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July 19, 2008

Malaysian think tank cuts 2008 GDP forecast again

The Malaysian Institute of Economic Research (MIER) has cut its gross domestic product (GDP) forecast for Malaysia in 2008 yet again to 4.6 percent from 5.4 percent, reported local daily The Edge.

“Taking into account the trends in MIER indices and the impact of higher food and oil prices that could dampen consumption and reduce business profits, we are compelled to lower our growth forecast,” it said in its second quarter (2Q) Malaysian Economic Outlook.

It had cut its forecast in October last year to 5.4 percent from 5.8 percent.

MIER said while it was likely that growth would exceed 5 percent in the first half of the year, conditions would deteriorate during the second half due to the knock-on effects of high oil prices and slower global growth.

The major issues the country would face going forward included political uncertainties, interest rate adjustments, exchange rate uncertainty and surging commodity prices, MIER executive director Datuk Dr Mohamed Ariff Abdul Kareem said.

“Malaysia is actually one of the better economies in the region. This political instability is definitely a spanner in the works and it is dangerous to the investment climate. Hence, there should be some semblance that things are calm,” he said after MIER revealed its 2Q Malaysian Economic Outlook report yesterday.

On the issue of inflation Mohamed Arif reiterated his suggestion that Bank Negara consider using the ringgit as a tool to combat the growing economic problem instead of the more obvious tool of interest rates.

“If the ringgit were allowed to trade free from restrictions, such as the one on offshore trading, it could help to contain inflationary pressure. This is because most of our inflation is imported inflation,” he said.

Malaysia’s currency has been trading in a managed float ever since it was unpegged from the US dollar in 2005.

He also commented that the government’s goal to cut its fiscal deficit as a percentage of GDP to 3.1 percent from 3.2 percent in 2007 as not realisable. He said that a more likely target would be 3.5 percent, which he explained was still low.

“It is time for the government to take up the slack left by the private sector. Greater flexibility can be given to public spending to function as a growth booster, should external or local conditions deteriorate,” he said.

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