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This article first appeared in The Edge Financial Daily on January 9, 2019

KUALA LUMPUR: Malaysia’s economic growth will slow to 4.7% and 4.5% in 2019 and 2020 from an average of 5% in the past four years, amid external headwinds, project reviews, and a slowdown in domestic public spending, says Moody’s Investors Service.

The rating agency wrote in an annual credit analysis report that Malaysia has been among the fastest-growing A-rated sovereigns in recent years, after China, Ireland and Malta, which therefore warrant a moderating growth in the coming years.

Reviewing 2018, Moody's said although the first nine months were helped by private sector consumption — supported by the tax holiday — there was slower growth in investment and a contraction in exports beginning in the third quarter, reflecting disruptions at natural gas and crude palm oil facilities.

Investments within the private sector too slowed in the first quarter of 2018, while public sector investments contracted over the course of the year as some projects neared completion.

“The moderation in growth incorporates the cancellation or postponement of several infrastructure projects and slowing domestic public spending. Continued trade tensions between China and the US will also weigh on the growth outlook, given the large share of trade in the overall economy.

“Our projections for gross domestic product (GDP) incorporate some slowdown in trade flows, assuming that further tariffs will be put in place. However, we do not consider more severe scenarios as part of our baseline assessment, and these would act as a further drag on growth if they do materialise,” Moody’s wrote in the report, which rates Malaysia’s outlook as A3 stable.

The agency said economic growth beyond the near term will rest on Putrajaya’s ability to support and create a more conducive environment for the private sector, given its constrained public investment due to fiscal weaknesses.

“The new government's fiscal policy choices, particularly abolishing a goods and service tax, will narrow its revenue base and reduce its fiscal flexibility. In addition, Malaysia's debt burden (at 50.7%), which is significantly higher than the A-rated median (of 39.7%), will remain a credit constraint.

“Deep domestic capital markets partly offset these fiscal weaknesses, while a solid institutional framework that includes effective monetary policy supports the credit profile. However, pervasive corruption is likely to remain a challenge for the government,” it added.

Moody’s revised downward Malaysia’s fiscal strength to “moderate” from “moderate(+)” earlier, taking into account the narrower revenue structure, greater reliance on oil-related and non-tax revenue, weaker starting points for both deficits and the debt burden, as well as difficulties associated with reducing the deficit further.

However, it said targets set out in the mid-term review of the 11th Malaysian Plan — whereby private consumption is expected to drive an annual overall GDP growth of 4.5%-5.5% in 2018 to 2020 (up 7% on year from the average of 6.5% between 2016 and 2017 — appears “achievable” and largely within its forecast.

Additionally, Moody’s said the stable outlook indicates that a change in the rating is unlikely in the near term, although the rating could come under upward pressure if the scope for fiscal consolidation increases.

“It balances credit constraints stemming from low debt affordability and high debt against credit strengths including resilient growth and a stable and broad funding base for Malaysia's debt, even in a weaker global environment.

“Conversely, we would consider downgrading the rating if Malaysia's fiscal prospects weaken or its debt burden increases,” the agency said.

It explained that downward rating pressures could arise if growing political tensions and diverging views within the government undermine policy effectiveness or impair the government’s ability to adhere to its fiscal consolidation objectives, or threaten the stability of capital flows to Malaysia.

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