This article first appeared in The Edge Financial Daily on December 19, 2018

KUALA LUMPUR: Malaysia’s persistent steep decline in government revenue in proportion to gross domestic product (GDP) is a source of concern, according to the World Bank.

“This limits the scope of government intervention in fiscal policy to respond in the event of economic shocks,” said World Bank country economist Shakira Teh Sharifuddin at the launch of its biannual Malaysian Economic Monitor yesterday.

Based on the latest budget, the government’s revenue-to-GDP is expected to drop further in 2019, she said. This is after accounting for the RM30 billion one-off dividend from Petroliam Nasional Bhd.

“Moreover, when we look across other countries, not only is Malaysia slated to record the lowest level of fiscal revenue to GDP, but the magnitude of decline over the years between 2012 and 2019 has also been one of the steepest,” Shakira added (see graphs).

According to her, investment incentive mechanism is an area that the government could look at to expand its coffers. “Some of these [tax incentives] are actually foregone tax revenues. [The World Bank’s research shows that] four out of five firms would come into Malaysia regardless of the incentives ... so these are some of the measures that Malaysia could look at to increase its revenue,” Shakira explained.

As for expenditure, the World Bank highlighted that the civil service wage bill continues to dominate public spending at a higher level of 40% of government expenditure next year, up from 25% in 2000.

In addition to ongoing fiscal consolidation and declining revenue, the government’s high level of public debt is also a concern, said Mara Warwick, World Bank’s country director for Brunei, Malaysia, the Philippines and Thailand.

“It is important that efforts to sustain growth in the near term are carefully balanced with the need to restore fiscal buffers,” she said, sounding caution about the increasing downside risks Malaysia is facing to its economic growth.

Nevertheless, even in the face of a potential slowdown in developed nations next year, Malaysia’s economy is expected to remain resilient, Shakira noted.

Meanwhile, private investment is expected to be sustained in the manufacturing and commodity sector.

“On the external front, the escalation of the trade war and [a] slowdown in the electronics cycle could dampen growth in the near term,” Shakira said. The World Bank’s analysis showed that Malaysia had been an early beneficiary of the trade war.

Early indications suggest that Malaysia is gaining market share in the US at the expense of China, particularly in electrical equipment, according to the World Bank.

It calculated that Malaysia already gained an additional 1.5 percentage points of market share in US imports of electrical equipment between July and September 2018.

However, any short-term gains from trade diversion stand to be wiped out if the trade war escalates and global investor confidence takes a further beating.

A decline in investor confidence, on top of a 25% tariff on all products traded between the US and China, would result in a 0.5% drop in the investment-to-GDP ratio at a global level, the report said. For Malaysia, research showed that the decline in the country’s output and exports would exceed 8% each.