KUALA LUMPUR (Oct 25): Kenanga Investment Bank Bhd expects Malaysia's gross domestic product (GDP) growth in the fourth quarter of 2018 (4Q18) to slow to 4.6% following a stronger estimated growth of 4.9% in 3Q18 helped by a boost from consumer demand due to the tax holiday from June till August.

In its Malaysia Economic Outlook 4Q18 today, Kenanga IB said as a result, the 2H18 GDP growth is expected to slow to 4.8% from 4.9% in the first half of 2018 (1H18), bringing its full-year GDP growth projection to 4.8% (2017: 5.9%).

The research house said post 14th General Election, both macroeconomic and policy risks are invariably present as the new government faces unprecedented challenges both internally (high debt, rising fiscal deficit, etc) and externally (trade war, US Fed monetary tightening, peak tech demand cycle, global economic slowdown etc).

It said the "adjustment" period of the new government will continue to weigh on the economy for at least another year.

"Coupled with a less sanguine global GDP growth outlook next year, we expect GDP growth to remain weak at 4.7% in 2019," it said.

Kenanga IB said it sees the government's planned cut in opex spending and its pre-GE14 pledge to remove the goods and services tax (GST) and to reintroduce fuel subsidy to weigh down on the government's balance sheet.

It said this would limit its fiscal policy options and resources to support the economy despite higher oil revenue.

"Hence, we expect the Federal Budget for 2019 to be less expansionary and the fiscal deficit to exceed 3.0% for this year and 2019," it said.

Kenanga IB said in line with the narrative of moderating export growth trend and a slew of macroeconomic uncertainties, it maintains its projection of a lower current account surplus for the year at 2% of GDP (2017: 3%).

With the continued emerging markets market rout, the ringgit is expected to remain under pressure, and USD/ringgit would test RM4.20 in the short term before settling around RM4.15 (revised from 4.05) by year end, the research house said.

"Given the less sanguine outlook on the global economy next year we are revising our USD/ringgit projection to 4.10 from 3.85," it said.