ECONOMIC HEALTH CHECK
Malaysia Expected to Continue Robust, Demand-Led Growth
IMF Survey online
February 28, 2013
- Expansion led by strong domestic demand, particularly investment
- Robust financial sector with high levels of capital, strong supervisory framework
- Wide-ranging reforms should support higher, more inclusive growth
Malaysia’s economy enjoyed robust, domestic-led growth in 2012, and is expected to grow by about 5 percent this year, accompanied by low unemployment and subdued inflation, say IMF economists.
In their regular report on the health of the Malaysian economy, the IMF economists say that the country continued the strong recovery that began in 2010 following the global crisis.
Increasing reliance on domestic demand
This growth has been fueled by the country’s increasing reliance on domestic demand. Higher spending by households, firms, and government on consumer and capital goods has offset weak exports to Europe and the rest of the world, says the IMF report.
Consumption has been supported by low interest rates, a strong labor market, and fiscal transfers to households. The growing trade in consumer goods among countries from the Association of Southeast Asian Nations is also helping shield Malaysia’s economy from the downturn in many other parts of the world.
Private and public investments have been supported by low interest rates and the catalytic effect of projects under the government’s Economic Transformation Program, particularly in oil, gas, and infrastructure. The aim is to move Malaysia up the international value chain and turn it into a high-income nation by 2020.
The rebalancing of Malaysia’s economy toward greater domestic demand has led to a significant deterioration in Malaysia’s external current account balance—to a surplus of about 6 percent of GDP in 2012, compared to 11 percent in 2011.
Skillful macroeconomic management
The report underscores that skillful macroeconomic management has underpinned strong, noninflationary growth despite the unsettled global conditions.
Monetary policy by Bank Negara Malaysia—the country’s central bank—has been appropriately supportive of growth in an economy facing external headwinds. Federal government fiscal policy, on the other hand, has been moderately contractionary. This, say IMF economists, is a measured and welcome step toward medium-term fiscal consolidation, which is needed to reverse the increase in federal government debt in recent years.
The report emphasizes that fiscal consolidation needs to be supported by structural fiscal reforms and by a move away from volatile and procyclical oil- and gas-related revenues. It welcomed the authorities’ plans to introduce a goods and services tax, and to gradually phase out costly universal fuel subsidies, replacing them with targeted support for the needy.
The report also applauded the authorities’ efforts to reform public financial management, and encouraged them to closely monitor the growing fiscal risks associated with the rising contingent liabilities of the federal government.
Malaysia’s robust financial sector
The IMF report welcomed the conclusion of the 2012 Financial Sector Assessment Program—undertaken by the IMF and World Bank—which found Malaysia’s financial sector to be robust, and underpinned by high levels of capital and a strong supervisory and regulatory framework.
It said the recent passage of financial legislation would help strengthen the legal framework for financial sector supervision, and praised the authorities’ use of targeted macroprudential policies to deal with risks associated with rising household debt and housing prices. The authorities’ close monitoring of developments and readiness to take any necessary, additional action was also welcomed.
Boosting productivity and inclusiveness
The IMF expects Malaysia’s economy to continue to perform well over the medium term. The report suggests that productivity and inclusiveness are likely to be boosted by investments under the country’s Economic Transformation Program, as well as by the wide-ranging reforms envisaged under the Government Transformation Program—a strategy to change the way Malaysia’s public sector operates.
Among reforms to make growth stronger, more balanced, and inclusive, are measures to boost the quality of education, which should help reduce Malaysia’s skills gap and increase the contribution of human capital in economic growth, and efforts to raise female labor force participation, which should help increase labor force growth. The report urges the Malaysian authorities to press ahead with the steady implementation of these reforms.
The IMF economists welcomed the introduction of a minimum wage in 2013, which should support the incomes of poorer workers, and recommends considering the introduction over time of unemployment insurance, and reforms to the pension system to further strengthen social protection.