Malaysia’s Economy May Shrink 4.2%

Malaysia’s economy may shrink more than previously forecast this year as the global recession reduces exports and household spending, the Malaysian Institute of Economic Research said.

Southeast Asia’s third-largest economy will probably contract 4.2 percent in 2009, the institute said in a report released in Kuala Lumpur today, cutting its forecast from an April prediction for a 2.2 percent decline in gross domestic product. It lowered the 2010 growth forecast to 2.8 percent from 3.3 percent.

The country “takes the hit from the knock-on effects of a flagging global economy,” the institute said. “Malaysia may not regain more strength until the global economy is back on track, which is going to be at a disappointingly slow pace.”

Prime Minister Najib Razak has unveiled 67 billion ringgit ($19 billion) of stimulus measures and eased foreign investment rules to shore up growth as plunging exports push the nation closer to its first recession in a decade. The government cut its 2009 GDP forecast in May, predicting a contraction of 4 percent to 5 percent.

Exports of goods and services may plunge 21.8 percent this year before growing 7.3 percent in 2010, the partially government-funded research institute predicts. Inflation may average 1.6 percent in 2009 and unemployment may reach 4.8 percent, it said.

Recession Looms

“If exports and foreign direct investment shrink severely, the downturn could be more damaging,” the institute said. “The healing from the current crisis will be difficult compared to previous ones, because of the synchronized nature of the downturn.”

The institute expects Malaysia will fall into a recession after contracting for a second quarter in the three months to June. GDP may contract 6 percent in the second quarter, shrink 4 percent in the third and expand 2 percent in the last three months of 2009, Ariff said.

The $187 billion economy shrank 6.2 percent in the first quarter of 2009, and second-quarter GDP data is due in August.

The ringgit, the worst performer among the 10 most-traded Asian currencies excluding the yen this year, fell 0.1 percent to 3.5663 as at 10:17 a.m. local time today.

The currency has been hurt by declining exports and will remain “volatile” until the global economy recovers, Mohamed Ariff Kareem, the institute’s executive director, told reporters in Kuala Lumpur today. The ringgit may strengthen to 3.4 to 3.5 against the dollar by the end of 2009 and 3 a dollar by 2012, he said, adding that the U.S. currency is “overvalued.”

Interest Rates

Malaysia’s central bank has kept its benchmark interest rate unchanged for two straight meetings after reducing borrowing costs 1.5 percentage points to 2 percent from November to February, saying the economy may improve in the coming months as the government implements stimulus measures.

There’s no urgent need for Bank Negara Malaysia to further reduce interest rates, though there is space to cut, Ariff said. Deflation, while possible, isn’t yet a threat for the country, he said.

An improvement in exports and the government’s measures to boost the economy will help the economy grow in the fourth quarter, he said. The budget deficit may exceed 8 percent of GDP this year and reach as much as 9 percent in 2010, he estimated.

The 2010 shortfall “will probably be bigger because this crisis isn’t going away anytime soon,” Ariff said. “2010 will still be a difficult year” and the government may need to boost spending to support growth.

Confidence Improves

The institute’s consumer sentiment index rose 26.9 points to 105.8 in the second quarter from the previous three months, helped by the government’s stimulus measures. The business confidence index climbed 44.1 points to 105.2.

Private consumption is expected to “moderate” in 2009 “owing to the reduction in income, a dismal labor market, a volatile stock market and lower commodity prices,” the institute said. “There will be some lag before the effects of the fiscal spending are felt, making the speed and efficiency of implementation critical.”