Malaysia’s Central Bank Trims 2013 Forecast; Data From Malaysia Underscores Fragile Growth Prospects in Southeast Asia

Updated August 21, 2013, 10:29 a.m. ET

Malaysia’s Central Bank Trims 2013 Forecast

Data From Malaysia Underscores Fragile Growth Prospects in Southeast Asia

ABHRAJIT GANGOPADHYAY

KUALA LUMPUR—Slowing growth and a dwindling current-account surplus are adding to market concerns about Malaysia when capital is flowing quickly out of the region. The central bank on Wednesday cut Malaysia’s full-year growth outlook, citing weak external demand as gross domestic product grew 4.3% in the second quarter from a year earlier, short of market expectations for a 4.7% rise. Bank Negara Malaysia projected the economy would grow 4.5%-5.0% in 2013, down from 5.0%-6.0% previously. GDP grew 4.1% in the first quarter on a seasonally adjusted basis. The cut to the central bank’s forecast “is perhaps a pre-emptive step to tamp down market expectation,” said Rahul Bajoria, an economist at Barclay’s Capital.Malaysia’s current account, a broad measure of trade in goods and services, remained positive in the second quarter but shrank by one-third from a year earlier, to 2.6 billion ringgit ($790 million).

Malaysia’s current account hasn’t been in deficit since the aftermath of the 1997 Asian Financial Crisis, but the surplus has been eroding quickly as exports slow and government-led infrastructure spending fans appetite for imported construction equipment and other heavy machinery.

Fitch Ratings last month cited the government’s deteriorating finances when it cut Malaysia’s outlook to negative from stable. The current-account surplus was just 1.1% of GDP in the second quarter, down from 7.9% of GDP at the end of last year.

Its weakening current account has left Malaysia exposed to international capital flows as investors reposition ahead of an end to the U.S. Federal Reserve’s extraordinary policy support for the American economy.

Foreign funds have been pulling out of emerging markets as U.S. interest rates rise, hammering current-account deficit countries such as India and Indonesia and sending the Malaysian ringgit to a three-year low against the U.S. dollar earlier this week.

Malaysia’s government has built up large debts in recent years—today equaling almost half of GDP—to fund projects such as an urban railway system. Nearly half of government bonds are held by foreigners—a large proportion for an Asian government—and foreign investors sold 6.6 billion ringgit ($2.04 billion) of Malaysian government bonds in June, the largest outflow the country has seen in a single month.

Malaysia’s central bank governor, Zeti Akhtar Aziz, said local institutional investors such as the government-backed pension fund and private insurance funds can absorb any selling of Malaysian government securities. She also said the outlook will brighten, a hope shared by policy makers across Asia as the U.S. recovery strengthens and China’s economy shows signs of renewed momentum.

The current-account surplus “has narrowed but it’s still a surplus and the recovery in external demand will improve this,” Ms. Zeti said.

Not everyone shares the optimism.

“We continue to expect further deterioration in the current-account picture due to a combination of strong import demand and reasonably subdued export growth,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse.

Ms. Zeti said that to keep the current account in surplus, large imports potentially could be staggered over a period to avoid sending the trade balance—a key component of the current account—into deficit.

“The government is in a position now to improve the fiscal position, and has the ability and capacity to do so in a gradual manner without disrupting the economy,” she said.