KUALA LUMPUR, June 14 (Xinhua) -- It has been a month since the Pakatan Harapan coalition led by Malaysian Prime Minister Mahathir Mohamad came into power. While the new administration has ambitious plans to fix up the country's economy, it may not be an easy task as it needs to balance its growth and fiscal budget.
In the past one month, several announcements have been made by the new government, such as the abolishment of the Goods and Services Tax (GST), reintroduction of fuel subsides and reviewing of some key mega infrastructure projects.
These measures, however, have sparked concerns on the country's near-term economic outlook. Although the rating agencies have not changed their stances on Malaysian credit rating, several foreign research houses have recently revised down Malaysia's economic growth forecasts for this year.
"The new Pakatan Harapan government has made some significant changes to policy that will have an impact on the growth, inflation and fiscal outlook," said ANZ Research in its recent report.
The research house now expects Malaysia's GDP growth to slow to 5.4 percent in 2018 from 5.9 percent in 2017, which is lower than its earlier forecast of 5.7 percent mainly due to Malaysia's weaker Q1 outturn and its expectations that Q2 will also be softer than initially thought.
"The quarterly profile will be relatively more volatile because of the effects of GST removal and Sales and Services Tax re-introduction on consumer spending behavior," it said.
It is also revising its GDP growth forecast next year to 5.2 percent from 5.5 percent previously as it foresees lower public consumption and investment, alongside an expected moderation in export growth.
"Nonetheless, these are still robust growth rates amidst near-term policy uncertainty," it added.
Malaysia's economy grew at 5.9 percent last year, the fastest in three years. It recorded a growth of 5.4 percent in the first quarter, which was below Malaysian Central Bank's full year growth forecast of 5.5 percent to 6 percent this year.
Nomura Research which has recently lowered its GDP growth forecast on Malaysia to 5.1 percent from 5.5 percent in 2018 and to 4.5 percent from 5 percent in 2019 also opined that Malaysian new leader's recent moves would hurt growth.
The new government's move to quickly unwound the GST and fuel subsidy rationalization - the two most crucial fiscal reforms to put Malaysia's fiscal position on a sustainable footing - may result in large spending cuts of about 1.3 to 1.5 percent of GDP annually in 2018 and 2019 to keep the country's fiscal deficit from widening sharply, according to the research house.
Malaysian new government has recently pledged to meet the previous administration's 2018 fiscal deficit target of 2.8 percent of GDP.
Nomura, however, foresees some slippage on the deficit target, as the government may choose to keep growth from slowing too sharply and thus breaches fiscal targets.
"We suspect the government may balk at greater spending cuts as growth begins to slow more visibly and accept a higher fiscal deficit instead," it said.
It also raised Malaysia's fiscal deficit forecast to 3 percent of GDP in 2018 and 2019, from 2.8 percent and 2.3 percent, respectively.
In a recent report, Capital Economics also highlighted that Malaysian new government's decision to scrap the 6 percent GST from the start of this month without putting in place any measures yet to plug the hole, and the likelihood of other populist campaign pledges such as the reintroduction of fuel subsidies being fulfilled further, add to concerns about the country's fiscal health.
The change of government also puts into question the future of a number of major infrastructure projects which is likely to dampen the country's near-term investment mood.
"Given all the uncertainty, the risks to our pre-election growth forecast of 5.5 percent in 2018 are to the downside," said the research house.
Last month, DBS Research also reaffirmed its below consensus call for Malaysia's economic growth, which is seen to slow to 5 percent in 2018 to 2019 from 5.9 percent in 2017.
"The removal of GST has lifted hopes for more consumption but expectation should be moderated," it said, adding that the need to plug the revenue gap in the fiscal position resulting from the zero rating of the GST could see a cut back in both public spending and investment.
It also pointed out that any potential upside in consumption could be eroded by weakness in public spending and investment.
