Malaysia's economy will expand by between five and six percent in 2011, spurred largely by strong domestic demand, the central bank forecast today.

The figure, however, represented slower growth after an impressive 7.2 percent expansion in 2010. The export-dependent economy suffered a 1.7 percent contraction in 2009 due to the global slowdown.

"The Malaysian economy is projected to grow by 5 to 6 percent in 2011," said Zeti Akhtar Aziz, the governor of the central bank, in its annual report.

"The growth momentum will be underpinned by strong domestic demand, emanating primarily from private sector activity," she added.

Zeti said inflation in Southeast Asia's third-largest economy could increase further in 2011 to average between 2.5 and 3.5 percent, driven primarily by rising global commodity and energy prices.

Inflation in 2010 stood at 1.7 percent.

Zeti said unemployment was projected to remain at 3.2 percent of the labour force in 2011.

Malaysia could be affected by the spillover effects of geopolitical tensions in the Middle East and the recent earthquake and tsunami in Japan, she added.

Prime Minister Najib Razak has unveiled a series of economic reforms since taking power in 2009, aimed at creating 3.3 million jobs and pushing Malaysia towards developed nation status by 2020.

He has promised major infrastructure projects and financial market liberalisation, vowing to stimulate the private sector to attract much-needed foreign investment.

Below are highlights from a press conference with Zeti during the release of the central bank's 2010 annual report:

Inflation is forecasted at 2.5-3.5 percent. Is this worrying?

On average, prices will increase in this range.. this is a situation that is manageable and we have taken into account these levels and the growth projections have already taken into account the impact it may have in consumption.

Much of the increase is due to these two components (food and fuel) at this point in time, not a concern but will monitor closely, whether higher commodity/energy (prices) is of a temporary nature or more permanent. All these factors will be taken into account in deciding our monetary policy.

Assessment of effect of Japan disaster on Malaysian economy?

Right now no significant impact on GDP growth, our growth is mainly driven by domestic demand. Key to this is continued consumption demand and also continued growth momentum in investment activity in the private sector. We have the enabling environment and the Economic Transformation Programme.

Can the 6 percent sustained GDP growth target be achieved?

Right now the Malaysian economy is firmly on a steady growth path. This path, in our assessment, can be achieved going forward into the future with sustained growth of 5-6 percent because we have the economic fundamentals and economic flexibility to adjust, to go into new areas of economic activity and to enhance our new areas of comparative advantage in manufacturing and services sector moving into the higher end of economic growth.

    

If oil prices stay high, would that pose a risk to growth?

We have already assumed in the region of $100 per barrel and if it stays within that range, it is already priced in this range on the average, could be higher then lower at other points in the year $90-$100 per barrel range, we can sustain this level of growth.

However, if it goes to $150 per barrel and stays at that level for a sustained period of time, it would affect global growth and would affect net oil importers. We saw in 2009 the consequences of this, we had -1.7 percent growth, ours was much less than those who are net importers. We are increasingly becoming well-positioned to absorb these kind of increases, what we describe as supply shocks, we are in better position to mitigate impact.

How would this affect subsidy programme?

We saw how it impacted that in 2008, and if we are talking of these very extreme scenarios then under the current scenario where the oil price will be between $90-$100 this is already priced in, and as I mentioned the government does have the breathing space to rationalise the subsidy in a very gradual manner. To have this flexibility is important because it is not the intention to have any dislocation to consumption activity or businesses.

    

When will the new financial masterplan be released and can you share some details?

    

It will be released in June. The changes will be across the board on banking, insurance and even the money and forex market. There will be greater leverage on technology and also look at how we can enhance the capacity of the financial system to best serve the new areas of requirements of a higher value added and higher income economy.

- Agencies