The World Bank expects the Malaysian economy to ease to 4.7 percent prior to normalising to five percent next year.
In its East Asia Economic update, the bank noted that lower oil prices will dampen growth via delays in capital expenditures in the oil and gas sector, which is a key driver of the recent investment boom.
“Private consumption will moderate on tighter credit and a small impact from the introduction of the Goods & Services Tax (GST), before rebounding in 2016,” it said.
“A slight uptick in inflation is therefore expected despite low readings in the first half as lower oil prices are reflected throughout the economy.”
World Bank also expects current account to narrow, “although upside is possible if manufacturing export growth retains momentum from the fourth quarter.” It noted that soft oil prices were the key risk to near term growth, external and fiscal 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 Petroliam Nasional Bhd (Petronas).”
It added that if prices of oil remain low, Petronas will be hard-pressed to maintain this dividend, particularly if it is to continue its large investment program.
Other risks include weakness within the global economy which could dampen export demand, renew volatility in capital flows as well as the realisation of contingent liabilities that have increased since the global financial crisis, it said.
Malaysia’s favourable economic prospects will support household income growth, albeit falling palm oil revenues will pose a challenge to smallholders’ livelihoods.
“While the introduction of GST may impact low-income urban households, most goods consumed by this group have been exempted or zero rated…Therefore, household income growth will remain on an upward, if somewhat slower, trend, with the share of the population earning less than US$4 (RM14.08) per day expected to decline further,” it said.