Actual finance blog

WASHINGTON–Consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount.

The Labour Department said Wednesday that consumer prices fell by 1 per cent last month, the biggest one-month decline on records that go back to February 1947. The drop was twice as large as the 0.5 per cent decline analysts expected.

The big drop reflected not only a huge fall in gasoline and other energy costs, but widespread declines in other areas. Core consumer prices, which exclude food and energy, fell by 0.1 per cent last month, the first drop in core prices in more than a quarter-century.

The big retreat in consumer prices reflects a remarkable turnaround from just a few months ago when a relentless surge in energy prices raised concerns that inflation could get out of control.

Since that time, the economy has been jolted by the most serious financial crisis in seven decades with all the turbulence expected to push the country into a severe and prolonged recession.

The U.S. troubles have quickly spread overseas, depressing growth around the world and cutting into demand for oil and other products, a development that has resulted in sharp declines in the price of crude oil and other commodities cash in 1 hour.

While some are worried that the price retreat could raise the prospect of a deflation, a prolonged bout of falling prices, most economists believe that current conditions are not likely to set the stage for such a development, which last occurred in the U.S. during the Great Depression.

Over the past 12 months, consumer prices have risen by 3.7 per cent, substantially below the 17-year high of a 12-month price increase of 5.6 per cent set this summer. Core prices are up 2.2 per cent over the past 12 months.

This price moderation is giving the Federal Reserve the room it needs to cut interest rates to battle the economic slump. The central bank is expected to cut the federal funds rate, the interest that banks charge each other, down to 0.5 per cent at its December meeting, even lower than the 1 percent where the funds rate stands currently. The 1 per cent funds rate ties the record low for the past half century.

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Wachovia reported a massive loss of nearly $24 billion Wednesday, in what was expected to be its last quarter as an independent company.

The struggling Charlotte, N.C.-based bank, which agreed to be acquired by Wells Fargo earlier this month, reported a net loss of $23.9 billion, or $11.18 a share, which included a whopping $18.8 billion impairment charge partly related to the planned merger.

Just a year ago, the company reported a profit of $1.62 billion, or 85 cents a share.

Despite the recent turmoil in financial markets, analysts were actually expecting the company to report a third-quarter profit of $547 million, or 2 cents a share.

Wachovia (WB, Fortune 500) shares fell 1.6% in early NYSE trading.

Wells Fargo execs, including CEO John Stumpf, said Wachovia’s results were about as dreary as they expected after poring over the company’s books and agreeing to buy the bank earlier this month.

"Wachovia’s third-quarter results were very much in line with our expectations," Stumpf said in a statement.

Like many of its peers, Wachovia was hit hard this quarter by issues of credit and bad bets on the U.S. mortgage market, most notably its 2006 purchase of the California mortgage lender Golden West Financial Corp.

Over the last three months, the company said it set aside $4.8 billion for loan losses, as the economy showed increasing signs of weakness and the housing market continued to deteriorate in already hard-hit parts of the country such as California and Florida.

Wachovia added Wednesday that non-performing assets, or loans that are not collecting interest or principal payments, increased five-fold from a year earlier to just over 3% of all loans.

Still, much of the blame for Wednesday’s results was the $18.8 billion impairment related, in part, to the tie-up with Wells Fargo.

Morgan Keegan analyst Robert Patten said the charge represented just how hard the two companies were working to clean up Wachovia’s books before proceeding with the merger.

"You want to set up ‘09 to look as good as possible," he said direct payday loan cash advance.

Assuming the company’s anticipated merger with Wells Fargo (WFC, Fortune 500) comes off without a hitch, Wachovia’s latest quarterly numbers will prove largely moot.

Still, the results offer a glimpse into just how badly the company was faring when investors seemed all but certain that Wachovia was destined to collapse.

Fears about Wachovia’s ultimate demise first took hold in mid-September following the collapse of Lehman Brothers and shortly after Lehman rival Merrill Lynch was forced into the arms of Bank of America (BAC, Fortune 500).

Speculation continued to swirl about the 129-year-old bank in the days that followed, including rumors of a possible merger with with investment bank Morgan Stanley (MS, Fortune 500).

Even as Wachovia’s consumer customers remained relatively calm about the bank’s fate in the days that followed, Wednesday’s results revealed that commercial depositors feared that the bank could be next. In just one quarter, the amount of commercial core deposits plunged by a colossal 24% from the previous quarter to $83.4 billion.

(Big customers flee)

Regulators finally interceded on Wachovia’s behalf the last weekend in September, helping broker a $2.2 billion purchase of Wachovia’s banking assets by Citigroup (C, Fortune 500).

Wachovia had a change of heart just days later, as it agreed to a sweetened offer from San Francisco-based Wells Fargo for all of Wachovia’s operations.

After some legal wrangling, Citigroup eventually walked away, leaving Wells Fargo in control of Wachovia in a deal worth $11.7 billion.

Wachovia shareholders have yet to approve the deal, although they are widely expected to do so by year’s end.

The combination of the two firms would transform Wells Fargo into a major player in the U.S. banking industry, with approximately $1.4 trillion in assets, a footprint in 39 states and the nation’s second-biggest retail brokerage network. 

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The global financial crisis will add at least 20 million people to the world’s unemployed, bringing the total to 210 million by the end of next year, the U.N. labor agency said Monday.

That will be the first time in a decade of record keeping that the global total has been above 200 million people, said officials of the International Labor Organization.

Global leaders need to focus on the impact on individuals rather than just financial institutions when they devise rescue plans, ILO Director-General Juan Somavia told reporters.

"We thought it was not good to talk about the financial crisis exclusively in financial terms," Somavia said. "We have to talk about the financial crisis in terms of what happens to people and in terms of what happens to jobs and enterprises."

He said it is already clear that people are going to be hurt by the financial crisis and that measures should be taken to provide unemployment compensation and other social protection.

"If we have enough resources to pump into the financial system, this is not the moment to say, ‘Yes, but we don’t have the resources to care about people,"’ said Somavia.

He said the first step in a global rescue plan remains getting out of "the credit paralysis."

"Hopefully, the decisions that have been taken are going to work," he said, adding that all measures should be taken to contain as much as possible the fall of the real economy and reduce the recession possibilities as much as possible.

But then attention should turn to "taking care of those enterprises that produce the most jobs," Somavia said payday advance lenders. "Those tend to be the small enterprises."

"The financial system has to go back to its fundamental function," he said, meaning providing credit to people with entrepreneurial spirit to set up a company that will produce goods and services and create jobs.

Another issue is protecting pensions, especially for those whose funds are invested in the stock market, he said.

"You better give enough credit to the pension systems so they don’t have to sell [shares] in a battered market," said Somavia, noting that the U.S. Congress had passed a US$700 billion rescue plan for financial institutions.

"Make sure some of that money goes to the pension systems so that they can pay pensions," he added. "People are very afraid all over the world."

The ILO based its unemployment projection in part on the latest forecast by the International Monetary Fund that the economies of the United States and Europe would virtually stop growing and that Japan would have only 0.5% growth, Somavia said.

The agency also factored in data from the United Nations and from countries that have produced recent statistics, he said.

"The estimate that we are now making is that as compared with January 2008 to December 2009 we are probably going to have about 20 million jobs lost, and this may be underestimated," Somavia said.

He said the agency had yet to break the forecast down by region or country. 

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Amidst all the chaos surrounding the $700 billion Wall Street bailout plan, the federal government’s other housing rescue program quietly opened for business Wednesday.

But will any mortgage servicers come knocking?

The Federal Housing Administration unveiled its $300 billion Hope for Homeowners program, which allows struggling borrowers to refinance into more affordable mortgages backed by the federal government. The legislation, which was signed into law in late July, was hotly debated for months on Capitol Hill with Democrats supporting it and Republicans opposed.

Before the so-called Wall Street bailout emerged, this FHA program was the federal government’s answer to the mortgage crisis. It was seen as a primary means to stemming the foreclosure tide and stabilizing the housing market.

Even now, foreclosure prevention measures in the current bailout legislation call for the Treasury Secretary to modify more loans through the FHA program.

"For homeowners in trouble, this may be the help they need," said Steve Preston, secretary of the federal Department of Housing and Urban Development, which oversees FHA. "It is yet one more way that families may be helped to weather the current turbulence in the housing market."

Banks, however, didn’t receive the program’s details from the FHA until Wednesday, and say it will likely be weeks before they can offer it to their customers.

Even then, lenders probably won’t rush to participate in the program, which is voluntary, since it requires them to take a pretty significant losses on the loan principal in most cases. Instead, banks have said that they’d prefer to use their own mortgage modification programs where they can better control the terms.

"We will continue to plow ahead with our own efforts to keep homeowners in their homes," said David Bradley, spokesman with Bank of America, which completed 15,750 loan modifications in August. "We’ve already been pretty aggressive in that regard."

Eligible borrowers must:

have taken out their mortgages on or before Jan. 1, 2008 and have made at least six payments.

be unable to afford their current loan, but did not intentionally miss payments.

have a debt-to-income ratio of at least 31%.

live in the house and not own other homes.

have provided accurate information on their loan documents and not been convicted of fraud in the past decade.

Under the program, borrowers will get:

a 30-year, fixed rate mortgage of up to $550,440 (no fax payday loans).

a new appraisal and loan for no more than 90% of the home’s value.

released from second mortgages and prepayment penalties.

But homeowners must pay a premium of 3% of the loan’s value upfront, and 1.5% of the outstanding mortgage amount annually 1500 payday loans. Also, they must share any appreciation in the home’s value with the FHA when they sell.

The law allows the FHA to insure up to $300 billion in new loans.

"This program can contribute meaningfully to stability in the housing market, while at the same time providing the appropriate safeguards and limitations to protect the interest of taxpayers," said Elizabeth Duke, Federal Reserve governor.

But HUD officials Wednesday backed away from the Congressional Budget Office’s original estimate that the bill will help 400,000 troubled borrowers.

"It’s very very difficult to really put a finger on it," Preston said.

It’s tough to forecast the program’s success in part because banks have had a very lukewarm reaction to it. Four large servicers told lawmakers two weeks ago that they would use the program only as a last resort.

The problem is that the Hope for Homeowners program requires banks to reduce the loan’s principal to 90% of a home’s current appraised value, which is likely to be much less than the owner paid for it. Lenders prefer to freeze or cut interest rates so they can at least recover the original amount of the loan, said Tom Kelly, spokesman for JPMorgan Chase, which has worked with 110,000 customers to modify or rework their loans between January 2007 and July 2008.

"You lock in your loss," Kelly said, by reducing loan principal.

Banks might turn to Hope for Homeownership if they feel the loan is hopeless and just want to get rid of it, he continued.

Lenders also won’t be pleased with the new home appraisals, which will show them just how underwater their borrowers are, said James Gaines, research economist at the Real Estate center at Texas A&M University.

He doesn’t see a lot of lenders flocking to the program.

"It will help some people, but it won’t be the universal panacea that people would like it to be," he said. 

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In the span of just 11 days, the Bush administration and lawmakers, seeing ominous warnings in the credit markets, rushed to create legislation to prevent a potential economic meltdown. Monday, the resulting $700 billion bailout package was defeated in a dramatic House vote.

The bill was designed to get financial institutions lending again by letting the U.S. Treasury buy up their troubled assets, most of which are tied to the housing market crash.

But after much contentious debate, and the addition of several taxpayer protections, the package was rejected by the House in a vote that was 228 to 205 against. The measure would have needed 218 votes for the House to pass. The next steps were not immediately clear but supporters were scrambling to put it up for another vote.

"I’m disappointed," said House Financial Services Chairman Barney Frank, D-Mass., talking to reporters after the vote. Noting that the Administration painted a dire picture of economic calamity if legislation didn’t pass, Frank said, "I’d like nothing better than to be proven wrong in the next few days. I was persuaded that we have a serious crisis and we’re threatened with a shutdown of the credit system when the economy is already weakened."

The credit markets had been seized up all day Monday, and after the vote, the Dow Jones Industrial Average started to plummet and ended the day down 778 points, the worst point drop ever. On a percentage basis, though, the Dow drop was only about 7%, far less than the 22% slide on Black Monday in 1987.

Here’s a quick breakdown of some of the bill’s key provisions:

Doling the money out: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury’s use. Authority to use the money would expire on Dec. 31, 2009, unless Congress certifies a one-year extension.

Protecting taxpayers: The ultimate cost to the taxpayer is not expected to be near the amount the Treasury invests in the program. That’s because the government would buy assets that have underlying value.

If the Treasury pays fair market value - which investors have had a hard time determining - taxpayers stand a chance to break even or even make a profit if those assets throw off income or appreciate in value by the time the government sells them. If it overpays for the assets, the government could be left with a net loss but would get something back on the open market for the assets when it eventually sells them.

If it ends up with a net loss, however, the bill says the president must propose legislation to recoup money from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.

In addition, Treasury would be allowed to take ownership stakes in participating companies.

Stemming foreclosures: The bill calls for the government, as an owner of a large number of mortgage securities, to exert influence on loan servicers to modify more troubled loans.

In cases where the government buys troubled mortgage loans directly from banks, it can adjust them more easily.

Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to the Treasury quick payday. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000.

They also will not be allowed to write new contracts that allow for "golden parachutes" for their top 5 executives if they are fired or the company goes belly up. But the executives’ current contracts, which may include golden parachutes, would still stand.

Overseeing the program: The bill would establish two oversight boards.

The Financial Stability Oversight Board would be charged with ensuring the policies implemented protect taxpayers and are in the economic interests of the United States. It will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury’s use of its authority under the rescue plan. Sitting on the panel would be 5 outside experts appointed by House and Senate leaders.

Insuring against losses: Treasury must establish an insurance program - with risk-based premiums paid by the industry - to guarantee companies’ troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

The amount the Treasury would spend to cover losses minus company-paid premiums would come out of the $700 billion the Treasury is allowed to use for the rescue plan. 

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Credit rating agencies, criticized for moving too slowly in cutting ratings on Wall Street firms and the complex instruments they devised, are now accused of acting too quickly.

As the credit crisis enters a new phase, the pendulum has swung too far back, critics argue. The agencies are still missing the mark, only now they are too aggressive, adding to market volatility, or changing their views within days or weeks.

Case in point: AIG.

A week ago, Standard & Poor’s warned that if insurance giant American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) didn’t demonstrate adequate access to capital in the short term, the rating company could cut its ratings by as much as three notches.

Late Monday, S&P, Moody’s Investors Service and Fitch Rating struck a triple blow to AIG’s investment-grade rating and warned more downgrades could follow.

Hours later, the U.S. government had rescued AIG with an $85 billion loan, and the rating companies scrambled once again to revise their outlooks.

“AIG was a signal they are being more aggressive in today’s environment,” said Joseph Mason, a finance professor at Louisiana State University payday advance lender. “They’ve had their backs against the wall, and they are being forced to cut.”

Credit market turmoil culminated this week in the government loan for AIG, once the world’s largest insurer based on market value; the bankruptcy filing of Lehman Brothers Holdings Inc(LEH.N: Quote, Profile, Research, Stock Buzz)(LEHMQ.PK: Quote, Profile, Research, Stock Buzz), spelling the demise of a 158-year-old trading company that was the parent of a major U.S. investment bank, and the hasty sale of Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz), the largest U.S. retail brokerage whose advertising symbol is the bull, to Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz). 

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Japan unveiled a stimulus package with $18 billion in fresh spending to shore up its flagging economy on Friday as figures showed that inflation has spiked to its highest in nearly 11 years, denting consumer spending.

Measures in the package span discounts on expressway tolls to assistance to farms and help for part-time workers to find better jobs. Funds are also earmarked for better medical care, ecological technology, housing loans and education, according to the Cabinet Office.

Economists are skeptical that the package will help revive Japan’s economy, which shrank 2.4% at an annual pace in the second quarter.

And critics call it a publicity stunt to lift Prime Minister Yasuo Fukuda’s dismal approval ratings.

"This is just reckless spending," Yukio Hatoyama, leader of the main opposition Democratic Party, said on nationally televised news. "The package is aimed at getting voters’ attention in anticipation of the next election."

All told, the value of the programs involved comes to $107.5 billion. Aside from the $18 billion cash infusion, most of the package consists of non-spending measures such as lower road tolls and loans to businesses.

Friday’s package did not include tax breaks, but cuts will be considered in the future, the government said.

Masamichi Adachi, senior economist for JP Morgan Securities in Tokyo, called the new spending a "drop in the bucket" compared to Japan’s total gross domestic product of about $4.6 trillion.

"It’s definitely positive, but to what extent (is the question)," he said.

July economic figures released Friday painted a mixed picture of the Japanese economy. Industrial production rose modestly, but the outlook is choppy. The jobless rate fell and retail sales rose. Household spending declined but not as steeply as expected.

The rapid acceleration in inflation was the most alarming of all the indicators released.

Japan’s core consumer price index, which excludes fresh food prices but includes energy, rose 2.4% in July, the quickest pace in almost 11 years, the Ministry of Internal Affairs said.

While Japan’s economy is indeed slowing, many economists see the downturn as mild, with little risk of the sort of deep recession that crippled the country in the 1990s.

"We’ve been calling this a ’shallow recession,’ and the data today tend to support that view," Adachi said low fee cash advance. "But that doesn’t mean they point toward a quicker recovery either."

The Bank of Japan, meanwhile, is unlikely to tighten monetary policy in response to inflation, even though July’s figure surpasses the central bank’s inflation target range of 0-2 percent. Last week, policy board members kept the key interest rate unchanged at 0.5%.

So-called core-core inflation excluding food and energy rose a modest 0.2%, indicating that huge price gains have yet to permeate all sectors.

Merrill Lynch (MER, Fortune 500) economists Takuji Okubo and Masayuki Kichikawa said earlier this week that current inflation appears to be a short-term trend.

"Going forward, whether core measures of CPI excluding food and energy would show signs of inflation would be the key factor in determining (the Bank of Japan’s) actions," they said.

Overall CPI was up 2.3% in July, while core CPI for the Tokyo area rose 1.5% in August.

Among other key economic data, Japan’s industrial production in July was up 0.9% from the previous month on a seasonally adjusted basis, posting the first rise in two months on higher output by makers of cars and electronics.

"Improved external demand for products of those industries in July seemed to be in the background of their industrial production gains," said UBS (UBS) economist Akira Maekawa in a research memo.

The news cheered investors, who helped push the benchmark Nikkei 225 stock index up 2.9% Friday. Stronger-than-expected economic growth figures in the U.S. in the second quarter - up 3.3% at an annual pace - also lifted sentiment.

The outlook for industrial production looks uneven. The Ministry of Economy, Trade and Industry said it expects production to fall 2.9% in August before increasing 3.4% in September.

Japan’s unemployment rate fell from 4.1% to 4% in July.

Meanwhile, spending by Japanese households slipped 0.5% from a year earlier but was more robust than anticipated. Hotter weather spurred sales in items like air conditioners and certain types of food, Maekawa said.

Retail sales in the country rose 1.9% in July from the previous year, the government said. 

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South Korea's economy expanded at the same pace in the second quarter as the first as export gains made up for cooling consumer spending.

The economy grew 0.8 percent from the previous quarter, the central bank said in Seoul today. From a year earlier, gross domestic product increased 4.8 percent, after a 5.8 percent gain in the first quarter.

Exports, which make up about half of the economy, may cool as the U.S. slowdown spreads to the emerging markets that have been buying South Korea's electronics and ships. At home, soaring fuel costs and a weaker won are driving the fastest inflation in almost 10 years, squeezing household incomes and company profits.

“The key uncertainty lying in front of the Korean economy is how sustainable will global demand be,'' said Oh Suk Tae, a Seoul-based economist at Citibank Korea Inc. “Third-quarter economic growth, especially private consumption, will be affected by rising oil prices.''

Both measures matched the median estimates of economists surveyed by Bloomberg News. On July 2 the government trimmed its 2008 growth forecast to 4.7 percent from 6 percent. The economy grew 5 percent last year.

South Korea's benchmark Kopsi Index of stocks fell 1.1 percent, in line with other Asian markets, after a report showed U.S. home sales fell, adding to concern the slowdown in the world's biggest economy will persist, slowing demand for Asian exports. The Kospi has dropped 15 percent this year.

Asian Growth

The won traded at 1007.40 won versus the dollar at 9:45 a.m. from 1007.10 yesterday. The currency, which fell as much as 11.5 percent this year, is now down 7.5 percent for 2008.

South Korea is among the first Asian countries to report second-quarter gross domestic product figures.

China's economy grew at the slowest pace since 2005 in the second quarter from a year earlier, and Singapore's expanded at the slowest pace in five years by the same measure. From a year earlier, South Korea's growth was the slowest since the first quarter of 2007.

Net exports — the difference between exports and imports — powered more than half of the nation's growth, contributing 0.5 percentage point to the increase, down from 0.7 percent in the first quarter.

Spending by households, which are burdened with record debt, fell 0.1 percent, the first decline in four years payday advances. Construction investment dropped 0.6 percent. Investment in factories increased 1 percent.

Domestic Demand

Domestic demand, which includes private and corporate spending, rose 0.3 percent in the second quarter, the smallest gain in 3 1/2 years, the report showed.

Finance Minister Kang Man Soo said today the economy faces various difficulties, and that it may pick up in late 2009.

Signs of a slowdown have already been emerging. Factory output had the smallest gain in a half year in May and shipments overseas rose by the least in five months in June.

Exports may also slow as central banks across Asia raise interest rates to combat inflation, slowing economic growth and weakening demand for South Korean goods.

“Demand from emerging markets in Asia will cool because of monetary tightening in the region,'' said Shin Dong Suk, an economist at Samsung Securities Co. in Seoul.

LG Electronics Inc., Asia's second-largest mobile-phone maker, said on July 21 its revenue is poised to fall from the second quarter, when it had a record profit, as slowing global economic growth undermines demand for phones and televisions.

Emerging Markets

“There may be a contraction in emerging markets because of the economic slowdown, the spike in oil prices and inflation,'' Brian Sohn, head of investor relations at LG, said July 21.

Exporters may also come under pressure now that the government has dropped its support for a weaker won to help contain inflation. The Bank of Korea has possibly spent more than $12 billion since the end of May to boost the won's value, according to Jung Chan Ho, a currency dealer at Shinhan Bank in Seoul.

Still, exports to China and other emerging markets will help keep South Korea's $970 billion economy from cooling too much as domestic demand slows, the Bank of Korea said on July 1.

Real gross domestic income, a measure of purchasing power, rose 1.6 percent from the previous quarter, when it declined 2.1 percent.

Governor Lee Seong Tae and his policy board left borrowing costs at 5 percent this month and said economic growth may slow and inflation may stay high for a “significant period of time.''

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A financial-services franchise serving families and downtown Honolulu workers has opened a second location at Fort Street Mall.

Cash Plus — which offers check cashing, payday advances, wire transfers, money orders and serves as a bill payment center for dozens of companies — opened at 1111-A Fort Street Mall, a few doors from McDonald’s and Hawaii Pacific University.

The store doubles as a wireless and high-speed Internet service provider from Mobi PCS and Clearwire.

The Fort Street store is the second franchise for co-owners and Hawaii entrepreneurs Mark Nakatsukasa and Dylan Mabuni paydayloans. They opened their original location in January 2006 at 1130 Middle St.

"There was a need for financial services in different communities," Nakatsukasa said.

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Malaysia's government shelved at least $1.1 billion in public works projects as soaring commodity prices forced it to spend more on food security and raised construction costs, swelling its five-year development budget.

Projects including a monorail and highway in northern Penang state will be scrapped, Sulaiman Mahbob, director general of the government's Economic Planning Unit, said in a press briefing in Putrajaya yesterday. The Southeast Asian nation will spend 230 billion ringgit ($70 billion) on roads, bridges and other works during the 2006-to-2010 period, 15 percent more than it planned earlier.

The changes “take into account additional development requirements and the increase in construction-related materials cost,'' Prime Minister Abdullah Ahmad Badawi told parliament in Kuala Lumpur today in a review of the five-year plan released today. “Development projects will also be reprioritized.''

Surging commodity prices have pushed up building costs and increased government subsidies on food and fuel, leaving Asia's governments with less to spend on public-funded bridges, roads and other works. That's limiting Abdullah's ability to regain support after his coalition lost its two-thirds parliamentary majority in elections this year.

“Given the rising project costs as well as ballooning fuel subsidies, there is a need to reprioritize the projects,'' said Lee Heng Guie, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur. “They will focus on all the people-centric projects'' including food security, rural roads and housing.

Penang Monorail

Scomi Engineering Bhd. had planned to bid for the 2 billion ringgit monorail project on Penang island, a popular tourist destination. Penang, Abdullah's home, was one of five states that came under opposition control after the March 8 elections.

Malaysian Resources Corp. and Melewar Industrial Group Bhd. were also potential bidders for the monorail job cash advance loans.

Other projects put on hold include a public park in the capital Kuala Lumpur, bringing the total value of projects shelved to at least 3.5 billion ringgit.

Instead, the government will spend an additional 1 billion ringgit each for Sarawak and Sabah states on Borneo island, which provided Abdullah's coalition with the parliamentary seats it needed to retain a simple majority in the lawmaking body.

An additional 10 billion ringgit will be spent on five special investment zones Abdullah has introduced across the country. Some 3 billion ringgit will go to food security programs, and 3 billion ringgit to a strategic investment fund for the trade ministry. Spending on low-cost housing, rural infrastructure and public transport will increase.

Political Pressure

Projects that will proceed include an electrified double- tracking rail development in the north of the Malaysian peninsula led by Gamuda Bhd. and MMC Corp., and a similar line being built by Ircon International Ltd. in the south.

Growth in Southeast Asia's third-largest economy may average 6 percent a year from 2006 to 2010, Abdullah said, maintaining the estimate given at the start of the five-year plan in 2006.

Achieving the targeted growth rate would be difficult, said Lee at CIMB.

“We are in trying circumstances,'' he said. Growth may ease from the average 6.1 percent pace of the past two years, as higher domestic fuel prices and “political headwinds'' add to external risks, he added.

The government's budget deficit is forecast to narrow to 3.2 percent of gross domestic product by 2010 from 3.6 percent in 2005, compared with the 3.4 percent estimated earlier. The deficit will total 21.6 billion ringgit this year, or about 3.1 percent of gross domestic product, the central bank said on March 26.

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