MANILA: Malaysia's gross domestic product (GDP) is expected to grow 5.8% this year on strong export demand and private consumption and a slower 5.6% next year on further fiscal tightening, the Asian Development Bank (ADB) said.

In its annual economic outlook report, Manila-based ADB said projections for Malaysia assumed a 12% to 15% growth in private investment, including increases in foreign direct investments of about US$1bil a year.

The investments will offset the planned cuts in public investment, but will not generate a significant improvement in the ratio of gross capital formation to GDP, it added.

“The improved economic performance in 2003, coupled with moves toward greater transparency in government decisions and a stronger anti-corruption stance, has created favourable conditions for 2004 (in Malaysia),” the ADB said in the report.

“Better investment outcomes, ...possible if policy is focused on investment-promoting initiatives, offer opportunity for higher-than-projected economic growth,” the report added.

The ADB noted that the Malaysian government is targeting a reduction of the fiscal deficit to 3.3% of GDP in 2004, with revenues projected to rise 7.2%.

However, it said “a planned 1.6% reduction in expenditures will be more difficult to achieve, although the government's decision to hold elections early in the year and avoid an extended period of politically-driven budget decisions, is encouraging in this regard.”

“Planned cuts in the development budget are already deep, but further modest cuts may be possible if necessary,” the ADB said.

It said the Malaysian government's aim to narrow further the budget deficit to 1.8% of GDP in 2005 and balance the budget in 2006 will need significant further spending cuts.

Meanwhile, pressure has gradually built on Bank Negara to consider a more flexible exchange rate and allow the ringgit to appreciate against the US dollar, it added.

“The rise in portfolio investment inflows to Malaysia, fuelled by the market view that the ringgit is undervalued, is likely to reinforce this,” it said.

However, it said a likely accommodative monetary policy in the context of low inflation and a narrowing fiscal deficit will contain the upward pressure on the ringgit. – AFX-Asia