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Malaysia Country Risk Report Q1 2019

Malaysia Country Risk Report Q1 2019

We are lowering our 2018 real GDP growth forecast for Malaysia to 5 1% (from 5 8% previously) due to slowing exports and a weaker investment outlook in H218 as well as to reflect the weak Q218 growth of 4 5% y-o-y, which underperformed the Bloomberg consensus estimate of 5 2% y-o-y

We maintain our 2018 and 2019 fiscal deficit forecasts, which both stand at 3 7% of GDP, as the fiscal situation in 2018, such as the reversion to sales and services tax, is unfolding largely according to our expectations thus far As for 2019, we acknowledge upside risks to our forecast from a moderation in the populist tone of the government but will maintain the forecast until after the budget is tabled on November 2 Over the long term, we remain concerned about competitive politics derailing the government's nascent fiscal consolidation efforts

We maintain our forecast for Malaysia's policy interest rate to remain at 3 25% through 2018 Benign inflation in H218 will reduce the need for a hike While a rate cut is becoming more likely due to weakening growth prospects, we do not expect a rate cut as the central bank will want to support the ringgit, which has been losing ground, by maintaining a positive policy rate differential against the US

We maintain our bearish outlook on the ringgit, forecasting a 2018 average exchange rate of MYR4 00/USD, against the backdrop of lingering political uncer-tainties and narrowing policy rate differential with the US We also remain negative on the unit over the long term due to narrowing growth differential against the US and a still-poor investment outlook That said, support from slight undervaluation in real effective exchange rate terms, subdued inflation and rising oil prices is likely to cushion the downtrend over the long term

Malaysia's Pakatan Harapan coalition government is showing signs of strain, which poses downside risk to policymaking and reform Recent events suggesting greater strain between coalition members include contentious Parti Keadilan Rakyat's (PKR) internal party elections, Prime Minister Mahathir Mohamad's ap-parent slight against the PKR and PKR President-Elect Anwar Ibrahim's planned return to parliament in October Major Forecast Changes

We have revised our 2018 real GDP growth forecast to 5 1% y-o-y, from 5 8%

Key Risks

Malaysia's economy is relatively well diversified and not particularly at risk from external shocks The largest threat to the Malaysian economy comes from a rapid unwind of the household credit boom that has taken place over the past few years since the global financial crisis This has the potential to result in a collapse in domestic demand amid declining property prices This is not our core view, however, as debt service ratios remain manageable at current levels


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
Revising Down Malaysian Growth Forecast On Mounting Headwinds
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: MAIN IMPORTS AND EXPORTS
TABLE: MAIN IMPORT & EXPORT PARTNERS
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy
Bank Negara Malaysia To Hold Rates Despite Slowing Growth
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
Political Realities A Threat To Malaysia's Fiscal Consolidation
TABLE: FISCALLY SIGNIFICANT POLICIES
Structural Fiscal Position
TABLE: MAIN EXPENDITURE AND REVENUE CATEGORIES
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
Malaysia Country Risk Q1 2019THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.ContentsCurrency Forecast
Malaysian Ringgit To Remain Under Depreciatory Pressure
TABLE: CURRENCY FORECAST
10-Year Forecast
The Malaysian Economy To 2027
Malaysia's Long-Term Real GDP Growth To Slow To 4.2%
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
PKR Issues Present Downside Risks To Malaysia's Political Stability
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Malaysian Electoral Politics To Remain Uncertain
Operational Risk
TABLE: OPERATIONAL RISK
Economic Openness
TABLE: TARIFF AND NON-TARIFF TRADE BARRIERS
TABLE: FREE TRADE AGREEMENTS
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES
TABLE: BARRIERS TO FDI
Utilities Network
TABLE: ELECTRICITY RISKS
TABLE: FUEL RISKS
TABLE: TELECOMMUNICATIONS RISK
TABLE: WATER RISKS
Global Macro Outlook
Contagion Risks Limited To EMs For Now
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % Y-O-Y
Index Tables
TABLE: MALAYSIA – MACROECONOMIC DATA & FORECASTS

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