## 1. Growth and Exports

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### Economic developments and outlook
- Growth and output gap
  - Growth is estimated at 4.7 percent in 2018 (5.9 percent in 2017), narrowing the output gap.
  - Growth is expected to remain flat at 4.7 percent in 2019.
  - Over the medium term, growth is expected to converge to potential (4.8 percent).
- Inflation and credit
  - Headline inflation: 2017 = 3.7 percent (average); 2018 = 1.0 percent (average).
  - Inflation should rise above 2 percent in 2019 as the effect of the GST removal dissipates and oil subsidies become targeted.
  - Credit growth has rebounded recently, driven by lending to corporations; the credit-to-GDP ratio is declining, and the credit gap has almost closed.
- External sector and exchange rate
  - Real effective exchange rate (REER) appreciated by 4.1 percent in 2018.
  - The current account surplus declined to an estimated 2.2 percent of GDP in 2018.
  - The external position remains stronger than warranted by fundamentals and desired policies.
- 2018 fiscal and public finances
  - 2018 fiscal deficit is estimated at 3.7 percent of GDP, 0.9 percent of GDP higher than budgeted.
  - Recognized additional tax refund obligations of about 0.3 percent of GDP in 2018.
  - Re-introduction of subsidies for lower-grade petroleum added 0.2 percent of GDP in spending.
  - Replacing the GST by the SST created an estimated revenue shortfall of 1.2 percent of GDP in 2018.
  - Higher oil revenues and transfers from Petronas and other GLCs raised 1.2 percent of GDP.
- Capital flows and financial conditions
  - Large capital outflows occurred in Q2 2018 amid EM risk-off and post-election policy uncertainty; effects were contained by increased domestic investor participation and central bank FX intervention.
  - Resident holdings in government paper increased from an average of 71 percent post-GFC to 75 percent in October.

### Risks to the outlook
- External risks
  - Rising protectionism and weaker-than-expected growth in trading partners.
  - Sharp tightening of global financial conditions causing financial stress for banks and corporations.
  - Lower-than-projected oil prices reducing exports and growth, complicating fiscal consolidation.
- Domestic risks
  - Contingent liabilities necessitating additional measures to ensure medium-term fiscal sustainability.
  - Delays or resistance to the governance reform agenda undermining confidence, investment, and growth.
  - Sharp adjustment in real estate prices or deterioration in households’ debt service ability affecting financial stability and growth.
- Overall risk assessment is tilted to the downside.

### Authorities’ views
- Authorities expected growth to be 4.9 percent in 2019, driven by domestic demand.
- Authorities expected inflation to rebound to between 2.5–3.5 percent in 2019, contingent on the timing of fuel subsidy reform and oil prices.
- Over the medium term, the authorities saw growth at 4.5–5.5 percent.
- Authorities broadly agreed with staff’s assessment of the economic outlook and risks.

### Policy framework and IMF assessment
- Policy objectives
  - Achieve fiscal consolidation while protecting growth and financial stability.
  - Monetary policy geared towards domestic stability.
  - Macroprudential policies to help maintain financial stability.
  - Address external imbalances over the medium term by creating fiscal space to expand social safety nets and reduce precautionary household saving, and by structural reforms to enhance investment and productivity.
- Fiscal consolidation and transparency
  - The 2019 budget is a consolidation effort with increased transparency over fiscal accounts.
  - Expenditure rationalization and improvements in targeting social assistance and subsidies are expected to save 2.1 percent of GDP.
  - Higher non-tax revenue of 1.3 percent of GDP, mainly due to additional one-off transfers from Petronas (2 percent of GDP), will partly finance one-off tax refunds (2.4 percent of GDP).
  - Full-year impact of replacing the GST with the SST and additional provision for 2019 tax refunds will raise the deficit by 0.7 percentage point of GDP.
  - The deficit is budgeted at 3.4 percent of GDP in 2019.

### Key macroeconomic and external indicators (selected exact figures)
- Nominal GDP (2018, est.): US$353.6 billion.
- Population (2018, mid-year): 32.4 million.
- GDP per capita (2018, current prices, est.): US$10,919.
- Poverty rate (2016, national poverty line): 0.4 percent.
- Unemployment rate (August 2018): 3.4 percent.
- Adult literacy rate (2017): 95.9 percent.
- Main goods exports (share in total, 2017): electrical & electronics (36.7 percent), commodities (13.6 percent), and petroleum products (7.7 percent).
- Real GDP (percent change): 2018 = 4.7; 2019 = 4.7; 2020 = 4.8.
- CPI inflation (annual average): 2018 = 1.0 percent; 2019 = 2.2 percent; 2020 = 2.6 percent.
- Current account balance (in percent of GDP): 2018 = 2.1 percent.
- Gross official reserves (US$ billions): 2018 = 101.4; 2019 = 113.4; 2020 = 126.8.
- General government debt (percent of GDP): 2018 = 56.3 percent; 2019 = 56.5 percent; 2020 = 56.0 percent.
- Federal government overall balance (in percent of GDP): 2018 = -3.7 percent; 2019 = -3.4 percent; 2020 = -3.0 percent.
- Household debt (in percent of GDP): 2018 = 83.8 percent.
- Credit-to-GDP ratio (in percent): 2018 = 129.1 percent.
- Credit-to-GDP gap (in percent): 2018 = 2.6.
- Total external debt (in billions of U.S. dollars): 2018 = 221.1; 2019 = 225.9; 2020 = 233.2.
- Total external debt (in percent of GDP): 2018 = 62.5 percent; 2019 = 61.0 percent; 2020 = 58.7 percent.
- Short-term external debt (percent of total, original maturity): 2018 = 43.4 percent.

### External sector and reserves (Appendix I highlights)
- NIIP and external debt
  - NIIP averaged 1.2 percent of GDP since 2010; 2018Q3 NIIP about -7.9 percent of GDP (end-2017: about -2.0 percent of GDP).
  - Total external debt (U.S. dollars) about 65.4 percent of GDP in 2018: Q3; about two-thirds in foreign currency and 46 percent in short-term debt.
- Current account assessment
  - Actual CA: 2.2; Cyclically Adjusted CA: 2.2; EBA CA Norm: 0.0; EBA CA Gap: 2.2.
  - Staff CA Gap: 2.2 percent of GDP (± about 1 percent of GDP).
- REER assessment
  - EBA REER models estimate Malaysia’s REER about 26-29 percent below warranted level.
  - Staff assesses REER gap in 2018 was close to -4.8 percent (± about 2 percent).
- Reserves and FX intervention
  - Gross official reserves: US$101.4 billion as of end-2018.
  - Gross official reserves about 108 percent of the ARA metric as of end 2018; reserves adjusted for net forwards positions are below 100 percent of the metric.
  - FX interventions should be limited to preventing disorderly market conditions.

### Fiscal framework, adjustment needs, and MTFF
- Fiscal framework and adjustment needs
  - Government plans: table a Fiscal Responsibility Act (FRA) and adopt accrual accounting by 2021.
  - FRA should stipulate fiscal objectives, fiscal anchor, operational targets and institutional setup.
  - Consider introducing an expenditure rule capping growth rate of expenditure to prevent procyclical policy.
- Adjustment needs (In percent of GDP):
  - Bringing fiscal deficit to 2 percent of GDP: 1
  - Additional social and development spending: 1 - 1.5
    - Social protection and healthcare spending
    - Investment in human capital
    - Infrastructure and R&D
  - Total Adjustment needs: 2-2.5
- Options for adjustment (In percent of GDP, 2020-2024):
  - Up to 2.5 total potential adjustment
  - 1.7 unspecified aggregate line-item
  - Additional sources of revenue:
    - Expanding SST coverage: 0.5
    - Reducing investment incentives in CIT: 0.5
    - Broadening PIT base: 0.5
    - Increase excise taxes (e.g., tobacco): 0.1
    - Capital gains tax: 0.1
  - Expenditure savings measures:
    - Rationalizing subsidies and transfers: 0.8
    - Wage bill savings: 0.3
    - Enhancing procurement policy: 0.3
    - Other: 0.2
- MTFF and scenarios (selected exact values)
  - Baseline scenario (2020–2024):
    - Revenue: 15.0% (2020), 14.9% (2021), 14.8% (2022), 14.7% (2023), 14.7% (2024)
    - Non-interest expenditure: 15.9% (2020), 15.7% (2021), 15.6% (2022), 15.4% (2023), 15.4% (2024)
    - Fiscal balance: -3.0% (2020), -3.0% (2021), -2.9% (2022), -2.9% (2023), -2.9% (2024)
  - Consolidation without revenue mobilization (2020–2024):
    - Revenue: 15.0% (2020), 14.9% (2021), 14.8% (2022), 14.7% (2023), 14.7% (2024)
    - Non-interest expenditure: 15.9% (2020), 15.5% (2021), 15.2% (2022), 14.8% (2023), 14.5% (2024)
    - Fiscal balance: -3.0% (2020), -2.8% (2021), -2.5% (2022), -2.3% (2023), -2.0% (2024)
  - Consolidation with revenue mobilization (2020–2024):
    - Revenue: 15.0% (2020), 15.2% (2021), 15.5% (2022), 15.7% (2023), 16.1% (2024)
    - Non-interest expenditure: 15.9% each year (2020–2024)
    - Fiscal balance: -3.0% (2020), -2.8% (2021), -2.5% (2022), -2.3% (2023), -2.0% (2024)

### Public Debt Sustainability (Appendix V highlights)
- Summary findings
  - Under the baseline, federal government debt projected to remain below authorities’ debt anchor of 55 percent of GDP and DSA benchmark of 70 percent, but remain high at around 50 percent of GDP over the medium-term.
  - If downside risks materialize and there is no fiscal consolidation, the 55 percent limit could be breached.
  - Gradual fiscal consolidation is needed to build buffers and lower debt sustainability risks.
- Key projected figures (baseline excerpt)
  - Nominal gross public debt: 2017: 50.2; 2018: 50.7; 2019: 51.9; 2020: 52.1; 2021: 51.5; 2022: 51.0; 2023: 50.4; 2024: 50.0 and 49.6 (two adjacent cells shown).
  - Public gross financing needs: 2017: 9.0; 2018: 8.5; 2019: 7.9; 2020: 8.5; 2021: 7.9; 2022: 7.9; 2023: 7.7; 2024: 6.6 and 7.1.
- Stress tests and risk scenarios
  - Worst quartile case: debt-to-GDP could reach 60 percent by 2024—exceeding the debt anchor.
  - Real GDP or interest rate shock: each could bring debt-to-GDP to 55 percent, hitting the debt anchor.
  - Combined macro-fiscal shock: would bring debt above 60 percent of GDP.
  - Contingent liability shock (assume government absorbs guarantees maturing within 5 years totaling 6 percent of GDP): debt-to-GDP could reach 55 percent.
  - Authorities’ consolidation scenario: deficit to about 2 percent of GDP over the medium-term would lower debt-to-GDP to 47 percent by 2024.

### Financial sector resilience and risks
- Banking system
  - Well-capitalized and liquid; capital and liquidity buffers exceed regulatory levels.
  - Aggregate NPLs at 1.5 percent of gross loans as of 2018 Q3; provisions sizable.
  - Mortgage exposure: mortgages represent 60 percent of total household debt and are mostly variable rate.
- Non-bank financial institutions (NBFIs)
  - NBFIs include retirement funds, investment funds, credit cooperatives, DFIs, and the National Higher Education Fund.
  - Main contagion channel: NBFIs’ investments in equities and bonds.
- Household debt and housing market
  - Total household debt: 83.2 percent of GDP as of 2018Q3 (also reported as 83.8 percent of GDP in other tables for 2018).
  - Household financial assets are twice the size of total household debt.
  - Second income group (earning between RM3,000 and RM5,000 per month) would face largest cash flow shortages under shocks per BNM stress tests.
  - House price growth declined from 6.5 percent in 2017 to 3 percent in 2018H1.
  - Unsold residential properties: decade-high of 167 thousand in June 2018.
- Corporate sector
  - Moderately leveraged; intercompany loans increased in 2018 as a share of GDP.
  - Interest cover ratio above 8 sector-wide (prudent threshold: 2).
  - Corporate NPLs at 2.5 percent.
- Crisis preparedness and macroprudential framework
  - Authorities enhancing operational resilience and crisis preparedness; further strengthening includes internal review of crisis preparedness, resolution framework, and related facilities.
  - Over the medium term, consider introducing sector-wide LTVs and debt-service-to-income limits for all income groups to replace self-imposed bank measures.

### Governance, anti-corruption, and structural reform agenda
- Fiscal governance weaknesses and vulnerabilities
  - Off budget spending and significant reliance on off budget initiatives, including government guarantees and PPPs.
  - Weaknesses in managing large infrastructure projects and in procurement systems.
  - Budget process “could be more transparent.”
  - Federal government guarantees equal 18 percent of GDP as of June 2018; possible future PPP payment obligations amount to 13 percent of GDP (undiscounted cash basis over next 30 years, as of June 2018).
- Reforms and initiatives
  - Mid-Term Review of the Eleventh Malaysia Plan reoriented priorities towards improving transparency and public services efficiency.
  - Establishment of the National Centre for Governance, Integrity and Anti-Corruption (GIACC) to develop a national anti-corruption plan and coordinate governance and anti-corruption reforms (launched January 29, 2019).
  - Special committees and institutional adjustments (e.g., PPP unit moved under MOF control) to tackle procurement and SOE governance weaknesses.
- Legislative and procedural reform needs
  - Reforms needed on freedom of information, political financing, declaration of assets.
  - Improve public investment management: avoid future tax refund arrears, improve financial oversight of SOEs, publish more detailed accounts and a fiscal risks statement, and consider consolidating tax administration.
- Structural reform agenda to lift productivity
  - Priorities: improve education quality, expand vocational and technical training, encourage innovation and technology adoption, align R&D with business needs, and accelerate CPTPP ratification (CPTPP entered into effect December 30, 2018, for the 7 members that have ratified it to-date).
  - Foreign worker policy updates should be market-based, clearly communicated, and gradually phased-in.

### CapEx shortfall and corporate savings (selected findings)
- CapEx gap
  - Total CapEx gap of all listed firms (excluding the services sector) accounts for 2.8 percent of GDP on average in 2000–2017.
- Interpretation
  - CapEx shortfall used as a proxy for corporate excess savings; industrial firms estimated to contribute positively to the current account surplus.

*Source: IMF staff report chapter "1. Growth and Exports" and associated appendices from the Malaysia country report (1mysea2019001).*

### 1. Growth and Exports _________________________________________________________________________ 20

### 1. Growth and Exports

### Economic developments and outlook
- Growth and output gap
  - Growth is estimated at 4.7 percent in 2018 (5.9 percent in 2017), narrowing the output gap.
  - Growth is expected to remain flat at 4.7 percent in 2019.
  - Over the medium term, growth is expected to converge to potential (4.8 percent).

- Inflation and credit
  - Headline inflation dropped from an average of 3.7 percent in 2017 to 1.0 percent in 2018.
  - Inflation should rise above 2 percent in 2019 as the effect of the GST removal dissipates and oil subsidies become targeted.
  - Credit growth has rebounded recently, driven by lending to corporations; the credit-to-GDP ratio is declining, and the credit gap has almost closed.

- External sector and exchange rate
  - Real effective exchange rate (REER) appreciated by 4.1 percent in 2018.
  - The current account surplus declined to an estimated 2.2 percent of GDP in 2018.
  - The external position remains stronger than warranted by fundamentals and desired policies (Appendix I).

- 2018 fiscal and public finances
  - The 2018 fiscal deficit is estimated at 3.7 percent of GDP, 0.9 percent of GDP higher than budgeted.
  - Recognized additional tax refund obligations of about 0.3 percent of GDP in 2018.
  - Re-introduction of subsidies for lower-grade petroleum added 0.2 percent of GDP in spending.
  - Replacing the GST by the SST created an estimated revenue shortfall of 1.2 percent of GDP in 2018.
  - Higher oil revenues and transfers from Petronas and other GLCs raised 1.2 percent of GDP.

- Capital flows and financial conditions
  - Large capital outflows occurred in Q2 2018 amid EM risk-off and post-election policy uncertainty, but effects were contained by increased domestic investor participation and central bank FX intervention.
  - Resident holdings in government paper increased from an average of 71 percent post-GFC to 75 percent in October.

- External shocks and trade
  - U.S. tariffs on imports from China could reduce Malaysia’s growth rate by 0.2 percentage points in 2019 via traditional trade channels and through financial and confidence effects, despite some trade diversion.

### Risks to the outlook
- External risks
  - Rising protectionism and weaker-than-expected growth in trading partners.
  - Sharp tightening of global financial conditions causing financial stress for banks and corporations.
  - Lower-than-projected oil prices reducing exports and growth, complicating fiscal consolidation.

- Domestic risks
  - Contingent liabilities necessitating additional measures to ensure medium-term fiscal sustainability.
  - Delays or resistance to the governance reform agenda undermining confidence, investment, and growth.
  - Sharp adjustment in real estate prices or deterioration in households’ debt service ability affecting financial stability and growth.
- Overall risk assessment is tilted to the downside (Appendix IV).

### Authorities’ views
- Authorities’ forecasts and perspectives
  - Authorities expected growth to be 4.9 percent in 2019, driven by domestic demand.
  - They expected inflation to rebound to between 2.5–3.5 percent in 2019, contingent on the timing of fuel subsidy reform and oil prices.
  - Over the medium term, the authorities saw growth at 4.5–5.5 percent.
  - Authorities broadly agreed with staff’s assessment of the economic outlook and risks and took positive note of methodological refinements to the external balance assessment.

### Policy framework and IMF assessment
- Policy objectives
  - Policies should aim at achieving fiscal consolidation while protecting growth and financial stability.
  - Monetary policy should continue to be geared towards domestic stability.
  - Macroprudential policies should help maintain financial stability.
  - External imbalances should be addressed over the medium term by creating fiscal space to expand social safety nets and reduce precautionary household saving, and by structural reforms to enhance investment and productivity.

- Fiscal consolidation and transparency
  - The 2019 budget is a consolidation effort with increased transparency over fiscal accounts.
  - Expenditure rationalization and improvements in targeting social assistance and subsidies are expected to save 2.1 percent of GDP.
  - Higher non-tax revenue of 1.3 percent of GDP, mainly due to additional one-off transfers from Petronas (2 percent of GDP), will partly finance one-off tax refunds (2.4 percent of GDP).
  - The full-year impact of replacing the GST with the SST and additional provision for 2019 tax refunds will raise the deficit by 0.7 percentage point of GDP.
  - The deficit is budgeted at 3.4 percent of GDP in 2019.

- Medium-term fiscal path and risks
  - Federal government debt is estimated at 51.9 percent of GDP at end-2018; the official anchor is to keep federal government debt below 55 percent of GDP.
  - Federal government guarantees stood at 18 percent of GDP (as of June 2018).
  - Possible future payment obligations related to PPP projects amount to 13 percent of GDP (on an undiscounted cash basis over next 30 years, as of June 2018).
  - The 2019 budget announced a consolidation path: deficit reduced to 3 percent of GDP in 2020, 2.8 percent of GDP in 2021, and 2 percent of GDP over the medium term.
  - Under this path, debt would decline to 47 percent of GDP by 2024 (Appendix V).

- Fiscal space and revenue mobilization
  - Malaysia’s tax revenue was low at 13.1 percent of GDP in 2017.
  - Revenue mobilization priorities (text table): strengthen the SST, revisit existing tax incentives for corporate investment, increase excise taxes, broaden the PIT base, and introduce a capital gains tax.
  - The authorities have established a high-level Tax Reform Committee to review the tax system, tax incentives, and possible new sources of sustainable revenues.

- Expenditure policy
  - Revenue measures should be coupled with expenditure rationalization.
  - The authorities’ zero-budgeting process has increased focus on existing spending; it could be further strengthened by a targeted and strategic spending review mechanism, on a rolling basis.
  - Revenue mobilization and expenditure rationalization should create space for additional social and development spending, prioritized in accordance with the Mid-Term Review of the Eleventh Malaysia Plan, including improvements in social protection and healthcare spending.

- Governance and structural reforms
  - Structural reforms advised to address policy gaps aim to boost investment and productivity and improve infrastructure.
  - Some deviations from IMF advice noted: the GST was zero-rated against IMF staff advice, creating a revenue shortfall.

*Source: IMF staff report chapter "1. Growth and Exports" from the Malaysia country report content provided.*

### 16.      Fiscal adjustment should be embedded in a strengthened fiscal framework. The

### 16.      Fiscal adjustment should be embedded in a strengthened fiscal framework.

### Fiscal framework and adjustment needs
- Government plans: table a Fiscal Responsibility Act (FRA) and adopt accrual accounting by 2021.
- FRA should stipulate: fiscal objectives, the fiscal anchor, key components of the medium-term fiscal framework including operational targets and the institutional setup.
- Consideration: introduce an expenditure rule (capping the growth rate of expenditure at an appropriately calibrated level that meets the government’s strategic objectives while ensuring fiscal sustainability) to help prevent procyclical fiscal policy and meet strategic spending objectives without undermining fiscal space (Appendix VI).
- Adjustment needs (In percent of GDP):
  - Bringing fiscal deficit to 2 percent of GDP: 1
  - Additional social and development spending: 1 - 1.5
    - Social protection and healthcare spending
    - Investment in human capital
    - Infrastructure and R&D
  - Total Adjustment needs: 2-2.5

- Options for adjustment (In percent of GDP, Options for Fiscal Policy Adjustment, 2020-2024):
  - Up to 2.5 total potential adjustment
  - 1.7 unspecified aggregate line-item
  - Additional sources of revenue:
    - Expanding SST coverage: 0.5
    - Reducing investment incentives in CIT: 0.5
    - Broadening PIT base: 0.5
    - Increase excise taxes (e.g., tobacco): 0.1
    - Capital gains tax: 0.1
  - Expenditure savings measures:
    - Rationalizing subsidies and transfers: 0.8
    - Wage bill savings: 0.3
    - Enhancing procurement policy: 0.3
    - Other: 0.2

### Authorities’ views on fiscal policy
- Authorities reaffirmed commitment to medium-term fiscal consolidation.
- Characterize higher deficit in 2018–2019 as temporary, reflecting efforts to improve fiscal transparency and governance.
- Revenue shortfall from replacing the GST with the SST will be addressed through revenue mobilization measures to be identified by the Tax Reform Committee and further expenditure rationalization.
- Commitment to reducing the deficit to 2 percent of GDP over the medium term.
- Emphasis on revenue mobilization and improving expenditure efficiency; plan to propose a FRA and adopt accrual accounting by 2021.

### Monetary, exchange rate, and financial markets policies
- Monetary policy stance: should remain broadly neutral.
  - Policy rate history: raised by 25 bps to 3.25 percent in January 2018; kept unchanged in five subsequent meetings.
  - At unchanged policy rates, stance remains broadly neutral; monetary policy should remain on hold given gradual growth deceleration, no evident underlying inflation pressures, and gradually tightening financial conditions (Chart 9 and Appendix VII).
- Exchange rate flexibility:
  - BNM intervention following surprise election results helped ensure orderly market conditions.
  - Future interventions should be limited to preventing disorderly market conditions; exchange rate to play role of shock absorber.
  - Gross foreign reserves: US$101.4 billion as of end 2018—about 108 percent of the Assessing Reserve Adequacy (ARA) metric for a floating exchange rate regime.
  - When adjusted for net forward positions, reserves are below 100 percent of the metric.
  - In case of an inflow surge, some reserve accumulation would be appropriate.
  - Foreign currency debt remains a potential claim on BNM’s foreign exchange reserves despite banks and corporates having external liquid assets.
- External debt:
  - External debt-to-GDP ratio rose by about 11 percentage points between 2009 and 2018Q3, to 65.4 percent of GDP (2009: 54¼ percent of GDP), measured in U.S. dollars.
  - About one-half of the increase due to rise in other investment liabilities (intercompany loans and interbank borrowing).
  - Portfolio debt inflows accounted for about 3 percentage points of GDP of the increase.
  - Standard stress tests show external debt-to-GDP would remain close to baseline under various shocks except under an exchange rate depreciation shock.
  - Close to one-third of external debt is denominated in ringgit.

- FX market measures:
  - Measures introduced in December 2016 reduced onshore FX market volatility but likely created distortions.
  - Attestation requirement for banks’ noninvolvement in offshore ringgit derivatives trading aims to monitor activity and dissuade speculative activities.
  - Export proceed conversion requirement and limit on foreign currency investments by residents with domestic ringgit borrowing can be distortive; these measures should be gradually phased out with due regard to market conditions.
  - August 2018 easing: exporters allowed to keep FX earnings in excess of 25 percent of export proceeds when needed to meet import or debt service obligations in the next six months without conversion/reconversion.

### Financial sector resilience and risks
- Banking system:
  - Banks are well-capitalized and liquid; capital and liquidity buffers exceed regulatory levels.
  - Loan quality strong: aggregate NPLs at 1.5 percent of gross loans as of 2018 Q3; provisions are sizable.
  - Impaired loans in oil and gas sector are adequately provisioned, written off, or restructured.
  - Real estate sector (especially commercial) is a vulnerability but risks mitigated by large developers’ cash buffers.
- Non-bank financial institutions (NBFIs):
  - NBFIs include retirement funds, investment funds, credit cooperatives, DFIs, and the National Higher Education Fund.
  - Main contagion channel: NBFIs’ investments in equities and bonds.
  - Some segments are government-owned, posing potential fiscal risk in case of a large adverse shock.
  - BNM has taken steps to improve NBFIs’ financial reporting.
- Household debt:
  - Total household debt: 83.2 percent of GDP as of 2018Q3.
  - Household financial assets are twice the size of total household debt.
  - Second income group (earning between RM3,000 and RM5,000 per month) would face largest cash flow shortages under income, interest rate, or cost-of-living shocks per BNM stress tests.
  - Macroprudential norms and credit underwriting standards have contained household NPLs at 1.4 percent.
  - Mortgages represent 60 percent of total household debt and are mostly variable rate.
  - Household debt requires close monitoring despite high loan quality and favorable stress test outcomes.
- Housing market:
  - House price growth declined from 6.5 percent in 2017 to 3 percent in 2018H1; transaction volumes declined.
  - Unsold housing units (completed or under construction) increasing and concentrated in high-rise buildings.
  - Banks’ direct exposure to developers remain small and closely monitored by BNM.
  - BNM stress tests: potential bank losses from sharp real estate price adjustment and shocks are small relative to banks’ capital buffers.
  - Policy measures introduced by BNM, MOF, and Ministry of Housing and Local Government aim to reduce cost of property or contracting mortgage loans.
  - Recommendation: gradually phase out residency-based differentiation in 2014 real estate measures as systemic risks dissipate; consider macroprudential measures that target specific segments without differentiated treatment of non-residents if needed.
  - Note: Number of unsold residential properties stood at a decade-high of 167 thousand in June 2018.

- Corporate sector:
  - Moderately leveraged; intercompany loans increased in 2018 as a share of GDP, driven by multinational lending to local subsidiaries.
  - Interest cover ratio above 8 sector-wide (prudent threshold: 2).
  - Corporate NPLs at 2.5 percent.
  - Some corporations face declining margins due to renegotiations and delays in public/infrastructure projects.

- Crisis preparedness and macroprudential framework:
  - Authorities are enhancing operational resilience and crisis preparedness; further strengthening could include comprehensive internal review of crisis preparedness, resolution framework, and related facilities (ELA or Deposit Insurance payout framework) and legislation.
  - Over the medium term, consider introducing sector-wide LTVs (on the second and first properties) and debt-service-to-income limits for all income groups to replace self-imposed bank measures.
  - BNM’s financial oversight framework appears robust; 2012 FSAP gaps (licensing standards, information-sharing, supervisory powers in insurance) have been addressed.
  - AML/CFT: continue strengthening implementation, enhanced customer due diligence on high risk politically exposed persons, expand asset declaration coverage of high-level public officials, and improve verification, sanctions, and public access.
  - Companies Commission of Malaysia study on beneficial ownership: should identify measures to enable access to accurate and up-to-date ownership information of legal persons and arrangements established in Malaysia.

### Authorities’ views on monetary, exchange rate, and financial sector measures
- Monetary policy: authorities view policy as still accommodative; growth and inflation are key determinants.
- FX interventions post-election deemed necessary to prevent disorderly market conditions; exchange rate flexibility remains first line of defense.
- View BNM reserves as adequate and external debt manageable, citing buffers:
  - BNM’s reserves account for a quarter of total foreign assets; remainder held by resident banks and corporates available to meet external obligations.
  - About one-third of external debt is ringgit-denominated.
  - Three-quarters of FX-denominated external debt subject to prudential requirements.
  - Over half of external debt has medium/long-term maturity.
  - Three-quarters of short-term interbank borrowing is intragroup, subject to local liquidity regulations.
- Regarding 2016 FX market measures, authorities disagree they created distortions; they argue measures reinforced non-internationalization of ringgit, limited speculation, and deepened onshore markets.
- Financial sector risks: authorities view risks as appropriately monitored and contained; they consider sector-wide LTVs on first and second mortgages unwarranted given existing supervisory measures and risk management.
- Regarding residency-based real estate measures, authorities consider them necessary to limit speculative demand and minimize financial sector risks given rebound in property purchases by non-citizens in 2017-2018H1.
- Crisis preparedness: authorities focus on periodic reviews and testing the banking system’s operational resilience, including to cyber risks.

*Source: 1mysea2019001*

### 33.      Weaknesses have been identified in fiscal governance and anti-corruption frameworks.

### 33.      Weaknesses have been identified in fiscal governance and anti-corruption frameworks.

### Fiscal governance weaknesses and vulnerabilities
- Off budget spending and significant reliance on off budget initiatives, including government guarantees and PPPs, make it difficult to form a comprehensive assessment of the government fiscal position.
- Weaknesses in managing large infrastructure projects and in procurement systems.
- A budget process that “could be more transparent.”
- Governance of large infrastructure projects shows challenges in project appraisal, approval, costing, and extension of government guarantees, creating corruption vulnerabilities.
- Malaysia ranks low compared to the OECD average on the strength of procurement systems and on a range of indicators of corruption and anti-corruption institutions (Appendix XI).

### Reforms and governance initiatives undertaken
- Mid-Term Review of the Eleventh Malaysia Plan reoriented priorities towards improving transparency and public services efficiency.
- Establishment of the National Centre for Governance, Integrity and Anti-Corruption (GIACC) to develop a national anti-corruption plan and coordinate governance and anti-corruption reforms.
  - Footnote: Launched on January 29, 2019.
- Intention to move forward with important legislation to secure reforms and ensure public participation and key institutional reforms.
- Special committees established to tackle specific governance weaknesses such as procurement.
- Strengthening of existing institutions, including the Malaysian Anti-Corruption Commission (MACC), the Economic Planning Unit, the PPP framework, and the SOE legal framework.

### Legislative and procedural reform needs
- Governance reform agenda will take time and require legislative changes; several important reforms require constitutional changes (Annex XI).
- Legislative reforms needed covering:
  - Freedom of information.
  - Political financing.
  - Declaration of assets.
- Public investment management improvements require additional legislative and procedural changes.
- Other needed measures:
  - Avoid future tax refund arrears.
  - Improve financial oversight of SOEs.
  - Publish a more detailed set of accounts and a fiscal risks statement.
  - Improve tax administration potentially by merging multiple tax collection roles under the Inland Revenue Authority.

### Structural reform agenda and productivity objectives
- Mid-Term Review of the Eleventh Malaysia Plan aims to help Malaysia reach high-income status and inclusive economic development by prioritizing:
  - Governance reforms.
  - Inclusive and balanced regional development.
  - Investing in human capital.
  - Enhancing environmental sustainability.
  - Strengthening economic growth.
- Acceleration of CPTPP ratification (currently under review) and increasing female labor force participation and productivity are identified as essential.
  - Footnote: The CPTPP entered into effect December 30, 2018, for the 7 members that have ratified it to-date.
- Recent slowdown in total factor productivity growth despite robust growth and improved export sophistication.
- Policy focus to lift productivity:
  - Improving education (quality of teachers, curriculum design).
  - Expanding vocational and technical training to address skills mismatches.
  - Encouraging innovation, technology adoption, and moving up the value chain.
  - Aligning research and innovation to business needs and fostering firm dynamism.
  - Addressing lack of coordination in R&D, commercialization, and innovation activities and low commercialization of R&D output.
- Industry 4.0 initiative: government intends to provide targeted incentives and funding; private sector investment in digitalization is needed.
- Foreign worker policy update to increase cost of hiring foreign labor and clamp down on illegal employment; reforms should be market-based, clearly communicated, and gradually phased-in.

### Authorities’ views
- Authorities agreed with identified governance weaknesses and steps needed to close gaps; committed to enhancing governance and combating corruption at all levels.
- Implementation pillars: good governance principles, strong institutions, integrity and accountability in the public sector.
- Reviewing CPTPP to ensure it is beneficial to Malaysia before ratification.
- Prioritizing quality over quantity in vocational and technical training.
- Intend to provide targeted incentives for Industry 4.0 and better integration of R&D.
- Recognize need to reassess costs of high presence of low-skilled foreign workers and overreliance of certain sectors on these workers.

### Staff appraisal, risks, and recommended policy priorities
- Economic context:
  - Real GDP growth is moderating towards potential.
  - No evident signs of inflationary pressures presently.
  - Risks to the growth outlook are to the downside.
  - Developments in 2018 suggest Malaysia’s external position remains stronger than warranted by fundamentals and desired policies.
- Policy priorities:
  - Anchor governance reforms in appropriate legislation and achieve fiscal consolidation while safeguarding growth and financial stability.
  - Fiscal policy should follow a gradual consolidation path, prioritizing revenue mobilization to create space for social and development spending.
    - The announced medium-term consolidation path is described as appropriate to build fiscal buffers and bolster market confidence without disrupting growth.
  - Strengthen the fiscal framework and rely on credible revenue and expenditure measures.
  - Given low tax revenues, revenue mobilization is a priority to finance government priorities under the Mid-Term Review and help external rebalancing.
  - Monetary policy: broadly neutral stance is appropriate given close-to-potential growth, no underlying inflationary pressures, and still-supportive albeit gradually tightening financial conditions.
    - Exchange rate flexibility remains the recommended first line of defense against shocks.
    - December 2016 FX market measures should be gradually phased out with due regard to market conditions.
  - Financial sector: appears resilient but household debt and the real estate market require close monitoring.
    - Bank profitability and liquidity are sound, and NPLs low.
    - Household debt is high compared to peers, with a high share of mortgages and pockets of vulnerability in lower-income groups.
    - Real estate sector (especially commercial) is a vulnerability requiring close monitoring.
    - Residency-based differentiation in property market measures should be gradually phased out as systemic risks dissipate.
    - Strengthen operational resilience and crisis preparedness, including a comprehensive review of overall framework, associated facilities and legislation.
- Specific governance and anti-corruption recommendations:
  - See through intended governance reforms and anchor them in legislation to secure independence of anti-corruption institutions and appropriate separation of powers.
  - Legislative reforms needed on freedom of information, political financing law, and declaration of assets.
  - Avoid future tax refund arrears.
  - Improve financial oversight of SOEs.
  - Enhance the effectiveness of the AML/CFT framework.
  - Consider adopting all staff’s past recommendations regarding public investment management.
- Reaffirmation of emphasis on productivity and inclusive development:
  - Priority actions to increase female labor force participation and productivity include:
    - (i) improving education;
    - (ii) accelerating innovation and technology adoption;
    - (iii) encouraging a move up the value chain.

*Source: MALAYSIA — INTERNATIONAL MONETARY FUND (excerpt, paragraphs 33–47).*

### 48.      It is recommended that the Article IV consultation with Malaysia be held on the

### 1mysea2019001 - 48.      It is recommended that the Article IV consultation with Malaysia be held on the

### Growth and Exports
- Malaysia has been one of the faster growing economies among the large ASEAN countries.
- Private domestic demand has been the main driver of growth in recent years.
- On the supply side, the mining sector and agriculture production experienced negative shocks, while growth in other major sectors were sustained.
- Electronics remain the main driver of export growth up to 2018Q3; commodity exports declined on account of lower palm-oil and LNG exports.
- Strong import growth was supported mainly by robust imports for re-export activities up to 2018Q3 and by strong domestic consumption growth in 2018Q3.
- As a result, while the current account has remained in surplus in 2018, it has declined relative to last year.

### Inflation and Domestic Resource Constraints
- Headline inflation experienced a temporary drop in 2018, reflecting zero-rating of the GST and suspension of domestic fuel price adjustments.
- Core inflation turned to negative following the removal of the GST in June and rebounded slowly after the reintroduction of the SST in September.
- Producer prices moderated in 2018, as the impact of rising global commodity prices was offset by the decrease in intermediate and final good prices.
- Following slower growth, the output gap declined to close to zero in 2018Q2 and Q3.
- The unemployment rate stabilized as labor force expansion continued to match employment growth.
- Payrolls continued to rise both in the services and the manufacturing sectors, with the latter growing at a faster pace throughout 2018Q3.

### Monetary Developments
- The BNM hiked its policy rate in January 2018 and has remained on hold since. Market interest rates have been largely stable.
- Real interest rates have increased as the expected inflation rate has declined.
- Monetary aggregates are growing in line with GDP and deposit growth is rising moderately.
- The credit gap declined to a post-GFC low.
- As a share of GDP, foreign currency deposits have been largely stable in recent quarters, but nonresident deposits have slightly declined.

### Capital Flows and External Sector
- Despite higher other investment inflows, large outflows of non-resident portfolio investments in 2018Q2 led to a deterioration in the financial account.
- The bulk of bonds and equity outflows occurred after the election in May and June and stabilized in July and August, notably outflows from the ringgit-denominated Malaysian government securities market.
- While BNM’s gross FX reserves stabilized after 2018Q2, its growing net short position in forwards led to a continued decline in net FX reserves in recent months.
- The currency depreciated from its 2013 peak after a series of external shocks in recent years.
- The stock market gained since late 2016, depicting a jump in the PE ratio in 2018.

### Fiscal Policy Developments
- The federal deficit fell gradually but is estimated to have widened in 2018.
- The zero rating of the GST reduced tax revenue, with higher oil-related revenue partly compensating for the decline.
- Increases in social spending reversed the declining trend of current expenditures in 2018.
- Development spending rose on a cash basis, despite existing projects being put on hold pending further review.
- The federal debt will remain high at around 50 percent of GDP, absent additional fiscal consolidation.
- Guarantees, as a share of GDP, jumped up recently after remaining stable for several years.

### Public Sector Fiscal Stance and Prospects
- Non-Financial Public Sector (NFPS) deficit improved after peaking in 2015.
- Public companies’ surpluses have been sustained.
- General government development spending has declined, with Petronas’ share lower than before.

### Financial Sector Developments and Soundness
- Credit growth, which had slowed considerably in recent years, picked up moderately in 2018.
- The pattern of credit pick-up was observed across the board.
- Overall corporate sector leverage is below levels prior to the Asian Financial Crisis.
- The banking system is well capitalized and gross non-performing loans are low.
- The banking system’s reliance on short-term external debt, as a share of GDP, increased in 2018, accompanied by a growing banks’ net external asset position since mid-2017.
- Financial Soundness Indicators:
  - Regulatory capital to risk-weighted assets: 17.0 percent (2018 Q2).
  - Regulatory Tier 1 capital to risk-weighted assets: 13.5 percent (2018 Q2).
  - Nonperforming loans to total gross loans: 1.6 percent (2018 Q2).
  - Return on assets: 1.5 percent (2018 Q2).
  - Return on equity: 13.4 percent (2018 Q2).
  - Loan-deposit ratio: 88.2 percent (2018 Q2).
  - Liquidity Coverage Ratio: 139.3 (2018 Q2).

### Household Debt and Housing Market
- Housing loan growth moderated, while personal loans growth accelerated slightly in 2018, but overall household debt declined as a share of GDP.
- Household debt-to-GDP ratio remains high compared to other countries and is above levels observed in countries with similar GDP per capita.
- Loan approvals and applications declined in early 2018 but later showed signs of improvement, reflecting stronger private sector confidence.
- High household financial assets help mitigate vulnerability from growing household debt.
- House prices appear to have stabilized, resulting in a slower increase relative to income and rents.
- The housing market in Kuala Lumpur is moderating; residential supply has been increasing and construction starts slowed since 2017Q3.

### Key Macroeconomic and External Indicators (selected exact figures)
- Nominal GDP (2018, est.): US$353.6 billion.
- Population (2018, mid-year): 32.4 million.
- GDP per capita (2018, current prices, est.): US$10,919.
- Poverty rate (2016, national poverty line): 0.4 percent.
- Unemployment rate (August 2018): 3.4 percent.
- Adult literacy rate (2017): 95.9 percent.
- Main goods exports (share in total, 2017): electrical & electronics (36.7 percent), commodities (13.6 percent), and petroleum products (7.7 percent).
- Real GDP (percent change): 2018 = 4.7; 2019 = 4.7; 2020 = 4.8 (Table projections).
- CPI inflation (annual average): 2018 = 1.0 percent; 2019 = 2.2 percent; 2020 = 2.6 percent.
- Current account balance (in percent of GDP): 2018 = 2.1 percent.
- Gross official reserves (US$ billions): 2018 = 101.4; 2019 = 113.4; 2020 = 126.8.
- General government debt (percent of GDP): 2018 = 56.3 percent; 2019 = 56.5 percent; 2020 = 56.0 percent.
- Federal government overall balance (in percent of GDP): 2018 = -3.7 percent; 2019 = -3.4 percent; 2020 = -3.0 percent.
- Household debt (in percent of GDP): 2018 = 83.8 percent.
- Credit-to-GDP ratio (in percent): 2018 = 129.1 percent.
- Credit-to-GDP gap (in percent): 2018 = 2.6 (Table 1 notes).
- Total external debt (in billions of U.S. dollars): 2018 = 221.1; 2019 = 225.9; 2020 = 233.2.
- Total external debt (in percent of GDP): 2018 = 62.5 percent; 2019 = 61.0 percent; 2020 = 58.7 percent.
- Short-term external debt (percent of total, original maturity): 2018 = 43.4 percent.

### Fiscal Operations and Projections (selected exact figures)
- Federal government revenue (2018): 236.5 (in billions of ringgit).
- Taxes (2018): 174.7 (in billions of ringgit).
- Expenditure and net lending (2018): 279.7 (in billions of ringgit).
- Compensation of employees (2018): 79.1 (in billions of ringgit).
- Interest (2018): 30.9 (in billions of ringgit).
- Net lending/borrowing (2018): -39.8 (in billions of ringgit).
- Federal government debt (in percent of GDP): 2018 = 51.9 percent.

*Source: 1mysea2019001 - IMF staff chapter excerpt.*

### Appendix I. External Sector Assessment

### 1mysea2019001 - Appendix I. External Sector Assessment

### Foreign asset and liability position and trajectory
- Malaysia’s net international investment position (NIIP), as a percent of GDP, averaged 1.2 percent of GDP since 2010.
- In 2018Q3, the NIIP was at about -7.9 percent of GDP (end-2017: about -2.0 percent of GDP), with higher net direct investment and other investment liabilities more than offsetting the reduction of net portfolio capital liabilities.
- Official reserves contribute most to net assets; net portfolio liabilities contribute most to net liabilities.
- Total external debt, measured in U.S. dollars, was at about 65.4 percent of GDP in 2018: Q3 (end-2017: about 70 percent of GDP), of which about two-thirds was in foreign currency and 46 percent in short-term debt.
- Assessment: NIIP should rise gradually over the medium term reflecting projected moderate current account (CA) surpluses. Balance sheet strength, exchange rate flexibility, and increased domestic investor participation would help support resilience to shocks, including outflows associated with external liabilities.

### Overall assessment and policy implications
- The external position in 2018 is assessed to remain stronger than the level consistent with fundamentals and medium-term desirable policies.
- The current account surplus, as a ratio to GDP, is projected to be lower than its 2017 level, following an increase in income account deficit and strong domestic private demand.
- Potential policy responses:
  - Continued exchange rate flexibility.
  - Improved government spending.
  - Structural policies to address policy gaps.
  - Spending needs should accommodate further improvements in social protection and public healthcare.
  - Address structural bottlenecks: labor market frictions (skills mismatch), low female labor participation, weak education quality.
  - Improve quality of infrastructure supported by enhanced public finance management to support higher private investment and productivity growth.

### Current account (CA)
- Background:
  - Malaysia’s CA surplus declined by about 7 percentage points of GDP between 2010 and 2017, driven mainly by a decline in national saving, while investment also rose.
  - In the first three quarters of 2018 the CA surplus narrowed to 2.2 percent of GDP, down from 3 percent of GDP in 2017.
  - Trade balance remains the main contributor to the overall CA surplus; services and income accounts register larger deficits.
  - In 2018, the CA surplus is estimated at 2.1 percent of GDP.
- Assessment (EBA and staff numbers):
  - Actual CA: 2.2
  - Cyclically Adjusted CA: 2.2
  - EBA CA Norm: 0.0
  - EBA CA Gap: 2.2
  - Staff Adj.: 0.0
  - Staff CA Gap: 2.2
- Interpretation:
  - The EBA CA regression (November 2018 vintage) estimates the 2018 CA norm at 0.0 percent of GDP after cyclical and multilateral consistency adjustments.
  - The 2018 cyclically adjusted CA is about 2.2 percent of GDP, implying a 2018 CA gap of 2.2 percent of GDP (± about 1 percent of GDP).
  - Unidentified residuals explain the entire CA gap, potentially reflecting structural distortions and country-specific factors not included in the model.
  - Identified domestic policy gaps have offsetting effects: low public healthcare spending contributes to the excess surplus, while FX intervention that helped to prevent further currency depreciation reduces the surplus.
  - The CA balance is expected to remain in surplus, albeit lower, over the medium term, driven by smaller private sector net saving.

### Real exchange rate (REER)
- Background:
  - In 2018, average REER was appreciated by 4.1 percent.
  - REER had depreciated nearly 3.5 percent since April 2018.
  - The REER is about 10 percent lower than its 2013 level, reflecting impact on the NEER from capital outflows and terms of trade shocks.
- Assessment:
  - The EBA REER models estimate Malaysia’s REER to be about 26-29 percent below what is warranted by fundamentals and desirable policies.
  - Usual macroeconomic stresses associated with such undervaluation are absent (e.g., high core inflation, sustained wage pressure, or significant FX reserve build up).
  - Consistent with the assessed CA gap, staff assesses the REER gap in 2018 was close to -4.8 percent (± about 2 percent).

### Capital and financial accounts: flows and policy measures
- Background:
  - Since the Global Financial Crisis, Malaysia experienced significant capital flow volatility, largely driven by portfolio flows in and out of the local-currency debt market.
  - In 2017, the annual financial account balance was in a small surplus for the first time since 2011.
  - Following the tightening of global financial conditions and general elections in spring 2018, Malaysia experienced intensified portfolio outflows from the Malaysian government debt market and equity market in the second quarter of 2018.
  - Since late 2016, the Financial Markets Committee implemented measures to develop the onshore FX market.
- Assessment:
  - Exchange rate flexibility and macroeconomic policy adjustments should continue to play the central role in response to capital flow volatility.
  - Capital flow management measures should be gradually phased out, with due regard to market conditions.

### FX intervention and reserves level
- Background:
  - During the first four months of 2018, gross official reserves increased by US$7.1 billion to US$109.5 billion as of end-April 2018.
  - Reserves dropped by US$8.1 billion since then and stood at US$101.4 billion as of end-2018.
  - Malaysia faced significant reserve losses in 2014 and 2015, a slight decrease in 2016, and an increase of nearly US$8 billion in 2017.
- Assessment:
  - Under the IMF’s composite reserve adequacy metric (ARA), reserves remain broadly adequate.
  - Gross official reserves are about 108 percent of the ARA metric as of end 2018, but reserves adjusted for net forwards positions are below 100 percent of the ARA metric.
  - Given limited reserves and increased hedging opportunities since 2017, FX interventions should be limited to preventing disorderly market conditions.

### Technical background notes (selected highlights)
- Ratios to GDP are based on staff estimates using U.S. dollar values and may vary with the authorities’ data due to different exchange rate assumptions for converting nominal GDP in U.S. dollar terms.
- Close to one-third of external debt is denominated in local currency and largely of medium-term maturity, reducing FX and rollover risks. Malaysia’s local currency external debt reflects holdings of domestically-issued debt (mainly Malaysian Government Securities - MGS) by nonresident investors (about 13 percent of GDP as of 2018Q3).
- Short-term FX-denominated debt largely belongs to the banking system; a good portion is matched by short-term foreign currency assets and is closely supervised by Bank Negara Malaysia through frequent liquidity stress tests.
- Staff stress test analysis suggests the Malaysian economy could be resilient to a large reversal due to the depth of domestic financial markets and the role of institutional investors.
- Preliminary assessment: the estimated 2018 EBA norm is 0.6 percentage point lower than the 2017 norm, largely reflecting a decrease in net foreign assets (NFA) and a larger debt stabilizing fiscal deficit.
- Since 2000, movements in the REER have been driven largely by the nominal exchange rate rather than inflation differentials. In 2018, the average NEER was about 5.2 percent appreciated.
- The REER gap is based on the estimated semi-elasticity of CA to REER at -0.46. The elasticity estimate was updated from the last assessment and is based on cross-country estimates from the IMF’s Consultative Group on Exchange Rates (CGER), adjusting for Malaysia’s trade openness and share of commodity exports.
- On December 2, 2016, the Financial Markets Committee (FMC) announced a package of measures to facilitate onshore FX risk management and enhance depth and liquidity of onshore financial markets. Two of these measures were classified as capital flow management measures under the IMF’s Institutional View on capital flows. Additional measures were announced in April, September, and November 2017.
- The IMF’s composite reserve adequacy metric uses a binary classification of the exchange rate regime and classifies Malaysia’s regime as “floating” since 2016.

*Source: 1mysea2019001 - Appendix I. External Sector Assessment*

### 11.      Capital expenditure (CapEx) shortfall

### 11.      Capital expenditure (CapEx) shortfall

### Definition and measurement
- CapEx gap of a firm ݆ in industry ݅, ݌ܽܩ	ݔܧ݌ܽܥ
௜௝
, is defined as the amount of investment required to restore its actual capital expenditure, over a 10-year period, to the desired dependence of external financing of industry ݅, ܦܨܧ
௜
ௗ௘௦௜௥௘ௗ
. That is,  
  ݌ܽܩ	ݔܧ݌ܽܥ
௜௝
ݔܧ݌ܽܥ	ൌ
௜௝
ௗ௘௦௜௥௘ௗ
ݔܧ݌ܽܥെ
௜௝
௔௖௧௨௔௟
, 
  ݔܧ݌ܽܥ
௜௝
ௗ௘௦௜௥௘ௗ
ݓ݋݈ܨ݄ݏܽܥ.ݐ݌ܱൌ
௜௝
ܦܨܧሺ1െ
௜
ௗ௘௦௜௥௘ௗ
ሻ
⁄
. 
- The measurement horizon used is a 10-year period.
- The approach distinguishes the ܦܨܧ
௜
ௗ௘௦௜௥௘ௗ
 for young and old firms in industry ݅, respectively.
- Sources used: WorldScope and IMF staff calculation.

### Key empirical finding
- Preliminary calculation shows that the total CapEx gap of all listed firms (excluding the services sector) accounts for 2.8 percent of GDP on average in the period between 2000–2017.

### Interpretation and economic role
- CapEx shortfall can be used as a proxy for excess savings by corporates: given a firm's cash flow, under-investment generates excess net savings.
- Investment channel is considered more significant than reduced dividend payouts in explaining corporate excess savings.
- In external-financing dependent industries there is evidence of gaps between actual and desired levels of external financing, particularly among young firms.
- Using CapEx gap as a proxy, industrial firms are estimated to contribute positively to the current account surplus.

### Potential drivers of lower-than-desired external financing
- External financing constraints faced by firms (particularly SMEs) in countries with less developed financial markets.
- Lack of profitable investment opportunities due to slow productivity growth.
- Weak governance.
- Policy distortions.
- A companion selected issues paper explores these possible economic drivers.

### Caveats and limitations
- Identification of the desired EFDs for Malaysian firms hinges on the assumption that firms in the same industry share similar technologies and investment cycles across countries; this assumption could be challenged by distinct roles in global value chains.
- The result is partial equilibrium: it does not consider the counterfactual effect of increased capital expenditure on future cash flows (operational cash flows are taken as given).

### Conclusions (summary of implications)
- In the past two decades, Malaysian companies have maintained high net savings rates, contributing to national savings.
- Micro firm level data suggest corporate gross savings are procyclical due to procyclical profits and acyclical dividend payments.
- Increases in gross savings do not lead to higher investment but to a larger holding of liquid financial assets (net savings).
- CapEx gap calculations imply industrial firms have contributed positively to Malaysia’s current account surplus.
- Further analysis of economic drivers is available in a selected issues paper.

*Source: 1mysea2019001 - 11.      Capital expenditure (CapEx) shortfall*

### Appendix V. Public Debt Sustainability Analysis

### Appendix V. Public Debt Sustainability Analysis

### Summary findings
- Under the baseline scenario, federal government debt is projected to remain below the authorities’ debt anchor of 55 percent of GDP and the DSA’s debt burden benchmark of 70 percent, but will remain high at around 50 percent of GDP over the medium-term.
- If downside risks materialize and there is no fiscal consolidation, the federal government debt limit of 55 percent of GDP could be breached.
- Sizable external financing needs and high contingent liabilities exacerbate debt sustainability risk.
- A gradual fiscal consolidation is needed to build fiscal buffers, improve market confidence, and lower debt sustainability risks.

### Macro-fiscal assumptions
- Growth:
  - Economic growth is moderating to 4.7 percent in 2018 and 2019 from 5.9 percent in 2017.
  - Growth will remain stable over the medium-term.
- Fiscal policy:
  - The federal government fiscal deficit is estimated at 3.7 percent of GDP in 2018 relative to the 2018 budget target of 2.8 percent.
  - The deficit is projected to decline to 3.4 percent in 2019, and then remain at around 3 percent over the medium-term if there is no additional fiscal consolidation.
- Interest rate:
  - Nominal interest rates are assumed to increase by 1 percentage points by 2024.
  - The effective interest rate on government debt will increase only modestly by 0.3 percentage points, helped by an extended maturity of federal government bonds (above 7 years as of 2018).

### Financing needs and debt profile
- Gross financing needs:
  - Malaysia’s gross financing needs (sum of fiscal deficit and maturing debt) are expected to be stable at around 8 percent of GDP, with a moderate decline trend over the medium-term.
- Debt definition and coverage:
  - The debt profile is based on the federal government budget and accounts for more than 90 percent of general government debt.
  - This definition does not include local and state governments and statutory bodies which typically receive explicit government guarantees.
- Contingent liabilities and PPPs:
  - Federal government guarantees equal 18 percent of GDP as of June 2018.
  - Possible future payment obligations related to PPP projects are 13 percent of GDP on an undiscounted cash basis over next 30 years, as of June 2018.
  - These could pose an upside risk to public debt and constrain fiscal space.
- External and currency composition:
  - The external financing requirement is high at 38 percent of GDP.
  - The share of foreign currency denominated debt is low at 3 percent of total debt.

### Realism of baseline assumptions
- Past assumptions on real growth and the primary balance are assessed as neither too optimistic nor pessimistic.
- The median forecast error for the GDP deflator is -1.8 percent, suggesting staff forecasts for nominal GDP have been relatively optimistic; forecast bias has improved in recent years.
- Under the baseline, the projected 3-year adjustment in the cyclically adjusted primary balance (CAPB) has a percentile rank of 31 percent compared to historical experience for high-debt market access countries; the CAPB level is in a percentile rank of 70 percent.

### Stress tests and risk scenarios
- Fan chart:
  - Incorporating feedback effects and historical shocks, under the worst quartile case the debt-to-GDP ratio could reach 60 percent of GDP by 2024—exceeding the authorities’ debt anchor.
- Macro-fiscal stress tests:
  - Primary balance shock (equivalent to half of the 10-year historical standard deviation): debt-to-GDP ratio is not expected to breach 55 percent throughout the projection period.
  - Real GDP shock (based on the 10-year historical standard deviation) or interest rate shock (based on the historical maximum real interest rate): each would bring debt-to-GDP to 55 percent, hitting the debt anchor.
  - Combined macro-fiscal shock: would bring debt above 60 percent of GDP, breaching the debt anchor.
  - The effect of an interest rate shock enlarges over a longer horizon, relevant amid expected monetary policy normalization in major advanced economies.
- Contingent liability shock:
  - Assumes government absorbs all guarantees maturing within 5 years, totaling 6 percent of GDP, over 5 years and assumes a negative feedback on the interest rate.
  - Debt-to-GDP could reach 55 percent under this scenario.
- Authorities’ fiscal consolidation scenario:
  - Authorities aim to bring down fiscal deficit to about 2 percent of GDP over the medium-term.
  - This gradual consolidation would lower debt-to-GDP to 47 percent by 2024, providing buffers based on historical volatility.
- Heat map and market perception:
  - Malaysia faces risks from a large external financing requirement above the upper threshold of early warning benchmarks.
  - Public debt held by foreigners is high at 26 percent, exceeding the lower threshold of early warning benchmarks.
  - A large domestic institutional investor base mitigates some of the foreign exposure risk.

### Key projected figures (baseline projections excerpt)
- Nominal gross public debt:
  - 2017: 50.2
  - 2018: 50.7
  - 2019: 51.9
  - 2020: 52.1
  - 2021: 51.5
  - 2022: 51.0
  - 2023: 50.4
  - 2024: 50.0 and 49.6 (two adjacent cells shown)
- Public gross financing needs:
  - 2017: 9.0
  - 2018: 8.5
  - 2019: 7.9
  - 2020: 8.5
  - 2021: 7.9
  - 2022: 7.9
  - 2023: 7.7
  - 2024: 6.6 and 7.1 (two adjacent cells shown)
- Real GDP growth (in percent):
  - 2017: 4.6
  - 2018: 5.9
  - 2019: 4.7
  - 2020–2024: 4.8 (stable)
- Inflation (GDP deflator, in percent):
  - 2017: 2.1
  - 2018: 3.8
  - 2019: 0.7
  - 2020: 1.9
  - 2021: 2.4
  - 2022: 2.4
  - 2023: 2.3
  - 2024: 2.2
- Nominal GDP growth (in percent):
  - 2017: 6.9
  - 2018: 9.9
  - 2019: 5.4
  - 2020: 6.7
  - 2021–2024: 7.3, 7.3, 7.2, 7.2 (as shown)
- Effective interest rate (in percent):
  - 2017: 4.3
  - 2018: 4.3
  - 2019: 4.5
  - 2020: 4.5
  - 2021: 4.3
  - 2022: 4.4
  - 2023: 4.5
  - 2024: 4.7 and 4.8 (adjacent)
- Sovereign spreads:
  - EMBIG (bp): 124
  - 5Y CDS (bp): 108
- Change in gross public sector debt (cumulative projection):
  - Cumulative change shown as -2.3 in table excerpt.

### Policy recommendations and medium-term fiscal framework (from Appendix VI)
- Debt anchor and prudent level:
  - Under status quo without fiscal consolidation, staff simulations suggest a 15–20 percent probability that debt will exceed 55 percent of GDP.
  - To contain the probability breaching the anchor within 10 percent, the debt level in normal time should be lowered to 46 percent of GDP.
  - The authorities’ consolidation path reducing debt-to-GDP to 47 percent by 2024 is appropriate.
- Need to operationalize the fiscal anchor:
  - The fiscal deficit target is simple and communicable but not fully operationalized in annual budgets; clearer operational rules in a medium-term fiscal framework are necessary.
  - The nominal fiscal deficit target is procyclical and does not consider the cyclical position of the economy nor the variability of debt service and oil-related revenues.
- Consideration of an expenditure rule:
  - An expenditure rule could help avoid procyclicality, be easy to communicate, implement, and monitor.
  - Key features recommended:
    - Cap the growth rate of primary expenditure (allowing automatic stabilizers to operate).
    - Avoid expenditure rules in percent of GDP as they tend to be procyclical.
    - Calibrate the expenditure growth rate to be consistent with the authorities’ debt anchor under realistic GDP growth and financing cost assumptions; include a feedback mechanism to adjust expenditure growth if projected debt trajectory deviates from the anchor.
    - Base the growth rate of expenditure on the government’s strategic objectives; given relatively low tax revenue and need for higher spending, revenue mobilization is a priority and the expenditure rule should be compatible with realistic revenue projections.
- Illustrative staff scenario:
  - With trend nominal GDP growth at 7 percent and without additional revenue mobilization, expenditure growth would need to be 5 percent to achieve a fiscal deficit of 2 percent of GDP by 2024, which would reduce non-interest expenditure from 15.9 percent of GDP in 2020 to 14.5 percent in 2024 and undermine social and development objectives.
  - Alternatively, keeping primary expenditure broadly constant in percent of GDP while achieving a 2 percent deficit by 2024 would require revenue in percent of GDP to increase from 15.0 percent in 2020 to 16.1 percent in 2024—implying specified revenue mobilization measures are needed.

*Source: IMF staff.*

### 4.      Well-defined escape clauses and a formal accountability mechanism will support the

### 4.      Well-defined escape clauses and a formal accountability mechanism will support the effectiveness of the rule-based framework

### Fiscal framework: escape clauses, accountability, and compliance
- A credible and resilient fiscal framework should include well-defined escape clauses that allow flexibility to adjust to tail events. An escape clause should define:
  - (i) a limited set of events triggering the operation of the clause,
  - (ii) for how long fiscal policy can deviate from the targets, and
  - (iii) a correction mechanism to the targets after the operation of the escape clause.
- Effectiveness of fiscal rules hinges on strong compliance:
  - Greater fiscal transparency (e.g., obligations to publicly explain deviations from the fiscal rule) can increase political incentives for compliance by raising reputational costs associated with noncompliance.
  - An independent fiscal institution could be useful to analyze fiscal policy developments and alert to the risk of breaching fiscal rules.

### Assumptions and consolidation path
- Trend nominal GDP growth: 7 percent
- Consolidation path: Achieving fiscal deficit of 2 percent of GDP by 2024 (in line with the authorities' plan)

### Scenarios: key fiscal aggregates (preserve exact values)
- Baseline scenario (2020–2024):
  - Revenue: 15.0% (2020), 14.9% (2021), 14.8% (2022), 14.7% (2023), 14.7% (2024)
  - Non-interest expenditure: 15.9% (2020), 15.7% (2021), 15.6% (2022), 15.4% (2023), 15.4% (2024)
  - Fiscal balance: -3.0% (2020), -3.0% (2021), -2.9% (2022), -2.9% (2023), -2.9% (2024)

- Consolidation without revenue mobilization (2020–2024):
  - Revenue: 15.0% (2020), 14.9% (2021), 14.8% (2022), 14.7% (2023), 14.7% (2024)
  - Non-interest expenditure: 15.9% (2020), 15.5% (2021), 15.2% (2022), 14.8% (2023), 14.5% (2024)
  - Fiscal balance: -3.0% (2020), -2.8% (2021), -2.5% (2022), -2.3% (2023), -2.0% (2024)

- Consolidation with revenue mobilization (2020–2024):
  - Revenue: 15.0% (2020), 15.2% (2021), 15.5% (2022), 15.7% (2023), 16.1% (2024)
  - Non-interest expenditure: 15.9% each year (2020–2024)
  - Fiscal balance: -3.0% (2020), -2.8% (2021), -2.5% (2022), -2.3% (2023), -2.0% (2024)

- Status quo (without consolidation)
  - Expenditure growth in line with trend nominal GDP growth
  - Alternate assumption: Expenditure growth: 5 percent every year

*Sources: IMF staff calculations based on Public Debt Sustainability Analysis.*

---

### Financial Conditions Index (FCI): purpose, methodology, and Malaysia-specific findings
- Purpose and policy role:
  - FCIs provide consolidated information from a broad array of widely observable financial variables to indicate whether overall financial conditions are tightening or loosening relative to a base period.
  - FCIs can summarize impact of financial conditions on growth or measure tightening/loosening of conditions; used alongside key components for policy conduct.

- Methodology and construction:
  - Two broad methodological categories: weighted-sum approach and principal-components approach.
  - The staff FCI for Malaysia is based on MCM’s FCI published in 2017 GFSR, with updates for 2017–2018Q2.
  - Approach: Koop and Korobilis (2014) with time-varying parameter vector autoregression (Primiceri, 2005) and dynamic factors (Doz, Giannone, and Reichlin, 2011).
  - Model handles: (i) selection of financial variables, (ii) weights to average variables into an index, and (iii) relationship between the FCI and the macroeconomy.
  - Model parameters estimated on 20 financial indicators covering credit, foreign exchange, debt, and equity markets for 43 advanced and emerging market economies for 1990–2016; increase in the index means tightening financial conditions.
  - The model implements dynamic model selection/model averaging and constructs an FCI by averaging over many individual FCIs built using different variables and time-varying weights.

- Malaysia-specific observations and policy relevance:
  - FCI and components reflect Malaysia’s financial histories, showing periods of both tight and loose conditions consistent with anecdotal evidence and historic developments.
  - Significant easing in 2016–17, as portrayed by the estimated FCI, justified the tightening monetary policy bias in 2017 and the policy rate increase in January 2018; recent tightening would justify monetary policy remaining on hold.
  - Caveat: Forecasting power of FCIs may be limited as financial systems evolve and relevant variables may change; therefore, FCIs are most useful when examined alongside key component series.

---

### External Debt Sustainability Analysis (EDSA): trends, risks, and mitigation
- Recent trends and composition:
  - Malaysia’s external debt-to-GDP ratio rose by more than 16 percentage points of GDP between 2009 and 2018Q1, to about 70 percent of GDP (2009: 54¼ percent of GDP).
  - About one-half of this increase was due to the rise in portfolio debt liabilities between 2009 and 2013, particularly nonresident investment in Malaysia’s local-currency debt securities.
  - Since 2014, portfolio debt liabilities as a share of GDP have declined, but increases in other debt liabilities (interbank borrowings and intercompany loans) contributed to an increase in the overall debt ratio by about 7.2 ppts of GDP.
  - As of 2018Q3, external debt (U.S. dollar-valued) stood at 65.4 percent of GDP, down from 70.3 percent of GDP in 2018Q1—driven by reduced nonresident holding of local-currency-denominated government debt and partly offset by increased interbank borrowings and intercompany loans.
  - Compositional effects noted:
    - Foreign currency-denominated debt increased both in nominal value and as a share of total external debt.
    - Share of short-term debt reached 48 percent of total external debt in 2018Q2 and dropped slightly to 46 percent in 2018Q3.

- Medium-term projection:
  - Under staff’s baseline, external debt-to-GDP ratio is projected to fall to about 53 percent by 2023.
  - This path reflects sustained current account surpluses (excluding interest payments), robust growth, continued non-debt generating capital inflows, and an expected increase in external financing rates.
  - Share of short-term debt (original maturity) is assumed to gradually decline to about 45 percent of total external debt by the end of the medium term.

- Vulnerabilities and stress-test outcomes:
  - External debt is most vulnerable to exchange rate depreciation: a 30 percent real exchange rate depreciation could push external debt above 71 percent of GDP over the medium-term.
  - A permanent drop in the current account balance (excluding interest payments) could raise external debt above 66 percent of GDP in the outer years.
  - Other scenarios (deceleration in real GDP growth, rise in interest rates) would lead to moderate increases in external debt.
  - Impact of adverse shocks is mitigated by:
    - High share of ringgit-denominated external debt (more than 30 percent).
    - Large net inflows of interbank borrowings that are predominantly stable intragroup placements among banks (three-quarters of short-term interbank borrowings as of 2018Q3).

- Buffers and mitigation measures:
  - As of December 2018, gross official reserves stood at $101.4 billion, or about 70 percent of short-term external debt by remaining maturity.
  - Gross official reserves are adequate under the IMF reserve adequacy metric (ARA) (about 108 percent of the ARA metric).
  - Exchange rate flexibility, a moderate current account surplus, and the relatively large share of ringgit-denominated external debt will continue to serve as important buffers.
  - Banks’ foreign currency debt is subject to robust internal controls and policies; intercompany FX loans are usually available on concessional terms, per the authorities.

### Selected external-debt statistics and indicators (preserve exact table values where shown)
- Total external debt (staff estimate): 65.4 (2018Q3); 70.3 (2018Q1); recent values include 63.1 (2014), 65.7 (2015), 68.7 (2016), 69.1 (2017), 67.9 (2018)
- Medium- and long-term: 35.3 (2018Q3)
- Short-term (original maturity): 30.1 (2018Q3)
- By currency (memorandum): Local currency denominated 30.6 (2018Q3); Foreign currency denominated 69.4 (2018Q3)
- Gross official foreign exchange reserves (US$ billion): 103.0 (2018Q3); previous values include 104.8, 107.8, 102.4, 94.5, 95.3, 115.9 across earlier dates
- Interbank borrowings (as share of GDP): increased from 12.6 to 16.2 percent since 2014 (noted contribution to overall debt rise)
- Projected external debt-to-GDP under baseline: 53 (2023)
- Stress test outcomes (selected):
  - 30 percent real depreciation → external debt about 71 percent of GDP
  - Permanent CA shock → external debt above 66 percent of GDP
  - Growth shock example: baseline 53, scenario 57 (growth shock result shown in figure captions)

*Italic source: IMF staff report (Malaysia): excerpts from sections on fiscal framework, Financial Conditions Index, and External Debt Sustainability Analysis.*

### Appendix IX. Foreign Exchange Market Considerations

### Appendix IX. Foreign Exchange Market Considerations

### A. Introduction
- Authorities prioritize development of onshore financial markets while seeking to curtail ringgit activity in offshore markets to limit short-term or speculative activity perceived to increase market stability risks.
- This appendix assesses foreign exchange market developments incorporating feedback from a July 2018 staff visit to Malaysia; focus is on Capital Flow Management Measures and foreign exchange market activity.

### B. BNM Market Development Initiatives
- Financial Sector Blueprint 2011–2020 guides market development with a core belief that financial markets should serve real economy participants and favor onshore ringgit-based activity.
- Four specific Financial Sector Blueprint recommendations regarding the foreign exchange market:
  - allow corporations to actively manage foreign currency exposures arising from overseas operations;
  - permit institutional funds and retail investors to trade in foreign currencies subject to safeguards;
  - allow financial institutions to offer internet and electronic trading platforms for corporations and retail investors;
  - permit participation by non-residents in the onshore foreign exchange derivatives market without underlying trades or investments, subject to safeguards.
- Implemented/developed measures and infrastructure:
  - improved credibility of the foreign exchange reference rate by using traded rates covering most of the day;
  - allowing residents to hedge foreign currency exposures up to net MYR position of RM6 million per bank against 5 major currencies (USD, CNH, GBP, EUR and JPY) without documentary evidence, subject to declaration of hedging intent to the licensed onshore bank;
  - allowing dynamic hedging for registered foreign institutional investors to hedge up to 100 percent of their underlying MYR assets and manage an additional 25 percent of FX exposure, with settlement of forward transactions on gross or net basis;
  - extending official trading hours by one hour to 6pm;
  - allowing short-selling of MGS and MGII;
  - implementing “RENTAS Segregated Securities Account (SSA) Initiative” up to fund manager level, replacing omnibus account blocking (all custodians comply except Euroclear, which has an extension);
  - adopting Legal Entity Identifier (LEI) as a unique identifier, in line with EU’s MIFID II practice for reporting financial market transactions.

### Box: Financial Market Participants’ Views (summary from July 2018 meetings)
- Common themes:
  - Late-2016 changes were implemented with limited advance notice and clarity, but participants have adjusted and compliance is not an issue.
  - Administrative burden and compliance costs are non-negligible but manageable.
  - Domestic markets are functioning reasonably well.
- Offshore participants were more negative about late-2016 tightening; large fixed income investors linked decline in Malaysian bond weighting in the JPMorgan EMBI from over 10 percent to 5.6 percent partially to December 2016 measures.
- Onshore banks reported:
  - decline in ‘speculative’ trading, good liquidity, tight bid/offer spreads;
  - most interbank activity conducted through three voice-brokers; moderate support for electronic matching;
  - BNM interventions seen as providing liquidity when conditions are thin or for large transactions; BNM not seen as defending an exchange rate level.
- Corporates reported generally acceptable liquidity and cost of doing business; noted issues:
  - strict interpretation of domestic borrowings captured corporate credit cards and activated limits on foreign currency investment, causing regional treasury units to be based outside Malaysia;
  - inability to manage FX risks across group entities where export and import activities are in separate companies, making mandatory conversion requirements more binding than intended.
- BNM indicated it welcomes applications for approval for foreign currency intragroup payments in such cases.

### C. The Regulatory Environment
- Regulatory regime is complex and motivated by desire to curtail offshore ringgit activity and other activity deemed ‘speculative’ (e.g., offshore ringgit NDF market).
- Late-2016 measures assessed as capital flow management measures under the Fund’s Institutional View included:
  - tightened enforcement (November 2016) requiring attestations that banks do not engage or facilitate transactions in the offshore ringgit NDF market (long-standing measure limiting onshore banks from engaging/facilitating offshore activities);
  - requirement for conversion of 75 percent of export proceeds (December 2016), increasing cost of investment abroad in FX and thus limiting capital flows;
  - extension to exporters (December 2016) of a pre-existing measure limiting investment in FX assets by residents with domestic ringgit borrowing (exporters had been previously exempted).
- April 2017 easing steps:
  - simplified and streamlined procedures for registered non-resident investors to hedge up to 100 percent of their ringgit exposures, up from 25 percent, and take an additional 25 percent MYR exposure on top of their underlying asset;
  - residents allowed to hedge up to net MYR position of RM6 million per bank against 5 major currencies (USD, CNH, GBP, EUR and JPY) without documentary evidence, subject to declaration of hedging intent;
  - since August 2018, exporters allowed to retain export proceeds in a Trade Foreign Currency Account (Trade FCA) to meet their 6 months foreign currency obligations (including import and foreign currency loan repayment), reducing conversion-reconversion practices.

### D. Market Developments
- Late-2016 measures markedly reduced turnover in the NDF market with limited activity moving onshore.
- Total spot and hedging activity (spot, forward and NDFs) fell from around US$150 billion per month to US$105 billion per month; activity has steadily increased since then driven by increased onshore spot activity.
- Onshore forward activity has been increasing only marginally despite some relaxations; overall, activity in longer-dated risk markets (NDF and onshore forwards) has declined while spot activity has increased.
- Ringgit volatility:
  - has remained near the middle of the pack of comparator countries;
  - after spiking in mid-2015, volatility returned close to levels of neighboring countries;
  - correlation between USD/MYR and oil was -0.94 pre-December 2016 and has since fallen to -0.79.
- Market resilience proxied as volatility per unit of currency traded:
  - resilience generally improved from end-2015, with a notable dip after end-2016 measures that has since been recovered;
  - assessment caveat: lack of central bank intervention data complicates resilience analysis because interventions lower volatility and increase traded volumes, which can overstate resilience.
- Financial market turbulence after the 2016 US election led to capital outflows from Malaysia, most pronounced in MGS and also noticeable in MGII; a rebound in non-resident holdings appears to coincide with April 2017 liberalization of dynamic hedging.
- Onshore market growth and relative performance:
  - BNM’s annual report reveals a 20 percent increase in onshore foreign exchange activity to US$2.4 trillion; majority composition: swaps 51 percent, spot 41 percent.
  - share of top ten banks in the market fell from 81 percent in 2016 to 77 percent in 2017.
  - In foreign exchange spot turnover as a percentage of GDP, Malaysia is at the median (0.5 percent) of a group of emerging market countries.
  - For forwards, swaps and options, Malaysia is materially above the median (2.3 percent versus a median of 1.0 percent for the group).

### E. BNM Intervention and Reserve Coverage
- BNM’s stated objectives: smoothing volatility and supporting market liquidity; market participants concurred that BNM is not defending an exchange rate level.
- Lack of intervention data makes deducing BNM’s reaction function difficult; USD/MYR has moved in a wide range over recent years.
- Reserve adequacy:
  - Assessed against the Fund’s reserve adequacy framework (ARA), BNM reserves were about 108 percent of the relevant metric in December 2018.
  - Improvement in ARA coverage (September 2016) stemmed from a substantial fall in the metric after the exchange rate regime was reclassified to ‘floating’.
  - ARA is a gross metric; unencumbered reserves are lower given BNM’s net USD short forward position of $21.7 billion in November 2018.
  - BNM publishes data on its forward book monthly with a one-month lag.

### F. Concluding Observations
- Progress: BNM has made important progress in developing onshore financial markets and the foreign exchange market, including market micro-structure, code of conduct, and market infrastructure.
- Potential further steps: additional improvements could yield lower transaction costs, increased liquidity and greater resilience.
- Trade-offs and policy stance:
  - Authorities limit participation by entities with short-term trading horizons and opt for measures enabling closer monitoring and stronger regulation.
  - Excluding segments (e.g., NDF participants) with heterogeneous risk profiles reduces liquidity in good times and resilience when shocks hit; presence of NDF market can moderate exits/entries during shocks.
  - The authorities appear to have placed themselves at a point along the regulation continuum where they prioritize easier monitoring and regulatory control over broader participation and short-term volatility considerations.
- Overall assessment: markets appear to be functioning reasonably well with narrow bid/offer spreads based on preliminary resilience assessment, domestic feedback, and comparisons with peer countries.

*Source: Appendix IX. Foreign Exchange Market Considerations (July 2018 mission feedback and IMF staff assessment).*

### 4.      The macroprudential measures adopted by the authorities have contributed to a

### 4.      The macroprudential measures adopted by the authorities have contributed to a

### Housing market effects
- The measures contributed to a slowdown in activity in the housing market, including by non-residents.
- Housing price growth decelerated to 3 percent in 2018Q1.
- Growth of the MHPI is now below its long-term average of 6 percent during 2001-17.

### Nonresident transactions and trends
- The number of nonresident transactions in the real estate market more than halved in 2015.
- Nonresident transactions dropped by another 38.9 percent in 2016, before picking up again in 2017.
- By 2017, nonresidents only accounted for 792 transactions in the property market.
- Nonresident activity in the property market rose by 12.2 percent in 2017 and by 8.5 percent in 2018H1.

### Macroprudential and capital-flow management measures affecting foreign buyers
- Measures assessed as CFM/MPMs under the Fund’s Institutional View on capital flows.
- Minimum price floors for acquisition of property by foreigners:
  - RM250,000 per unit enforced on June 30, 2009.
  - Raised to RM500,000 per unit effective January 1, 2010.
  - Raised to RM1 million effective January 1, 2014.
- State measures (example: Penang):
  - Since July 1, 2012, Penang restricted foreign interest to property purchase above RM1 million in Penang and RM2 million for landed property on the island.
  - In 2015, non-citizens limited to properties above RM2 million for landed properties and RM1 million for strata-titled properties on the island.
  - For the mainland of Penang, the floor price maintained at RM1 million for landed properties and reduced to RM500,000 for strata-title properties.
  - Penang State government introduced a 3 percent approval fee for all foreign purchase of properties in the state at that time.
  - The share of residential property transactions in Penang was 7.4 percent of the national real estate transactions.
- Rationale: authorities view macroprudential measures aimed at nonresidents as a necessary signal to property developers to encourage a rebalancing of supply towards the more affordable range, thus reducing the probability of large price adjustment (and financial stability implications) in the future.

### Housing supply and related measures
- Measures to support affordable supply include:
  - Establishment of a single entity for affordable housing (announced in July 2018).
  - Enactment of a Residential Tenancy Act (announced in the Federal Budget 2018).

### Fiscal governance and anti-corruption vulnerabilities
- Fiscal governance vulnerabilities identified:
  - Reliance on off budget spending, including government guarantees and public-private partnerships (PPPs).
  - Weaknesses in managing large infrastructure projects and procurement systems.
  - A budget process that could be more transparent.
- Malaysia ranks low compared to the OECD average in the 2017 World Bank Benchmarking PPP Procurement, especially on:
  - (i) needs assessment, call for tender, and bid preparation;
  - (ii) bid opening, evaluation and award;
  - (iii) payments to suppliers.
- The Open Budget Survey 2017 suggested:
  - Malaysia provides the public with limited budget information;
  - Few opportunities for public engagement in the budget process;
  - The legislature and supreme audit institution provide weak oversight of the budget.

### Corruption indicators and public perception (as of end 2017)
- Malaysia performed worse than the OECD average in:
  - WGI: Control of Corruption, 2017 (normalized between 0 and 1; higher is better).
  - Maplecroft: Anti-corruption Institutions, 2017.
- According to Transparency International, in 2017:
  - 60 percent of respondents perceived corruption to be on the rise and gave poor ratings on the previous government's efforts to fight corruption.
- Inefficient bureaucracy and corruption were among the six most problematic factors in doing business in Malaysia according to the 2017 World Economic Forum executives survey.

### Government initiatives to address governance weaknesses and corruption
- Institutional and governance reforms undertaken or announced:
  - Mid-Term Review of the Eleventh Malaysia Plan reoriented priorities toward transparency and public services efficiency.
  - National Centre for Governance, Integrity and Anti-Corruption (GIACC) established to develop a national anti-corruption plan (expected launch in the first quarter of 2019).
  - Special Cabinet Committee against Corruption (JKKMAR) formed and meets monthly.
  - Special Investigation Committee on Governance, Procurement, and Finance formed to audit existing procurement contracts in line ministries.
  - Pre-qualified open tender enforced; single-sourced tenders prohibited.
  - Special Task Force on 1MDB formed to track asset recovery and criminal investigations.
  - Institutional adjustments:
    - The Prime Minister no longer holds the Minister of Finance portfolio.
    - Consideration of vesting with a parliamentary committee the responsibility for high level appointments (e.g., Attorney General, head of the MACC and judges).
    - Economic Planning Unit moved from the PM office to a new Ministry of Economic Affairs (MEA).
    - PPP unit moved under MOF control; existing PPP framework under review by MOF and MEA.
    - Work on strengthening legal framework and SOEs’ structure to improve fiscal management and governance.

### Legislative and institutional reforms needed
- Constitutional and legislative reforms required to anchor changes:
  - Independence of the MACC (appointment of the Chief Commissioner, securing its own yearly operational budget, and wider reporting of findings) and separation of prosecution powers from legal advisory powers require constitutional changes and a 2/3 approval in Parliament.
  - Legislative reforms needed on freedom of information, political financing, and declaration of assets.
- Public investment management improvements recommended:
  - Establish an independent appeals panel for procurement and publish an annual report from this panel.
  - Update regulations to establish a rigorous process for appraisal, pre-approval and approval of projects to avoid premature funding decisions.
  - Establish comprehensive reporting of PPPs and their associated risks.
  - Develop a medium-term fiscal framework reconciling the medium-term resource envelope with medium-term estimates of operational and development expenditure, including required funding to complete projects.
  - Avoid future tax refund arrears, improve financial oversight of SOEs and publish a more detailed set of accounts, and publish a fiscal risks statement.

### Data and statistical issues (as of January 2019)
- General: Data provision is broadly adequate for surveillance, but further efforts needed to improve statistics for consolidated general government and public sector.
- National accounts:
  - DOSM publishes annual and quarterly GDP with base year 2010, based on the 2008 SNA.
  - Quarterly data released about one and a half month after the reference quarter.
- Price statistics:
  - CPI and PPI available timely; CPI basket updated from January 2016 using Household Expenditure Survey 2014.
- Government finance statistics:
  - Need for adoption of accrual reporting and improved timeliness, detail, and availability of data on NFPEs and state and local governments.
  - Need to disseminate more detailed data on non-listed NFPEs’ assets and liabilities and financing.
- Monetary statistics:
  - MFS reported timely and broadly conform to Fund needs; SRFs 1SR and 2SR reported with a lag of about one month.
  - Need to improve institutional coverage, sectorization, and classification and valuation of financial instruments.
  - Expand coverage to include insurance corporations, pension funds, and other financial intermediaries.
- Financial Soundness Indicators:
  - BNM reports the 12 core FSIs and one of the 13 encouraged FSIs for deposit taking institutions; FSIs reported with a lag of one quarter.
- Balance of payments:
  - DOSM compiles and publishes quarterly BOP estimates in accordance with BPM6 and the SDDS; quarterly data released about one and a half month after the reference quarter.
  - Authorities improved BOP reporting in 2018, but persisting large negative net errors and omissions need to be addressed.
  - International investment position data on other investment—assets and liabilities—are reported only in aggregate form.
- Malaysia subscribes to the Special Data Dissemination Standard (SDDS) and uses a timeliness flexibility option for general government operations (within six quarter lags after the end of reference year).

*Source: IMF staff report excerpts from the Malaysia 2019 Article IV consultation informational annex and Appendix XI.*

### Introduction

### Introduction

### Authorities' opening remarks and policy stance
- Authorities express appreciation to the IMF team for the comprehensive and constructive dialogue during the 2019 Article IV consultation.
- Staff’s assessment is viewed as positive on Malaysia’s economic and financial outlook and the appropriateness of the current macroeconomic policy setting.
- In an environment of heightened uncertainty and downside risks in the global economy, resilience of the Malaysian economy is underpinned by:
  - strong macroeconomic fundamentals; and
  - a robust financial system.
- Appropriate policy frameworks, timely policy responses and ample buffers are in place to further reinforce the economy’s resilience.
- Authorities remain vigilant over near-term risks while committed to medium-term structural reforms to ensure inclusive and sustainable growth.
- As a highly open economy with a financial system integrated with the international financial system, Malaysia is susceptible to external influences and spillovers.
- Authorities are committed to exchange rate flexibility as a first line of defense against shocks.
- A broad suite of policies remain available; effectiveness of policies is continuously assessed as conditions evolve.
- Authorities welcome staff’s recognition of positive outcomes from foreign exchange measures implemented by the authorities.
- Authorities urge staff to:
  - offer more constructive policy advice, such as alternative measures to better address key challenges; and
  - move away from rigid adherence to the Fund’s prescriptive set of policy advice.
- Policies should be designed in the context of the situation.

### Latest economic developments and outlook
- Growth performance:
  - In the first three quarters of 2018, the economy recorded growth of 4.7%.
  - This was a moderation from the 5.9% growth in 2017.
  - 3Q 2018: 4.4%.
  - 4Q 2018: growth is expected to rebound, supported partly by the on-going recovery in commodity output.
  - For 2018 as a whole, the Malaysian economy is on track to expand at around the official forecast of 4.8%.
  - At close to 5%, and amid global trade tensions and tighter financial conditions during the year, growth remains highly respectable.
- Inflation and prices:
  - Headline inflation averaged at 1.0% in 2018.
  - Factors: zerorisation of the Goods and Services Tax (GST) and the fixing of retail fuel prices.
- Labour market:
  - Labour market conditions were favourable, underpinned by firm employment and steady income growth.
  - Higher net employment gains were mainly driven by high- and mid-skilled workers.
- External sector:
  - Malaysia’s current account is expected to continue to register a surplus in 2018.
  - 1Q-3Q 2018: 2.1% of GDP.
  - 2017: 3.0% of GDP.
  - Positive exports growth supported the external position.
  - Highly volatile short-term capital flows, driven mainly by global uncertainties, were ably intermediated by deep capital markets and a broad base of domestic institutional investors.
- Outlook for 2019:
  - Growth projected to remain on a steady growth path driven by:
    - gradual recovery in commodities output (supporting manufacturing sector and trade performance); and
    - new production facilities particularly in the petrochemicals industry.
  - Demand side:
    - Private sector spending will remain the anchor of growth amid continued rationalisation of public sector expenditure.
    - Private consumption is expected to normalise following the lapse of one-off factors in 2018, but remain firm underpinned by continued income and employment growth.
    - Government measures such as the minimum wage increment, cash transfers and targeted fuel subsidy will support household spending among the lower-income household.
    - Investment activities will remain supported by on-going multi-year infrastructure projects and sustained capital spending by both domestic- and export-oriented firms.
  - Inflation in 2019:
    - Expected to average moderately higher, with the impact of the consumption tax policy on headline inflation lapsing towards the end of the year.
    - Trajectory of headline inflation will be dependent on global oil prices given the resumption of the managed float fuel pricing mechanism.
    - Underlying inflation is expected to remain contained in the absence of strong demand pressures.
  - External outlook:
    - Exports are expected to record a more moderate but positive growth, in line with expectations of slower global growth and trade momentum.
- Medium-term fundamentals:
  - Diversified export base in terms of products and markets would partially mitigate impact from slower global growth and trade.
  - Current account is expected to remain in surplus, driven by a sizeable goods surplus sufficient to offset services and income deficits.
  - Deep and diversified financial markets and strong economic fundamentals will continue to intermediate capital flows.
  - Broad base of domestic institutional investors (banks, insurance companies, and provident and pension funds) will mitigate excessive volatility.
  - Exchange rate flexibility with adequate levels of international reserves remain an important tool against external shocks.

### Risks and financial stability
- Growth risks:
  - Risks to the growth outlook are tilted to the downside and stem mainly from external sources.
  - As a small open economy, Malaysia will be affected particularly by intensification of the trade conflict and slower-than-expected growth in trading partners.
  - Notwithstanding these risks, strong fundamentals and the diversified economy will help Malaysia weather downside risks.
- Banking and corporate sector resilience:
  - Macro- and micro- level stress tests conducted by the authorities and individual banking institutions affirm Malaysian banks’ strong capacity to withstand extreme macroeconomic and financial shocks, hence presenting low downside risks to growth.
  - Vulnerabilities associated with banks’ and corporates’ external debt are largely contained considering the risk profile and activities underpinning such exposures.
- Household sector:
  - Staff assessed household debt as elevated; authorities view that risks to financial stability from household indebtedness have receded amid:
    - sound underwriting standards;
    - risk management practices; and
    - loan affordability assessments.
  - Household debt growth has moderated towards a more sustainable rate, lower than that of income.
  - Household debt-to-GDP ratio has been declining, a trend sustained since 2015.
  - Increase in house prices has moderated in recent years to be in line with domestic fundamentals.

### Fiscal policy
- Fiscal policy conduct centers on strengthening the public finance position while supportive of sustainable and inclusive economic growth.
- Authorities have adopted a prudent fiscal management approach aiming to:
  - build healthy fiscal buffer; and
  - ensure debt remain at sustainable level.
- Authorities are committed to instill efficient and good governance in fiscal policy management.
- Measures initiated to strengthen transparency and governance in fiscal management include efforts to achieve greater expenditure optimization and revenue enhancement.
- The inaugural publication of the Fiscal Outlook and Federal Government Revenue Estimates in November 2018 signified ongoing efforts to promote better transparency and accountability in Malaysia’s public finance management.
- This is complemented with the [text ends].

*Source: Introduction (1mysea2019001) — 1mysea2019001 - Introduction*

### introduction of the Medium-Term Fiscal Framework (MTFF) which outlines the 3-year fiscal

### introduction of the Medium-Term Fiscal Framework (MTFF) which outlines the 3-year fiscal

### Medium-Term Fiscal Framework, fiscal governance, and public finance reforms
- Introduction of the Medium-Term Fiscal Framework (MTFF) outlining the 3-year fiscal consolidation plan and the indicative expenditure ceiling for the 2019-2021.
- Work underway to introduce the Fiscal Responsibility Act (FRA) by 2021 to strengthen the current fiscal governance framework.
  - The FRA will strengthen the conduct of fiscal policy by enhancing fiscal rules and principles, transparency and accountability while ensuring macro stability in the medium and long term.
- Introduction of the Government Procurement Act to enhance fiscal governance and improve efficiency of public spending.
- Establishment initiative of a Debt Management Office to enhance debt management operations and intensify fiscal risk assessment.
- Implementation priorities to improve public finance management:
  - Improving the budgeting system.
  - Enhancing procurement management.
  - Strengthening performance management, monitoring and evaluation framework.
  - Expediting implementation of the accrual accounting system to enhance transparency and full disclosure of government’s assets and liabilities.

### Expenditure optimization and revenue measures
- Authorities undertaking a rigorous expenditure optimization exercise to minimize fiscal leakages while ensuring public programs and projects continue to support growth.
  - Key measures to improve spending efficiencies:
    - Streamlining the structure and functions of ministries and agencies.
    - Ceasing low priority programs and projects with low multiplier effect to the economy.
    - Improving Government procurement policy through strengthening procurement processes and implementing wider use of open tender.
  - The Public Finance Committee established to monitor progress and ensure effective implementation.
- Revenue enhancement:
  - Tax Reform Committee set up to carry out comprehensive review of the Malaysian tax system, including reviewing tax incentives and exploring new sources of sustainable revenue.
  - Main tasks: narrow the tax gap and improve tax efficiency to increase tax buoyancy.
  - Committee expected to provide recommendations to the Government for consideration and implementation.

### Monetary policy stance
- Authorities welcome staff view that monetary policy should continue to be geared towards domestic stability and that the monetary policy framework has performed well.
- Monetary Policy Committee (MPC) actions:
  - Raised the Overnight Policy Rate (OPR) by 25 basis point to 3.25% in January 2018.
  - OPR was maintained for the remainder of the year.
  - MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.

### Adjusting to external shocks and exchange rate policy
- External pressures in 2018:
  - Large non-resident portfolio outflows and exchange rate depreciation pressure driven primarily by external developments.
  - Ongoing external uncertainties could potentially continue into 2019.
- Authorities’ view:
  - Exchange rate flexibility remains a key policy to enhance resilience to capital outflows and help adjustment to external shocks.
  - Foreign exchange market operations are limited to ensuring orderly market conditions, especially during large and volatile capital flows.
  - Complementary actions: enhance depth and liquidity of the onshore market, strengthen underlying fundamentals of the economy and financial system, and expand hedging flexibilities for domestic market participants.
- Resilience and policy stance:
  - Gradual review of December 2016 measures in line with evolving market conditions; measures may be retained if effective in managing risks to the financial system and macroeconomic stability.
  - Authorities request staff to suggest policy alternatives to meet objectives rather than only advising removal of measures.

### International reserves and external debt metrics
- International reserves:
  - USD101.7 billion remain adequate, sufficient to finance 7.3 months of retained imports and 1.0 times short term external debt as at 15 January 2019.
  - Assessment of reserve adequacy should account for high degree of reserves decentralisation and liquid external assets held by the private sector.
  - Domestic corporates and banks account for about three-quarters of Malaysia’s external assets.
- External debt:
  - External debt-to-GDP ratio declined from 70.3% in 1Q 2018 to 65.4% in 3Q 2018.
  - Mitigating factors for external debt resilience:
    - About one third of external debt is denominated in ringgit.
    - Three-quarters of foreign-currency external debt subject to Bank Negara Malaysia’s prudential requirements and approval framework.
    - Intercompany loans (mostly FDI) generally on flexible and concessionary terms (no fixed repayment schedules and zero or much lower interest rates).

### December 2016 measures and market outcomes
- Effectiveness acknowledged:
  - Prior to December 2016, offshore NDF market raised USDMYR 1-month implied volatility to 12.0%.
  - Volatility moderated to an average of 4.6% (regional currencies SGD, THB, IDR, PHP, CNY at 5.5%).
- Market volumes and liquidity:
  - Spillover impact of the MYR NDF market remained contained with subdued daily volume of USD0.6 – 0.7 billion per day, from an average of USD2.9 billion in 2016 (High: USD6.9 billion).
  - Onshore foreign exchange trading volume recorded a daily average transaction volume of USD10.6 billion since December 2016.
  - Domestic liquidity improved, reflected in narrowed USDMYR bid-ask spread and net inflows from resident trade contributing to more balanced foreign currency supply and demand.
- Policy adjustments:
  - Enhancement to export conversion measure in August 2018: exporters allowed to automatically retain export proceeds with onshore banks to meet up to 6 months’ foreign currency obligations without first converting proceeds into ringgit.
  - Streamlining of investment abroad rules described as prudential in nature and not distortive.

### Financial sector resilience and sectoral risks
- Overall assessment:
  - Staff assessment that Malaysian financial sector is resilient and risks to financial stability remain broadly contained is welcomed.
  - Ongoing efforts to enhance operational resilience and crisis preparedness, including strengthening the resolution framework and contingent resolution funding facilities in line with the Financial Stability Board’s Key Attributes.
- Non-bank financial institutions (NBFIs):
  - NBFIs intermediate about 50% of financial system assets.
  - Contagion risks from NBFIs remain contained; most regulated by BNM, Securities Commission Malaysia, Malaysia Co-operative Societies Commission, or subject to oversight by government ministries.
  - Institutional arrangements support inter-agency cooperation and strengthened reporting frameworks for systemic NBFIs.
- Corporate sector and household vulnerabilities:
  - Businesses maintain healthy debt servicing capacity and liquidity; overall corporate debt grew in line with domestic economic expansion and overall quality of business borrowings remains high.
  - Some sectors (oil and gas, real estate) face persistent headwinds; bank exposures to these sectors (excluding end-financing for property) remain small.
  - Household sector metrics:
    - Financial assets and liquid financial assets of households are 2.1 times and 1.4 times of debt, respectively.
    - Ratio of aggregate impaired loans to total outstanding household debt for both banks and non-banks remained low and stable.
  - Vulnerable household group (monthly earnings below RM3,000):
    - Proportion of exposures to this segment declined to 18.3% of total exposures of the banking system as at end-June 2018 (2013: 25.1%).
    - Bulk of new loans approved to this segment with prudent debt service ratios below 60%.
    - Authorities note that significant income, interest rate or cost of living shocks could affect ability to service debt.
    - Internal simulations (Financial Stability and Payment Systems Report 2017) suggest potential losses to the banking system from household sector exposures between RM66 billion and RM104 billion under stressed scenarios; manageable given banks’ high excess capital buffers (RM124.5 billion).
- Property market and macroprudential measures:
  - Authorities vigilant against property market risks; mortgages account for significant portion of household debt.
  - Mitigants:
    - Prudent loan-to-value (LTV) measures generally below 80%.
    - Low and reducing share of investment borrowers.
    - Sensitivity analysis indicates banks have sufficient capital buffers to absorb potential losses from up to a 50% decline in property prices and spillovers to dependent business sectors.
  - Macroprudential and fiscal measures since 2010 have effectively contained household indebtedness and rising property prices; demand management measures complemented by efforts to increase supply of affordable houses.
  - Authorities consider current macroprudential measures sufficient and note existing regulatory tools:
    - Differentiated capital charges for loans with higher LTV.
    - Review of provisioning practices considering LTV as a risk driver.
    - Strengthened requirements on credit risk management for construction sector introduced in January 2018 to set expectations for robust assessments of financing proposals for new property development.
  - Authorities disagreed with staff recommendation to phase out differentiated RPGT and floor price for non-residents’ purchase of properties, viewing these measures as relevant to ensure house price growth reflects domestic fundamentals.

### AML/CFT and anti-corruption measures
- Cash Threshold Reporting (CTR) threshold reduced from transactions amounting to RM50,000 (approximately USD12,000) and above, to RM25,000 and above in a day.
- Measures based on 2017 National Risk Assessment (NRA) and enforcement cases indicating cash widely used by criminals.
- Malaysia committed to five-year National AML/CFT Strategic Plan objectives.
  - As at 2018, 82% of the 74 action and sub-action plans have been reported as either completed or currently in progress within the stipulated timeline.
- Anti-corruption reforms:
  - MTR 11MP and related commitments to strengthen governance and public institutions.
  - Plans to establish parliamentary select committee to endorse appointments to key bodies (Malaysia Anti-Corruption Commission (MACC), Election Commission (EC), National Audit Department, Judicial Appointments Commission) and make MACC and EC answerable directly to Parliament.
  - Transform MACC into a fully independent body and continuously review and strengthen anti-corruption legislation (MACC Act, Witness Protection Act, Whistleblower Protection Act).
  - Launch of National Anti-Corruption Plan (NACP) 2019-2023 covering 6 strategies including increasing efficiency and transparency in public procurement and institutionalising credibility of law enforcement agencies.

### Reforms for sustainable and inclusive growth (MTR 11MP)
- Mid-Term Review of the 11th Malaysia Plan (MTR 11MP) tabled and approved by Parliament in October 2018 outlines medium-term strategies and reform measures focusing on strengthening the economy, public institutions and governance.
- Key priorities:
  - Strengthening sectoral growth, particularly services and manufacturing, and promoting private investment.
  - Accelerating improvement in education and human capital development to increase productivity.
    - Emphasis on quality, equity, access, unity, efficiency and inclusivity of education.
    - Focus on science, technology, engineering and mathematics education and higher order thinking skills for basic education.
    - Governance of Institutions of Higher Education and stronger industry-academia linkages to improve quality of graduates.
    - Continuous review of Technical and Vocational Education programmes in collaboration with industry.
  - Improve business climate through enhancing delivery of public services, reducing bureaucratic red tape and provision of quality infrastructure.
  - Intensify adoption of Good Regulatory Practices, expanded to sub-national or state level.

### Concluding remarks
- Malaysia’s diversified economy, sound fundamentals and strong financial system have strengthened resilience to withstand shocks.
- Robust policy framework and pre-emptive, pragmatic policy approach have minimised risks and vulnerabilities.
- Authorities remain vigilant to adverse developments and potential risks and consider they have adequate policy buffers to respond in a timely and effective manner to preserve macroeconomic and financial stability and achieve sustainable and inclusive growth.
- Authorities call for the Fund to play a greater role in reducing risks from disruptive cross-border spillovers.

*Source: 1mysea2019001 - introduction of the Medium-Term Fiscal Framework (MTFF) which outlines the 3-year fiscal*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1mysea2019001.pdf_