This article first appeared in The Edge Financial Daily on April 14, 2017 - April 20, 2017

KUALA LUMPUR: The World Bank yesterday maintained its forecast of Malaysia’s 2017 economic growth at 4.3%. It is a relatively conservative forecast, which anticipates that the economy will be anchored by higher government subsidies, more infrastructure spending and rising exports.

“Malaysia’s growth rate slowed quite sharply in 2016, and that was actually warranted as the country introduced fiscal policies to adjust to low commodity prices. I also understand other economists might have a more bullish view on Malaysia, but this is our best estimate for now,” said Sudhir Shetty, the World Bank’s chief economist for East Asia and Pacific.

“Despite favourable prospects, the region’s resilience depends on policymakers taking into account of, and adjusting to, significant global uncertainties and domestic vulnerabilities,” he told reporters at the release of the World Bank’s “East Asia and Pacific Economic Update” report yesterday.

He pointed out that the government’s fiscal position remains under pressure despite a gradual pickup in global trade growth and rising commodity prices.

“That is why we have not upgraded our growth forecast for Malaysia this year,” Shetty explained.

Last month, Moody’s Investors Service revised its assessment of Malaysia’s fiscal position to “moderate (+)” from “high (-)”. The weaker rating reflected concerns over continued deterioration in revenue for the fourth consecutive year, together with large debt stock and poor debt affordability.

However, World Bank senior economist for Malaysia Dr Rafael Muñoz Moreno said Malaysia’s fiscal position is “less of a concern as rising fiscal pressure is more prevalent in other nations”.

“What we see is that the recovery in commodity and oil prices will provide some ease to fiscal consolidation prospects for the government,” he said.

The World Bank expects Malaysia’s fiscal deficit to fall to 3% this year, and to 2.8% in 2018, from 3.1% in 2016.

World Bank country manager for Malaysia Faris Hadad-Zervos noted that Malaysia had introduced various methods, such as the goods and services tax, to cushion its fiscal position from external volatilities.

“In view of the increasing global risks, Malaysia has to make sure that it has ample fiscal space to allow itself to continue withstanding the uncertainties stemming from these risks,” Hadad-Zervos added.

Against this backdrop, Shetty anticipates that Malaysia will see modest growth over the next three years, “somewhat rising in 2017, and modestly picking up in 2018 and 2019”.

While stronger exports will support growth, the economy will also be driven by domestic demand, backed by a stable labour market and income support measures, such as cash transfers — Bantuan Rakyat 1Malaysia — that will sustain private consumption in the near term.

As for the recent uptick in inflation that caused real interest rates to turn negative, Moreno said the surge will be temporary. It merely reflects the low-base effect from last year and a temporary pickup in fuel prices this year.

Inflation rose to an eight-year high of 4.5% in February this year, but it was still well below the record high of 5.7% in November 2008.

“Our expectation this year is that the consumer price index (CPI) will move into a more sustainable path,” Moreno said, adding that negative real interest rates are “not a concern at the moment”.

The World Bank expects the CPI to average 2.2% this year, lower than Bank Negara Malaysia’s (BNM) projection of 3% to 4%.

“We are keeping an eye on second-round effects — whether those are going to trigger any salary increases — and that is not the case for Malaysia,” explained Moreno, who does not believe there is a need for BNM to intervene with monetary policy tools at this point in time.

However, Hadad-Zervos highlighted that there “should also be a continued focus on increasing affordability to tackle the rising cost of living”.

Looking abroad, the protectionist rhetoric of US President Donald Trump will continue to pose risk to global trade growth, noted Shetty.

In turn, this also poses a risk to Malaysia’s export-reliant economy.

“What we are seeing is tapering down of the protectionist tone, but we should not discount or dismiss it as mere rhetoric. What could happen is that a country initiates unilateral action. That could result in retaliatory action,” Shetty cautioned.

However, Shetty noted that all is not lost as other free trade negotiations, such as the China-led Regional Comprehensive Economic Partnership, could be a blessing in disguise for emerging East Asian economies such as Malaysia.

“The East Asia region can seize opportunities to advance regional integration, including by deepening ongoing initiatives, lowering barriers to labour mobility, and expanding cross-border flows of goods and services within the Asean Economic Community,” he explained.