Economic growth on course with new government sworn in
KUCHING: The Pakatan Harapan (PH) Government will likely maintain its real gross domestic product (GDP) growth forecast range of between 5.5 to six per cent in 2018 (5.9 per cent in 2017), in line with the Bank Negara Malaysia’s (BNM) official forecast, analysts observed.
The research arm of Affin Hwang Investment Bank Bhd ( Affin Hwang) yesterday said the win by PH came as a major surprise and would likely be a shock to the market given that the change in ruling government is unprecedented.
However, it pointed out that Malaysia’s economy is expected to still rely more on internally generated growth such as private consumption.
“We believe the PH Government will likely maintain its real GDP growth forecast range of between 5.5 to six per cent in 2018 (5.9 per cent in 2017), in line with the BNM official forecast, as compared to our forecast of 5.3 per cent.
“Going into 2018, we expect Malaysia’s economy to still rely more on internally generated growth, especially from private consumption, which benefits from a favourable labour market, steady income growth and positive credit environment,” it opined.
Meanwhile, on the movement of the market, from a macro perspective, Affin Hwang noted that the market’s immediate focus would be on how the new government addresses policies and strategies to improve business and consumer sentiment and private investment growth trends.
“This is due to concerns that some of the government- funded construction/infrastructure projects may be reviewed going forward.
“PH has indicated that it plans to review public-sector projects to ensure transparency in contract awards, which will likely lead to delays in the implementation of planned projects such as the Klang Valley MRT Line 3 (MRT3), Gemas- Johor Bahru Electrified Double Tracking (EDT) and KL-Singapore High Speed Rail (HSR),” it said.
Aside from that, it highlighted that the market would also be focusing on PH’s strategies to fix the government’s fiscal deficit position, with the abolishment of the goods and services tax (GST), as highlighted in its manifesto for GE14.
“GST has become an important source of the BN Government’s revenue since its introduction from April 2015, following the decline in government oil revenue.
“While the PH government has unveiled its fiscal reform review plan, we believe any fast-action plans to address the deficit position concerns will safeguard and maintain the country’s sovereign credit rating outlook by the international rating agencies,” Affin Hwang said.
Nevertheless, it commented that the risk of the country’s sovereign rating outlook being downgraded is small, as it expected the PH government would likely cut operating expenditures and demonstrate its commitment to fiscal consolidation as well.
“All this also depends on how the PH government initiates immediate actions to generate economic activities in taking steps toward long-term economic growth and sustainability,” it stressed.
With the possibility of GST revenue as a source of revenue from 2018 and beyond abolished, Affin Hwang believe the PH government might need to depend on collection from direct taxation (even with the reintroduction of an SST).
“Therefore, we believe that apart from cutting operating expenditures (such as optimising further the outlays on supplies and services), the development expenditures may not be reduced as it will remain supportive of construction and economic activities,” it opined.
As for foreign investments into Malaysia, Affin Hwang said, there could be some short-term concerns on the volatility in short-term capital flows due to the shift in investor sentiment.
“However, with the PH government likely to initiate immediate strategies to generate economic activities, as well as measures on fiscal reform, we expect the ringgit to trade between RM3.90 to RM3.95 per dollar throughout most of the first half of 2018 (1H18), before appreciating to RM3.80 per dollar by end 2018, supported by steady, sustained economic growth in 2018, as well as expectations of higher oil prices and possible monetary policy normalisation in 2H18,” it opined.
Overall, Affin Hwang believed that Malaysia would still be an attractive destination for foreign direct investment (FDI).
“We believe Malaysia will remain attractive as a destination for FDI inflows. Malaysia will benefit from the recovery in global FDI flows as well as higher intra-Asean and intra-Asia FDI flows.
“The PH government will likely pursue trade agreements with many parts of the world, from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was signed on 8 March 2018, the Regional Comprehensive Economic Partnership (RCEP) and the Asean-EU Free Trade Agreement (AEUFTA).
“It is worth noting that the PH Government in general agrees with this, and they highlighted in their manifesto that their policies will be ‘geared towards competitive open economy, encourage investment and productivity’,” the research team said.