Malaysia's economy is healthy, but undercurrents could pose risks in the long term, Ms Selena Ling, head of Treasury Research and Strategy at OCBC Bank, told an ST Global Forum panel discussion yesterday.

These worrying signs include possible tax hikes, the government's contingent liabilities and the country's slippage in world competitiveness rankings.

For now, though, Malaysia has posted positive numbers on several fronts. In the first quarter of this year, its gross domestic product (GDP) grew a surprisingly robust 5.6 per cent over the same period last year, way above market expectations of 4.8 per cent .

Foreign direct investment held steady at 8.8 per cent of GDP, slightly up from 8.7 per cent last year. And while household and government debts are on the high side, Ms Ling said, inflation is manageable and unemployment is low.

"(This strong growth) sets a very nice economic backdrop for an election if it were to be called later this year or even early next year," she said. The country's next election must be held by August next year.

Despite the good showing, voters have flagged the government's handling of the economy as a key issue in the next election.

"What they mean is bread-and-butter issues, not economic growth. And this is a result of... GDP growth not filtering down to the lower-income households."

What Ms Ling is concerned about is the government's ability to meet its target of a balanced federal budget by 2020. This could mean more tough measures -such as tax hikes - that will affect the average Malaysian's ability to make ends meet.

"If you believe some speculation that at some stage they (the government) will have to pay for all these infrastructure projects, then GST may go up again after elections," she said. The 6 per cent goods and services tax was introduced in April 2015, adding to the burden of Malaysians who already had to pay more for fuel after government subsidies were rolled back.

Ms Ling advised watching out for contingent liabilities, namely loan guarantees the government has given to entities that are financing infrastructure projects, which add up to roughly 15 per cent of GDP.

To sustain its future growth, the country needs to focus on structural reform, in areas such as education, productivity and governance.

She noted that while Malaysia ranked 25th out of 140 countries in a recent WEF Global Competitiveness Index, its rankings had surprisingly slipped in areas such as primary school enrolment, technological readiness and tackling diseases such as tuberculosis and HIV.

Ms Ling also warned that Malaysia now has lower foreign reserves than Indonesia, a reversal of the situation just three years ago.

As at May 31, Indonesia had US$125 billion (S$173 billion) in reserves against Malaysia's US$98 billion.