Malaysia's Mahathir faces headwinds as second-quarter economic growth falters

By Joseph Sipalan

KUALA LUMPUR (Reuters) - Malaysia cut its full-year growth forecast and reported much slower second-quarter expansion on Friday, as the country reviews mega projects and tackles a massive debt left by the previous government.

Weaker growth figures were expected, analysts say, due to global uncertainties and questions raised by Mahathir Mohamad's stunning election win in May that ended six-decade-long single party rule in Southeast Asia's third-largest economy.

Slower growth also signals the economic risks facing the 93-year-old Mahathir, who was premier from 1981 to 2003 and now has been back in the job for 100 days.

Annual expansion in the second quarter fell to 4.5 percent, well below January-March's 5.4 percent and a Reuters poll forecast for 5.2 percent.

Bank Negara Malaysia (BNM), the central bank, blamed the fall partly on commodity production "shocks".

The second quarter had the slowest growth since October-December 2016.

Mining contracted "due mainly to unplanned supply outages, while the agriculture sector was affected by production constraints and adverse weather conditions," BNM said.

HARD TO KEEP PAST FORECAST

The bank lowered its 2018 growth projection to 5.0 percent from 5.5-6.0 percent.

Given the first half's results, "it's hard to keep to the previous (growth forecast) numbers," said Brian Tan, an analyst at Nomura.

Friday's GDP announcement was Governor Nor Shamsiah Mohd Yunus' first since taking over in late June as part of a high-level management shake-up by Mahathir .

"The second quarter of 2018 was an eventful quarter," she told reporters.

"For some, it will be remembered for the 14th general election, the beginning of a one-off tax holiday and significant improvement in consumer and business sentiments," she said.

The ringgit has been depreciating since April, but is still emerging Asia's strongest-performing currency this year, shedding about 1.4 percent against the dollar.

Also on Friday, BNM relaxed currency conversion rules, saying it would no longer force exporters to convert proceeds into ringgit and will allow flexibility for hedging.

Prakash Sakpal, Asia economist at ING in Singapore, said the desired effect of Friday's steps is to weaken the ringgit and protect against fallout from the trade war between the United States and China, which is Malaysia's biggest trading partner.

"They are relaxing the export controls, so that should cushion some of the impact from the trade war," he said.

Nor Shamsiah said the trade war has had a minimal effect so far but the global economy will be affected if it escalates.

IS THE WORST OVER?

Since taking over, Mahathir has pushed to review major infrastructure projects launched by the past administration and cracked down on corruption. He also repealed an unpopular goods and services tax.

But his government has warned that much effort is needed to pay off debts of over $1 trillion accumulated by the previous government led by Najib Razak, who is being investigated in connection with a scandal at state fund 1Malaysia Development Berhad (1MDB).

"I think the worst is over for Malaysia - the Q2 figure can even be taken as a sign of strength as the government is trying to take difficult steps," said Trinh Nguyen, Hong Kong-based senior economist at Natixis Asia.

"The message coming out of Malaysia is that the focus is on fiscal consolidation," she said.

Nor Shamsiah said monetary policy will remain "accommodative" and the economy is on a steady growth path this year and in 2019.

(Additional reporting by A.Ananthalakshmi and Liz Lee; Writing by Praveen Menon; Editing by Richard Borsuk)