Zeti: Domestic demand shows signs of economic recovery

Central bank governor sees better external demand in third quarter

KUALA LUMPUR:
The country’s domestic demand is showing clear signs of recovery from the fiscal stimulus and an accommodative monetary policy, says Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz. “We have seen the worst,” she told reporters after delivering a keynote address at the 5th Banking and Financial Law School 2009 conference yesterday.

Zeti expects an improvement in external demand in the third quarter and an expansion in gross domestic product (GDP) in the next three months. “We expect growth to be modest at the initial stage and improve more significantly next year,” she said, adding that there would be a revision in the country’s growth forecast in Budget 2010, to be tabled in parliament next month.

The Government expects the economy to shrink as much as 5% in 2009. The country’s economic contraction eased to 3.9% in the second quarter from a 6.2% decline in the first quarter.

Zeti said interest rates were also “appropriate” as government stimulus and improving overseas demand had helped boost economic recovery. The current interest rate level was supporting the demand for access to financing, she added. Bank Negara has cut its key rate from 3.5% in mid-November to 2% to spur growth.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said the economic recovery momentum had been rising since the first quarter. “The pace of recovery should be sustainable based on the economic indicators we have seen so far, with steady improvements in industrial production index and exports, especially in the second quarter,” he said. Yeah expects the country’s export level to turn positive in December and GDP to achieve positive growth in the fourth quarter. RAM’s GDP forecast is a contraction of 3.3% this year.

AmResearch Sdn Bhd senior economist Manokaran Mottain believes the country’s economy is currently in a recovery phase, backed by an upturn in global trade. “We are maintaining our GDP growth forecast of minus 3% this year, with a growth of 1% to 2% in the fourth quarter. Our GDP growth forecast in 2010 is 3% to 4%. “The Government’s stimulus package would be disbursed and help boost the economy into 2010,” he said.

On interest rates, he expects a review only upon a firmer recovery in the domestic economy.
“If economic growth is modest, then a revision in interest rates will only happen in the second half of 2010. It may even be flat for the whole year,” he said.

Yeah foresees interest rates remaining at 2% for the rest of the year, as any increase may derail economic recovery.

The central bank has kept interest rates unchanged for a fourth straight meeting last month.

On whether the country was experiencing a W-shaped recovery, Zeti said there was no credit crunch as financial institutions remained strong and continued to provide financing for domestic businesses. Only over-leveraged countries needed to reduce their indebtness, she said, adding: “Only if they restructure their financial system would they be able to see any sign of increase in consumption activity. “There could be a second round of impact on their financial system given the economic slowdown but, in Malaysia’s case, we never had that situation to begin with and our banks are financially very solid.”
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