Malaysia seen slowing after currency crisis

Malaysia seen slowing after currency crisis

KUALA LUMPUR (Reuter): Malaysia's booming economy is expected to slow down in the aftermath of a regional currency crisis that has forced a recent devaluation of the Thai baht and the Philippine peso, economists said.

Continuing turbulence in the regional currency markets, and a rise in Malaysian interest rates as the country spends its reserves to defend the ringgit, would bring down the growth rate.

"The specter of overheating is returning to haunt Malaysia," said a currency strategist at a U.S. bank in Singapore.

He said foreign investors, who have driven growth in Southeast Asia, were re-examining Malaysia's nagging current account deficit and its declining export competitiveness.

Now in its 10th year of eight percent annual growth, Malaysia could see gross domestic product growth falling to around six percent or lower for the next two years, the economists said.

"One or two years of slower growth is exactly what the doctor ordered for Malaysia," said Abhijit Chakraborti, senior strategist with Lehman Brothers in Hong Kong.

Malaysia's still-strong economy was being driven with little regard to efficiency and productivity, he said.

"Malaysian corporates and the government seem to have moved towards growth for growth's sake rather than productivity and efficiency driven growth. In most areas, factor of productivity is declining."

"It may not be bad to have more muted growth and allow some of the external imbalances and imbalances in terms of (the) factor of productivity (to) correct within the economy," Chakraborti said.

But Malaysia sees it differently.

Led by Prime Minister Mahathir Mohamad, the government believes it can sustain eight percent annual growth for the next few years. Malaysia is aiming to become a fully developed nation by the year 2020 and says it needs average annual growth of seven percent or more until then to reach that target.

The strong possibilities of a speculative attack on the ringgit in the short-term, rising imports and the steady withdrawal of overseas investors will keep interest rates high, the economists said.

While strong reserves and the inherent strength of the economy will shield the currency from any serious long-term threats, the high-interest-rate regime would slow down growth, they said.

"I don't see the ringgit succumbing to pressures emanating from the currency market," said P.K. Basu, director of regional economics with UBS in Singapore. The high interest rates "should cause the economy to slow down quite a bit, which is positive from certain perspectives."

"It would also help slow down the pace of loans growth which has remained fairly robust," Basu said. Annual loans growth at the end of May was at a high 29.5 percent.

Economists said a slower-than-expected recovery in exports and a resultant widening in the country's current account deficit would also contribute to the growth slowdown.

In the first five months to 1997, export earnings totaled 81.8 billion ringgit (US$32.7 billion), a marginal rise from 80.3 billion ringgit in the same period of last year.

Industrial growth remains strong. The Statistics Department said on Saturday the industrial index grew 11.4 percent year-on- year in May and 11.3 percent in the first five months of 1997 from the previous corresponding period.

Basu of UBS said the devaluation of the baht and peso will also erode Malaysia's export competitiveness.

"The current account deficit is going to go back up from 5.0 percent of GDP at the end of last year to 6.5/7.0 percent this year," said Chakraborti of Lehman Brothers.

He said big imports, deferred from last year, will be booked this year. "And as the current account deficit widens you will again see interest rates staying up for the rest of the year."

"In this environment you will certainly see growth slowing to a much greater degree than forecast," he said.