Press Release No. 18/73

On February 9, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] 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 Assessment[2]

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.