KUALA LUMPUR (June 27): Malaysia's economy is expected to expand 5.4 percent this year, picking up from growth of 4.7 percent in 2013, as brightening exports outweigh an easing of domestic demand as fiscal and monetary tightening take effect, the World Bank said on Friday.

Exports, a mainstay of the Southeast Asian economy, are likely to grow 6.3 percent this year and 6.2 percent in 2015 as a global recovery boosts demand for the country's key shipments such as oil and electronics, the bank said.

"Export growth will be driven by higher energy, commodity and petrochemical production, as new investments start to come online," the World Bank said in its annual Economic Monitor report on Malaysia's outlook.

However, the report added that high levels of household debt were a risk to growth as interest rates looked set to rise.

The central bank is expected to begin raising interest rates in July for the first time in three years, partly due to what it describes as financial imbalances such as consumer indebtedness. Household debt levels in Malaysia climbed to 86.5 percent of GDP in 2013, among the highest in Asia.

The report noted that the real interest rate has become negative, with inflation picking up to 3.7 percent in the first four months of this year, compared to the benchmark interest rate of 3 percent.

"While necessary to rebuild buffers, policy adjustments carry risks of inducing excessive retrenchment in household spending," the bank said.