<![CDATA[Malaysian economy: a boost for Mahathir, but US-China trade war threatens to spoil Pakatan Harapan's party]>

News that the Malaysian economy expanded more than expected in the first quarter of the year will be welcomed by the new Pakatan Harapan government " but it shouldn't get too carried away with the celebrations.

The US-China trade war together with domestic issues such as the expected transition of power from current Prime Minister Mahathir Mohamad to Anwar Ibrahim are among the factors that could spoil the party, experts have warned.

Figures released by the Malaysian central bank on Thursday show the economy grew 4.5 per cent in the first quarter, beating projections of 4.3 per cent. However, the bank cautioned that external factors including the trade war could hit exports and drag on the economy and maintained its projection that full-year growth would be between 4.3 and 4.8 per cent.

Meanwhile, political analysts warned that domestic concerns could also hit investor confidence if the government fails to maintain a strong fiscal policy.

Still, Pakatan Harapan is likely to take some comfort in the figures, which some will see as a validation of its first year in government.

With Malaysia relegated to the World Government Bond Index watch list and grappling with a ringgit on the downtrend against the US dollar, the administration has been widely criticised for failing to rejuvenate a faltering economy.

But it blames many of its problems on the debts it inherited from the Barisan Nasional, which until the watershed election last May had ruled the country since its independence from Britain. Top figures from the Barisan Nasional, including the former prime minister Najib Razak, are currently on trial for corruption.

On trial: former Malaysian Prime Minister Najib Razak. Photo: AP

Economist Yeah Kim Leng said the Pakatan Harapan had worked hard to stamp out corruption and reform core institutions during its first year. But now, that phase was over and investors were "looking at policy direction and policy certainty".

"Investors have expressed concern over the lack of economic direction, which is why the government now is refocusing efforts and looking at economic strategy," said Yeah.

Inter-Pacific Securities research head Pong Teng Siew said the government's decision to restart the China-backed East Coast Rail Link and the Bandar Malaysia mixed-use development would boost investor confidence.

The Pakatan Harapan put both projects on the back burner shortly after the election, citing costs and questioning the Barisan Nasional's motivations for signing the deals.

"The projects are a key part of reinvigoration," said Pong. "The issues are over. Now it is going on to the next stage where the projects on hold will resume, and from there hopefully yet another stage where new projects will be implemented."

LEADING CONCERNS

The looming political transition may give investors pause for thought. The expected handover from Mahathir, 93, to prime minister-in-waiting Anwar " for which no date has yet been set " could weigh on investors' minds, said Yeah.

And TA Securities research head Kaladher Govindan said the shock election result that ended the Barisan Nasional's more than six decades of uninterrupted rule had created "uncertainties". It was key not to dwell on the past, he said: "The government must shore up sentiment by coming up with more forward-looking statements [and detail] the nation's direction going forward."

Prime-minister-in-waiting: Anwar Ibrahim. Photo: Bloomberg

Meanwhile, some opposition lawmakers have argued the latest GDP figures are no cause for celebration, pointing out that growth is slower than the previous quarter's 4.7 per cent and the 5.3 per cent of the same period last year. They have criticised the Pakatan Harapan for an over-reliance on oil and gas revenue.

Senator Khairul Azwan Harun said the nixing of a goods and services tax (GST) to restore a sales and service tax last year had spooked foreign investors, as had the most recent national budget.

"We are now more dependent on petrol revenues. For all the faults of the previous government, you cannot take away the fact that it implemented GST so the economy would not be dependent on this one source of income," he said.

"Unlike [Pakatan Harapan] when they were in opposition, we won't ignore the fact that international factors are contributing to this economic slump ... But we aren't wrong to point out that Pakatan Harapan's indecisiveness and internal politics are major factors as well."

This was echoed by former minister Khairy Jamaluddin, who attributed the slower growth to Pakatan Harapan's "unclear and ambiguous mission and vision for the economy".

The Pakatan Harapan has been criticised for an over-reliance on oil and gas revenue. Photo: Reuters

But the economist Kaladher said moves such as restoring the sales and service tax, which boosted consumer spending, and doubling the country's reliance on its oil revenues could be forgiven.

"These one-off things have already been highlighted. Going forward the government must just address leakages in the economy and make up for losses from abolishing the GST. Their figures put forth that [sales and service tax] collections can be stronger than expected."

BRIGHT SPOTS

New fiscal reform measures such as a gradual increase in the minimum wage, targeted fuel subsidies and the revival of projects such as the East Coast Rail Link and other train lines were likely to support private consumption and investment growth in the short term, according to AllianceDBS Research.

Ongoing central bank development initiatives to boost market liquidity and accessibility " as well as flexibility in currency hedging " also offer reason for optimism. The bank highlighted the initiatives as it released the quarterly figures, just one week after cutting its overnight policy rate by 25 basis points to three per cent.

While the Pakatan Harapan can do little to change the outcome of the US-China trade war, it is able to do something about lingering political uncertainty.

"The government must assure investors that it is creating the right environment to make people confident of its efforts to build the country's financial [credentials], which it should have done in the first year," said economist Yeah.

"Hopefully by 2020 we should see greater certainty and more focus, direction and clarity on economic management."

This article originally appeared on the South China Morning Post (SCMP).

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