Malaysia’s economy continues to perform well despite external headwinds

Growth has averaged above 5 per cent over the past 5 years, leading to higher per capita income and reducing already-low poverty.

On February 15, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the 2019 Article IV consultation with Malaysia.

Malaysia’s economy continues to perform well despite external headwinds. Growth has averaged above 5 per cent over the past 5 years, leading to higher per capita income and reducing already-low poverty. Economic growth is now moderating and is estimated at 4.7 per cent in 2018, underpinned by robust domestic and external demand. Headline inflation dropped from an average of 3.7 per cent in 2017 to an estimated 1 per cent in 2018 as domestic fuel price adjustment was suspended, the GST was zero-rated and replaced by the narrower-base SST, and food price inflation declined. The credit-to-GDP ratio is declining. On the external side, the current account surplus is estimated at 2.2 per cent of GDP in 2018, having gradually narrowed in recent years as growth drivers have shifted towards domestic demand.

Growth is expected to stabilize in 2019 and over the medium term, with inflation picking up and the current account surplus continuing to narrow. Domestic demand will remain the main driver of growth, with private consumption and investment supported by an improved business environment and investor confidence. This would counterbalance the negative drag from the external environment and fiscal consolidation, leaving growth flat at 4.7 per cent in 2019 and close to potential (about 4¾ per cent) over the medium term. Inflation would rise above 2 per cent in 2019, as the effect of the GST removal dissipates and oil subsidies become targeted. Over the medium term, growth is expected to converge to potential and inflation will remain subdued.

Risks to the growth outlook are to the downside and stem largely from external factors. Malaysia’s highly open economy is vulnerable to rising protectionism, weaker-than-expected growth in trading partners, or a significant slowdown in China. A sharp tightening of global financial conditions could cause financial stress, while lower-than-projected oil prices could reduce exports and growth. Domestically, contingent liabilities could necessitate additional measures to ensure medium-term fiscal sustainability, while delays or resistance to the governance reform agenda could undermine confidence, leading to lower investment and growth.

Executive Board Assessment 

Executive Directors commended the authorities for the resilient performance of the Malaysian economy over recent years, noting that growth was solid, without signs of inflationary pressures. Directors concurred that, while the medium‑term outlook remains favourable, risks are tilted to the downside stemming primarily from the external environment. They encouraged the authorities to continue implementing credible macroeconomic policies while safeguarding growth and financial stability, and undertaking structural reforms to boost sustainable, inclusive growth.

Directors agreed with the planned gradual pace of fiscal consolidation in 2019 and over the medium term to support debt reduction and strengthened fiscal buffers. They encouraged the authorities to embed the medium‑term fiscal path in a strengthened fiscal framework that would rely on credible revenue and expenditure measures. Noting Malaysia’s low tax revenue ratio, Directors emphasized that revenue mobilization should be a priority, not only to support medium‑term consolidation, but also to help finance needed expenditure to achieve government priorities identified under the Mid‑Term Review of the Eleventh Malaysia Plan. They welcomed continued efforts to increase fiscal transparency.

Directors supported the broadly neutral monetary policy stance. Going forward, domestic economic and financial conditions should continue to guide monetary policy decisions, with exchange rate flexibility the first line of defence against shocks. Directors noted that exchange rate flexibility should help further financial market deepening. A number of Directors encouraged the authorities to phase out the 2016 FX market measures with due regard to market conditions. Some Directors were of the view that such measures could be helpful in preserving overall financial stability.

Directors agreed that the financial sector appears resilient, with sound profitability and liquidity indicators and low NPLs. They encouraged the authorities to continue close monitoring of risks stemming from large household debt and the real estate market, noting that household debt is high compared to peers, with a large share of mortgages and with pockets of vulnerability among lower‑income groups. A number of Directors agreed that the measures related to the residency‑based differentiation in the property market should be gradually phased out as systemic risks dissipate. A few Directors suggested a more cautious approach should be taken in phasing out these measures. Directors commended the authorities’ ongoing efforts to enhance crisis preparedness noting that they could be strengthened by a comprehensive review of the overall framework.

Directors commended the authorities’ initiatives to improve governance and strengthen anti‑corruption institutions and emphasized the importance of anchoring them in appropriate legislation, particularly to help secure their independence. Directors encouraged the continued strengthening of the AML/CFT framework.

Directors agreed with the authorities’ emphasis on raising productivity and achieving inclusive and regionally balanced development. They encouraged prioritizing human capital development and increasing female labour force participation and productivity, including through improving education; accelerating innovation and technology adoption and encouraging a move up the value chain.