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Malaysia: Staff Report for the 2012 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2013
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Malaysia—Medium-Term Debt Sustainability Analysis

1. Malaysia’s external debt is expected to remain on a steady downward trend over the medium term, falling to 23 percent of GDP by 2017. The 6 percentage point decline in the external debt to GDP ratio from 2011 to 2017 mostly reflects sustained current account surpluses and some shift towards domestic debt. Stress tests indicate that external debt would remain manageable under a variety of shocks, including weaker GDP growth, a lower current account balance, and a one-time 30 percent depreciation of the ringgit. Under these scenarios, the external debt to GDP ratio rises above the baseline over the projection period by only modest margins. In the case of the exchange rate depreciation scenario, the debt ratio would rise sharply to 41 percent of GDP in 2012, but would subsequently fall to 35 percent of GDP by 2017.

2. The gross debt to GDP ratio for the general government is expected to decrease modestly over the medium term. Under the baseline scenario, debt is expected to decline gradually relative to GDP over the next five years, reaching about 51 percent of GDP by 2017. Bound tests indicate that the debt path is highly vulnerable to growth and interest rate shocks. Indeed, as a result of plausible shocks the federal government’s self-imposed debt ceiling of 55 percent of GDP would be breached. For instance, a decline in real GDP growth of about 1.2 percentage point relative to the baseline would increase the debt to GDP ratio to about 58 percent in 2017. Stronger and more front-loaded consolidation efforts can help reduce the probability of breaching the debt ceiling and ensure that the government’s goal of reducing debt to 40 percent of GDP by 2020 can be achieved. This consolidation effort would require clearly articulated revenue and expenditure measures, including a phased reduction of subsidies, a broadening of the tax base, and more targeted and efficient social spending.

Figure 1.Malaysia: External Debt Sustainability: Bound Tests 1/2/

(External debt, in percent of GDP)

Sources: International Monetary Fund, country desk data; and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2010.

Figure 2.Malaysia: Public Debt Sustainability: Bound Tests 1/2/

(Public debt, in percent of GDP)

Sources: International Monetary Fund, country desk data; and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2013, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Table 1.Malaysia: External Debt Sustainability Framework, 2007–2017(In percent of GDP, unless otherwise indicated)
ActualProjections
20072008200920102011201220132014201520162017Debt-stabilizing

non-interest

current account 6/
1Baseline: external debt29.329.633.630.028.228.126.625.724.523.522.70.6
2Change in external debt−2.80.44.0−3.6−1.9−0.1−1.5−0.9−1.2−0.9−0.90.0
3Identified external debt-creating flows (4+8+9)−19.1−18.4−8.2−15.4−14.2−6.7−6.1−5.9−5.5−5.2−5.00.0
4Current account deficit, excluding interest payments−16.6−18.3−16.9−12.2−12.1−7.2−7.0−6.7−6.4−6.3−6.3−0.6
5Deficit in balance of goods and services−19.9−22.3−20.3−17.2−15.9−10.4−10.3−9.9−9.4−9.1−8.9
6Exports106.299.591.493.791.686.584.382.280.178.977.9
7Imports86.377.271.176.675.776.173.972.270.769.869.0
8Net nondebt creating capital inflows (negative)1.43.43.11.71.10.71.01.01.01.01.01.0
9Automatic debt dynamics 1/−3.9−3.55.6−4.9−3.2−0.2−0.2−0.1−0.10.10.3−0.4
10Contribution from nominal interest rate1.21.21.41.21.11.21.11.11.11.31.41.3
11Contribution from real GDP growth−1.7−1.20.5−2.0−1.3−1.4−1.3−1.3−1.2−1.2−1.1−1.1
12Contribution from price and exchange rate changes 2/−3.4−3.63.7−4.1−3.0−0.7
13Residual, including change in gross foreign assets (2-3) 3/16.218.812.211.912.36.64.65.04.34.24.20.0
External debt-to-exports ratio (in percent)27.629.836.832.030.832.531.531.230.629.829.1
Gross external financing need (in billions of U.S. dollars) 4/−10.1−19.11.911.319.633.935.739.142.845.748.6
In percent of GDP−5.2−8.31.04.66.811.110.510.710.710.510.3
Scenario with key variables at their historical averages 5/10-Year

Historical

Average
10-Year

Standard

Deviation
28.118.28.3−1.5−11.0−20.12.0
Key macroeconomic assumptions underlying baselineFor debt stabilization
Real GDP growth (in percent)6.34.8−1.57.25.15.02.45.15.05.15.25.25.25.2
GDP deflator in U.S. dollars (change in percent)11.913.8−11.113.911.06.97.40.66.03.13.53.23.03.0
Nominal external interest rate (in percent)4.44.94.04.24.24.20.44.44.34.64.85.66.46.4
Growth of exports (U.S. dollar terms, in percent)12.611.9−19.625.113.910.612.1−0.28.55.76.16.97.0
Growth of imports (U.S. dollar terms, in percent)13.66.7−19.331.415.310.513.36.38.15.96.57.27.2
Current account balance, excluding interest payments16.618.316.912.212.114.62.87.27.06.76.46.36.3
Net nondebt creating capital inflows−1.4−3.4−3.1−1.7−1.1−0.61.9−0.7−1.0−1.0−1.0−1.0−1.0

Derived as [r - g - r(l+g) + ea(l+r)]/(l+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,

The contribution from price and exchange rate changes is defined as [-r(l+g) + ea(l+r)]/(l+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 nondebt 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 nondebt inflows in percent of GDP) remain at their levels

Derived as [r - g - r(l+g) + ea(l+r)]/(l+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,

The contribution from price and exchange rate changes is defined as [-r(l+g) + ea(l+r)]/(l+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 nondebt 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 nondebt inflows in percent of GDP) remain at their levels

Table 2.Malaysia: Public Sector Debt Sustainability Framework, 2007–2017(In percent of GDP, unless otherwise indicated)
ActualProjections
20072008200920102011201220132014201520162017Debt-stabilizing

primary balance 9/
Baseline: public sector debt 1/41.241.252.853.754.555.455.154.253.252.151.4−1.4
Of which: foreign-currency denominated2.92.61.92.12.11.91.71.51.41.21.1
Change in public sector debt−0.30.011.60.90.81.0−0.4−0.9−1.0−1.1−0.7
Identified debt-creating flows (4+7+12)−1.8−1.99.4−1.1−1.41.0−0.4−0.9−1.0−1.1−0.7
Primary deficit0.71.84.12.51.72.11.51.11.00.50.8
Revenue and grants24.424.626.223.424.825.223.623.122.822.822.5
Primary (noninterest) expenditure25.126.530.325.826.427.325.124.223.823.323.3
Automatic debt dynamics 2/−2.5−3.85.4−3.6−3.1−1.1−2.0−2.0−2.0−1.6−1.5
Contribution from interest rate/growth differential 3/−2.3−3.95.4−3.4−3.1−1.1−1.9−2.0−2.0−1.6−1.5
Of which: contribution from real interest rate0.1−2.24.70.0−0.71.50.70.60.60.91.0
Of which: contribution from real GDP growth−2.3−1.70.7−3.4−2.5−2.6−2.6−2.6−2.6−2.5−2.5
Contribution from exchange rate depreciation 4/−0.30.10.0−0.20.10.0−0.10.00.00.00.0
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 (2-3) 5/1.51.92.12.02.20.00.10.00.00.00.0
Public sector debt-to-revenue ratio 1/168.7167.4201.6229.8219.8219.6233.7235.0233.2228.7227.8
Gross financing need 6/8.78.213.58.711.010.910.09.58.08.09.8
In billions of U.S. dollars16.819.027.321.431.833.233.934.932.034.746.3
Scenario with key variables at their historical averages 7/55.455.054.654.253.853.4−2.1
Scenario with no policy change (constant primary balance) in 2011-201655.455.655.755.756.156.6−1.6
Key macroeconomic and fiscal assumptions underlying baseline
Real GDP growth (in percent)6.34.8−1.57.25.15.15.05.15.25.25.2
Average nominal interest rate on public debt (in percent) 8/5.44.84.74.34.44.44.44.54.85.35.3
Average real interest rate (nominal rate minus change in GDP deflator, in percent)0.5−5.610.60.3−1.13.01.41.41.32.12.3
Nominal appreciation (increase in U.S. dollar value of local currency, in percent)6.7−4.20.811.8−3.5−0.92.90.00.00.00.0
Inflation rate (GDP deflator, in percent)4.910.4−6.04.15.51.53.03.13.53.23.0
Growth of real primary spending (deflated by GDP deflator, in percent)8.410.512.6−8.67.68.7−3.61.43.33.15.2
Primary deficit0.71.84.12.51.72.11.51.11.00.50.8

General government gross debt.

Derived as [(r - p(l+g) - g + ae(l+r)]/(l+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(l+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.

General government gross debt.

Derived as [(r - p(l+g) - g + ae(l+r)]/(l+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(l+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.

Malaysia—Fund Relations

(As of December 31, 2012)

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

II. General Resources Account

SDR

Millions
Percent of

Quota
Quota1,773.90100.00
Fund holdings of currency (exchange rate)1,245.9770.24
Reserve tranche position527.9329.76
Lending to the Fund New Arrangement to Borrow36.50

III. SDR Department

SDR

Millions
Percent of

Allocation
Net cumulative allocation1,346.14100.00
Holdings1,285.8395.52

IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements: None

VI. Projected Payments to the Fund: None.

VII. Exchange Arrangement:

On July 21, 2005, Bank Negara Malaysia 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 “other managed”.

Malaysia maintains bilateral payments arrangements with 23 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 2002-10. 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 licensed onshore banks, allowing residents to open and maintain 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, and a relaxation of the conditions on residents and nonresidents to enter into foreign exchange forward contracts to hedge capital account transactions with licensed onshore banks. Further measures were also taken to ease rules on residents’ borrowing in foreign currency, and borrowing in ringgit by residents from nonresidents as well as lending in ringgit by residents to nonresidents for use in Malaysia.

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, in accordance with the UN Security Council resolutions, maintains restrictions on payments and transfers for current international transactions with respect to some designated individuals and entities. These measures 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 2011 Article IV consultation took place during October 27-November 9, 2011 (IMF Country Report No. 12/43). Staff discussions for the 2012 Article IV consultation were conducted on a mission to Kuala Lumpur during November 29-December 12, 2012. In addition, a staff visit took place during July 11-13, 2012.

IX. FSAP Participation:

Malaysia conducted its first FSAP in 2012.

X. Technical Assistance:

FAD: Mission in October 2008 to analyze the distributional impact of social safety net programs. A fiscal ROSC mission was fielded in May-June 2011. A mission on debt management was fielded in June 2012 to look at the institutional, legal, organizational and operational aspects of debt management, monitoring of fiscal risks, and reporting of debt operations. A mission on fiscal risks took place in January 2013.

LEG: Missions were fielded in May and September 2011 to help draft a Centralized Asset Management Corporations Bill, in the context of a three year project to assist Malaysia in implementing an asset forfeiture regime.

MCM: Workshop in November 2008 on stress testing. Workshop in October 2009 on assessing the systemic implications of financial linkages and developing early warning indicators for the insurance and corporate sectors at BNM. Mission in October 2009 on macrofinancial risk analysis and vulnerability analysis for corporate and financial institutions. Workshop in May 2010 on monitoring financial risks. A technical assistance mission on stress testing is scheduled for April 2013.

STA: A mission to assist with the migration to the Government Finance Statistics Manual (GFSM) 2001 was conducted during October-November 2012.

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 on Money Laundering (APG). The full report was adopted by APG members in July 2007 (http://www.apgml.org/documents/docs/17/Malaysian%20MER%20%20FINAL%20August%202007.pdf).

XII. Resident Representative/Advisor: None.

Malaysia—Statistical Issues

(As of January 10, 2013)

I. Assessment of Data Adequacy for Surveillance
General: Data provision is broadly adequate for surveillance. However, further efforts to improve statistics for the consolidated general government and public sector are necessary.
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 1993 SNA. The quarterly data are released about two months after the reference quarter.



Price statistics: The CPI and the PPI are available on a timely and comprehensive basis. A revised CPI was introduced in January 2011; it covers all 14 states and features a more disaggregated measure of the consumption basket and updated expenditure weights based on a 2009/10 comprehensive household income and expenditure survey.
Government finance statistics: There is a need to improve the timeliness, detail, and availability of data on NFPEs and the state and local governments. Dissemination of more detailed data on nonlisted 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 Bank Negara Malaysia (BNM). There is also a need to disseminate more information on public private partnerships.
Monetary 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. 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 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: Department of Statistics Malaysia compiles and publishes quarterly balance of payments 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.
II. Data Standards and Quality
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).
Malaysia: Table of Common Indicators Required for Surveillance(As of January 10, 2013)
Date of

Latest

Observation
Date

Received
Frequency

of

Data6
Frequency

of

Reporting6
Frequency of

Publication6
Exchange rates1/10/20131/10/2013DDD
International reserve assets and reserve liabilities of the monetary authorities131/12/20121/8/2013Bi WBi WBi W
Reserve/base money31/12/20121/8/2013Bi WBi WBi W
Broad money11/121/8/2013MMM
Central bank balance sheet31/12/20121/8/2013Bi WBi WBi W
Consolidated balance sheet of the banking system11/121/13MMM
Interest rates21/10/20131/10/2013DDM
Consumer price index11/121/13MMM
Revenue, expenditure, balance and composition of financing3—general government420112012AAA
Revenue, expenditure, balance and composition of financing3—federal government2012:Q312/12QQQ
Stocks of central government and central government guaranteed debt52012:Q312/12QQQ
External current account balance2012:Q312/12QQQ
Exports and imports of goods and services11/121/13MMM
GDP/GNP2012:Q312/12QQQ
Gross external debt2012:Q312/12QQQ

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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