IMF Executive Board Concludes 2012 Article IV Consultation with Malaysia

Public Information Notice (PIN) No. 13/24
February 28, 2013

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post program monitoring, and of ex post assessments of member countries with longer term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with Malaysia is also available.

On February 11, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malaysia.1


Malaysia’s economy continues to perform well. Robust domestic demand has offset external weakness and fueled growth, estimated at 5.1 percent in 2012. Key drivers of the expansion have been private and public investments, particularly in oil, gas, and infrastructure, including large projects under the government’s Economic Transformation Program. Consumption growth has also been strong, supported by a strong labor market and by government transfers to households. Net exports, on the other hand, have been a drag on growth, reflecting weak external demand. Inflation has continued to ease, on lower commodity prices and base effects. Average consumer price inflation eased to 1.7 percent in 2012, the lowest in three years and one of the lowest in the Asia­Pacific region.

With inflation subdued, Bank Negara Malaysia has kept its policy interest rate at 3 percent since May 2011, and market interest rates have remained also low and stable. Malaysia has experienced significant and volatile portfolio flows in recent years, reflecting unsettled global financial conditions. However, Malaysia’s sound financial system, liquid capital markets, and two­way exchange rate flexibility have facilitated the absorption of flows. Credit growth has continued to be robust. While credit to households has moderated somewhat, unsecured personal loans have continued to grow rapidly, and household debt remains high. Housing prices have also continued to climb.

The federal government’s deficit is estimated to have declined to about 4.5 percent of GDP in 2012, from 4.8 percent in 2011. Spending in 2012 exceeded original budget projections by about 2 percent of GDP, particularly in wages, pensions, fuel subsidies, and transfers. This, however, was offset by buoyant revenue, reflecting strong economic growth and one­off factors. The federal government’s debt is estimated to have risen to about 53 percent at end­2012, from about 52 percent in 2011.

Executive Board Assessment

Executive Directors commended the authorities for their skillful policies, which have underpinned Malaysia’s strong macroeconomic performance despite a weak external environment. Directors noted that the external rebalancing of Malaysia’s economy has gained momentum, and that domestic demand is increasingly driving economic growth. Looking ahead, Directors considered that Malaysia’s medium term prospects are favorable, as the authorities continue to focus on safeguarding financial stability, strengthening fiscal sustainability, and securing high and inclusive growth.

Directors endorsed the current settings for monetary policy and the mildly contractionary fiscal stance in the 2013 budget. They nonetheless encouraged the authorities to further develop their medium­term plans to restore a prudent level of federal government debt and rebuild fiscal space. Directors emphasized that fiscal consolidation would need to be supported by structural fiscal reforms and a move away from oil­ and gas­related revenues. Accordingly, they welcomed the authorities’ plans to introduce a goods and services tax, and to gradually replace universal fuel subsidies with targeted support for the most vulnerable. Directors took note of the authorities’ efforts to reform public financial management, and encouraged them to adopt the recommendations of the recent Fund technical assistance on fiscal risks.

Directors noted with satisfaction that the 2012 Financial Sector Assessment Program review found Malaysia’s financial sector to be robust, highly capitalized, and underpinned by a sound supervisory and regulatory framework. They welcomed the recent passage of legislation to further strengthen financial supervision. Directors also commended the use of targeted macroprudential policies to curb risks associated with rising household debt and housing prices, and the authorities’ readiness to take additional action as needed.

Directors welcomed the authorities’ intention to implement wide ranging reforms to boost growth and inclusiveness. In this context, they underscored the importance of increasing labor market flexibility, raising female participation, and fostering the skills needed for a high value­added economy. Directors welcomed the introduction of a minimum wage, and considered that adopting unemployment insurance and pension system reforms would further strengthen social protection.

Directors took note of the staff’s assessment that, despite the significant narrowing of the current account, Malaysia’s external position appears stronger than warranted by fundamentals and desirable policies. However, they agreed with the authorities that this mainly reflects structural factors. A few Directors also pointed to underlying methodological limitations in the assessment of the external position. Directors considered that the authorities’ policy of maintaining two­way exchange rate flexibility remains appropriate, and that a flexible exchange rate and ongoing structural reforms would facilitate the economy’s continued rebalancing.

Malaysia: Selected Economic and Financial Indicators, 2008–13
          Est. Proj.
  2008 2009 2010 2011 2012 2013

Real GDP (percent change)

4.8 1.5 7.2 5.1 5.1 5.0

Total domestic demand

6.4 1.6 10.4 7.3 11.6 6.9


8.4 1.4 5.8 8.9 7.4 6.4

Private consumption

8.7 0.6 6.6 7.1 7.3 7.8

Gross capital formation

1.8 9.4 23.8 3.2 22.5 8.2

GDP deflator

10.4 6.0 4.1 5.5 1.5 3.0

Saving and investment (in percent of GDP)


Gross domestic investment

21.5 17.8 23.1 23.6 28.0 29.4

Gross national saving

38.5 33.4 34.2 34.6 34.0 35.3

Fiscal sector (in percent of GDP)


Federal government overall balance

4.6 6.7 5.4 4.8 4.5 3.9


20.8 22.3 20.1 21.0 22.0 21.0

Expenditure and net lending

25.4 28.9 25.5 25.9 26.6 24.9

Federal government non oil primary balance

11.2 13.6 10.6 10.3 9.6 8.4

Consolidated public sector overall balance 1/

5.4 7.2 2.5 3.3 5.1 6.4

General government debt

41.2 52.8 53.7 54.5 55.4 55.1

Inflation and unemployment (period average, in percent)


CPI inflation

5.4 0.6 1.7 3.2 1.7 2.2

Unemployment rate

3.3 3.7 3.3 3.1 3.0 3.0

Money and credit (end of period, percentage change)


Total liquidity (M3)

11.9 9.2 6.8 14.3

Credit to private sector

12.9 6.2 9.7 12.1

Three month interbank rate (in percent)

3.4 2.2 3.0 3.2 3.2

Balance of payments (in billions of U.S. dollars)


Current account balance

39.4 31.4 27.3 31.7 18.1 20.1

(In percent of GDP)

17.1 15.5 11.1 11.0 6.0 5.9

Trade balance

51.6 39.9 41.8 48.4 41.1 38.4

Services and income account balance

6.9 3.0 7.7 9.8 16.5 10.9

Capital and financial account balance

35.6 22.8 6.2 7.2 3.8  19.4

Errors and omissions

9.4 4.7 22.0 8.0 8.2 0.0

Overall balance

5.5 3.9 0.8 30.9 6.1 0.7

Gross official reserves (US$ billions)

91.5 96.7 106.5 133.6 139.7 140.4

(In months of following year's imports)

7.6 6.1 5.9 7.0 6.7 6.4

(In percent of short term debt) 2/

274.4 250.4 207.3 256.2 251.1 235.0

Total external debt (US$ billions)

68.5 68.0 74.1 81.1 85.5 90.0

(In percent of GDP)

29.6 33.6 30.0 28.2 28.1 26.6

Of which: short term (in percent of total) 2/

48.7 56.8 69.3 64.3 65.1 66.4

Debt service ratio


(In percent of exports of goods and services)

2.8 6.6 7.7 10.2 8.2 7.6

(In percent of exports of goods and nonfactor services)

2.9 7.0 8.1 10.8 8.8 8.1

Memorandum items:


Nominal GDP (in billions of US$)

231 202 247 288 304 339

Nominal GDP (in billions of ringgit)

770 713 795 881 939 1,016

Sources: CEIC; data provided by the authorities; and IMF staff estimates.

1/ 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.

2/ By remaining maturity.

1 Under 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. At 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:


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