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Malaysia budget deficit to climb as growth slows

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October 16, 2008

Malaysia budget deficit to climb as growth slows
Malaysia's budget deficit is likely to exceed 5 percent of gross domestic product this year and will come in much higher than forecast by the government next year due to slowing growth, Reuters quoted a key thinktank as saying Thursday.

The Malaysian Institute of Economic Research (MIER) said the budget deficit would likely exceed 4 percent of GDP in 2009 and economic growth for the Southeast Asian country would likely slide to 3.4 percent next year.

Malaysia's government is forecasting economic growth of 5.4 percent in 2009 after projected 5.7 percent growth this year.

The government's budget deficit forecast for this year is 4.8 percent of gross domestic product, way up from an original target of percent of 3.1 percent of GDP, as spending surged 16.7 percent, due in large part to fuel subsidies.

The government expects the deficit to fall back to 3.6 percent of GDP in 2009.
But MIER said the government forecasts for budget shortfall may be too optimistic.

"It is likely to exceed 5 percent in 2008, (it) may even exceed 4 percent in 2009," MIER Executive Director Mohamed Ariff told reporters.

With economic growth expected to slow down sharply next year, Ariff said Bank Negara Malaysia, the central bank, may start easing rates early next year, although he did not expect aggressive cuts, adding that 25 basis points was more likely.

Malaysia's central bank has kept rates unchanged at 3.5 percent for over two years, despite a surge in inflation.

Inflation in Malaysia surged to 8.5 percent year-on-year in July and August after the government cut fuel subsidies. The central bank expects inflation to drop to 4 percent by mid-2009.

Ariff said that inflation was likely to prove "sticky" and said it would run at 5.5 percent in 2008.

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