This article first appeared in The Edge Financial Daily on August 20, 2019

KUALA LUMPUR: An affiliate of Fitch Ratings Inc has raised its 2019 real gross domestic product growth forecast for Malaysia to 4.6% from 4.2% previously, following the country’s strong economic performance in the first half of 2019 (1H19).

The revision was done by Fitch Solutions Macro Research (Fitch Solutions), a product of Fitch’s affiliate, Fitch Solutions Group Ltd.

The revision reflects the stronger-than-expected average growth rate of 4.7% year-on-year (y-o-y) in 1H19, as well as its view for private consumption to remain strong and for the deceleration in investment growth to bottom out, Fitch Solutions said in an Aug 16 report.

However, it expects net exports to drag on overall growth in 2H19 amid deteriorating external conditions due to the escalating US-China trade war, with exports likely to remain anaemic, while imports are expected to pick up along with investment.

“We expect private consumption to remain the main engine of growth and to continue benefiting from government policies that raise disposable income and purchasing power, such as the RM37 billion in tax refunds paid out in 2019, as well as the central bank’s decision to cut the policy rate by 25 basis points to 3% in May.

“Government spending, however, is likely to remain subdued for the rest of 2019. The factors that led to the sharp decline in government consumption growth in 2Q19 (second quarter of 2019) to 0.3% y-o-y from 6.3% y-o-y in 1Q19 are likely to remain in play. These include a smaller fiscal budget, continued focus on paying down public debt, and unfavourable base effects,” it said.

Its previous analysis had expected investment to prove less of a drag on growth over 2019, which it said appears to be playing out in 2Q19.

“We believe that investment is likely to bottom out over the course of 2H19, with work on the renegotiated RM44 billion East Coast Rail Link having restarted on July 24.

“Furthermore, there remains potential for manufacturers in Malaysia to benefit from the increasingly acrimonious US-China trade war in terms of companies relocating capacity to Malaysia, especially in the low to mid value-add segment,” it said, adding that the government also plans to woo more investments from China.

It also highlighted that goods exported to the US from Malaysia currently do not face additional tariffs as do Chinese goods and this should put Malaysia in good stead to attract companies targeting the American market.