KL central bank warns of challenges ahead

KUALA LUMPUR • Malaysia faces significant challenges in the medium term, with rising inflation and lower consumption and private investment expected to take a toll on economic growth this year, the central bank said yesterday.

The projections by Bank Negara Malaysia (BNM) of 4.0 to 4.5 per cent growth came even as its currency - the ringgit - headed for its biggest monthly rally since 1998 on speculation that investors are turning less bearish on the currency as oil stabilises.

Growth in Malaysia, the world's second-largest exporter of liquefied natural gas, has faltered due to weak energy prices and risks linked to a financial scandal involving state- owned 1Malaysia Development Berhad (1MDB). The ringgit currency had slumped to six-year lows last year.

"We recognise that there are downside risks arising from a more moderate recovery in major economies, further weakness in global commodity prices and further adjustments in spending among households," central bank chief Zeti Akhtar Aziz told a news conference.

Private consumption growth is expected to trend below its long-term average this year, while private sector investment growth is projected to be slower compared with the past five years due to greater uncertainties and caution, BNM said.

Headline inflation is forecast to edge higher to between 2.5 and 3.5 per cent compared with 2.1 per cent last year, in part due to a weak ringgit. "Over the medium term, the challenges that Malaysia will face are expected to remain significant," Tan Sri Dr Zeti said in the report.

But, the ringgit is headed for its biggest monthly rally as investors are turning less bearish on the currency as Brent crude rallies from a 12-year low and a recovery in commodities bolsters government finances for Asia's only net oil exporter.

The ringgit rose 0.42 per cent to 3.9930 versus the US dollar yesterday, and has been Asia's best performer in 2016 with a 7.5 per cent gain. It was trading 2.29249 against the Singdollar.

The currency has climbed 11 per cent from its 2016 low in January and sentiment is improving after indebted 1MDB completed the sale of its power assets to China General Nuclear Power Corp.

But, challenges are mounting for Malaysia amid scandals over US$11 billion (S$15 billion) in debt racked up by 1MDB. Uncertainty also remains over leadership at the central bank as Dr Zeti will retire next month.

Malaysia will likely face volatile movements in capital flows, the central bank said, adding that its monetary operations will be directed towards ensuring sufficient domestic liquidity in the financial system.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on March 24, 2016, with the headline 'KL central bank warns of challenges ahead'. Print Edition | Subscribe