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Malaysia: PH Government 30-Day Report Card Summary

Core Content

The document provides an analysis of Malaysia's economic and political situation following the surprise outcome of the 14th general election and the first 30 days of the Pakatan Harapan (PH) government's tenure. It outlines the government's priorities, the progress on manifesto promises, the fiscal and debt challenges, and the impact of external factors on investor sentiment and capital flows.

Main Points

Government Priorities and Progress

• The PH government has outlined several key priorities, including fiscal rationalization, institutional reforms, and curbing corruption.
• As of the first 30 days, 5 out of 10 manifesto promises are underway, indicating a steady implementation of policies.
• Key actions taken include:
  • Abolishing the Goods and Services Tax (GST) and introducing the Sales and Service Tax (SST).
  • Stabilizing petrol prices and introducing targeted subsidies.
  • Setting up a special task force to investigate the 1MDB scandal and recover assets.
  • Establishing a committee for institutional reforms and appointing a new Attorney General.
  • Canceling the High Speed Rail (HSR) and MRT3 projects.

Fiscal and Debt Management

• The government has declared a MYR1trn debt position, which is 80.3% of GDP, and remains committed to a 2.8% fiscal deficit target for 2018.
• Measures to plug the fiscal gap include:
  • Reintroducing the SST in September 2018.
  • Relying on higher oil dividends and cost rationalization.
  • Reducing government expenditure through restructuring, downsizing, and cutting minister salaries by 10%.
• The Ministry of Finance estimates MYR10bn in cost savings for the year.
• The government is also addressing corruption by drafting new laws and requiring officials to declare assets.

Investor Sentiment and Capital Flows

• Foreign investors were net sellers of Malaysian bonds and equities in May, totaling MYR12.9bn in bonds and MYR5.6bn in equities.
• The Ringgit weakened 1.6% against the USD since end-April.
• Despite this, the current account surplus reached MYR15bn in the first quarter, the highest since 2Q 2014.
• Malaysia's foreign reserves stood at US$108.5bn as of end-May, sufficient to cover 7.6 months of retained imports.

External Risks and Outlook

• The document highlights that external risks are manageable, with a low level of short-term external debt and a high proportion of hedged foreign currency liabilities.
• The external debt has stabilized since peaking in 2016, and more than a third of the debt is in Ringgit.
• The foreign currency debt is mainly offshore borrowings, which are largely hedged.
• The author expects a turnaround in capital flows in the second half of 2018, which could lead to a consolidation and trend reversal in the USDMYR exchange rate, provided there is policy clarity, positive rating agency affirmation, and stable growth.

Key Information

• Real GDP growth for 1Q 2018 was 5.4% y/y, down from 5.9% in 4Q 2017.
• Exports accelerated 14% y/y in April, signaling a positive start for the second quarter.
• Private consumption is expected to be a key growth driver in the second half of 2018.
• The 2019 Budget will be released on 2 November, and the mid-term review of the 11th Malaysia Plan will be tabled in September.
• Foreign investment in Malaysia remains net negative, but the author believes the situation will improve as the government addresses fiscal and governance issues.

Conclusion

The PH government is on track to deliver on its manifesto promises, with a focus on fiscal discipline, institutional reform, and corruption eradication. While foreign investor sentiment remains cautious, the government's efforts to stabilize the economy and improve governance are expected to reassess risks and rebuild investor confidence over time. The economic outlook is cautiously optimistic, with a 5% GDP growth forecast for 2018, supported by a strong current account surplus and adequate foreign reserves. The exchange rate is expected to stabilize if the government maintains its policy clarity and fiscal targets.