Malaysia May Raise Growth Forecast, Reducing Need for Stimulus

March 22, 2010, 1:22 PM EDT
By Stephanie Phang and Michael Munoz
March 23 (Bloomberg) -- Malaysia’s central bank may raise its 2010 growth forecast amid an economic rebound that’s reduced the need for emergency stimulus measures, as the government prepares to unveil its long-term strategy.
“It is almost certain Bank Negara will raise the official GDP growth forecasts,” said Azrul Azwar Ahmad Tajudin, chief economist at Bank Islam Malaysia Bhd. This provides “increased latitude to unwind further the unprecedented stimulus measures, both monetary and fiscal, which were undertaken to minimize the impact of the global recession,” he said.
Central bank Governor Zeti Akhtar Aziz raised interest rates for the first time in almost four years on March 4, joining nations from Australia to India in withdrawing monetary stimulus as Asia leads a recovery from the global slump. Prime Minister Najib Razak, who boosted government spending and eased investment rules last year to revive growth, is due to unveil policies next week to help Malaysia become a high-income economy.
Malaysia emerged from its first recession in a decade last quarter as exports such as Sime Darby Bhd. palm oil and Unisem (M) Bhd. semiconductors recovered. Najib said last week the economy can expand as much as 6 percent this year and his trade minister said March 2 overseas sales may increase as much as 7 percent, more than a previous forecast of 3.5 percent.
Ringgit Gains
The ringgit has climbed 2.7 percent this year, the third- best performer among 10 Asian currencies outside Japan, as Asia’s recovery drew funds to the region and Malaysia moved ahead of most of its neighbors in raising borrowing costs.
Malaysia may increase interest rates further to avert asset bubbles and discourage risky investments, even as inflation will likely remain “modest” this year, Zeti said in a March 12 Bloomberg Television interview.
Bank Negara this month increased the benchmark rate to 2.25 percent from a record-low 2 percent. Consumer prices climbed 1.2 percent in February from a year earlier, accelerating from an average 0.6 percent pace for all of 2009.
Faster growth may help Najib cap the budget deficit this year, forecast by the government to narrow to 5.6 percent of GDP from a 22-year high of 7.4 percent in 2009.
Withdraw Stimulus
“Bank Negara is expected to raise interest rates further,” perhaps to 2.75 percent before the end of the year, said David Cohen, Singapore-based director of Asian forecasting at Action Economics. “Similarly, the government will seek to trim the budget deficit, gradually withdrawing some of the fiscal stimulus implemented last year.”
Najib’s government has said it plans to reduce spending by revamping subsidies on fuel and essential items from sugar to flour. Such goods are sold at below market rates in Malaysia because the state pays suppliers to keep prices low.
Still, a plan to limit fuel subsidies to benefit the nation’s poorest consumers by May has been delayed to later this year, the consumer affairs ministry said this month. The government may also postpone plans to introduce a goods and services tax next year that would have widened its tax net, the Malaysian Insider news Web site said March 18, citing an unidentified government lawmaker. The date for the tax hasn’t been decided, Najib said the same day.
New Economic Model
Those plans may be included in the new economic model, Reuters reported last week, citing an unidentified government official. The government will also review proposals to further pull back Malaysia’s four-decade policy of giving preferential economic benefits to the country’s ethnic Malay majority, Reuters said, citing the official who had seen the plans.
Najib, who already increased the foreign ownership limit in Malaysian banks and stockbrokers and opened up services industries, said March 18 the government is “sparing no efforts” to achieve economic growth of 5 percent to 6 percent this year and “to help Malaysia achieve its goal to become a high-income nation.”
Comments by the government suggest the new economic model will focus on boosting productivity through innovation and research and development, Australia and New Zealand Group Ltd. said in a March 16 report. While that will contribute toward raising labor productivity, “it is unlikely sufficient to elevate Malaysia’s status to a high-income economy by 2020,” said Yeo Han Sia, a strategist at ANZ. “To reach the per capita income target of $15,000 by 2020, Malaysia’s aggregate investment will have to rise substantially in the coming decade. We would look for specific policy thrusts in the new economic model to address the stagnant private investment rates.”

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