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IMF Executive Board Concludes 2017 Article IV Consultation with Malaysia

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
April 2017
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On March 15, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Malaysia.

Despite a challenging global economic environment, the Malaysian economy performed well over the past few years. Notwithstanding the impact of the global commodity price and financial markets volatility, the economy remained resilient, owing to a diversified production and export base; strong balance sheet positions; a flexible exchange rate; responsive macroeconomic policies; and deep financial markets. While real GDP growth slowed down, Malaysia is still among the fastest growing economies among peers. The challenging global macroeconomic and financial environment puts premium on continued diligence and requires careful calibration of policies going forward.

Risks to the outlook are tilted to the downside, originating from both external and domestic sources. External risks include structurally weak growth in advanced and emerging market economies and retreat from cross-border integration. Although the Malaysian economy has adjusted well to lower global oil prices, sustained low commodity prices would add to the challenge of achieving medium-term fiscal targets. Heightened global financial stress and associated capital flows could affect the economy. Domestic risks are primarily related to public sector and household debt, along with pockets of vulnerabilities in the corporate sector. Federal debt and contingent liabilities are relatively high, limiting policy space to respond to shocks. Although the household debt-to-GDP ratio is likely to decline, household debt also remains high, with debt servicing capacity growing only moderately.

Real GDP growth rate is expected to increase moderately to 4.5 percent year-on-year (y/y) in 2017 from 4.2 percent in 2016. Domestic demand, led by private consumption, continue to be the main driver of growth, while a drag from net exports, similar to 2016, will remain. Consumer price inflation is projected to rise and average 2.7 percent y/y in 2017 on the back of higher global oil prices and the rationalization of subsidies on cooking oil. The current account surplus would be largely unchanged as impacts from an improved global outlook and higher commodity prices would be offset by the strength of imports on the back of a resilient domestic demand.

Executive Board Assessment2

Executive Directors commended the resilience of the Malaysian economy, which reflects sound macroeconomic policy responses in the face of significant headwinds and risks. While Malaysia’s economic growth is expected to continue in 2017, weaker-than-expected growth in key advanced and emerging economies or a global retreat from cross-border integration could weigh on the domestic economy. Against this background, Directors urged vigilance and continued efforts to strengthen policy buffers and boost long-term economic growth.

Directors agreed that the authorities’ medium-term fiscal policy is well anchored on achieving a near-balanced federal budget by 2020. The planned consolidation will help alleviate risks from elevated government debt levels and contingent liabilities and build fiscal space for future expansionary policy, as needed. Directors recommended that the pace of consolidation reflect economic conditions and that any counter-cyclical fiscal policy measures be well-targeted and temporary. They noted that improvements to the fiscal framework, such as elaborating medium-term projections and preparing and publishing an annual fiscal risks statement, would help anchor medium-term fiscal adjustment and mitigate risks.

Directors agreed that the current monetary policy stance is appropriate. Going forward, Bank Negara Malaysia (BNM) should continue to carefully calibrate monetary policy to support growth while being mindful of financial conditions. Directors emphasized that global financial market conditions could affect the monetary policy space and should be carefully monitored.

Directors noted that the banking sector is sound overall and that financial sector risks appear contained. Nonetheless, they cautioned that potential pockets of vulnerability should be closely monitored. They noted that household debt remains relatively high, while in the corporate sector, there are emerging vulnerabilities in some sectors. Directors suggested that macroprudential measures be adjusted if needed.

Directors underscored the central role of macroeconomic policy and exchange rate flexibility in helping the economy adjust to external shocks. In this regard, they welcomed the authorities’ commitment to keeping the exchange rate as the key shock absorber. They recommended that reserves be accumulated as opportunities arise and deployed in the event of disorderly market conditions. Noting the authorities’ aim to improve the functioning of the onshore forward foreign exchange market, Directors urged the BNM to monitor the effects of the recent measures introduced in this regard, recognizing their benefits and costs. They emphasized that close consultation and communication by BNM with market participants will be essential in further developing the foreign exchange market and bolstering resilience.

Directors underscored that steadfast implementation of the authorities’ ambitious structural reform agenda is key to boosting long-term economic potential. They supported the emphasis on increasing female labor force participation, improving the quality of education, lowering skills mismatch, boosting productivity growth, encouraging research and innovation, and upholding high standards of governance.

Table 1.Malaysia: Selected Economic and Financial Indicators, 2012–18
Nominal GDP (2016 est.): US$296.4 billionPopulation (2016): 31.7 million
GDP per capita (2016, current prices): US$9,360Poverty rate (2014, national poverty line): 0.6 percent
Unemployment rate (2016): 3.5 percentAdult literacy rate (2015): 94.6 percent
Main exports (share in total goods exports): electrical & electronic products (39 percent), and com modities (23 percent)
Est.Proj.
2012201320142015201620172018
Real GDP (percent change)5.54.76.05.04.24.54.7
Total domestic demand10.66.35.35.94.85.15.1
Private consumption8.37.27.06.06.16.26.0
Public consumption5.45.84.34.41.04.72.9
Private investment21.412.811.16.44.45.35.4
Public gross fixed capital formation15.91.8−4.7−1.0−0.51.01.9
Net exports (contribution to growth)−3.6−1.01.2−0.4−0.2−0.20.0
Saving and investment (in percent of GDP)
Gross domestic investment25.725.925.025.126.125.525.3
Gross national saving30.929.429.428.128.127.327.1
Fiscal sector (in percent of GDP)
Federal government overall balance 1/−5.1−4.2−3.4−3.2−3.1−3.0−2.7
Revenue20.720.419.918.917.316.616.6
Expenditure and net lending25.724.623.322.120.419.619.3
Federal government non-oil primary balance−10.3−8.7−7.3−5.2−3.4−3.3−2.7
Consolidated public sector overall balance 2/−5.6−6.0−7.4−7.8−7.2−6.4−5.6
General government debt 3/54.656.456.257.956.356.054.9
Of which: federal government debt51.653.052.754.552.752.551.4
Inflation and unemployment (period average, in percent)
CPI inflation1.72.13.12.12.12.72.9
Unemployment rate3.03.12.93.13.53.43.2
Macrofinancial variables (end of period)
Broad money (percentage change) 4/8.87.46.33.02.73.34.1
Credit to private sector (percentage change) 4/5/12.110.29.28.65.25.96.5
Credit-to-GDP ratio (in percent) 4/6/123.6129.7130.1134.8134.1131.9130.3
Credit-to-GDP gap (in percent) 4/6/7/13.515.712.713.59.4
Overnight policy rate (in percent) 4/3.003.003.253.253.00
Three-month interbank rate (in percent) 4/3.23.23.93.83.4
Nonfinancial corporate sector debt (in percent of GDP)98.0100.296.2102.0101.599.497.9
Nonfinancial corporate sector debt issuance (in percent of GDP) 4/4.73.53.22.63.2
Household debt (in percent of GDP)80.586.186.889.188.988.888.7
Household financial assets (in percent of GDP)176.3187.0182.4182.9181.6
House prices (percentage change) 4/11.810.98.57.45.45.56.5
Exchange rates (period average)
Malaysian ringgit/U.S. dollar3.093.153.273.914.15
Real effective exchange rate (percentage change)−0.20.5−0.7−7.9−4.3
Balance of payments (in billions of U.S. dollars) 7/
Current account balance16.211.314.88.96.15.56.1
(In percent of GDP)5.23.54.43.02.01.81.8
Goods balance36.630.634.628.124.425.326.7
Services and primary income account balance−14.4−13.8−14.5−13.6−13.8−14.6−14.9
Capital and financial account balance−7.4−6.4−24.3−13.3−1.02.45.2
Of which: Direct investment−7.9−2.0−5.51.24.34.23.2
Errors and omissions−7.6−0.2−1.75.4−1.50.00.0
Overall balance1.34.6−11.21.03.67.911.3
Gross official reserves (US$ billions)139.7134.9115.995.394.6102.4113.8
(In months of following year’s imports of goods and nonfactor services)7.77.47.46.35.96.16.6
(In percent of short-term debt by original maturity) 7/150.7130.7111.6116.2112.7132.6149.5
(In percent of short-term debt by remaining maturity) 7/104.191.878.475.174.279.386.5
Total external debt (in billions of U.S. dollars) 7/196.9212.3213.4194.2202.6207.1214.5
(In percent of GDP) 7/62.665.763.165.668.366.863.4
Of which: short-term (in percent of total, original maturity) 7/47.148.648.742.241.437.335.5
short-term (in percent of total, remaining maturity) 7/68.169.369.365.463.062.461.3
Debt service ratio 7/
(In percent of exports of goods and services) 8/17.217.317.921.323.724.925.7
(In percent of exports of goods and nonfactor services)18.218.419.122.625.126.327.2
Memorandum items:
Nominal GDP (in billions of ringgit)9711,0191,1061,1571,2291,3231,426
Sources: Data provided by the authorities; CEIC Data Co. Ltd.; Dealogic; World Bank; UNESCO; and Fund staff estimates.

Based on staff’s estimate of the federal government fiscal balance using GFSM 2001, which differs from the authorities’ cash-based measure of the fiscal deficit.

Capital expenditure in the budget includes foreign fixed assets and other items, such as purchase of shares and land, which are excluded from public investment in the national accounts

General government includes the federal government, state and local governments, and the statutory bodies.

Latest available data.

Based on the depository corporation survey.

Based on a broader measure of liquidity.

Staff estimates.

Includes receipts under the primary income account.

Sources: Data provided by the authorities; CEIC Data Co. Ltd.; Dealogic; World Bank; UNESCO; and Fund staff estimates.

Based on staff’s estimate of the federal government fiscal balance using GFSM 2001, which differs from the authorities’ cash-based measure of the fiscal deficit.

Capital expenditure in the budget includes foreign fixed assets and other items, such as purchase of shares and land, which are excluded from public investment in the national accounts

General government includes the federal government, state and local governments, and the statutory bodies.

Latest available data.

Based on the depository corporation survey.

Based on a broader measure of liquidity.

Staff estimates.

Includes receipts under the primary income account.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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