Think tank warns of recession risk in Malaysia

By EILEEN NG,Associated Press Writer AP - Friday, October 17

KUALA LUMPUR, Malaysia - A private Malaysian think tank Thursday cut its 2009 economic growth forecast for the country to 3.4 percent and warned of a possible recession if the U.S. economy deteriorates.

The influential Malaysian Institute of Economic Research predicted the economy would expand 5.3 percent this year after a strong performance in the first six months.

But it expected growth to slide to 3.4 percent in 2009, down from its earlier forecast of 5 percent, due to the knock-on effects of a flagging global economy. This was sharply lower than the government's forecast of 5.4 percent.

Executive Director Mohamad Ariff warned that growth in 2009 may slump further if the U.S., one of Malaysia's top trading partners, goes into recession.

"There is a 40 percent chance that Malaysia will enter technical recession in 2009, meaning two quarters of negative growth and a 30 percent chance it could be a real recession lasting more than two quarters depending on what happens in the U.S.," he said.

The institute said the global credit crisis showed no signs of abating despite concerted interest rate cuts and massive liquidity injection by governments and central banks worldwide.

It said consumer and business confidence in Malaysia has dipped and warned conditions would worsen if the credit squeeze dries up funds for investment and household spending.

Ariff said there are heightened concerns that the current global economic slump could drag on until the end of 2010 or 2011.

Given the economic pressure and declining oil prices, he warned Malaysia's budget deficit may exceed 5 percent of gross domestic product this year and more than 4 percent in 2009.

The government raised development spending in August which it said will push the fiscal deficit to 4.8 percent of GDP this year and 3.6 percent in 2009, from 3.2 percent in 2007.

Finance Minister Najib Razak earlier this week said Malaysia can still grow 5 percent this year but the government may need to revise its 2009 forecast. He has said he would announce a "stabilization plan" on Monday to prop up the economy.

Najib, who is also deputy premier, is expected to take over from Prime Minister Abdullah Ahmad Badawi in March.

The quicker-than-expected transition follows the ruling coalition's poor election results in March and is aimed at thwarting opposition leader Anwar Ibrahim's threat to oust the government through parliamentary defections.