The Malaysian economy grew by 5.4% y-o-y in Q1 2018, from 5.9% in Q4 2017. Growth was driven by strong private consumption and net exports, while investment was soft. Although Malaysia’s economic fundamentals remain strong, the new government under Dr Mahathir has increased policy uncertainty, particularly in business investment. Nonetheless, most analysts expect stronger household spending this year aided by populist policies to mitigate the weaker investment outlook. The consensus view is for GDP growth to hover around 5.0% this year.
Dr Mahathir’s Surprise Election Victory
In the wake of Dr Mahathir’s surprise election victory, the downside risks to Malaysia’s investment outlook has increased. During the campaign, Dr Mahathir promised to review Chinese foreign investment contracts including infrastructure projects such as the East Coast Railway link, as well as other large-scale infrastructure projects such as the Singapore-KL high-speed link. As a number of these projects are in partnership with domestic businesses, this could hit business sentiment in the short-term, until the new government provides more clarity around policy going forward.
Potential Implication For Current Fiscal Targets
There are also potential implications for current fiscal targets. On top of the replacement of the GST with a simple sales tax, targeted fuel subsidies will also be reintroduced together with cash handouts. This means higher fiscal deficits in the near term, something that most credit agencies do not look favorably upon. On the upside, however, the new government now has a window to implement key institutional reforms. It has pledged financial prudence, a reduction in wastages and a drive to curb corruption, all of which will go a long way in bolstering the public coffers in the medium term. More importantly, cleaning up the public perception and ease of doing business in Malaysia will improve the nation’s long-term investment prospects.