Malaysia to Cut Economic Forecast; Rates Appropriate
Malaysia’s central bank said it will lower the country’s 2009 economic forecast amid a worse-than- expected slump in exports, predicting the nation will recover in the second half of the year.
“The export contraction was much greater than was earlier envisaged,” Governor Zeti Akhtar Aziz said in a Bloomberg Television interview in Singapore on May 9. “This more significant contraction of the export sector will require a revision of the numbers. The important part is the domestic sector continues to grow.”
Southeast Asia’s third-largest economy is facing its first contraction in more than a decade, with the central bank currently forecasting it may shrink 1 percent this year or expand that much. The 1.5 percentage points of interest-rate cuts since late November and the government’s 67 billion ringgit ($19 billion) of stimulus measures are enough for now, Zeti said.
“Right now the assessment is that there will be an improvement in the second half of the year, especially in the fourth quarter,” she said. “Unless that assessment changes, then the current rate is the appropriate rate.”
Asian governments have pledged to pump more than $950 billion into their economies through increased expenditure, tax cuts and cash handouts to kick-start local consumer and business spending. Growth in Asia including Japan, Australia and New Zealand will probably slow to 1.3 percent this year, from 5.1 percent in 2008, the International Monetary Fund said May 6.
Measures ‘Sufficient’
Malaysia’s stimulus plans are “sufficient” and if implemented aggressively and efficiently, will help the economy resume growth in the second half of this year after a “marked contraction” in the first six months, Zeti said. The government has the capacity to do more if needed, she added.
Bank Negara Malaysia kept its overnight policy rate unchanged at 2 percent in April following three consecutive reductions from Nov. 24 to Feb. 24.
The worst global economic slump since World War II has battered Asian exports, including Malaysian-produced Intel Corp. computer chips and IOI Corp. palm oil. The country’s industrial production fell for a seventh month in March, dropping 14.4 percent from a year earlier, a report showed today. Exports slumped 15.6 percent.
Once the world economy improves, Asia “holds the greatest promise for a stronger recovery,” Zeti said. “Our financial system continues to function, and therefore when conditions in the global environment stabilize, I believe that Asia will see a rapid recovery fast cash advance.”
Asian Currencies Rise
Malaysia’s GDP growth may revive to a 4 percent-to-5 percent pace once the global economy recovers, she said, without specifying a time frame.
The ringgit rose to a four-month high of 3.4965 against the dollar today as all of Southeast Asia’s five most-used currencies advanced on optimism the global recession is easing.
“The market expects to see improvements going forward,” said Suresh Kumar Ramanathan, a rates and currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “The dollar is selling off as risk appetite is coming back.”
Zeti didn’t say by how much the 2009 economic forecast would be changed. She said the central bank will unveil the new estimates when it releases first-quarter economic data, due later this month.
“The domestic economy is still holding its ground,” Zeti said. “If we didn’t have a domestic sector, the contraction would have been so much more severe.”
Low Interest Rates
Global central banks including the U.S. Federal Reserve have slashed interest rates to help spur economic growth and sustain consumer spending. Indonesia’s central bank on May 5 lowered its benchmark interest rate for a sixth straight month.
“Interest rates are likely to remain low for an extended period of time and this can have negative implications,” Zeti said. “For us, we also have to consider the return on savings. We are a high-savings economy,” where deposits account for about 180 percent of GDP, she said.
Malaysia scrapped its fixed-exchange rate of 3.8 ringgit against the dollar in July 2005 in favor of a managed float against the currencies of its major trading partners.
The ringgit “has seen greater volatility” against the dollar, Zeti said. Still, “our currency has been relatively stable against most of the currencies in this region. Malaysia does not have a target level, we don’t even have a band against which we operate.”
Malaysia’s ringgit fell 1.4 percent this year against the dollar, the worst performance among the 10 most-traded currencies in Asia outside Japan.
“The currency should reflect the underlying fundamentals,” she said. “If the underlying fundamentals hold the promise to improve, and going into next year especially, then the currency should also reflect that performance.”