SERC cuts 2018 GDP growth forecast

PETALING JAYA: The Socio-Economic Research Centre (SERC) which revised its gross domestic product (GDP) projections for 2018 upwards prior to the 14th general election in May, has now curbed its optimism, targeting 5.2% growth instead, in anticipation of a slower second half on the back of external headwinds and domestic developments.

SERC had projected GDP growth at 5.1% prior to April 9 when it revised it upwards to 5.5% on the strength of domestic demand.

Speaking at a media briefing yesterday, SERC economist Lee Heng Guie ( pix) said growth momentum for the second quarter (Q2) will remain flat at 5.4% as it was in Q1, whereas the remaining two quarters are expected to register GDP growth of 5%.

With Malaysia undergoing a period of policy transition under the helm of the newly minted government, uncertainties are bound to persist in the near term and private investments are expected to remain slow as investors take a wait-and-see approach. Private investment is expected to recover next year.

As for the trade dispute between the US and China, Lee noted that the situation is still manageable with the US$50 billion (RM200 billion) tariffs on Chinese imports by the US equating to only 2.2% of China’s total exports and 11.6% of its exports to the US.

However, he cautioned that if it escalates to a full-blown trade war, GDP growth might fall to below the 4% range. “Hopefully, that scenario won’t come true.”

Stronger domestic conditions and higher crude oil prices could serve as buffers to the external headwinds.

Lee said the government’s approach on austerity and savings through rationalising expenditure, downsizing the government, axing of political appointees and renegotiating terms for infrastructure projects that are yet to begin – such as the Mass Rapid Transit 3 and the Kuala Lumpur Singapore High Speed Rail – will help in acting as fiscal buffers against external issues. On the country’s debt, which according to the government has exceeded RM1 trillion, he said Malaysia is still on track to achieving the 2.8% budget deficit target with the government’s direct debt still remaining at around 55%. As for contingent liabilities, Lee said the government will have to relook existing guidelines to determine control measures.

“I believe the coming budget will give a much clearer direction on how the government will contain the debt level both in direct debt and contingent liabilities.”

The open tender system, better procurement practices and the new government’s stance against the issuance of letters of support for projects could be beneficial. The government, Lee said, should assess whether projects passed are capable of servicing their loans.

Lee expects Bank Negara Malaysia to keep the Overnight Policy Rate at 3.25% at its policy meeting today. Inflation is expected to be at 1-2% with the zerorating of the Goods and Services Tax.

The ringgit, meanwhile, is expected to hover between RM4.00 and RM4.10 to the dollar on policy uncertainties, net selling of domestic equities and bonds, surging US Treasury yields, expectation of further US interest rate hikes and revived strength of the greenback. This can, however, be counteracted with stronger domestic fundamentals in the form of policy clarity, fiscal and debt path and affirmation of Malaysia’s sovereign rating.