(Recasts to focus on economic, fiscal risks, add quotes)
* Economy expands 4.3 pct in Q2 y/y, vs poll 4.9 pct
* Full-year growth target trimmed to 4.5-5.0 pct
* Cbank says Malaysia can cope with capital outflows
* Current account shrinks, seen in surplus for year
By Anuradha Raghu and Siva Sithraputhran
KUALA LUMPUR, Aug 21 (Reuters) - Malaysia's current account
surplus plunged in the second quarter on weakening exports,
overshadowing a slight acceleration in economic growth and
highlighting the country's vulnerabilty to market selloffs that
have rocked several other Asian economies.
The Indian rupee hit record lows this week and Indonesia's
stock market and currency plunged on concerns that their
worsening current account deficits left them exposed to an
expected withdrawal of U.S. super-loose monetary policy.
Fears that Malaysia and Thailand could join that club have
pushed their currencies to multi-month lows in recent days,
raising concern that the market contagion could spread to
economically healthier countries in Southeast Asia.
Data on Wednesday confirmed that Malaysia's current account
surplus is evaporating fast, falling to 2.6 billion ringgit
($790 million) in the second quarter from 8.7 billion ringgit in
the first three months and 22.9 billion ringgit before that,
reflecting plunging exports and solid imports.
Still, the decline was not as much as some economists had
Economic growth accelerated slightly to 4.3 percent in the
April-June period from a year earlier, helped by pre-election
government spending and a pick-up in activity after the May
polls, but fell well short of economists' expectations of 4.9
In a nod to the deteriorating growth prospects, the central
bank cut its forecast for full-year growth to 4.5-5.0 percent
from 5-6 percent.
Malaysia, which is heavily dependent on its exports of
commodities such as palm oil, could soon be recording its first
current account deficits since the 1997 Asian financial crisis.
"I think the era of strong double-digit current account
surpluses is over," said Lee Heng Guie, an economist at CIMB
Investment Bank in Kuala Lumpur.
"Unless an export recovery materialises and is supported by
a revival in commodity prices, the surplus will still be
narrowing for the next two years."
Central bank Governor Zeti Akhtar Aziz said that Malaysia
was expected to maintain a current account surplus this year,
and could cope with the current "highly destabilising" capital
"This is not a new phenomenon. We coped with it before," she
said, adding that the economy was expected to remain supported
by strong domestic growth.
Sales of Malaysian bonds by foreigners, who hold almost half
of the country's government debt, could be absorbed by Malaysian
institutions including the insurance industry, she said.
Other data on Wednesday showed that inflation
ticked up to 2.0 percent in July from 1.8 percent in June, in
line with market expectations.
Manufacturing output rose 3.3 percent in the second quarter
after subdued growth of 0.3 percent in the first, while mining
activity picked up 4.1 percent after shrinking in the first
three months of the year.
Many businesses put investment plans on hold in the first
quarter ahead of the tense national election in May that was
narrowly won by the long-ruling National Front coalition.
Investment has been rising strongly as Prime Minister Najib
Razak pushes through his $444 billion Economic Transformation
Programme aimed at doubling per capita incomes by 2020, but that
has also pushed up imports, undermining the current account.
While economists note that Malaysia has a much stronger
external position than Indonesia, its weaknesses include a
stubborn fiscal deficit, a relatively high government debt of 53
percent of GDP and one of Asia's highest household debt levels.
Najib faces a possible leadership challenge from within his
ruling party in October, raising uncertainty over his pledge to
cut the budget deficit of 4.5 percent of GDP. He has pledged to
announce steps to improve the fiscal position in his budget
address in October.
Malaysia's ringgit has tumbled more than 7 percent
this year to three-year lows around 3.3 to the dollar and is
among Asia's worst performers this year. On Wednesday, it
weakened further ahead of the data, falling 0.2 percent to
"It is just a liquidity event that hurt everyone," Abdul
Farid Alias, the chief executive of Malayan Banking Bhd
(Maybank), Malaysia's biggest bank by assets, told
reporters on Wednesday.
"The fundamentals of the economy in Malaysia, of our
organisation, remain strong."
The Malaysian data follows Thai gross domestic product
figures released on Monday that showed a surprise contraction in
second-quarter growth, partly due to weakening exports.
Regional economies have built up hefty foreign reserves and
sharply reduced foreign currency debt since they were devastated
by the Asian financial crisis in 1997, making them less
vulnerable to flighty foreign capital.
Data from the Bank for International Settlements shows
Malaysia has enough reserves to cover four times its short-term
external debt, while Thailand has 6.8 times. Indonesia has only
Kelvin Tay, regional chief investment officer Wealth
Management Southern Asia-Pacific, said that while Asian debt
levels had risen since the 2008 financial crisis, they were
mostly sustainable because of higher growth rates.
"We have actually gone up (in debt) but don't forget the
economies here are at growing at 6.5-7 percent as a whole," he
said. "If you have growth of that kind of level you can
certainly sustain the debt levels. If your growth falls to 4-4.5
percent then, yeah, you are in trouble."
Malaysia's central bank left its key policy rate unchanged
at 3.0 percent at its last meeting in July, but warned that the
weak global environment may hurt growth prospects. However, a
pick-up in inflation and further weakness in the currency could
prompt it towards a tightening bias.
(Additional reporting by Niluksi Koswanage in Kuala Lumpur,
Saeed Azhar in Singapore and Wayne Arnold in Hong Kong; Writing
by Stuart Grudgings; Editing by Kim Coghill)