Slowing Growth May Create `Headache' For Thailand, Malaysia Central Banks

Economic expansion in Thailand and Malaysia probably slowed last quarter after global demand eased, reducing the scope for policy makers to raise interest rates even as rising commodity prices increase inflation risks.

The Thai economy grew 7.2 percent in the three months through September from a year earlier, after expanding 9.1 percent in the second quarter, according to the median forecast of 15 economists surveyed by Bloomberg News. Malaysia’s gross domestic product rose 5.6 percent after an 8.9 percent expansion the previous period, the median of 12 estimates shows.

The International Monetary Fund said last month Asian policy makers need to move early to exit policy stimulus “to head off pressures in goods and asset prices.” Malaysia and Thailand have paused after raising borrowing costs earlier this year, citing weakening prospects for the world economy, while Singapore, India and South Korea further tightened monetary policy this quarter to fight inflation.

“Asian countries are having a headache handling strengthening currencies and accelerating inflation risk,” said Pimonwan Mahujchariyawong, an economist at Kasikorn Research Co. in Bangkok. “Slower economic growth going forward will make it harder to raise interest rates, but they have to do it eventually because rising commodities prices and money inflows will fuel price pressure and asset bubbles.”

Food Prices

World food prices climbed to the highest level in more than two years in October as costs rose for meat, dairy products, cereals, cooking oil and sugar, according to the United Nations’ Food and Agriculture Organization.

The U.S. Federal Reserve said this month it will purchase $600 billion of Treasuries to spur the world’s largest economy, a move that policy makers from Asia to South America said could depress the dollar and spark capital flight to emerging markets.

Malaysia and Thailand will report third-quarter GDP data on Nov. 22.

“In the Malaysian economy, recent indicators on exports and external-related sectors affirmed the earlier expectations for growth to moderate in the third quarter,” the central bank said Nov. 12. “Nevertheless, domestic demand has provided strong support to growth. Going forward, overall growth will continue to be well supported by domestic economic activity.”

Bank Negara Malaysia left borrowing costs unchanged for a second consecutive meeting this month and pledged “greater vigilance” against potential risks posed by capital inflows. Such investments have contributed to the ringgit’s 9.6 percent appreciation this year and pushed the stock market to a record level.

Currency Effect

While a stronger currency results in cheaper imports, it also makes the country’s overseas shipments more expensive. Malaysia’s exports rose at the slowest pace in 10 months in September as shipments to the U.S. and China eased.

The Southeast Asian economy, whose products include IOI Corp. palm oil and Intel Corp. computer chips, may experience some deceleration in the final quarter of 2010, International Trade & Industry Minister Mustapa Mohamed said last month. The economy is forecast by the government to grow 7 percent this year and as much as 6 percent in 2011.

Thai Prime Minister Abhisit Vejjajiva said Nov. 12 he is “still worried” about gains in the baht, which earlier this month strengthened to the highest level in 13 years. The currency has appreciated more than 11 percent this year, the best performance in Asia, raising concern that Thailand’s goods may become more expensive relative to its regional rivals.

Exporters Complain

General Motors Co., Ford Motor Co. and Siam Cement Pcl are among companies that cited the currency as a threat to shipments from Thailand, an exporter of cars, rice and electronics. Thailand’s export growth slowed in October as cooling global expansion and the baht’s strength damped demand for the nation’s goods, a report showed today.

Thai consumer confidence fell for the first time in six months in October as the baht surged and the nation’s worst floods in five decades devastated agricultural land, a report showed this month. Abhisit has said the flooding may curb Thai GDP growth this year by 0.3 percentage point.

In contrast, Taiwan’s economy expanded faster than economists estimated last quarter, adding to the case for a third increase in interest rates this year to prevent a property bubble. GDP climbed 9.8 percent in the three months through September from a year earlier, the statistics bureau said yesterday. The median estimate in a Bloomberg News survey of 17 economists was 8.34 percent.

Capital Measures

Thailand last month removed a 15 percent tax exemption for foreigners on income from domestic bonds and Bank of Thailand Governor Prasarn Trairatvorakul said Oct. 21 the bank is studying additional measures to reduce the volatility of the baht.

Sean Callow, a Sydney-based senior currency strategist at Westpac Banking Corp. and Kasikorn Research’s Pimonwan expect the Thai central bank to hold the nation’s benchmark interest rate at 1.75 percent for a second meeting on Dec. 1 to avoid attracting more money inflows and adding pressure on the baht.

Prasarn said last month that while inflation isn’t under “immediate pressure,” there’s a risk that price increases may accelerate to the upper end of the central bank’s target next year.

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net; Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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