* 2013 GDP growth seen at 5-6 pct, inflation at 2-3 pct
* Export growth of 1.8 pct forecast, vs 0.1 pct in 2012
* Sees risk to growth if Europe instability re-emerges
By Anuradha Raghu and Al-Zaquan Amer Hamzah
KUALA LUMPUR, March 20 (Reuters) - Malaysia's economy is
expected to grow 5-6 percent this year as strong domestic demand
powers growth, although there's a risk that re-emerging euro
zone instability and fragile global economic recovery could slam
on the brakes, the central bank said.
Bank Negara, in its annual economic outlook released on
Wednesday, said private spending drove growth last year and will
play a greater role in 2013.
This largely echoes an upbeat progress report that Prime
Minister Najib Razak presented on Tuesday for a decade-long,
$444 billion Economic Transformation Programme (ETP) aimed to
boost private investment and incomes. He will be hoping that the
state of the economy will shore up his popularity ahead of a
tight election that must be held by late June.
At a press conference on the central bank's annual
assessment of the economy, Governor Zeti Akhtar Aziz replied to
a question on the potential impact of the coming vote, "The
election is taking place when the economy is doing really well.
Unlike in Europe, we are not confronted with issues relating to
unemployment, financial system, and credit flows not being
The central bank's report comes out at a time investors have
mixed feelings about Malaysia. The trade-dependent country has
had surprisingly strong growth in spite of poor exports, but
there's significant worry about the coming elections, in which
opposition parties might improve on their strong 2008 showing.
Malaysia's stock market benchmark index is the only one in
Southeast Asia to be down this year.
While Bank Negara was largely upbeat on economic prospects,
it warned that the external environment remains challenging due
to slowing growth risks to Malaysia's main export markets such
as the U.S., China and the European Union.
"Under this challenging global economic environment, the
focus of policies by the government and the bank will be on
supporting the Malaysian economy to grow at a sustainable
level," the central bank said.
IMPROVEMENT IN EXPORTS
Exports from Malaysia, a key producer of electronics, oil
and palm oil, could rise 1.8 percent in 2013, as shipments of
higher value manufactured products grow. This compares to 0.1
percent increase in 2012 but is in line with this year's
recovery in Asian exporters like South Korea and Indonesia.
The central bank said it expects the shift in Malaysia's
economy toward strong domestic consumption and private
investments to continue.
Government spending, ramped up ahead of the general
elections, is expected to increase more slowly in 2013 than last
year in line with Malaysia's goals of lowering its budget
deficit and encouraging private investments, the central bank
Malaysia's gross domestic product grew at a surprisingly
strong 6.4 percent in the last quarter of 2012, topping the
central bank's expectations and boosting full-year GDP growth to
5.6 percent, compared to 5.1 percent in 2011.
This year, Malaysia is likely to get a leg up from overall
performance of Southeast Asia, which the central bank said is
expanding due to infrastructure projects and upgrades around the
APPROPRIATE INTEREST RATES
Bank Negara, which has kept its key interest rate at 3.00
percent since May 2011, said monetary policy this year will
focus on addressing risks to inflation and growth, with current
rates still appropriate and accommodative.
It signalled inflation would be manageable at a higher 2-3
percent expected this year, compared with 1.6 percent in 2012,
in spite of rising commodity prices and the gradual removal of
government subsidies to lower the budget deficit.
Economists expect monetary policy to be kept steady as
inflation remains mild, but say the central bank may consider a
hike in the second half if prices begin to climb at a faster
clip. This year's third monetary policy meeting will be May 9.
Malaysia's headline inflation rate remains one of the lowest
in the region thanks to a long-list of items with
government-controlled prices, from oil to rice and sugar.
The annual inflation rate in February, released earlier on
Wednesday, ticked up to 1.5 percent, matching Reuters poll
forecasts and moving away from December's near three-year
Many Asian central banks have kept their policy rates on
hold, citing manageable inflation, but hinted at possible
monetary policy easing to revive growth if there's a lull in
(Editing by Niluksi Koswanage and Richard Borsuk)