Malaysia precariously balanced after rate cuts

Malaysia precariously balanced after rate cuts

By Jalil Hamid

KUALA LUMPUR (Reuters): Malaysia has taken a high stakes
gamble over the economy, pushing down interest rates in line with
Prime Minister Mahathir Mohamad's strategy for spurring growth,
but risking a still weaker currency.

In a major policy reversal that marked a blow to Mahathir's
deputy Anwar Ibrahim, Malaysia's central bank last Friday eased
its tight monetary policy by lowering a key interest rate.

Analysts said while lower rates could provide some breathing
space to businesses, they were unlikely to halt an economic
slowdown and could put the ringgit currency under pressure.

The central Bank Negara said late last Friday that it would
cut the benchmark three-month intervention rate to 10.5 percent
from 11 percent effective Aug. 3. The rate cut was expected to
feed through into lower bank lending rates.

With inflation contained and the current account swinging into
surplus, the "fundamental trends provide Malaysia with the room
for a cautious easing of monetary policy to minimize the severity
of the downturn in (the) domestic economy".

"I think there's room for maneuver now," said a senior banking
industry official familiar with Bank Negara's deliberations. "The
pressure on inflation is tapering off."

Until now, Bank Negara had steadfastly stood by tight money as
the best way to defend the ringgit and pave the way for economic
recovery. But that orthodox approach has all but fallen by the
wayside because of lackluster growth, weak corporate earnings and
a sagging stock market.

Mahathir and Special Functions Minister Daim Zainuddin have
campaigned for lower rates to help businesses survive the
recession.

Like the International Monetary Fund, Anwar, who is also the
finance minister, has shared the central bank's worries that a
reduction in interest rates would undercut the ringgit.

"In a way, Anwar has been accused by some of following IMF
guidelines on tight interest rate regime," said political
commentator Rustam Sani. "It seems that decision-making on the
economy has now shifted from Anwar's side to Daim's."

The once-vibrant economy is officially forecast to contract by
one to two percent in 1998 amid Asia's financial crisis. But
analysts reckoned that it could shrink as much as four percent.
They said the rate cut was unlikely to spur an upward revision.

Malaysia's depressed stock market could gain on the rate cut
news but analysts said it could be bad news for the already weak
ringgit. The ringgit, now at some 4.14 to the U.S. dollar, has
lost over 30 percent of its value against the dollar since the
Asian financial crisis erupted in mid-1997.

"The ringgit may come under pressure as a result of the move,
though this may be mitigated by the fact that other Asian
countries such as Thailand and South Korea had cut rates before,"
said markets consultant firm S&P's MMS International.

Banking industry officials said the climate was now ripe for
an easier stance. "In this kind of environment, there's room for
cautious easing of monetary policy," said a senior banker.

Officials said recent foreign investment commitments could
support the ringgit. They cited the sale of a big stake in
telecoms firm Binariang to British Telecom [BT.L] and new
investment commitments by Shell [RD.AS] [SHEL.L] in Malaysia.

The rate cut came days after Malaysia, hit by twin rating
downgrades, shelved plans to raise $2 billion from the
international bond market to help fund banks' sour loans.

Analysts said Malaysia could not afford to bring interest
rates down too far or risk pricing itself out of the Eurobond
market.

Some analysts expected Bank Negara now to cut banks' statutory
reserve requirement (SRR), or funds required to be kept interest-
free with the central bank. A one percentage point cut in the SRR
would release four billion ringgit ($1 billion) into the banking
system.

The SRR was cut to eight percent from 10 on July 1. Analysts
said the international standard for SRR is three percent. The
additional liquidity from an SRR cut could be used for banks'
recapitalisation, analysts said.