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As China expands its influence into Southeast Asia, Malaysia has emerged as one of the biggest winners, with its port and railway projects expected to receive as much as 400 billion ringgit ($93 billion) from the world's second largest economy, Citi Research said in a Tuesday note.
But questions have persisted over the commercial viability and funding for those projects, which could have "significant implications" for Malaysia's economic growth and the ringgit, Citi said.
"Overall, FDI (foreign direct investments) from China may understate the extent of Chinese involvement in the Malaysian economy, but overstate the impact on gross domestic product (GDP) growth or Malaysian ringgit demand, " the bank's analyst Wei Zheng Kit wrote.
Kit questioned overcapacity in Malaysia's ports, which may indicate China's interest in those projects was motivated more by geopolitical interests, than profit. For instance, the ports along the peninsula's West coast would allow China to secure access to the Straits of Malacca, Kit said.
In addition, funding the projects through loans from Chinese state-owned banks could increase the Malaysian government's liabilities, while construction contracts awarded to Chinese firms were in fact "services imports," which could subtract from headline GDP growth and ringgit demand, he added.
That comes as Malaysia's fiscal deficit grew to 30.5 billion ringgit in the first five months of 2017, an increase from 26 billion ringgit in the same period a year ago, Citi said.
Until there is more clarity on China's involvement in Malaysia's infrastructure expansion, immediate fears over the country's growing fiscal deficit will hinge on the timing of General Elections, which were due by mid-2018, the bank added.
Citi expected Prime Minister Najib Razak to call for early elections in August or September of this year, which would allow the government to rein in spending for "political" gains and keep the deficit at the targeted 2 to 2.5 percent of GDP between 2017 and 2019.
In the leadup to an election, Malaysia tends to expand fiscal spending on projects that appeal to the electorate.
"Still, we acknowledge rising risks of a delay closer to the mid-2018 deadline, which would imply a significantly slower pace of fiscal consolidation," Kit wrote, adding that stabilizing oil prices may help the country reduce or eliminate revenue declines.
Overall, Citi expects Malaysia's economy to grow 5.2 percent in 2017, benefiting from the momentum in the tech-export improvement.
The Southeast Asian country posted a surprise 5.6 percent rise in GDP in the first quarter, above consensus expectations for 4.8 percent as domestic demand more than doubled.