Malaysia’s economy expanded the least in almost two years after a new consumption tax curbed private spending, adding pressure on policy makers to revive confidence in a nation facing political turmoil and a weakening currency.
Gross domestic product rose 4.9 percent in the three months through June from a year earlier, after climbing 5.6 percent in the previous quarter, the central bank said in Kuala Lumpur Thursday. The median in a Bloomberg News survey was for a 4.5 percent increase.
Foreign funds have dumped about $3 billion of the nation’s shares this year and the ringgit is at a 17-year low as Prime Minister Najib Razak grapples with allegations of financial irregularities at a state investment company. The export-dependent economy is also threatened by a rout in commodity prices and China’s yuan devaluation this week.
“Malaysia continues to be caught in changing domestic and external cross-currents,” Weiwen Ng and Glenn Maguire, economists at Australia & New Zealand Banking Group Ltd., wrote in a note, pointing to the currency’s weakness as a barometer of sentiment. “If fundamentals are overshadowed, the risk is that the confidence deficiency that the Malaysian ringgit is suffering from may evolve into an economic malaise.”
The ringgit is Asia’s worst-performing currency this year as it dropped about 13 percent against the greenback. It weakened beyond 4 a dollar for the first time since 1998 Wednesday spurred by the yuan devaluation. The FTSE Bursa Malaysia KLCI Index has also lost about 13 percent from this year’s high in April.
The impact of the ringgit’s depreciation is manageable and the economy will remain on a steady growth path, central bank Governor Zeti Akhtar Aziz told reporters in Kuala Lumpur Thursday. Monetary policy remains accommodative and supportive of economic activity, she said. Bank Negara left its key rate unchanged for a sixth straight meeting in July.
The ringgit and stocks rose today as speculation China intervened to stem the yuan’s plunge helped calm markets. The currency temporarily extended gains after the report showed GDP slowed less than estimated.
“While household spending did indeed pull back as GST effect played out in full force, it still posted an OK growth rate,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore, referring to the goods and services tax implemented in April. Private consumption “did not collapse as precipitously as might have been feared,” he said.
Malaysia’s GDP is forecast to grow 4.5 percent to 5.5 percent this year, down from an earlier projection of as much as 6 percent. Other economies in the region have signaled a softening outlook, as Singapore slashed the upper end of its growth forecast for 2015 after the economy shrank last quarter.
The Wall Street Journal reported on July 3 about $700 million may have moved through government agencies and companies linked to debt-ridden 1Malaysia Development Bhd. before ending up in accounts bearing Najib’s name. The Malaysian Anti-Corruption Commission said the 2.6 billion ringgit in Najib’s accounts was from donors in the Middle East.
A key consumer confidence gauge is at the lowest since 2008, and measures of manufacturing wages and credit-card spending weakened last quarter, according to inflation-adjusted data compiled by Bloomberg.
In July, the ringgit slid past the 3.8-a-dollar peg that was set during the Asian Financial Crisis and was kept from 1998 to 2005. The central bank’s efforts to defend it contributed to the country’s foreign-exchange reserves dropping below $100 billion for the first time since 2010.
The drop in reserves was anticipated, and the central bank will set about to rebuild them, Zeti said. They remain ample to facilitate international transactions, she said.
Private consumption expenditure climbed 6.4 percent last quarter from a year ago, slowing from 8.8 percent in the previous period, the statistics department said Thursday.
Exports fell 3.7 percent in the second quarter from a year earlier, after dropping 0.6 percent in the previous three months. Manufacturing expansion eased to 4.2 percent, while private investment growth slowed to 3.9 percent from 11.7 percent in the first quarter.
“Private consumption is expected to continue to adjust to the introduction of the goods and services tax,” the central bank said. “Investment activity will be supported by capital spending in the manufacturing and services sectors, as well as for infrastructure projects. These developments will contribute towards offsetting the weaker performance of the external sector.”