Malaysia tightens policies to cool its economy
Malaysia tightens policies to cool its economy
By Ong Saw Lay
KUALA LUMPUR (AFP): Malaysia will move soon to further tighten monetary policy, boost interest rates and rein in spending on cars and property to curb inflation and cool an overheating economy, analysts have said.
Rising personal credit will put pressure on inflation in the second half of the year and further strain the country's deteriorating current account deficit, which can only improve with tough policy action, they said.
"We expect monetary tightening, higher interest rates, and administrative action aimed at specific hot spots such as cars and residential property by the third quarter," said Crosby Research in its first quarterly economic report for 1995.
The key three-month interbank rate is projected to rise above seven percent by year-end from 5.7 percent earlier this year. It was hovering at 6. 05 percent Tuesday.
"The central Bank Negara will guide domestic rates up in line with a global trend to prevent an outflow of funds that can stunt growth," a foreign exchange analyst said.
The anticipation of higher rates has kept punters out of the drifting Malaysian stock market.
Economists said a seven-year boom had led to a build-up in consumer-led inflationary pressure aggravated by rising wages in labor-tight Malaysia.
The Malaysian economy, one of Asia's economic powerhouses, has been expanding at above eight percent a year since 1987. But the strong growth has stirred stability concerns.
"We expect inflation to rise to 3.9 percent this year, after surpassing four percent in the second half of the year, from 3.7 percent for the whole of last year," a private economist said.
Private consumption accounted for 43.6 percent of last year's 8.7 percent growth in Malaysia's gross domestic product (GDP) in contrast to only 22.4 percent in 1993.
With the workforce almost fully employed, real wage growth is expected to rise by about eight percent this year from 6.3 percent last year, analysts said.
While the economy should grow above potential at 8.8 percent this year, tighter policies could slow consumption and private investment to bring overall growth down to 7.7 percent next year, Crosby said.
Consumer spending is projected to rise strongly by 10.1 percent this year from 7.9 percent last year to contribute to the widening current account deficit through imports of consumer goods and cars, Crosby said.
The brokerage, however, believe the rising deficit was merely a symptom of underlying overheating and not a problem of stability.
The current account balance should improve in the next two years, it said.
The deficit nearly doubled to 11.6 billion ringgit, or 6.6 percent of gross national product, last year, from 6.3 billion ringgit in 1993.
Malaysia's central bank has projected the shortfall to deteriorate to 13. 79 billion ringgit this year.
"The deficit is of increasing concern as consumption is rising and investment is less driven by foreign investment into export- oriented industries compared to the previous cyclical deterioration," Crosby said.