUR (July 20): Malaysian Finance Minister Lim Guan Eng pared back expectations for economic growth for this year to about 5% as the export-reliant nation braces for knock-on effects of a brewing trade war.

“If the global economy slows, as a trading nation, definitely Malaysia will be impacted,” Lim said in an interview with Bloomberg Television’s Haslinda Amin in Putrajaya on Thursday. His forecast is more bearish than most economists’ estimates and lower than the central bank’s 5.5% to 6% projection.

Almost two months in office, 57-year-old Lim is spearheading Prime Minister Tun Dr Mahathir Mohamad’s agenda to bring down government debt, curb spending and fight corruption. He has to do that with lower revenue after a 6% consumption tax was scrapped and against the backdrop of rising global risks as US-China trade tensions intensify and investors flee emerging markets.

“But let’s say if things can be kept on even keel, there are also opportunities for us,” Lim said. “Not only as a trans-shipment point, but also as a neutral country in this dispute, which allows both China and American companies to invest and also export their products.”

Trade has underpinned Malaysia’s expansion since last year, helping to push up the growth rate to 5.9% in 2017. Neighboring Singapore, China and the US are its top trading partners.

Debt Burden

A former chief minister of Penang state, Lim is overseeing the new government’s austerity drive, which includes salary cuts for ministers and scrapping and reviewing large infrastructure projects. The government is saddled with more than 1 trillion ringgit of debt and liabilities, which has been worsened by state guarantees for public companies, including the scandal-hit 1MDB.

“Sometimes it’s not the debt that haunts you, it’s your ability to repay,” he said, adding that his focus is on reducing the burden in nominal terms and also in proportion to GDP.

Lim said his priority is to meet a fiscal deficit target of 2.8% of GDP for this year, while a balanced budget won’t be achieved anytime soon. Former premier Datuk Seri Najib Razak had projected to close the deficit by 2022 or 2023, missing his previous deadline of 2020.

Currency Value

Despite the debt burden, Lim inherits a fairly stable currency and moderate inflation. Consumer prices rose 0.8% in June from a year ago, the lowest in more than three years, while the ringgit has weakened 0.5% against the dollar this year, a better performance than most of its peers.

Lim said he agreed with Dr Mahathir that the fair value of the ringgit was around 3.8 to the dollar, which is 7% stronger than its current level, and the same as the peg Dr Mahathir set in 1998 during the Asian financial crisis.

“Sometimes we think the market has probably undervalued the strength of the ringgit, but we want to let the market decide,” Lim said. “The fact that many investors are having a second look, or are looking at Malaysia as an investment destination, that shows that they are interested in our emphasis on transparency.”