Malaysia's Economy Grows 7.1% on Commodity Shipments

Malaysia's economy expanded faster than expected in the first quarter as surging prices boosted palm oil and petroleum exports and higher salaries for civil servants spurred consumer spending.

Southeast Asia's third-largest economy grew 7.1 percent in the first three months from a year earlier, down from a 7.3 percent gain in the fourth quarter, the central bank said in Kuala Lumpur today. That was more than the median estimate of a 6.5 percent increase in a Bloomberg News survey of 17 economists.

Bank Negara Malaysia expects a modest easing in growth in the second half due to a slowdown in major economies. Public expenditure may slow as surging costs force Prime Minister Abdullah Ahmad Badawi's government to delay projects, while inflation may crimp consumer spending.

"The following quarters may see slower growth as exports and related sectors like manufacturing decelerate,'' said Suhaimi Ilias, an economist at Aseambankers Malaysia Bhd. Delays in implementing infrastructure projects after the recent elections will also have an impact on construction, he added.

Abdullah's ruling coalition, which lost its two-thirds majority in parliament for the first time in 34 years in March 8 elections, may find it difficult to push through increases in pump fuel prices needed to cap government subsidy costs, said Lee Heng Guie, an economist at CIMB Investment Bank Bhd.

Fuel Subsidies

Bank Negara today also removed limits on the amount of funds that local companies and individuals can borrow in foreign currencies to provide greater access to finance and reduce the cost of doing business.

Malaysia will announce measures to revise fuel subsidies, which may balloon to 53 billion-ringgit ($16.4 billion) this year amid record crude prices, after a Cabinet meeting on May 30, Prime Minister Abdullah said today.

"Rising food and fuel subsidies together with accelerating building-material costs have warranted a critical review of fiscal spending priorities,'' Lee said. "Still, any price- sensitive policy changes are best pushed through when the economy is in a position of strength.''

Malaysia last month said it is reviewing many state projects because of rising costs, as surging global prices of steel, cement and other building materials threaten construction planned under Abdullah's 200 billion-ringgit ($62 billion) development budget for the five years to 2010.

Political Uncertainty

Abdullah also faces calls to step down from former Premier Mahathir Mohamad and some members of his own party amid claims by the opposition it can convince enough ruling coalition lawmakers to defect and form a new government by mid-September.

"Higher food costs and potential hikes in fuel prices could weigh on consumption, and business investment could weaken in the current political uncertainty,'' said Lee at CIMB. "With the still-tough external environment ahead, and cautious domestic sentiment post general elections, we expect the pace of growth to turn relatively weaker in the second half.''

Malaysia's $151 billion economy is still expected to grow between 5 percent and 6 percent this year, Governor Zeti Akhtar Aziz said today, maintaining the central bank's March forecast.

"Uncertainties in the global environment will remain,'' Zeti told reporters in Kuala Lumpur. "Still, the Malaysian economy is expected to remain resilient.''

Monetary Policy

Malaysia's monetary policy stance remains consistent with the outlook for inflation and economic growth, Zeti said. The central bank will assess its outlook for consumer prices in 2008 after the government's review of fuel subsidy costs, she added.

Construction grew 5.3 percent in the first quarter, after a 4.7 percent gain in the previous three months, according to today's report. Services climbed 8 percent, after a revised 9.3 percent increase in the fourth quarter.

Private consumption increased 11.8 percent, compared with a previous rise of 10.2 percent. Public consumption rose 10.5 percent, after a 4.2 percent gain earlier. Domestic demand expanded 10.1 percent, accelerating from 9.1 percent.

Exports of goods and services in the last quarter increased 6 percent, compared with 7.8 percent in the previous three months. Sales of palm oil, crude oil and liquefied natural gas gained, while electronics shipments declined.

Malaysia is a producer of Intel Corp. chips and Dell Inc. computers, and Southeast Asia's second-largest producer of oil, gas and palm oil.

Manufacturing grew 6.9 percent, compared to 5.6 percent in the last quarter of 2007.

Agriculture expanded 6.3 percent, from 4.7 percent in the fourth quarter. Mining grew 3.7 percent, up from 3.5 percent previously.