Malaysia can weather storm

The Malaysian economy is not likely to slip into recession, but pro-growth policies must be in place to mitigate risks to the slower growth in 2009, says Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz.

"We believe the economy can ride out this challenging period because of the positive conditions that prevail - with our labour market relatively stable, access to financing and both the government and the central bank having the flexibility to implement stimulus," she told Business Times in an interview yesterday.

"Although there has been a slowing in our export growth in the second half of this year, our domestic demand has held its ground and we are still seeing some strong growth in the region of seven per cent," she added.

The central bank head also did not discount the possibility of a second round of stimulus package to boost growth for Malaysia.

"The key to achieving domestic demand is sustained private consumption and increased government expenditure. Should we require a further stimulus, the government has the flexibility to do so," Zeti said.

This is possible because the government's debt level is very low, at 34.8 per cent of gross domestic product (GDP). She said the central bank also has the flexibility to provide greater accommodation to growth.

Bank Negara estimates that the RM7 billion stimulus package announced by the government in November can contribute one per cent growth to the GDP next year if it is implemented effectively.

"When the stimulus package was announced, our assessment was based on a recovery in the global environment in the second half of 2009. So far, the policy response (in the West) has been piecemeal. With the resolution and stimulus measures, we believe recovery could occur in 2010.

"If conditions in the major economies worsen, then further stimulus will definitely be necessary to prevent our economy from slipping into negative territory," Zeti said.

While this would mean that the fiscal deficit to GDP (at 4.8 per cent in 2008) could widen further especially with reduced revenue from crude oil, it should be seen as temporary, she added.

"These are the times, during low level of indebtedness, that the government has to step in. It is very important not to allow the country to slip into recession where we'll have higher unemployment, negative growth and result in closure of businesses," Zeti said.

On the central bank's monetary policy, Zeti said it has the flexibility to lower interest rates and use other instruments to support growth, especially since it has projected inflation levels to decline to less than three per cent in the second half of 2009.

The central bank was strongly criticised in July for not cutting the benchmark interest rates amid soaring inflation levels of 7-8 per cent year-on-year but Bank Negara was one of the first to recognise a slower growth risk.

It cut the rate by 25 basis points in November to 3.25 per cent, to support domestic demand.

With the current stimulus package, the economy is on course to achieve a 2.5 to 3.5 per cent growth, but Zeti warned that external conditions could deteriorate further.

"That is why it is important to lend support to the domestic economy which has been able to hold its ground," she added.

Consumption in the second half of the year has been in the 7-8 per cent range, while investments have remained positive, growing 3-4 per cent.

Business Times- Rupa Damodaran