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4 Jun 2018

International Economy

New context of Malaysian economy after“2018 poll: Closely watch major shift in economic policy amid fragile economic fundamentals (Current Issue No. 2913)

          The economic policies recently announced by newly-elected Malaysian Prime Minister Mahathir Mohamad mark a major shift from those under the ousted Barisan Nasional government, especially the country's policies on large-scale infrastructure investments. On May 28, 2018, Prime Minister Mahathir announced the scrapping of a planned high-speed rail project to connect Kuala Lumpur, Malaysia and Singapore worth over USD28 billion.

            KResearch views that the revision of mega projects, including the recently-cancelled high-speed rail link between Malaysia and Singapore, may not affect the short-term economic growth of Malaysia. It may however help ease the country's fiscal burden in the long run. As Malaysia is facing a fundamental challenge due to its fragile fiscal status, the decision may contribute to the improvement of Malaysia's credit rating in the future.

            The foreign direct investment policy expected to be redefined by the Pakatan Harapan government may not significantly alter or decelerate the value of foreign direct investment unless the new government can convince the private sector of a smooth continuation of policy implementation. The enhanced confidence of foreign investors will help prevent a drastic slide and stabilize the amount of investment in the future. Nonetheless, close attention should be paid to prospective revisions of investment rules and regulations that may give more competitive edges to domestic businesses.

            While keeping a cautionary perspective, KResearch expects that Malaysia's GDP expansion rate in 2018 will decline to 5.3 percent compared to a 5.9-percent growth rate achieved in 2017. With regard to impacts on Malaysia's financial markets, the future uncertainties associated with new policies may affect foreign investors' decisions to invest in debt instruments and equity securities. Thus, the issue should be closely monitored. Therefore, clarity in Malaysia's national administration policies in the next 5 years will be a key factor to maintain the confidence of investors in the short and long term.