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May 18, 2018

Inheriting slowing Malaysian economy, Mahathir makes tax changes


May 18, 2018

KUALA LUMPUR: Malaysia´s annual economic growth slowed to 5.4 percent in the first quarter of 2018, leaving the country´s new government with the task of turning around an economy that has decelerated for two consecutive quarters.

Releasing the latest gross domestic product data on Thursday, the central bank said domestic demand would help growth stay favourable, though the January-March performance was below a median forecast of 5.5 percent given by a Reuters survey of economists.

The slowdown comes amid uncertainty over economic policies of the new administration of 92-year-old Mahathir Mohamad, who led an opposition alliance to a surprise win over his scandal-tainted former protege Najib Razak and a Barisan Nasional coalition that had led the country for six decades.

Regarded as the architect of modern Malaysia, Mahathir retired in 2003 after leading the country for 22 years, but he returned to upset the country´s traditional political order by allying with old foe, opposition leader Anwar Ibrahim, having become angered by Najib´s alleged corruption.

For all the scandals, Najib oversaw an economy that put in its best performance in three years in 2017, but growth has decelerated from 5.9 percent in the fourth quarter of 2017 and from 6.2 percent in the third quarter, when it made its strongest showing in three years.

During his first week back in office, Mahathir has announced moves to effectively scrap a goods and services tax (GST) - a significant source of government revenue, reintroduce a sales tax, and review various projects signed off by the previous government.

Mahathir has also promised to reintroduce fuel subsidies, adding to concerns that populist policies could hurt economic growth and weaken the government´s fiscal strength.

Ratings agency Moody´s said the new government´s election campaign promises would be "credit negative" for the economy unless adjustments were made to offset the impact.

But, on Thursday, Mahathir told Malaysians not to worry as his administration was already cutting back on spending.

"At the same time, we will earn more from petroleum, because the budget was made when it was $50 (a barrel) and now it´s $70," Mahathir said at a news conference.

The decision to scrap GST is expected to give the economy a fiscal boost, but likely cause a 1 percent increase to the government´s budget deficit, Capital Economics said in a research note.

Former prime minister Najib had pushed a fiscal consolidation strategy when he first took the reins in 2009, slashing the budget shortfall by half from 6.7 percent that year to 3 percent in 2017."It is only a matter of time before the government will come under pressure to close the gap, suggesting a fiscal consolidation later down the line," Capital Economics said.

Bank Negara Malaysia Governor Muhammad Ibrahim said that scrapping GST would impact inflation, but it was too early to say by how much.

The central bank projected headline inflation averaging 2-3 percent in 2018, up from 1.8 percent in the first quarter.

Monetary policy would remain accommodative, the governor said, adding that it premature to judge how the new government´s policies would effect economic growth.

"Although 5.4 percent is slightly lower than official projection of 5.5-6.0 percent (growth in 2018), GDP growth is expected to remain favourable going forward, driven by continued strength in domestic and global demand," Muhammad told reporters.

The central bank said first quarter growth was propped up by expanding private sector activity and strong support from exports.

Net exports saw a sharp rebound, expanding 62.4 percent annually in the first quarter compared to a 1.9 percent contraction in the October-December period.

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