Malaysia needs more rate cuts as growth slows, economists say

KUALA LUMPUR: Malaysia needs to cut interest rates further and implement public spending plans to avoid a deeper slump after the global recession pushed growth in the Asian economy to a three-year low last quarter, economists say.

Southeast Asia’s third-largest economy expanded 4.7% in the third quarter from a year earlier, slowing from a revised 6.7% gain in the previous three months, the central bank said Friday.

“Sustaining domestic demand will be the key to ensuring that growth in 2009 will remain positive,” Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said on Friday. “Our policies therefore are focused on sustaining domestic demand to mitigate the impact of weaker global growth.”

Asian countries including Malaysia and the Philippines are relying on domestic demand to support growth as recessions in the US, Japan and Europe hurt exports of made-in-Asia Intel Corp chips and other goods. Malaysia last month cut interest rates for the first time since 2003 and announced a RM7 billion spending plan to bolster its economy.

“Exports are no longer the pillar of growth,” said Lee Heng Guie, chief economist at CIMB Investment Bank Bhd, who expects the central bank to cut its benchmark rate to 2.75% by the end of 2009 from 3.25% now. “The execution of public projects is crucial as any delay or slow disbursement of funds will pull down the growth.”

Malaysia’s benchmark stock index declined 0.4% at the 5pm close of trading on Friday, before the economic data was released. The ringgit dropped 0.1% to 3.6205 against the dollar.

The pace of growth in Asian economies will probably ease “substantially” as the global slowdown erodes demand for their exports and banks restrain lending amid the credit crunch, the International Monetary Fund said Nov 24. The slump has prompted policymakers from China to the US to cut lending rates and announce spending packages to sustain growth.

Bank Negara cut its overnight policy rate by a quarter of a percentage point to 3.25% on Nov 24 and lowered the amount of money lenders need to set aside as reserves to support economic growth. The benchmark rate will probably fall by another half percentage point by March, according to Aseambankers Malaysia Bhd, Oversea-Chinese Banking Corp (OCBC), JPMorgan Chase & Co and HSBC Holdings plc.

“With Bank Negara signalling to the market that inflation risks have subsided and as growth concerns take centre stage, sagging growth is foreseen in the next year,” said Enrico Tanuwidjaja, an economist at OCBC in Singapore. “Malaysia will turn to domestic economic consumption as the main growth sustainer until global demand picks up.”

Finance Minister Datuk Seri Najib Razak announced the public spending programme on Nov 4 as he predicted economic expansion would slow to an eight-year low of 3.5% in 2009 amid the worst global financial crisis since the Great Depression.

It is important that we see “the early implementation of the fiscal stimulus because that will be a major factor that will contribute to sustaining domestic demand,” Zeti said Friday. — Bloomberg