KUALA LUMPUR: The World Bank expects the Malaysian economy to slow to 4.7 per cent in 2015 before returning to 5.0 per cent next year.
In its first outlook for Malaysia this year, it said lower oil prices will dampen growth through delays in capital expenditures in the oil and gas (O&G) sector, a key driver of the recent investment boom.
It expects private consumption to moderate on tighter credit and a small impact from the introduction of the Good sand Services Tax (GST), before rebounding in 2016.
“A slight uptick in inflation is therefore expected despite low readings in the first half as lower oil prices are reflected throughout the economy,” it said in its East Asia Pacific Economic Update.
LNG exports, primarily to Japan, are a major component of the current account surplus and the four to five month lag in the transmission of oil prices to LNG prices is starting to be felt.
With the possibility of Japan restarting its nuclear reactors sooner than expected, LNG imports are expected to reduce.
“The current account is thus expected to narrow, although upside is possible if manufacturing export growth retains momentum from the fourth quarter.”
On risks to near term growth, the World Bank said the soft oil prices will impact growth, fiscal and external accounts.
“Although the government announced a slew of expenditure cuts to remain on a consolidation path, over a fifth of revenues depend on oil, including a yearly dividend from Petronas.”
If oil prices remain low, Petronas will be hard-pressed to maintain this dividend, especially if it is to continue its large investment programme.
Other risks include weakness in the global economy that would dampen export demand, renewed volatility in capital flows, and the realisation of contingent liabilities, which have increased since the global financial crisis.
Malaysia’s favourable economic prospects will support overall household income growth although falling palm oil revenues (driven by oil prices and the floods in late 2014) will pose a challenge to the livelihoods of smallholders.
“While the introduction of GST may impact low-income urban households, most goods consumed by this group have been exempted or zero-rated.”
It also expects the labour markets to remain robust but not buoyant, in line with economic performance.
Household income growth will remain on an upward, if somewhat slower, trend, with the share of the population earning less than US$4 per day expected to decline further.
On challenges, the World Bank said productivity-enhancing reforms are critical to support long-term growth and boost shared prosperity.
These include modernising social policies towards income-targeted programmes focused on equality of opportunities, reforming the education system without increasing public spending, enhancing competition in the economy and ensuring the sustainability of public finances by reducing dependence on energy revenues.
“Further gains in reducing inequality and boosting incomes at the bottom of the distribution hinge on speeding up these reforms to close skills- and income-based achievement gaps in education and the labour market.”
On the outlook for the region, the World Bank said growth will ease slightly in developing countries in East Asia and Pacific this year, even as the region benefits from lower oil prices and a continued economic recovery in developed economies.
“Despite slightly slower growth in East Asia, the region will still account for one-third of global growth, twice the combined contribution of all other developing regions,” said Axel van Trotsenburg, the World Bank’s East Asia and Pacific regional vice president.
Low global oil prices will benefit most developing countries in East Asia, especially Cambodia, Laos, the Philippines, Thailand, and the Pacific island countries.
However, the region’s net fuel exporters, including Malaysia and Papua New Guinea, will see slower growth and lower government revenues.
In Indonesia, the net impact on growth will depend on how much a decline for its coal and gas exports.