Economic package may include cut in interest rate


BY JAGDEV SINGH SIDHU

MANY economists see the government incorporating an interest rate cut in its proposed economic package to give the economy a stronger boost, given the growing impact of the Severe Acute Respiratory Syndrome (SARS) outbreak. 

Tourist arrivals and hotel occupancy rates in Malaysia have dropped significantly since the outbreak of SARS, and the slump in those sectors, together with a still anaemic manufacturing sector, now threatens the official forecast of 4.5% gross domestic product (GDP) growth for this year. 

“They have to be pro-active. It is about time they (Bank Negara) come up with a rate cut,”' said SBB Secu-rities economist Manokaran Mot-tain. 

Expectations of a cut in interest rates to bolster economic activity weakened by uncertainty over the war in Iraq were rife during the first quarter of the year. 

But Bank Negara did not relent to such calls, choosing instead to say in its 2002 Annual Report released in March that rates were sufficiently low to do the job once economic activity picked up. 

The central bank said then that domestic fundamentals had streng-thened significantly and that there was stronger resilience to external shocks. It added, however, that global uncertainties could cause the balance of risk to shift towards a possible slowdown in the domestic economy. 

It also left a caveat. 

“Under this environment, monetary policy will remain flexible to appropriately influence emerging changes in macroeconomic conditions,” the central bank said in its report. 

“While current circumstances support the maintenance of an accommodative monetary stance, pre-emptive action will be taken when developments indicate a significant change in circumstances that will increase the risks towards significantly lower economic growth.” 

Since the report came out, the impact of the SARS outbreak in many parts of Asia has widened and has already dealt a terrible blow to countries like Hong Kong and Singapore. 

For Malaysia, tourist arrivals from China, Hong Kong and Taiwan have dropped by 80%, and the impact on the tourism sector, which some say accounts for about 15% of the services industry, would be significant if the drop is not addressed soon. 

As hard as it is to exactly quantify the economic impact of SARS at the moment, economists have nonetheless cut their growth projections for many Asian countries as the outbreak of the disease has impaired the domestic consumption element of economies in the region. 

Apart from the weak external sector, worries about the impact of falling tourist arrivals and slower activity in the broader services sector, especially in the important retail and restaurants segment, have prompted many economists to trim their GDP estimates for Malaysia. 

The Malaysian Institute of Eco-nomic Research (Mier) on Tuesday cut its full-year growth projection for the country to 3.7% from 5.7%. J.P. Morgan had earlier revised Malay-sian growth for the second time in a month to 3.5%. Other economists canvassed by StarBiz have also cut their expectations. 

Although the assumptions do not point to a recession, some economists have taken the trend of lowered expectations and the term “pre-emptive action” in Bank Ne-gara's own words as an opportunity for a rate cut should economic conditions deteriorate further. And now with the impact of SARS on the economy visible, some say the move would come sooner than later. 

“There is room for Bank Negara to cut if it wants to,” said CIMB economist Lee Heng Guie. 

Even though an interest rate cut is a possibility and a means to reduce the impact of slower cash flow and debt on companies and consumers, most countries in the region have not done so following the outbreak of SARS. 

Only Indonesia's central bank, citing slower inflation, had cut its intervention rate on April 7.  

Economists say one reason for the tentativeness among central banks in the region to slash rates is that inflation is creeping up in countries like South Korea and the Philippines. Others simply wonder whether a cut in interest rates would work at this time. 

“A rate cut will not be immediately effective for Malaysia,” said DBS Bank senior economist Wong Chee Seng, who lowered his growth estimates for Malaysia to 4.1% from 5.2% a couple of weeks ago. 

He said an interest rate cut would only work its way through the system after about a year and that would have an impact on a banking system already flush with liquidity. 

Regional research economist Song Seng Wun said cutting interest rates in those countries affected by SARS would not work, as the element of fear gripping the people in Hong Kong and Singapore would not encourage them to spend more. 

Song also believes that large companies in Malaysia would not be really concerned about the base lending rate as their funding cost is generally based on a rate that is slightly above Klibor. 

“The average lending rates would have to be substantially lowered to have an impact on the economy,” said K&N Kenanga head of research Seow Choong Liang. 

Another economist with a local brokerage believes that cutting interest rates would not be the right approach. 

“Look at Japan and the US. It is no longer the issue of the price of funds but the mechanism. Bank Negara would have to look at the mechanism of lending to stimulate the economy,” he said. “Maybe that's why the economic package is taking time to be announced.” 

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