Malaysia Needs More Rate Cuts as Growth Falters, Economists Say

By Stephanie Phang and Michael Munoz

Nov. 29 (Bloomberg) -- 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 percent in the third quarter from a year earlier, slowing from a revised 6.7 percent gain in the previous three months, the central bank said yesterday.

“Sustaining domestic demand will be the key to ensuring that growth in 2009 will remain positive,” Bank Negara Malaysia Governor Zeti Akhtar Aziz said in Kuala Lumpur yesterday. “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 U.S., Japan and Europe hurt exports of made-in-Asia Intel Corp. chips and other goods. Malaysia this month cut interest rates for the first time since 2003 and announced a 7 billion ringgit ($1.9 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. in Kuala Lumpur, who expects the central bank to cut its benchmark rate to 2.75 percent by the end of 2009 from 3.25 percent 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 percent at the 5 p.m. close of trading yesterday, before the economic data was released. The ringgit dropped 0.1 percent to 3.6205 against the dollar.

Stimulus Plans

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 policy makers from China to the U.S. 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 percent 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., JPMorgan Chase & Co. and HSBC Holdings Plc.

‘Growth Concerns’

“With Bank Negara signaling 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 Oversea-Chinese Banking Corp. in Singapore. “Malaysia will turn to domestic economic consumption as the main growth sustainer until global demand picks up.”

Finance Minister Najib Razak announced the public spending program on Nov. 4 as he predicted economic expansion would slow to an eight-year low of 3.5 percent 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,” Governor Zeti said yesterday.

Najib, who is also deputy premier, is due to replace Prime Minister Abdullah Ahmad Badawi next year as head of the ruling coalition, and needs to prevent the economic slowdown from fueling public discontent after the government suffered its worst election result in half a century this March.

Global Slowdown

“Growth is expected to moderate further during the next two quarters in the face of a global downturn,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore, who expects Malaysia’s economy to expand 2.5 percent next year. “The downside risk is for a more prolonged slowdown.”

Sales by U.S. electronics makers in Malaysia will fall this year and next and the manufacturers will probably have to cut jobs in 2009, Wong Siew Hai, chairman of the American Malaysian Chamber of Commerce’s 17-member electronics industry group, said this week.

“It’s quite serious this time around,” Wong said. Electronics manufacturers are “in cost-control mode” and have delayed their capital investments, he said, predicting more interest-rate cuts by the central bank “to get people to spend, not to save, and to get the costs of business to go down.”

Eng Teknologi Holdings Bhd., the Malaysian maker of hard- disk drives whose clients include Western Digital Corp., said this week orders in the first half of 2009 may fall as much as 20 percent. Genting Bhd., Asia’s largest listed casino operator, slipped into losses last quarter and said the rest of the year will be “challenging” amid the global economic slowdown.

To contact the reporter on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net