On February 7, 2020, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
Malaysia’s economy is stable despite domestic and external challenges.
Growth has averaged just under 5 percent over the past 5 years, leading
to higher per capita income. Economic growth has held up, and is
estimated at 4.5 percent in 2019, driven by domestic demand. Headline
inflation moderated from an average of 1 percent in 2018 to 0.7 percent
in 2019, reflecting declining global oil prices, moderating wage
growth, and the impact of replacing the GST with the smaller-base SST
in 2018. Credit growth is moderating. On the external side, the current
account surplus is estimated to have increased to 3.5 percent of GDP in
2019, driven by a temporary decline in capital imports and an
improvement in the primary income account.
Growth is expected to remain stable in 2020 and to rebound in the
medium term, with inflation slightly higher and the current account
declining. Domestic demand will be the main driver of growth, with
stable employment and income growth supporting private consumption.
Private investment will gradually pick up as the business environment
continues to improve and external uncertainties dissipate. Headline
inflation is expected to increase to slightly over 2 percent as
domestic demand rises, the base effect of the consumption tax regime
change vanishes, and fuel subsidies become targeted. The current
account surplus is expected to narrow to 2.7 percent of GDP as capital
imports resume. Over the medium term, growth should converge to
potential (just below 5 percent) and inflation remain under control,
while the current account surplus continues to moderate.
Risks to the growth outlook are, on balance, to the downside.
Malaysia’s highly open economy is vulnerable to escalating trade
actions and weaker-than-expected trading partners’ growth. An abrupt
deterioration in market sentiment towards emerging markets could lead
to tighter financial conditions. However, a durable truce that may
follow the recent signature of the phase-one deal between the US and
China is an upside risk. Domestically, contingent liabilities could
pose fiscal risks and a sharp drop in real estate prices or a
deterioration in household debt service ability could affect growth and
financial stability, while domestic policy uncertainty could reduce
Executive Board Assessment
Executive Directors welcomed that the Malaysian economy has been stable
despite internal and external challenges. Directors recognized the
progress made on the reform agenda and encouraged the authorities to
remain committed to governance and structural reforms. To address the
risks facing the economy, Directors recommended that policy priorities
ahead should continue to focus on a medium-term fiscal consolidation
plan, while safeguarding growth and financial stability.
Directors welcomed the planned pace of fiscal consolidation and
encouraged the authorities to identify well-defined spending and
revenue measures to support this adjustment, including in the context
of the upcoming medium-term revenue strategy preparation. They also
encouraged the authorities to push ahead with the adoption of a Fiscal
Responsibility Act, and with plans to improve debt management, public
procurement, and the public investment framework.
Directors supported the broadly neutral monetary policy stance, given a
closing output gap and broadly neutral financial conditions. They
agreed that monetary policy should remain data dependent. Directors
commended the authorities’ commitment to exchange rate flexibility as
well as recent initiatives to deepen the FX markets and encouraged them
to explore further options in this area, as this would enhance the
ability of the exchange rate to act as a shock absorber. In general,
they advised the authorities to continue to review the effectiveness of
FX market measures and consider gradual phasing out of such measures.
Directors agreed that the financial sector is stable, and that
profitability, capitalization and asset quality of banks are sound.
However, they noted that household debt is high compared to peers, with
pockets of vulnerability among lower-income groups. Directors advised
the authorities to closely monitor risks in the real estate and
household sectors. Further enhancing the macroprudential toolkit would
be helpful. Directors commended the ongoing efforts to strengthen
financial literacy and manage cyber risks and climate change risks to
the financial sector.
Directors commended the authorities’ progress in developing and
implementing governance reforms. They stressed the importance of
sustaining the momentum and anchoring the reforms in legislation,
particularly to help secure the independence of anti-corruption
institutions, freedom of information, and to establish an asset
declaration system. Further strengthening the AML/CFT framework will
also be important.
Directors underscored that continued structural reforms aimed at
raising investment and productivity are important to safeguard
macroeconomic and financial stability and help address the external
imbalances over the medium term. They supported the authorities’
emphasis on raising productivity as it would help achieve high-income
status and inclusive growth. Directors advised that priority be given
to enhancing the business environment and improving access to credit
for SMEs; promoting trade openness; enhancing the quality of and access
to education; encouraging innovation, including through digitalization
of the economy; and boosting female labor participation.