Malaysian Economy Heads For Soft-Landing

They said Malaysia was keeping its promise of slowing business activity and allaying fears of an overheating economy following eight years of consistently strong economic growth.

They (the figures) are very positive. They confirm the slowdown we have seen this year, said Desmond Supple, regional economist with research firm IDEA in Singapore.

Malaysia's central bank, Bank Negara, announced on Sunday that annual gross domestic product (GDP) grew by 8.4 per cent in the second quarter to June, after 8.3 per cent in the first quarter and 9.6 per cent in the corresponding period of 1995.

Economists said the data also confirmed that economic growth for calendar 1996 would be close to the government's forecast of 8.3 per cent, against 9.5 per cent in 1995. Malaysia's financial markets, however, shrugged off the data. Dealers said the GDP growth figure was within expectations and had already been discounted. Kuala Lumpur's key Composite Index ended a shade lower at 1,104.28, off 1.05 points.

 

Supple said various policy measures taken by Bank Negara and the government over the last year were taking effect and meeting demands by international investors to restrain overall growth. Domestic demand in Malaysia is weakening and the tight monetary policy which Bank Negara introduced in the last one year is taking effect. The government's aim of slowing growth to 8.3 per cent will be largely achieved, he said.

The data is not a surprise. In fact, it was close to my own forecast that the economy will slow down this year, said Kostas Panagioutou, economist with HLG Securities in Kuala Lumpur.

The slowdown is much more pronounced on domestic spending. It was up 14.6 per cent last year. This year it will be half of that, close to seven per cent, he said.

Economists have said demand for investment in a large number of big infrastructure projects, consumer demand and a subsequent surge in imports were the main problems facing Malaysia.

However, the key source of Malaysia's lower growth rate - a slower increase in exports - was not the ideal way for the country to achieve its targets, most economists said.

Exports in the second quarter grew by just 9.1 per cent against a robust 16.4 per cent leap in the previous quarter.

The pace of growth in imports of investment and consumption goods declined to 5.5 per cent and 3.0 per cent, against 10.5 and 3.4 in the first quarter.

(The) export slowdown is not particularly positive, said Supple of I.D.E.A, adding that much of the slowdown in exports was due to a softening in the manufacturing sector and fall in commodity prices.

Some economists also feared robust economic growth could return next year if the money supply remains strong, despite slowing slightly in its broad M3 measure to 22.9 per cent at the end of the second quarter from 27 per cent at the end of March.

M3 remains quite strong compared with the second quarter last year when it grew by 15.2 per cent year-on-year.

Credit growth is still significantly higher than at the end of last year. Unless credit growth eases,@there could be a rebound in GDP growth (next year), Supple said.

The economy also faces the problem of rising inflationary pressures due to wage increases, rising food prices, cost of utilities and supply side bottlenecks such as the shortage of cement and construction materials.

Inflation in the second quarter was at 3.7 per cent against 3.4 per cent in the first quarter, Bank Negara said.