KUALA LUMPUR, June 27 (Reuters) - Malaysia's economy isexpected to expand 5.4 percent this year, picking up from growthof 4.7 percent in 2013, as brightening exports outweigh anexpected cooling in domestic demand, the World Bank said onFriday.
Exports, a mainstay of the Southeast Asian economy, arelikely to grow 6.3 percent this year and 6.2 percent in 2015 asa global recovery boosts demand for the country's key shipmentssuch as oil and electronics, the bank said.
"Export growth will be driven by higher energy, commodityand petrochemical production, as new investments start to comeonline," the World Bank said in its annual Economic Monitorreport on Malaysia's outlook.
However, the report added that high levels of household debtwere a risk to growth as interest rates looked set to rise.
The central bank is expected to begin raising interest ratesin July for the first time in three years, partly due to what itdescribes as financial imbalances such as consumer indebtedness.
Household debt levels in Malaysia climbed to 86.5 percent of GDPin 2013, among the highest in Asia. The report noted that the real interest rate has becomenegative, with inflation picking up to 3.7 percent in the firstfour months of this year, compared to the benchmark interestrate of 3 percent.
While Malaysia's banking sector is well capitalised, withlow levels of non-performing loans, the rise in interest ratescould cause "excessive retrenchment" in household spending, thereport said.
"We're not saying necessarily we see a risk to financialsector stability, we see more of a risk to growth," saidFrederico Gil Sander, senior country economist.
Private consumption growth is expected to ease to 6.5percent this year due to fiscal tightening and higher interestrates, the World Bank said.
Malaysia's exports grew a meagre 0.6 percent in 2013, buthave rebounded in recent months led by electronic exports as theUnited States, Europe and other major economies recover.
Thepolitical crisis in Thailand also may have helped Malaysia'sexports as electronics manufacturers shifted production, thereport said.
Malaysia was broadly on track to meet its goal of reducingthe fiscal deficit to 3.5 percent of GDP this year from 3.9percent in 2013, but would only do so if it follows through onpledges to further cut fuel subsidies and implement abroad-based consumption tax, said World Bank Country DirectorUlrich Zachau. "
One thing that will be critical for that is that themeasures that are announced and which we very strongly welcomeon the subsidy reform side go ahead and are implemented," hesaid.
Prime Minister Najib Razak, in his annual budget speech toparliament last October, announced his government would bring ina goods and services tax (GST) in 2015 at a rate of 6 percent,above market expectations of 4 or 5 percent.
The government's economic report, released just ahead of thebudget speech, said that spending on subsidies, including fuel,would total 39.4 billion ringgit in 2014, down from 46.7 billionringgit in 2013.
In a report on Friday, DBS Group Research highlightedMalaysia's fast-growing household debt as a reason why interestrates are likely to rise this year.
It expects the central bankto raise the benchmark rate to 3.5 percent by September from 3.0percent now.
"The low interest rate environment and the property boom arethe key reasons for the rise (in debt)," it said. "Many are treating the property market as the new depositbox that pays higher returns than what banks are offering."
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Exports, a mainstay of the Southeast Asian economy, arelikely to grow 6.3 percent this year and 6.2 percent in 2015 asa global recovery boosts demand for the country's key shipmentssuch as oil and electronics, the bank said.
"Export growth will be driven by higher energy, commodityand petrochemical production, as new investments start to comeonline," the World Bank said in its annual Economic Monitorreport on Malaysia's outlook.
However, the report added that high levels of household debtwere a risk to growth as interest rates looked set to rise.
The central bank is expected to begin raising interest ratesin July for the first time in three years, partly due to what itdescribes as financial imbalances such as consumer indebtedness.
Household debt levels in Malaysia climbed to 86.5 percent of GDPin 2013, among the highest in Asia. The report noted that the real interest rate has becomenegative, with inflation picking up to 3.7 percent in the firstfour months of this year, compared to the benchmark interestrate of 3 percent.
While Malaysia's banking sector is well capitalised, withlow levels of non-performing loans, the rise in interest ratescould cause "excessive retrenchment" in household spending, thereport said.
"We're not saying necessarily we see a risk to financialsector stability, we see more of a risk to growth," saidFrederico Gil Sander, senior country economist.
Private consumption growth is expected to ease to 6.5percent this year due to fiscal tightening and higher interestrates, the World Bank said.
Malaysia's exports grew a meagre 0.6 percent in 2013, buthave rebounded in recent months led by electronic exports as theUnited States, Europe and other major economies recover.
Thepolitical crisis in Thailand also may have helped Malaysia'sexports as electronics manufacturers shifted production, thereport said.
Malaysia was broadly on track to meet its goal of reducingthe fiscal deficit to 3.5 percent of GDP this year from 3.9percent in 2013, but would only do so if it follows through onpledges to further cut fuel subsidies and implement abroad-based consumption tax, said World Bank Country DirectorUlrich Zachau. "
One thing that will be critical for that is that themeasures that are announced and which we very strongly welcomeon the subsidy reform side go ahead and are implemented," hesaid.
Prime Minister Najib Razak, in his annual budget speech toparliament last October, announced his government would bring ina goods and services tax (GST) in 2015 at a rate of 6 percent,above market expectations of 4 or 5 percent.
The government's economic report, released just ahead of thebudget speech, said that spending on subsidies, including fuel,would total 39.4 billion ringgit in 2014, down from 46.7 billionringgit in 2013.
In a report on Friday, DBS Group Research highlightedMalaysia's fast-growing household debt as a reason why interestrates are likely to rise this year.
It expects the central bankto raise the benchmark rate to 3.5 percent by September from 3.0percent now.
"The low interest rate environment and the property boom arethe key reasons for the rise (in debt)," it said. "Many are treating the property market as the new depositbox that pays higher returns than what banks are offering."
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