Malaysia's economy expanded 5.6 percent in the third quarter to September from a year earlier and is on track to grow four to five percent in 2002, said Bank Negara today.

Gross domestic product (GDP) during the three months was also up 3.4 percent from the previous quarter, due to a recovery in electrical products exports and strong domestic demand.

The pace of year-on-year growth picked up from 3.9 percent in the second quarter and 1.1 percent in the first three months. For the first nine months of the year, GDP grew 3.5 percent.

Bank Negara governor Zeti Akhtar Aziz said GDP growth could strengthen further in the fourth quarter but any US-led war against Iraq would slow down the country's recovery.

She said the government may lift its spending and loosen monetary policy to boost the economy in the event of a sharp global slowdown.

Strong fundamentals

"Our fundamentals remain strong and this places Malaysia in a position to undertake further additional stimulus if necessary. We do not have any structural imbalances and this allows us that policy of flexibility," she told a news conference.

Zeti said Malaysia now has a "higher tolerance level" for external shocks and would be able to "minimise the implications on our domestic economy and achieve reasonable economic performance."

Analysts said the third quarter data were within market expectations of between five and six percent growth.

Exports in the third quarter logged a double-digit gain of 11.1 percent from a year earlier, up from 3.1 percent growth in the second quarter amid a recovery in demand for electrical products such as audio-visual equipment and air conditioners.

Manufacturing remained the main growth engine in the third quarter, expanding 7.3 percent year-on-year from 5.6 percent in the second quarter.

Electronics output growth was sustained at a high level of 20.40 percent, with electrical products turning around to grow 0.6 percent after four consecutive quarters of decline.

Export driven

Zeti said the recovery was mainly export driven, with exports of electrical products up 0.8 percent after falling 8.9 percent in the second quarter.

All other industries also expanded, with agriculture and mining rebounding to grow 5.4 and 7.2 percent respectively after falling 1.6 and 1.4 percent in the second quarter.

Growth in the services sector eased to 3.4 percent from 4.2 percent in the previous quarter.

Construction growth dipped to 2.3 percent from 3.4 percent previously amid labour shortages caused by the deportation of illegal immigrants but Zeti said the situation was temporary and was expected to return to normal next year.

Gross foreign investment inflows rose to RM3.5 billion in the third quarter, mainly in the oil and gas sector, with manufacturing applications up 34 percent in the first nine months of the year.

Future inflows would continue to remain substantial, she added.

Increased bank lending boosted third quarter growth, with non-performing loans declining to their lowest levels in 18 months at 7.7 percent in September.

The ringgit peg of 3.80 to the dollar, fixed since September 1998, remained consistent with economic fundamentals despite weakening against major currencies in the January-October period, Zeti said.

On a possible cut in interest rates, she said they were at appropriate levels and were among the lowest in the region.