Malaysia Growth Withstands Global Risks on Spending Boost

Malaysian Prime Minister Najib Razak
Najib Razak, Malaysia's prime minister. Photographer: Goh Seng Chong/Bloomberg

Malaysia’s economic expansion unexpectedly accelerated as construction and consumption climbed, easing pressure on the central bank to join its Asian counterparts in cutting interest rates to shore up growth.

Gross domestic product rose 5.4 percent in the three months through June from a year earlier, after expanding a revised 4.9 percent in the previous quarter, Bank Negara Malaysia said in a statement in Kuala Lumpur yesterday. The median of 23 estimates in a Bloomberg News survey was for a 4.6 percent expansion.

Prime Minister Najib Razak’s increased spending ahead of a general election that must be called by early 2013 has bolstered Southeast Asia’s third-largest economy, allowing the central bank to keep rates unchanged for more than a year. Growth in 2012 may be at the upper end of the 4 percent-to-5 percent forecast range even as risks from Europe and the U.S. remain, Bank Negara said.

“Malaysia is in a sweet spot at the moment,” said Lim Su Sian, an economist at HSBC Holdings Plc in Singapore. “While it’s inevitable we will see the global weakness start to filter through and investment might lose some of its momentum, there’s a lot of underlying support from the government and economic transformation programs. This strong number cements our view there won’t be a rate change this year.”

Higher Forecasts

Economists at CIMB Group Holdings Bhd. and Bank of America Corp. raised their forecasts for Malaysia’s growth this year after the second-quarter GDP figures were released. CIMB raised its prediction to 5 percent from 3.8 percent previously, while Bank of America now expects the economy to expand 4.7 percent in 2012 from 4.2 percent earlier.

The ringgit has strengthened about 1.5 percent this quarter, the biggest gainer among Asia’s 11 most-traded currencies. It rose 0.1 percent to 3.1298 per dollar as of 9:56 a.m. in Kuala Lumpur, after climbing as much as 0.4 percent earlier, according to data compiled by Bloomberg. The benchmark FTSE Bursa Malaysia KLCI Index fell 0.1 percent to 1,652.15 after closing at a record yesterday.

“The strong support provided by domestic demand, underpinned by activities in both the private and public sectors have ensured higher growth amidst the challenging global environment,” the central bank said. “This trend is expected to be sustained going forward, although downside risks emanating from external developments remain.”

Bigger Budget

Najib has raised civil servant salaries and pensions, waived school fees and increased handouts for the poor under a 232.8 billion-ringgit ($74 billion) budget this year as he works to boost support for his ruling coalition. In June, the government proposed to expand the annual allocation by 13.4 billion ringgit.

Services rose 6.3 percent in the April-to-June period from a year earlier after climbing 5.3 percent in the first three months of 2012, the report showed. Construction rose 22.2 percent last quarter, quickening from a 15.5 percent pace the previous period.

MTD ACPI Engineering Bhd., a maker and supplier of precast concrete products, and construction and property group Sunway Bhd. have won contracts for a mass railway project in the capital. The first line, estimated to cost 30 billion ringgit, is scheduled to be operational by July 2017.

The central bank said yesterday its benchmark overnight policy rate at 3 percent continues to support growth while minimizing the risks of financial imbalances. It has kept rates steady for seven straight meetings.

Supportive Rate

“At the prevailing level of the overnight policy rate, monetary conditions continue to be supportive of economic activity,” Bank Negara said.

While domestic demand is expected by the central bank to remain resilient, Malaysia’s economy still faces threats from weakening global demand. Bank Negara said the global recovery faces downside risks amid policy uncertainty over the European sovereign-debt crisis and fiscal woes in the U.S.

The central bank can adjust the degree of accommodation if the global economy weakens, Governor Zeti Akhtar Aziz told reporters in Kuala Lumpur yesterday. The risk of slowing growth is bigger than that of accelerating inflation, she said. Consumer prices rose at the slowest pace in more than two years in July, a separate report yesterday showed.

“Given that there is excess capacity in our economy, the strength of domestic demand is not expected to exert inflationary pressure,” Zeti said. “Upside risks to inflation however could emerge should global supply disruptions occur and result in higher energy or commodity prices.”

Moderate Inflation

She also said emphasis will be placed on ensuring that monetary policy will remain appropriate to avoid the build-up of financial imbalances. Inflation will remain moderate for the rest of 2012, Zeti said.

China reported its slowest growth in three years last quarter, while Bank of Korea Governor Kim Choong Soo said in July Asia’s fourth-largest economy is losing steam faster than expected.

Bank Negara unveiled a framework for so-called agent banking yesterday, which will allow financial institutions to reach out to consumers in rural areas through the use of non-bank retail outlets.

“Authorized banking agents will provide basic banking services of accepting deposits and facilitating withdrawals,” it said. “Other basic banking services that can be provided by the agents are fund transfers, bill payments and financing repayments.”

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