KUALA LUMPUR, Feb 11 — Sluggish global demand for its exports and weak commodity prices are expected to have dragged Malaysia's economic growth in the fourth quarter of 2014 to its weakest pace in more than a year.

Malaysia was the best-performing economy in Southeast Asia in the first three quarters of last year, with annual growth averaging 6.1 per cent, but its fortunes turned along with the collapse in global crude and commodities prices.

A further slowdown expected this year as lower oil prices hit energy revenues, restricting the government's ability to spur economic growth and control its mounting debt, and analysts say risks of a credit downgrade and capital flight are rising.

"With market volatility rising and the (ringgit) depreciating significantly in the past three months, policy challenges to maintaining financial and macro stability have risen substantially, in our view," Rahul Bajoria of Barclays said in a research report.

After a strong first half, Malaysia's exports slipped in the second half hit by a slowdown in China, its largest trade partner, and falling global energy prices.

Fourth-quarter gross domestic product was forecast to expand 5.0 per cent from a year earlier, a Reuters poll of economists showed, down from 5.6 per cent in the third quarter.

Strong finish

Some analysts noted that stronger-than-expected December exports and industrial output, led by manufacturing, could bolster the final quarter. That could put full-year growth at 5.8 percent, the poll showed, better than 4.7 per cent in 2013.

However, concerns remain that energy exports will likely continue to contract. To address investor concerns, the government said it would slash spending in order to hit its deficit-reduction targets.

The government also revised its growth forecast for 2015 to between 4.5 and 5.5 percent from 5-6 per cent.

A deterioration in Malaysia's external balances has also piled pressure on the ringgit but economists said a weaker currency may be what is needed.

"In many respects, allowing exchange rate depreciation is probably preferable because it boosts export competitiveness while not encouraging acceleration of credit growth amidst already-elevated household debt," Credit Suisse said in its note to clients.

"We believe BNM (Bank Negara Malaysia) will prefer to ease its monetary policy via exchange rate - allowing the ringgit to depreciate further," the investment bank said.

The government is set to implement a consumer tax in April, which will likely lead to a one-off spike in inflation. — Reuters