Malaysian GDP growth may slow to 5.7%, MIER says

Malaysian GDP growth may slow to 5.7%, MIER says

Bloomberg Jakarta

Malaysia's economic growth may slow to 5.7 percent this year from an estimated 7.2 percent in 2004, the Malaysian Institute of Economic Research said, as overseas demand for the nation's electronics falters.

The economic think-tank, whose forecasts are closely followed by industry, expects Malaysia's U$115 billion economy to expand 5.3 percent in 2006.

Southeast Asia's third-largest economy probably grew 7 percent last year, the fastest in four years, according to government forecasts. The institute's estimates, announced today in Kuala Lumpur, were unchanged from forecasts made in December.

Slowing economic growth in the U.S. and China may reduce demand for semiconductors, hard-disk drives and other electrical and electronics products, which accounted for almost half of Malaysia's exports in November.

"As the pace of expansion in industrial countries moderates, Malaysia's export performance may cool down, while FDI inflows may be affected," the institute said.

The think-tank said the U.S. will probably raise interest rates this year, and China's economic growth will slow.

China's economic growth will probably ease to 8 percent this year from an estimated 9.3 percent in 2004, according to the median estimate of 10 economists surveyed by Bloomberg last week. That would be the slowest pace of expansion since 2001.

Malaysia's fourth-quarter economic growth probably slowed to 6 percent from a year earlier, the institute said. The effect of the Dec. 26 tsunami on the economy will be "no more than marginal," it said.

The tsunami killed 69 people in Malaysia after slamming into northern states including Penang and Kedah.

Economic growth slowed to 6.8 percent in the third quarter after expanding a revised 8.2 percent in the previous three months, the central bank said in November.

Malaysia probably won't change the ringgit's peg to the U.S. dollar this year because China isn't likely to scrap its own fixed currency anytime soon, the institute's Executive Director Mohamed Ariff Kareem told reporters in Kuala Lumpur.

He said maintaining the six-year-old peg is a "political decision."

In its report, the institute said Malaysia's government should review the currency peg now rather than later because of the slowdown in global economic growth.

"With the global economic prospects getting less encouraging in the next two years, and the expectations that the dollar slide will go on further, it appears that right about now it's as good a time for the monetary authorities to consider the dismantling of the peg," the think-tank said in the report.

Malaysia's ringgit was pegged to stem capital flight during the Asian financial crisis.

The decision gave the central bank room to cut interest rates, helping the economy recover from its worst recession in 41 years. China's currency, the yuan, was fixed at about 8.3 to the dollar in 1995.

The institute's consumer sentiment index fell 4.6 points, to 109.3 in the fourth quarter from 113.9 in the third quarter.

Its business confidence index fell 12.9 points to 97.3 in the fourth quarter from 110.2 in the third quarter, affected by factors such as an expected slowdown in the global and domestic economy, and higher energy costs and toll rates, it said.