Economists: Step Up Govt Spending

Published: 2009/02/26

The Malaysian government should step up spending to complement interest rate cuts and rejuvenate the economy, said economists.

Bank Negara Malaysia has slashed the Overnight Policy Rate (OPR), which determines banks' lending rates, by 1.5 per cent in three straight meetings.Economists said the second stimulus package, to be unveiled on March 10, would be more effective in countering slowing economic growth.

On Tuesday, the key rate was cut by another half per cent, or 50 basis points, to 2 per cent. Banks are also allowed to keep less money at the central bank as the statutory reserve requirement (SRR) was halved to 1 per cent.Inter-Pacific Research said that while the SRR and OPR cuts might delay the rise of bad loans and bankruptcies, fiscal measures remained very important.

"Should the measures turn out to be positive and implemented swiftly, we believe it could help contain the downtrend of the economic outlook," it said.Economists are also not ruling out more rate cuts if the economy slows further, while falling inflation gives more room for the central bank to do this.

They said that Bank Negara's policy statement indicated that future data could be worse than government and market expectations.Exports and industrial production numbers weakened sharply last December, while consumer and business sentiment dropped to a new low.

The fourth quarter gross domestic product (GDP) figures will be released tomorrow.OSK Research said that worsening macroeconomic fundamentals would result in the Malaysian economy falling into recession this year."Lower interest rates will drive foreign direct investment from Malaysia to other countries with relatively higher returns, i.e.

China with an interest rate of 5.3 per cent and India with 6 per cent currently," it said.OSK, which has cut its GDP forecast for 2008 to 5 per cent, expects a contraction of 1 per cent for this year.

It is maintaining its 2010 projection at a positive 2.2 per cent.Affin Investment Bank economist Alan Tan believes that future monetary policy committee meetings will signal a stance towards a weaker ringgit to boost exports.

A weaker ringgit means that Malaysia's exports will be cheaper.Tan also expects Bank Negara to reduce its intervention in the foreign exchange market to support the ringgit, allowing it to fall in tandem with regional currencies.