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.