Hobbled by debt, Malaysia to cut public investment as growth seen slowing

By Joseph Sipalan

KUALA LUMPUR (Reuters) - Malaysia's new government will cut public spending sharply despite foreseeing the economy growing more slowly than had been expected earlier, as it has to reduce a large debt pile left behind by the previous administration.

Voted into power in May, Prime Minister Mahathir Mohamad's government quickly revised up Malaysia's debt to around 1 trillion ringgit ($239.23 billion), saying it had been understated by Najib Razak, the former premier now facing multiple charges of graft and abuse of power.

The government released its economic outlook report on Friday, to accompany its first budget. The report forecast economic growth of 4.8 percent in 2018 - a sharp drop from the 5.9 percent pace a year earlier - with a slight pick up to 4.9 percent next year.

Last month, Mahathir had flagged expectations that growth would be between 4.5-4.9 percent, down from an earlier forecast of 5.0 percent.

"Private sector expenditure will remain as the key driver of growth, cushioning the effects of lower public sector spending in 2018 and 2019," the government said in the report.

Public sector investment is forecast to contract by 1.5 percent in 2018 and fall further by 5.4 percent next year.

The slowing growth and spending forecasts come two weeks after the government abandoned previous fiscal goals, estimating wider budget deficits over the next few years.

Mahathir's government is set to deliver an austerity flavoured first budget on Friday, as it looks to fill a revenue gap left by the scrapping of a consumption tax.

It has already announced the cancellation or suspension of at least $20 billion in public infrastructure projects, and the government is unlikely to invest in new projects in the short-term, according to the economic report.

PRIVATE SECTOR FOCUS

In 2019 monetary policy will remain accommodative and any "adjustments will depend on risks surrounding the outlook for domestic growth and inflation," the government said in the report.

Inflation is projected to increase 2.5-3.5 percent next year from this year's 1.5 to 2.5 percent.

The government expects the private sector to play a bigger role in development, with private investments seen growing 4.5 percent this year and increasing 5 percent in 2019.

Private consumption will remain the main growth driver. It is projected to grow 7.2 percent in 2018 and moderate slightly to 6.8 percent in 2019.

Most sectors will likely face tepid growth over this year and 2019, though the mining sector is seen rebounding from a 0.6 percent decline in 2018 to grow 0.7 percent the following year.

Agriculture is seen expanding 3.1 percent in 2019, improving on 0.2 percent projected growth this year due to expected improvements in palm oil yield.

The government said export growth will likely ease slightly to 3.9 percent in 2019 from 4.4 percent growth projected for this year.

The current account surplus is projected to narrow to 38.6 billion ringgit in 2018, down from 40.3 billion ringgit the previous year. The government expects it to drop further in 2019 to 34 billion ringgit.

($1 = 4.1800 ringgit)

(Editing by A. Ananthalakshmi and Simon Cameron-Moore)