Malaysia Economic Growth May Slow to 4%-5% Next Year, Zeti Says

By Shamim Adam

Oct. 15 (Bloomberg) -- Malaysia's economy may expand as little as 4 percent in 2009, the slowest pace in eight years, and the central bank is ready to shift its focus to boosting growth as inflation worries ease, Governor Zeti Akhtar Aziz said.

``What is very vital is the economy should not be allowed to slip into a sharp economic downturn,'' Zeti said in an interview in Washington yesterday. ``We have the capacity and the capability to implement fiscal, monetary and other measures to prevent such an economic downturn.''

Demand for made-in-Asia exports is weakening as the economies of its biggest customers of the U.S., Europe and Japan slow. The International Monetary Fund last week forecast the world's advanced economies will expand next year at the weakest pace since 1982, stifling growth in emerging nations.

The Malaysian economy will probably expand between 5 percent and 5.5 percent this year, Zeti said. That's below the official forecast of 5.7 percent in 2008.

Finance Minister Najib Razak yesterday said the government's economic growth prediction for 2009 of 5.4 percent may be revised.

The government's forecast ``was before all these developments that led to the severity of the financial crisis,'' Zeti said. ``The next 12 months will be highly challenging, but the recovery could happen by 2010.''

Still, growth next year may be quicker than Bank Negara Malaysia's ``rough estimation'' of 4 percent to 5 percent amid the introduction of policies to encourage consumption and expenditure, Zeti said. The government plans to announce an economic ``stabilization plan'' on Oct. 20.

Stimulus Package

Malaysia isn't the only country that is providing such stimulus to its economy. Australia announced yesterday that it will give pensioners, home buyers and families A$10.4 billion ($7.2 billion) in a spending package to spur growth as the global financial crisis freezes credit and stifles expansion.

Bank Negara Malaysia has ``flexibility'' to move on interest rates if the growth slowdown warrants a cut in borrowing costs, Zeti said.

The central bank has maintained its overnight policy rate at 3.5 percent for 19 straight meetings, avoiding following its counterparts around the region in raising borrowing costs even after inflation accelerated to a 26-year high. Policy makers next meet on Oct. 24.

Inflationary pressures are receding as commodity and fuel prices decline, and consumer price gains may ease faster than initially expected, the governor said. The central bank forecasts inflation to average 5.5 percent to 6 percent in 2008.

`Vicious Cycle'

The inflation rate may fall below 4 percent before the second half of 2009, and the balance of risks are now tilted towards growth, she said.

``If there are signs that the moderation is more than what we had earlier assessed, we have the flexibility to respond,'' Zeti said. ``We do not want to see unemployment increase or the closure of businesses. We need to avoid a vicious circle of worsening economic conditions.''

Malaysian banks are well capitalized and have little exposure to toxic assets blamed for the global credit crisis, Zeti said, adding that it is ``key'' and ``critical'' that lenders continue to disburse loans to spur economic expansion.

``The central bank will be ready to extend liquidity in the event of any tightening of liquidity conditions,'' Zeti said. ``Our role is to see there is no disruption in access to financing.''

Credit Crunch

The credit crunch has toppled banks in the U.S. and Europe, forcing governments to intervene and take stakes in lenders to prevent any more collapses.

The U.S. Congress this month passed legislation allowing the Treasury to spend as much as $700 billion to buy troubled mortgage-related assets and purchase equity in banks. European leaders on Oct. 12 agreed to guarantee new bank refinancing and use taxpayer money to keep distressed lenders afloat.

Bank Negara does not plan to impose new or tighter rules on Malaysia's financial system in response to the turmoil as it had already strengthened the regulatory and supervisory frameworks in the past decade since the Asian crisis, Zeti said. Still, reforms must be made as its market evolves, she said.

``I do not believe in allowing completely unregulated systems,'' Zeti said. ``As new developments take place, the regulatory regime needs to evolve commensurate with these developments.''

To contact the reporter on this story: Shamim Adam in Washington at sadam2@bloomberg.net