A Postcard From Malaysia

Now Mahathir’s objective is fiscal consolidation to surpass the policy mistakes of the Najib years while stabilizing a more robust growth path. It is a challenging task that must be implemented amid America’s new protectionism and U.S. tariff wars.

Moreover, Mahathir has had to suspend several multibillion-dollar projects, including China-backed initiatives, in a bid to target Malaysia's estimated $250 billion national debt and other liabilities.

Early signs are promising. In 2019, economic growth is likely to be around 4.5%; in 2020, 4.2%. Private consumption is the key contributor as consumers have loosened their purse strings amid an improving labor market and lower consumption tax.

However, investment growth is lingering as several high-profile projects have been put on the back-burner following the new government's fiscal rationalization.

Preparing for 2020 contingencies

As the new government's first budget suggests, the focus is on institutional reforms, improving the standards of living, particularly for the lower income groups, as well as encouraging entrepreneurship. The fiscal deficit is projected to narrow to 3.0% of GDP by 2020, and to 2.0% in the medium-term.

It is a typical Mahathir mix: people first, good governance, self-sufficiency, but openness to international trade and investment.

Yet, there are two key risks to the fiscal target forecast. On the one hand, growth could be less than anticipated, thanks to the challenging external environment. On the other hand, revenue flows could prove more volatile than expected, given the higher dependence on oil-related revenues, which account for almost a third of total.

While the government's expansionary efforts are limited by the ongoing fiscal consolidation, Malaysia can still rely on more accommodative monetary policy. In 2019, monetary policy is expected to be stable. As international headwinds are likely to escalate in 2020, the central bank could opt for a more dovish stance.

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Disclaimer: Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute ...

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