Dec. 2 (Bloomberg) -- Malaysia reduced its borrowing costs by more than half for a $540 million loan, said a banker involved in the deal, as higher taxes and reduced public spending boosts confidence in the government's ability to pay its debt.

More than 30 banks agreed to lower the interest rate as Malaysia's credit rating was raised after the government's efforts to control spending. Bank of Tokyo-Mitsubishi Ltd. and HSBC Holdings Plc are arranging the loan, said the banker, who declined to be named.

The country's $115 billion economy, Southeast Asia's third- largest after Indonesia and Thailand, may expand by more than the government's forecast of 7 percent this year as private consumption booms, Second Finance Minister Nor Mohamed Yakcop said yesterday in Kuala Lumpur.

``With the government focusing more on fiscal consolidation rather than fiscal expansion, worries that lenders had before about growing budget deficit are now disappearing,'' said Tim Condon, head of Asian financial markets research at ING Groep NV in Singapore today.

Malaysia will pay an interest margin of 0.21 percentage point more than the London interbank offered rate for the new loan, down from the 0.56 percentage point margin it paid for a $540 million credit signed in 2002, said the banker. Three-month Libor was last at 2.4 percent.

In March 2002, the Malaysian government took a $540 million loan due in December 2008 from 20 lenders, according to Bloomberg data. The new loan's maturity is unchanged.

More than 30 banks offered to lend the country's government almost double the amount it sought, the banker said. The government doesn't plan to increase the size of the loan, which will be signed by the end of the year, he added.

Loan Fees

The banks arranging the loan offered other banks a fee of 0.27 to 0.33 percent on the amounts provided, the banker said.

Fitch Ratings raised Malaysia's foreign-currency rating one level to A- on Nov. 8, its fourth lowest investment grade, bringing it in line with that from Standard & Poor's A-. Moody's Investors Service puts the country one level lower at Baa1, though it said Sept. 29 that it may raise that to A3, matching its two rivals.

Malaysia plans to narrow its budget deficit in 2005 to a six- year low of 17.7 billion ringgit ($4.7 billion), or 3.8 percent of gross domestic product, by cutting spending and boosting taxes on cigarettes and alcohol, Prime Minister Abdullah said in his budget speech in September.

Abdullah, who took office a year ago, scrapped projects such as a $3.8 billion railway to help reduce the budget deficit. He is also overhauling state-backed companies such as carmaker Proton Holdings Bhd., power producer Tenaga Nasional Bhd. and Telekom Malaysia Bhd., aiming to improve their efficiency.

Malaysia's economy grew at a slower pace of 6.8 percent in the third quarter after higher global energy costs and an oversupply of semiconductors curbed exports from manufacturers such as Malaysian Pacific Industries Bhd.

To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net.

Last Updated: December 2, 2004 06:13 EST