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IMF Executive Board Concludes 2018 Article IV Consultation with Malaysia

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2018
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On February 9, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Malaysia.

Background

The Malaysian economy has shown resilience in recent years despite external shocks and has continued to perform well. Progress was made toward achieving high income status and improving inclusion. Median household income has risen further and the already-low national poverty ratio declined. Real GDP growth has surprised on the upside in 2017, and is estimated at 5.8 percent for the year, driven by domestic demand and robust exports. While headline consumer price inflation went up to 3.8 percent in 2017 due to higher oil prices, core inflation and credit growth are contained. On the external side, the current account surplus is estimated to increase to 2.8 percent of GDP, helped by strong exports.

Growth is projected to start to decelerate from its 2017 peak, remaining above potential at 5.3 percent in 2018, and converging to its potential rate of close to 5 percent in the medium term. In 2018, headline inflation is expected to moderate to 3.2 percent, as the response of core inflation to a positive output gap is partly offset by lower contribution from oil prices. The current account surplus is expected to soften to 2.4 percent of GDP in 2018, as export growth normalizes.

Risks to the growth outlook are balanced. On the external side, downside risks include a global retreat from cross-border integration, structurally weak growth in advanced economies, and a significant China slowdown, while a speedy approval and implementation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and possibly lingering strong global demand for electronics are upside risks. Domestically, the confidence effects related to the cyclical upturn could be stronger than anticipated, while exposures in the real estate sector pose a downside risk.

Executive Board Assessment2

Executive Directors commended the authorities for the strong and resilient performance of the Malaysian economy, underpinned by accommodative monetary policy and gradual fiscal consolidation. While growth will likely remain above potential in 2018, inflationary pressures appear contained, and risks to the outlook are balanced. Going forward, Directors emphasized the importance of supporting economic growth while maintaining stability, as well as raising productivity through structural reform.

Directors agreed with the planned pace of fiscal consolidation in 2018, noting that it will help build buffers while maintaining financial market confidence. Going forward, they supported a gradual consolidation path consistent with the authorities’ fiscal anchor, which would help build additional fiscal space. Directors advised that fiscal consolidation should prioritize higher revenue, to facilitate the adoption of fiscal measures to support external rebalancing. They encouraged further progress on the fiscal structural agenda, including efforts to strengthen fiscal transparency and risk management.

Directors supported the January increase in the monetary policy rate, and agreed that the current policy stance is appropriately biased toward less accommodation while remaining supportive of demand. Noting that Bank Negara Malaysia’s monetary policy framework has served the country well, Directors recommended that monetary policy and exchange rate flexibility remain the first line of defense against shocks.

Directors welcomed improvements in the depth and liquidity of onshore financial markets during 2017 following the Financial Markets Committee (FMC) measures that liberalized and increased the flexibility of onshore hedging instruments, as well as a general rebound of capital inflows to emerging markets. They supported the consultative and inclusive approach adopted by the FMC in developing these measures, and encouraged the authorities to build on these successes to address any further gaps in financial market development. Some Directors urged the authorities to phase out—in a manner that preserves financial stability—the measures assessed by staff as capital flow management measures. A few other Directors, however, were of the view that there should be a greater openness to other approaches to promoting the authorities’ development objectives. Directors urged the authorities to continue a constructive dialogue with staff on these issues.

Directors agreed that financial sector risks appear contained, with sound bank profitability and liquidity, and low nonperforming loans. Nonetheless, they noted that vulnerabilities in household mortgages and the property development sector require vigilance, and recommended taking any necessary steps to mitigate risks. They encouraged the development of a rental real estate market. Directors welcomed the authorities’ commitment to take further actions to address deficiencies in Malaysia’s AML/CFT framework.

Directors commended the authorities’ emphasis on raising productivity and investment and encouraged further labor market reforms. Priority should be given to measures that encourage female labor force participation, improve the quality of education, reduce skills mismatches, and bolster public infrastructure and the regulatory framework to further encourage private investment.

Table 1.Malaysia: Selected Economic and Financial Indicators, 2013–19
Nominal GDP (2017, est.): US$314.4 billionPopulation (2017, mid-year): 32 million
GDP per capita (2017, current prices, est.): US$9,808Poverty rate (2016, national poverty line): 0.4 percent
Unemployment rate (November 2017): 3.3 percentAdult literacy rate (2015): 94.6 percent
Main exports (share in total goods exports, 2016): electrical & electronic products (36.5 percent), and commodities (13.5 percent)
Est.Proj.
2013201420152016201720182019
Real GDP (percent change)4.76.05.04.25.85.35.0
Total domestic demand6.35.35.94.56.45.85.3
Private consumption7.27.06.06.07.06.25.6
Public consumption5.84.44.40.94.05.02.0
Private investment12.811.16.34.39.28.08.0
Public gross fixed capital formation1.8−4.7−1.1−0.5−0.6−0.21.9
Net exports (contribution to growth)−1.01.2−0.30.1−0.1−0.10.1
Saving and investment (in percent of GDP)
Gross domestic investment25.925.025.125.925.425.425.7
Gross national saving29.429.428.128.228.227.827.9
Fiscal sector (in percent of GDP)
Federal government overall balance 1/−4.2−3.4−3.2−3.1−3.0−2.8−2.5
Revenue20.419.918.917.316.716.616.6
Expenditure and net lending24.623.322.120.419.819.319.1
Federal government non-oil primary balance−8.7−7.3−5.2−3.6−3.6−3.5−3.0
Consolidated public sector overall balance 2/−6.0−7.4−7.7−5.2−5.0−3.5−3.0
General government debt 3/56.456.257.956.254.253.652.4
Of which: federal government debt53.052.754.552.750.750.148.9
Inflation and unemployment (annual average, in percent)
CPI inflation2.13.12.12.13.83.22.8
CPI inflation (excluding food and energy) 4/1.32.13.22.61.62.22.6
Unemployment rate3.32.93.23.53.43.23.0
Macrofinancial variables (end of period)
Broad money (percentage change)7.46.33.02.74.98.58.0
Credit to private sector (percentage change) 5/10.29.28.65.36.45.85.6
Credit-to-GDP ratio (in percent) 4/6/129.7130.1134.7134.0129.7126.4123.7
Credit-to-GDP gap (in percent) 4/6/15.712.713.59.43.2
Overnight policy rate (in percent)3.003.253.253.003.00
Three-month interbank rate (in percent)3.33.93.83.43.3
Nonfinancial corporate sector debt (in percent of GDP)99.898.6106.7109.5104.2103.1102.1
Nonfinancial corporate sector debt issuance (in percent of GDP)3.53.22.63.23.2
Household debt (in percent of GDP)86.186.889.088.384.682.580.7
Household financial assets (in percent of GDP)187.0182.1183.1181.5177.6
House prices (percentage change)10.98.57.46.95.15.05.2
Exchange rates (period average)
Malaysian ringgit/U.S. dollar3.153.273.914.154.31
Real effective exchange rate (percentage change)0.5−0.7−7.9−4.3−1.5
Balance of payments (in billions of U.S. dollars) 4/
Current account balance11.314.89.07.08.98.38.5
(In percent of GDP)3.54.43.02.42.82.42.2
Goods balance30.634.628.024.427.128.630.7
Services balance−3.0−3.3−5.3−4.6−5.0−5.8−6.4
Income balance−16.3−16.5−13.7−12.8−13.3−14.4−15.8
Capital and financial account balance−6.4−24.3−14.5−0.23.62.73.2
Of which: Direct investment−2.0−5.5−0.53.42.11.00.3
Errors and omissions−0.2−1.76.4−3.2−4.90.00.0
Overall balance4.6−11.21.03.67.711.111.7
Gross official reserves (US$ billions)134.9115.995.394.6102.4113.3125.0
(In months of following year’s imports of goods and nonfactor services)7.47.56.35.65.86.06.3
(In percent of short-term debt by original maturity) 4/130.7111.6116.2112.5111.7123.9143.6
(In percent of short-term debt by remaining maturity) 4/91.878.374.471.572.179.087.2
Total external debt (in billions of U.S. dollars) 4/212.3213.4195.0204.2217.3221.2227.5
(In percent of GDP) 4/65.763.165.868.969.163.058.6
Of which: short-term (in percent of total, original maturity) 4/48.648.742.041.242.241.338.3
short-term (in percent of total, remaining maturity) 4/69.369.465.764.765.464.963.0
Debt service ratio 4/
(In percent of exports of goods and services) 7/17.317.921.423.522.723.023.1
(In percent of exports of goods and nonfactor services)18.419.122.724.924.124.424.5
Memorandum items:
Nominal GDP (in billions of ringgit)1,0191,1061,1581,2301,3521,4671,584
Sources: Data provided by the authorities; CEIC Data Co. Ltd.; World Bank; UNESCO; and IMF, Integrated Monetary Database and 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.

IMF staff estimates. U.S. dollar values are estimated using official data published in national currency.

Based on data provided by the authorities, but follows compilation methodology used in IMF’s Integrated Monetary Database.

Based on a broader measure of liquidity. Credit gap is estimated on quarterly data from 2000, using one-sided Hodrick-Prescott filter with a large parameter.

Includes receipts under the primary income account.

Sources: Data provided by the authorities; CEIC Data Co. Ltd.; World Bank; UNESCO; and IMF, Integrated Monetary Database and 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.

IMF staff estimates. U.S. dollar values are estimated using official data published in national currency.

Based on data provided by the authorities, but follows compilation methodology used in IMF’s Integrated Monetary Database.

Based on a broader measure of liquidity. Credit gap is estimated on quarterly data from 2000, using one-sided Hodrick-Prescott filter with a large parameter.

Includes receipts under the primary income account.

1Under 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.
2At 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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