Malaysia faces significant challenges in the medium term, with rising inflation and lower consumption and private investment expected to take a toll on economic growth in 2016, the central bank said today.

South-East Asia’s third-largest economy is projected to grow 4.0 to 4.5 percent in 2016, compared with 5 percent growth last year, Bank Negara Malaysia (BNM) said in its annual report. That would be the second straight year of slower growth.

Growth in Malaysia, the world’s second-largest exporter of liquefied natural gas, has faltered due to weak energy prices and risks linked to a financial scandal involving state-owned 1MDB. The ringgit currency slumped to six-year lows last year.

“We recognise that there are downside risks arising from a more moderate recovery in major economies, further weakness in global commodity prices and further adjustments in spending among households,” central bank chief Zeti Akhtar Aziz told a news conference.

The recent rally in oil prices would not have an immediate impact on the Malaysian economy, Zeti said, as she does not expect crude oil prices to exceed US$60 per barrel for at least two to three years.

Private consumption growth is expected to trend below its long-term average in 2016, while private sector investment growth is projected to be slower compared with the past five years due to greater uncertainties and caution, BNM said.

Headline inflation is forecast to edge higher in 2016 to between 2.5 and 3.5 percent compared with 2.1 percent last year, in part due to a weak ringgit.

“Over the medium term, the challenges that Malaysia will face are expected to remain significant,” Zeti said in the report.

The mounting challenges for Malaysia come amid scandals over US$11 billion in debt racked up by state fund 1MDB, and nearly US$700 million of deposits into Prime Minister Najib Abdul Razak’s private accounts.

Najib has denied any wrongdoing, saying he did not use the funds for personal gain and this year he was cleared of any criminal offence or corruption.

Uncertainty also remains over leadership at the central bank: Zeti will retire on April 30 after 16 years at the helm, but no announcement has been made yet on who her successor will be.

The central bank’s governance committee has submitted its recommendation to the government and it is now up to the government to decide, Zeti said today.

Malaysia will likely face volatile movements in capital flows, the central bank said, adding that its monetary operations will be directed towards ensuring sufficient domestic liquidity in the financial system.

Exports are likely to grow 2.4 percent this year compared with 1.9 percent in 2015. Imports are seen rising 4.9 percent versus 0.4 percent last year.

The central bank expects the trade balance for 2016 to remain in surplus, albeit lower at RM79.5 billion (US$19.91 billion) compared with RM94.6 billion in 2015.

The central bank sees the current account surplus at RM19.1 billion for 2016, down from RM34 billion last year.

- Reuters