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Malaysia: Staff Report for the 2009 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund
Published Date:
August 2009
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Annex I: Malaysia—Medium-Term Debt Sustainability Analysis

1. The public debt ratio is projected to increase over the medium term, while the external debt would decline in relation to GDP. This reflects the challenging external environment but still broadly favorable medium-term growth prospects, as well as a reversal of the fiscal consolidation trend of the last few years. For the federal government, the debt ratio would exceed 50 percent of GDP.

2. Under the baseline scenario, public sector debt would increase sharply, reaching about 72 percent of GDP by 2014. Ample domestic savings allow the government to meet its borrowing requirements without external financing. Nevertheless, market concerns about the size of public deficit and debt and the lack of a consolidation strategy have led to the first local currency downgrade since the 1997 crisis. Bound tests indicate that public sector gross debt would increase further in the event of shocks, with the most extreme shock (a decline in growth) leaving debt at 90 percent of GDP.

3. External debt is projected to decline to 19 percent of GDP by 2014, reflecting mostly the large current account surpluses and a drawdown in private external debt. Sustainability does not appear to be at risk. Bound tests indicate the external debt would remain manageable under all shocks considered, including a one-time 30 percent depreciation of the ringgit, which would leave it at about 37 percent of GDP.

Table 1.1.Malaysia: External Debt Sustainability Framework, 2000–14(In percent of GDP, unless otherwise indicated)
ActualProjection
200020012002200320042005200620072008200920102011201220132014Debt-stabilizing non-interest current account 6/
Baseline: External debt45.249.248.444.642.338.133.430.425.727.326.124.622.821.119.44.8
Change in external debt-6.84.0-0.7-3.9-2.3-4.2-4.7-3.0-4.71.6-1.2-1.5-1.8-1.7-1.6
Identified external debt-creating flows-14.6-7.0-11.5-18.1-26.3-16.9-22.6-22.2-13.4-0.6-4.8-4.9-5.3-5.4-5.4
Current account deficit, excluding interest payments-11.5-9.9-9.8-13.6-13.5-16.7-17.0-16.5-18.4-13.8-11.0-10.4-10.5-10.6-10.6
Deficit in balance of goods and services-19.2-17.4-17.3-19.6-20.4-23.0-22.2-20.3-22.3-17.4-14.6-14.1-14.3-14.6-14.8
Exports119.8110.4108.3106.3115.4118.2116.7110.2102.695.691.890.590.189.789.3
Imports100.693.091.186.795.095.294.689.980.378.277.276.475.775.074.5
Net nondebt creating capital inflows (negative)0.80.40.4-2.0-9.02.0-2.3-1.48.910.95.95.75.75.75.7
Automatic debt dynamics 1/-3.92.6-2.1-2.5-3.8-2.2-3.3-4.2-3.82.30.3-0.1-0.5-0.5-0.5
Contribution from nominal interest rate2.42.11.81.61.41.61.41.21.01.00.90.90.80.70.7
Contribution from real GDP growth-3.9-0.2-2.4-2.6-2.7-1.9-2.0-1.8-1.21.2-0.7-1.0-1.2-1.3-1.2
Contribution from price and exchange rate changes 2/-2.40.7-1.5-1.5-2.5-1.9-2.6-3.6-3.7
Residual, including change in gross foreign assets 3/7.911.010.714.224.012.717.819.18.72.23.63.33.53.73.8
External debt-to-exports ratio (in percent)37.744.644.741.936.732.328.627.625.028.528.427.125.323.521.8
Gross external financing need (in billions of U.S. dollars) 4/5.12.91.8-1.4-0.7-6.9-6.2-10.1-19.5-19.5-7.30.6-0.3-1.0-2.6
In percent of GDP5.43.21.8-1.3-0.6-5.0-4.0-5.4-8.8-9.8-3.60.3-0.1-0.4-1.0
Scenario with key variables at their historical averages 5/10-year historical average10-year standard deviation27.326.625.524.523.622.79.4
Key macroeconomic assumptions underlying baseline
8.70.55.45.86.85.06.16.34.6-4.52.54.15.56.06.0
Real GDP growth (in percent)8.60.55.45.86.85.06.16.34.65.62.1-4.52.54.15.56.06.0
GDP deflator in U.S. dollars (change in percent)4.9-1.63.13.36.04.77.512.313.75.64.613.7-0.92.52.52.52.5
Nominal external interest rate (in percent)5.34.64.13.63.64.24.14.24.04.20.53.93.53.53.53.43.4
Growth of exports (U.S. dollar terms, in percent)17.0-8.86.67.322.812.612.612.710.910.98.3-11.80.95.27.68.18.2
Growth of imports (U.S. dollar terms, in percent)23.8-8.66.54.124.010.213.213.56.310.59.5-7.93.75.67.27.67.8
Current account balance, excluding interest payments11.59.99.813.613.516.717.016.518.414.53.313.811.010.410.510.610.6
Net nondebt creating capital inflows-0.8-0.4-0.42.09.0-2.02.31.4-8.90.44.4-10.9-5.9-5.7-5.7-5.7-5.7
B. Bound tests
B1. Nominal interest rate is at historical average plus one standard deviation27.326.124.723.021.319.74.8
B2. Real GDP growth is at historical average minus one standard deviations27.326.425.223.822.421.24.9
B3. Non-interest current account is at historical average minus one standard deviations27.327.727.827.527.226.94.4
B4. Combination of B1-B3 using 1/2 standard deviation shocks27.327.126.625.824.90.04.7
B5. One time 30 percent real depreciation in 200927.339.239.038.437.737.23.9

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Table 1.2.Malaysia: Public Sector Debt Sustainability Framework, 2004–2014(In percent of GDP, unless otherwise indicated)
ActualProjections
20042005200620072008200920102011201220132014Debt-stabilizing primary balance 9/
Baseline: Public sector debt 1/64.360.355.250.648.456.961.264.566.768.871.5-3.7
Of which: foreign-currency denominated20.416.511.58.39.69.69.08.37.66.96.3
Change in public sector debt-1.5-4.0-5.1-4.6-2.28.54.33.22.22.12.7
Identified debt-creating flows-11.6-7.6-6.1-8.0-8.57.32.61.21.31.92.7
Primary deficit-7.1-4.6-2.5-3.9-3.64.43.23.04.35.46.5
Revenue and grants37.234.635.337.538.534.735.435.234.133.232.3
Primary (noninterest) expenditure30.030.032.833.634.939.138.738.238.438.638.8
Automatic debt dynamics 2/-4.4-3.0-3.6-4.1-5.03.0-0.7-1.8-3.0-3.6-3.8
Contribution from interest rate/growth differential 3/-4.4-2.9-2.6-3.4-4.73.0-0.7-1.8-3.0-3.6-3.8
Of which: contribution from real interest rate-0.50.20.6-0.3-2.60.70.70.50.30.10.0
Of which: contribution from real GDP growth-3.9-3.1-3.2-3.1-2.02.2-1.4-2.3-3.3-3.7-3.8
Contribution from exchange rate depreciation 4/0.0-0.1-1.0-0.7-0.3
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g., bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes 5/10.13.61.03.46.31.21.72.01.00.30.0
Public sector debt-to-revenue ratio 1/172.8174.4156.3134.9125.8163.8172.8183.3195.3207.4221.6
Gross financing need 6/3.54.77.86.33.614.68.19.99.910.711.4
In billions of U.S. dollars4.46.512.211.78.129.517.322.424.328.434.2
Scenario with key variables at their historical averages 7/56.966.677.587.898.0108.36.2
Scenario with no policy change (constant primary balance) in 2008–201356.954.451.246.240.534.7-2.1
Key macroeconomic and fiscal assumptions underlying baseline
Real GDP growth (in percent)6.85.35.86.34.6-4.52.54.15.56.06.0
Average nominal interest rate on public debt (in percent) 8/5.65.25.14.94.84.33.83.53.12.82.6
Average real interest rate (nominal rate minus change in GDP deflator, in percent)-0.40.61.2-0.3-5.51.41.31.00.60.30.1
Nominal appreciation (increase in U.S. dollar value of local currency, in percent)0.00.57.06.74.2
Inflation rate (GDP deflator, in percent)6.04.63.85.210.33.02.52.52.52.52.5
Growth of real primary spending (deflated by GDP deflator, in percent)-11.45.215.79.08.67.01.32.86.16.56.5
Primary deficit-7.1-4.6-2.5-3.9-3.64.43.23.04.35.46.5
B. Bound tests
B1. Real interest rate is at historical average plus one standard deviation56.962.366.770.173.377.1-3.1
B2. Real GDP growth is at historical average minus one standard deviation56.963.369.675.582.189.9-3.5
B3. Primary balance is at historical average minus one standard deviation56.962.667.270.774.077.8-4.6
B4. Combination of B1-B3 using 1/2 standard deviation shocks56.963.168.372.476.380.7-2.6
B5. One time 30 percent real depreciation in 2006 10/56.961.273.675.477.077.0-4.1
B6. 10 percent of GDP increase in other debt-creating flows in 200656.971.274.275.977.679.7-4.2

Gross debt of consolidated public sector, including nonfinancial public enterprises. Does not include nongovernment guaranteed domestic debt of NFPEs.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Gross debt of consolidated public sector, including nonfinancial public enterprises. Does not include nongovernment guaranteed domestic debt of NFPEs.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Annex II: Malaysia—Fund Relations

(As of May 31, 2009)

I. Membership Status: Joined March 7, 1958; Article VIII

II. General Resources Account:

SDR millionPercent Quota
Quota1,486.60100.00
Fund holdings of currency1,246.4183.84
Reserve position in Fund240.1916.16

III. SDR Department:

SDR millionPercent Allocation
Net cumulative allocation139.05100.00
Holdings147.54106.10

IV. Outstanding Purchases and Loans: None.

V. Financial Arrangements: None.

VI. Projected Obligations to Fund: None.

VII. Exchange Arrangement:

On July 21, 2005, the BNM announced the adoption of a managed float with the exchange rate of the ringgit to be monitored against an undisclosed trade-weighted basket of currencies. Based on information on the exchange rate behavior, the de facto exchange rate regime is classified as floating.

Malaysia maintains bilateral payments arrangements with 22 countries. The authorities have indicated that these arrangements do not have restrictive features.

Capital control measures imposed in early 1994 and in 1998 in the wake of the Asian crisis have mostly been lifted, except for the internationalization of the ringgit. In particular, since May 2001, nonresident portfolio investors are freely allowed to repatriate their principal sums and profits out of the country at any time. Malaysia further liberalized exchange control regulations during 2002-07. The main measures were a relaxation of regulations on investment abroad by domestic institutions, an easing of regulations on domestic credit facilities extended to nonresidents, abolition of overnight limits on all foreign currency accounts maintained by residents and of the net open position limit imposed on a licensed onshore bank, allowing residents to open and maintain joint foreign currency accounts for any purpose, easing requirements on foreign currency and ringgit credit facilities from nonresidents, relaxation of rules on the provision of financial guarantees, abolition of several reporting requirements, allowing domestic institutions to enter into repo transactions with non-residents, granting flexibility for domestic institutions to sell nonperforming loans to external parties, and a relaxation of the conditions on residents to enter into foreign exchange forward contracts to sell foreign currency receivables for ringgit for any purpose (prior to April 2003, only export proceeds and services receivables—excluding interest receivables—were allowed to be sold on a forward contract basis). The authorities also allowed local investors to buy foreign-listed securities and foreign firms to sell shares in the local market. In 2008, further measures were undertaken, including the lifting of limits on residents’ borrowing in foreign currency, and the easing of rules on borrowing in ringgit by residents from nonresidents and lending in ringgit by residents to non-residents.

The Malaysian authorities view remaining exchange control regulations as prudential in nature and necessary to ensure the availability of adequate information on the settlement of payments and receipts as part of the monitoring mechanism on capital flows. These controls do not contravene Malaysia’s obligations under Article VIII.

Malaysia maintains restrictions on payments and transfers for current international transactions with respect to the Taliban and individuals and economic entities associated with terrorism. These measures, taken in accordance with relevant UN Security Council resolutions, are maintained for the reasons of national and international security and have been notified to the Fund pursuant to the IMF Executive Board Decision No. 144-(52/51). Malaysia also restricts current international transactions between Malaysian residents and Israeli companies and individuals; however, since these restrictions affect the underlying transactions themselves, they are not subject to Fund jurisdiction under Article VIII, Section 2(b).

VIII. Article IV Consultation:

Malaysia is on the standard 12-month consultation cycle. Discussions for the 2009 Article IV consultation took place during November 9-20, 2007, September 9-16, 2008, and May 21-June 1, 2009.

IX. FSAP Participation:

Undertaking an FSAP remains a priority for the authorities. Next year they expect to be in a better position to propose a timeline.

X. Technical Assistance:

MFD: Workshop in February 2000 on bank supervision, focusing on the issues of consolidated supervision, risk-based supervision, and accounting requirements. Mission in October 2003 on Islamic banking, and December 2003 on AML/CFT. Workshop in November 2008 on stress testing.

STA: Mission in August 2003 on Malaysia’s IIP data, which were subsequently published in the 2003 BOPSY. Mission in January 2005 on integrated monetary database, and in November 2005 on government finance statistics.

XI. AML/CFT:

Malaysia (including the Labuan International Offshore Financial Center) underwent its second Mutual Evaluation in February 2007 that was conducted by the Asia Pacific Group (APG). The full report (http://www.apgml.org/documents/docs/17/Malaysian%20MER%20-%20FINAL%20August%202007.pdf) was adopted by APG members in July 2007.

XII. Resident Representative/Advisor: None.

Annex III: Malaysia—Statistical Issues

Data provision to the Fund is broadly adequate for surveillance. However, further efforts to improve statistics for the consolidated public sector are necessary. Malaysia subscribes to the Special Data Dissemination Standard (SDDS). It is using a timeliness flexibility option for general government operations (within six-quarter lags after the end of reference year).

  • National accounts: Currently, the Department of Statistics Malaysia (DOSM) compiles and publishes annual and quarterly estimates of GDP by activity and by expenditure at current and constant prices, and annual estimates for gross disposable income, saving, and net lending for the economy based on the 1968 SNA. The quarterly data are released about two months after the reference quarter. In addition, DOSM has developed experimental institutional sector accounts in accordance with the 1993 SNA. There are significant differences in the estimates for key aggregates, particularly for GDP, final consumption expenditures (government, household, NPISH, and gross capital formation) common to both the 1968 SNA-based GDP compilation system and the 1993 SNA-based institutional sector accounts system.
  • Prices: The CPI and the PPI are available on a timely and comprehensive basis. A revised CPI was introduced in January 2006; it covers all 14 states and features a more disaggregated measure of the consumption basket and updated expenditure weights based on a 2004/05 comprehensive household income and expenditure survey. The PPI features a 2000 base year with weights derived from the 2000 Input-Output tables. The implicit GDP deflator does not appear to track well changes in the prices of exported and imported products following the large exchange rate fluctuations in 1997 and 1998.
  • Labor market statistics: Data on employment and unemployment are disseminated quarterly, and wages/earnings data are disseminated monthly.
  • Monetary and financial statistics: The monetary and financial statistics (MFS) are reported on a timely and regular basis and are broadly in conformity with the Fund’s data needs. There is a need to improve the institutional coverage of the financial corporations, sectorization of the domestic economy, and classification and valuation of financial instruments to ensure full adherence to the IMF’s Monetary and Financial Statistics Manual (MFSM). In addition, due to the growing importance of insurance corporations, pension funds, and other financial intermediaries in Malaysia, coverage of MFS should be expanded to include these institutions. The MFS missions of January 2004 and 2005 developed an integrated monetary database to be used for publication and operational needs of the BNM, STA, and APD. The Bank Negara Malaysia (BNM) reports data in STA’s standardized report forms (SRFs) which provide more detailed classification of certain items, fuller sectoral and instrument breakdown, and currency aggregation. MFS based on the SRFs are published in the quarterly IFS Supplement on Monetary and Financial Statistics.
  • Balance of payments (BOP): DOSM compiles and publishes quarterly BOP estimates in accordance with the fifth edition of the Balance of Payments Manual and the SDDS. The quarterly data are released three months after the reference quarter. No data are shown for the capital transfers or acquisition/sale of nonproduced nonfinancial assets, and transactions in reserve assets are computed as differences in amounts outstanding and thus include valuation changes. The international investment position data on other investment—assets and liabilities—are reported only in an aggregate form.
  • Fiscal accounts: There has been limited progress in improving the consolidation of accounts across various levels of government, and broadening the coverage of major nonfinancial public enterprises (NFPEs). With assistance from STA, the authorities are working on improving the consolidation of the public sector accounts, particularly the treatment of taxes and dividends paid by key nonfinancial public enterprises to the central government. There is a need to improve the timeliness, detail, and availability of data on NFPEs and the state and local governments, as well as for ensuring that quasi-fiscal and off-budget operations are adequately recorded. Dissemination of more detailed data on NFPEs’ assets and liabilities and domestic and foreign financing by type of debt instrument and holder would be desirable; efforts in this direction will require continued close collaboration among the Economic Planning Unit (EPU), the Treasury, and BNM.
Malaysia: Table of Common Indicators Required for Surveillance(As of June 11, 2009)
Date of Latest ObservationDate ReceivedFrequency of Data6Frequency of Reporting6Frequency of Publication6
Exchange rates06/11/0906/11/2009DDD
International reserve assets and reserve liabilities of the monetary authorities105/0906/09Bi-WBi-WBi-W
Reserve/base money05/0906/09Bi-WBi-WBi-W
Broad money04/0906/09MMM
Central bank balance sheet05/0906/09Bi-WBi-WBi-W
Consolidated balance sheet of the banking system04/0906/09MMM
Interest rates206/11/0906/11/09DDM
Consumer price index04/0905/09MMM
Revenue, expenditure, balance and composition of financing3—general government4200709/08AAA
Revenue, expenditure, balance and composition of financing3—federal government03/0906/09QQQ
Stocks of central government and central government-guaranteed debt503/0905/09QQQ
External current account balance12/0803/09QQQ
Exports and imports of goods and services04/0906/09MMM
GDP/GNP03/0905/09QQQ
Gross external debt12/0803/09QQQ

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing is only available on an annual basis.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing is only available on an annual basis.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A).

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