Rapid growth raises fears

Rapid growth raises fears

KUALA LUMPUR (AFP): Malaysia's economic policies will allow 1996 growth to exceed the central bank's 8.3 percent target, triggering possible concerns about stability, a foreign research firm said yesterday.

With excessive growth, the current account deficit would remain high at 8.1 percent of gross national product and underlying inflationary pressures were likely to escalate, Crosby Securities said in a report.

Its quarterly regional economic review forecast Malaysian gross domestic product (GDP) growth of 8.6 percent for 1996, down from 9.5 percent in 1995 and 9.2 percent in 1994.

"Consequently we expect stability concerns to resurface over the course of the year," the report said.

Economic growth in Malaysia has averaged more than eight percent since 1987.

"Despite GDP growth slowing in the first quarter to 8.3 percent, we believe that the growth momentum remains strong," the report said.

There was no evidence that Malaysia's tight monetary policy had been effective, Crosby Securities said.

Demand pressures remained high judging from high car and manufacturing sales, it said.

Given high consumption growth, inflation was expected to rise to around four percent by the end of the year after hitting 3.6 percent in May.

The high influx of short-term capital to cash in on rising domestic interest rates and speculate on the ringgit's rise following more restrictive measures by Thailand and Indonesia had added to Malaysia's problems in curbing inflation, the report said.

The ringgit strengthened to a nine-month high of 2.48 to the dollar in May and is currently hovering at 2.49.

"This is likely to limit the use of interest rates as a policy tool," Crosby said, forecasting local rates would rise only another 50 basis points over the course of the year.

Local three-month interbank rates have risen to 7.36 percent from 6.1 percent at the end of last October, pushing up lending rates to 8.8 percent in June from 7.2 percent at the end of September.

The government has said there will be no major economic policy changes, but the central bank was likely to resort to administrative measures to rein in inflation and cool consumption growth for long-term stability, the report said.

Crosby did not rule out the central bank resorting to a third increase in the statutory reserve requirements of banks to at least 14.5 percent from the current 13.5 percent.

There could be greater pressure on banks to slow loan growth and curb auto and property credit.

"It could also come up with new action against short-term capital inflows if the external sector continues to be expansionary," Crosby said.