Slowing Malaysian economy poses challenge for Mahathir government

[KUALA LUMPUR] Malaysia's annual economic growth slowed to 5.4 per cent 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 per cent 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, Dr Mahathir retired in 2003 after leading the country for 22 years, but angered by Mr Najib's alleged corruption he returned to upset the country's traditional political order by allying with old foe, opposition leader Anwar Ibrahim.

During his first week back in office, Dr Mahathir 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.

Dr 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.

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 per cent in 2018, up from 1.8 per cent 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 per cent is slightly lower than official projection of 5.5-6.0 per cent (growth in 2018), GDP growth is expected to remain favourable going forward, driven by continued strength in domestic and global demand," Mr Muhammad told reporters.

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

The ringgit currency suffered a brief wobble following the shock election result, but it has since stabilised, and Mr Muhammad said it should reflect fundamentals in the medium to long term, despite the "noise" in the short term.

Other data released on Thursday showed Malaysia's current account deficit widened to RM15.0 billion (S$5.1 billion) in the first quarter from RM13.9 billion in the previous three months.

For all the scandals, Mr Najib oversaw an economy that put in its best performance in three years in 2017, though the latest data shows a loss of momentum during the six months through March.

Growth has decelerated from 5.9 per cent in the fourth quarter of 2017 from 6.2 per cent in the third quarter, its strongest showing in three years.

Malaysia's 2017 full year growth of 5.9 per cent was also its best in three years, and well up from the previous year's 4.2 per cent.

Mr Muhammad said the central bank could reopen investigations into state fund 1Malaysia Development Berhad (1MDB) if there was any new information.

Dr Mahathir has said there is sufficient evidence to investigate a multi-billion dollar scandal at 1MDB, which was founded by Mr Najib, who has denied any wrongdoing.

REUTERS