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Malaysia's growth cools as pressure grows to boost confidence

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Malaysia's economy expanded the least in almost two years after a new consumption tax curbed private spending, adding pressure on policy makers to revive confidence in a nation facing political turmoil and a weakening currency.

[KUALA LUMPUR] Malaysia's economy expanded the least in almost two years after a new consumption tax curbed private spending, adding pressure on policy makers to revive confidence in a nation facing political turmoil and a weakening currency.

Gross domestic product rose 4.9 per cent in the three months through June from a year earlier, after climbing 5.6 per cent in the previous quarter, the central bank said in Kuala Lumpur Thursday. The median in a Bloomberg News survey was for a 4.5 per cent increase.

Foreign funds have dumped about US$3 billion of the nation's shares this year and the ringgit is at a 17-year low as Prime Minister Najib Razak grapples with allegations of financial irregularities at a state investment company. The export- dependent economy is also threatened by a rout in commodity prices and China's yuan devaluation this week.

"External demand is one key impediment to growth," Edward Lee, regional head of research at Standard Chartered Plc in Singapore, said before the announcement. "There will be some volatility" seen on consumption because of the goods and services tax, before its impact stabilises later this year, he said.

The ringgit is Asia's worst-performing currency this year as it dropped 12.5 per cent against the greenback. It weakened beyond 4 a dollar for the first time since 1998 Wednesday spurred by the yuan devaluation. The FTSE Bursa Malaysia KLCI Index has lost about 13 per cent from this year's high in April.

The impact of the ringgit's depreciation is manageable and the economy will remain on a steady growth path, central bank Governor Zeti Akhtar Aziz told reporters in Kuala Lumpur Thursday. Monetary policy remains accommodative and supportive of economic activity, she said.

Malaysia's GDP is forecast to grow 4.5 per cent to 5.5 per cent this year, down from an earlier projection of as much as 6 percent. Other economies in the region have signaled a softening outlook, as Singapore slashed the upper end of its growth forecast for 2015 after the economy shrank last quarter.

Malaysia's central bank left its key rate unchanged for a sixth straight meeting in July.

The Wall Street Journal reported on July 3 that about US$700 million may have moved through government agencies and companies linked to debt-ridden state investment company 1Malaysia Development Bhd. before ending up in accounts bearing Najib's name. The Malaysian Anti-Corruption Commission said the 2.6 billion ringgit in Najib's accounts was from donors in the Middle East.

A key consumer confidence gauge is at the lowest since 2008, and measures of manufacturing wages and credit-card spending weakened last quarter, according to inflation-adjusted data compiled by Bloomberg.

In July, the ringgit slid past the 3.8-a-dollar peg that was set during the Asian Financial Crisis and was kept from 1998 to 2005. The central bank's efforts to defend it contributed to the country's foreign-exchange reserves dropping below US$100 billion for the first time since 2010.

The drop in reserves was anticipated, and the central bank will set about to rebuild them, Ms Zeti said. They remain ample to facilitate international transactions, she said.

BLOOMBERG