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Exclusive: Shadowed by trade war, Malaysia says 2020 fiscal deficit target a 'challenge'

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07/22/2019 | 05:11am EDT
Malaysia's Finance Minister Lim Guan Eng speaks during an interview with Reuters in Putrajaya

KUALA LUMPUR (Reuters) - Malaysia will find it challenging to meet its 3% fiscal deficit target for next year due to uncertainties around the U.S.-China trade war, the finance minister told Reuters in an interview on Monday.

Southeast Asia's third-largest economy is dealing with a debt pile of over 1 trillion ringgit (194.5 billion pounds), which the administration of Prime Minister Mahathir Mohamad has blamed on mismanagement by the previous government.

Malaysia is also struggling with slowing economic growth, hurt largely by a global slowdown and the trade war between the United States and China - two of Kuala Lumpur's biggest trading partners.

Finance Minister Lim Guan Eng said while Malaysia can meet this year's fiscal deficit target of 3.4%, next year's target of 3% would be harder to meet.

"That will be challenging. Because (of) the uncertainties brought about by the trade war," Lim said.

"There's a time lag effect. The full brunt of it, everyone expects it to hit next year."

Lim said he was "cautiously confident" about meeting the government's full year growth forecast of 4.3% to 4.8%.

The central bank in May warned that weakening global demand and the U.S.-China trade war are raising risks for Malaysia. It cut interest rates by 25 basis points, Malaysia's first since July 2016, amid the growth concerns.

CHINA OUTREACH

Despite the impact on the economy, Lim said Malaysia could benefit from trade diversion from the trade war.

"In the short term, we expect to gain some benefits in the form of business relocation, trade and investment diversion. We are seeing numbers pointing to that," Lim said.

"But in the long term, everyone is a loser. There are no winners."

The finance minister, who met with Chinese officials on his visit to Beijing earlier this month, said China offered more infrastructure investments under the Belt and Road initiative.

"If the pricing is right, we will consider it," he said.

Malaysia will send an investment mission next month to Shenzhen in a bid to attract technology and other companies who might be looking to move their supply chains in light of the trade war, the minister said.

Malaysia will also consider selling panda bonds in China and another tranche of Japanese samurai bonds to raise funds if the pricing is attractive, he said.

Prime Minister Mahathir, who came to power after a stunning election victory last May, had vowed to renegotiate or cancel what he calls unfair Chinese projects authorised by his predecessor.

In April, Malaysia and China agreed to resume construction of a multi-billion dollar rail project after negotiating the cost down by nearly a third.

Lim also said Malaysia and China were in discussions to establish a link between the Shenzhen and Kuala Lumpur stock exchanges, he said.

"This is linking... both in terms of products and infrastructure," he said, adding that it could be finalised in the next six months.

(Reporting by Joseph Sipalan and A. Ananthalakshmi; additional reporting by Joe Brock; Editing by Michael Perry and Sam Holmes)

By Joseph Sipalan and A. Ananthalakshmi

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