June 20 (Bloomberg) -- Malaysia's economy may expand 6 percent for a second straight year in 2008, the government said, reducing the need for an interest-rate cut to fuel growth.

``There should be enough momentum in the economy'' to repeat this year's projected growth, Deputy Prime Minister Najib Razak said in an interview. The economy will improve ``as the government starts to spend and there's more money moving.''

Malaysia's government plans to spend 200 billion ringgit ($58 billion) in the five years to 2010 on roads, bridges and other development projects to bolster domestic demand. More than a million civil servants in the country will get their first pay rise in five years next month.

``This year, they are more likely to cut than hike'' interest rates, said Robert Prior-Wandesforde, a Singapore-based economist at HSBC Holdings Plc, who expects Malaysia's economy to expand 6.2 percent in 2008. Next year, there may be ``a bias towards tightening.''

The central bank said in March it expects growth in the $147 billion economy, Southeast Asia's third-largest, will accelerate to 6 percent this year, the fastest pace in three years.

The ringgit strengthened to 3.4285 to the dollar as of 10:46 a.m. local time today, after falling yesterday. The currency has gained 2.9 percent this year.

Bank Negara Malaysia will probably refrain from raising rates next year as inflation eases, said Prior-Wandesforde from HSBC, who expects inflation to average 1.5 percent in 2008.

Stimulus Package

Malaysia's central bank has kept its benchmark interest rate unchanged at 3.5 percent in the nine monetary policy meetings since April 2006, refraining from a cut in borrowing costs even as exports faltered and inflation eased this year.

Prime Minister Abdullah Ahmad Badawi said on May 21 that more than 1 million civil servants, including police and pensioners, would receive pay increases of as much as 42 percent. He has also eased business rules and cut taxes to lure foreign investment.

The government probably won't need to change its 6 percent economic growth estimate for 2007 in its September budget announcement, Najib said, citing the boost to consumer demand from the pay increase, which he said would add at least half a percentage point to economic growth.

Malaysia isn't scheduled to give an official 2008 growth forecast until September.

``The worst of the exports slowdown I suspect is now past,'' Prior-Wandesforde said. ``Export growth will pick up, while the service sector will remain strong, and GDP growth as a whole will also pick up.''

Balanced Budget

Higher government spending won't hurt the country's efforts to control its deficit, Najib said in the interview in Putrajaya, outside Kuala Lumpur, yesterday.

Malaysia, which has spent more than it earns for nine straight years, needs to reduce its deficit before ratings agencies will consider raising its credit ratings.

The government expects a budget deficit of 3.4 percent of gross domestic product this year. The median for countries with an A credit rating is 0.5 percent, according to Standard & Poor's. Malaysia last posted a budget surplus in 1997.

``We are committed'' to balancing the budget, Najib said, without specifying a timeframe. ``We'll maintain it at least at 3.4 percent. But if it is possible, we will try to bring it down below 3.4 percent. We won't be able to reach 0.5 percent, but we can bring it down if possible to maybe 3.2 or thereabouts.''

Fiscal Loosening

Moody's Investors Service has an A3 rating on Malaysia's foreign currency long-term debt, the fourth-lowest investment level, and hasn't upgraded the rating since December 2004. Standard & Poor's has had an A- rating, the equivalent grade, on the Southeast Asian nation's debt since October 2003.

``The risks are the deficit could deteriorate towards 4 percent this year,'' said HSBC's Prior-Wandesforde. ``Growth this year won't be particularly exceptional, and a large part of the reason why they're getting the growth they are getting this year is because of a big fiscal loosening.''

The government will also hold back from reducing its fuel subsidies for the rest of the year, Najib said. Malaysia, which pays suppliers to keep retail gasoline and diesel prices low, last raised pump prices in March 2006. The move prompted protests led by opposition parties.

``It's good macroeconomic management to cut back fuel subsidies,'' Najib said. ``But it will come at a political cost. I think in the long term we should try to reduce the subsidy, but it has to be a gradual process. There's no target. We'd like to maintain petrol prices at the present level, at least for the rest of this year.''

To contact the reporters on this story: Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.netStephanie Phang in Kuala Lumpur at at sphang@bloomberg.net

Last Updated: June 20, 2007 00:05 EDT