Malaysia to see sharp slowdown in private investment growth this year — SERC

-A +A

KUALA LUMPUR (July 10): Think tank Socio-Economic Research Centre (SERC) has lowered its private investment growth forecast for 2018 by more than half to 3%-4%, from the earlier estimate of 8.3%, its executive director Lee Heng Guie says.

The main reason for the downward revision is to reflect the 'wait and see' approach by both domestic and foreign investors to the Pakatan Harapan (PH) government's policy directions, including the ongoing review of mega infrastructure projects in the country and potential catalysts in Budget 2019, he added.

According to Lee, Malaysia saw a sharp pullback in private investment growth in the first quarter of this year (1Q18) to 0.5%, versus 9.3% in the same period last year.

"Hopefully, things will be clearer when the government tables Budget 2019 (on Nov 2), more so after our prime minister's visit to China (next month)," Lee told a news conference by SERC on current global and domestic economic conditions today.

It was reported that Prime Minister Tun Dr Mahathir Mohamad wants to visit China as early as possible to raise the "unfairness" in some infrastructure contracts agreed to by the previous administration with China.

Nevertheless, Lee remains confident that the government will achieve its targeted fiscal deficit of 2.8% of gross domestic product (GDP) this year as it rationalises its expenditure.

"Austerity drives can unleash confidence," he said, adding that the PH government has made it clear to the public of its fiscal plan to put deficit and public debt firmly on a downward path. In May, Finance Minister Lim Guan Eng announced that the federal government's total debt and liabilities amounted to RM1.087 trillion or 80.3% of GDP.

Lee said if plans for fiscal and debt consolidation are credible and involve structural reforms, there is every chance growth can resume even as cuts or rationalisation of public spending take hold.

"The fiscal condition that we are in now is not about acute austerity in spending, but more of rationalising or reprioritising the capital expenditure and operating spending," he added.

This is because, Lee said, cost savings and expenditure efficiency derived from the value for money projects could mean wider economic and multiplier impact on the economy as a whole.

SERC also cut its full-year GDP estimate to 5.2% from 5.5% previously, blaming impact from external headwinds and implications of domestic political and policies transition.

Lee also warned that the reintroduction of the sales and services tax in September and its net impact on the price of goods and services may take off some spending strength.

He sees the local economy will be largely supported by private consumption in the second half of this year (2H18).

"Consumer spending will still be calling the shots. Private consumption resilience held intact on improved income growth and stable labour market condition (in 1H18)," he said.

Malaysia private consumption grew 6.9% in 1Q18, versus an average growth of 6.5% in 2017, while unemployment rate was 3.3% between February and April.

Lee also noted that the three months of 'tax holiday' due to the zero-rated goods and services tax between June and August together with the payment of cost of living aid and fuel price stabilisation are expected to keep consumer spending growth steady.

SERC cuts 2018 export growth estimate amid trade war worries

The think tank also cut its export growth estimate for 2018 to 6.5%, from 7.5% previously, amid concerns over the trade war between the US and China. The estimate is less than half of the 18.9% export growth rate achieved last year.

"The ride ahead for Malaysia's exports is likely to be bumpy given the risk of trade tensions between the US and China, as well as the US' allies impacting the technology sector, automobile, steel and aluminium industries," said Lee.

He expects the tit-for-tat trade war would inflict damage to the global economy and trade.

Malaysia will be affected via the global supply and value chains currently, but Lee is of the view that the impact will be manageable.

"No one is spared from the US-China trade war. The war has started, the key now is to assess whether the war would become worse or not," said Lee.

"But as long as we (Malaysia) get our fundamentals intact, I don't think we have to raise interest rate like Indonesia to defend our currency," he added.

It was reported that the “biggest trade war in economic history” began last Friday, with the start of new tariffs on US$34 billion worth of Chinese products, along with China's retaliatory tariffs on US products. And the Donald Trump administration is threatening further tariffs in the months ahead, on imported automobiles and auto parts.

Like most economists, SERC also expects Bank Negara Malaysia to leave its benchmark interest rate unchanged at 3.25% at the Monetary Policy Committee tomorrow.

The projection takes into account the US-China trade tensions and market volatility risks to global growth, as well as domestic politics and policy transition.

On the ringgit, Lee said factors such as the political and policies transition post the 14th general election, net selling of domestic equities and bonds, surging US Treasury yields and US interest rate hikes concerns are weighing on the local currency's appreciation.

"What could provide a counteract strength to support the ringgit are strong economic and financial fundamentals, the clarity of policies, the fiscal and debt path and the affirmation of Malaysia's sovereign ratings," he said.

As at 3.12pm, the ringgit was trading at 4.013 against the US dollar.