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### INTRODUCTION — Overview
- Following a strong recovery from the downturn of 2008−09, economic momentum in Malaysia is beginning to ease against a weakening external environment.
- Macroeconomic policies moved toward a less accommodative stance from early 2010, helping keep inflation contained and stabilizing the rapid post-crisis buildup in public debt.
- Key medium-term challenge: raising potential growth and reducing income disparities through sustained structural reforms anchored around medium-term fiscal consolidation.
- Policy considerations to raise inclusiveness: increasing pension benefits and introducing an unemployment insurance scheme.

### Economic context — Growth, inflation, and outlook
- Economic activity:
  - Private consumption growth remained strong through 2011:Q3 due to robust employment and wage growth.
  - Manufacturing export growth has weakened; commodity exports have remained resilient.
  - Forward-looking sentiment indicators suggest less optimistic near-term prospects.
- Output gap and inflation:
  - Core inflation: 2.5 percent.
  - Headline inflation expected to average around 2.5 percent.
  - Under the baseline, core inflation projected to fall below 2 percent in 2012 as the output gap turns mildly negative.
- Staff baseline growth projections and external balances:
  - Growth for 2012 (Proj.): 4 percent.
  - Growth for 2013 (Proj.): 4.5 percent.
  - Current account surplus narrowed to 10.8 percent of GDP (expected).
  - Demand for exports expected to remain soft, leading to sluggish private investment and industrial production.
  - Impact of Thailand floods expected to be limited; temporary supply chain disruptions likely offset by a shift in production to Malaysia.
- Risks to the outlook:
  - Risks tilted to the downside.
  - Major downside scenarios: slower recovery in advanced economies; sharp escalation of global financial stress; prolonged supply chain disruptions from Thailand floods.
  - Domestic downside risks: households unable to sustain consumption due to high indebtedness; deterioration in credit quality; tightening of financing conditions.
  - Upside: swift resolution of the European crisis and faster growth in advanced economies.

### Financial sector, household indebtedness, and macroprudential measures
- Household indebtedness and credit composition:
  - Gross household debt rose by 12.3 percentage points to 76 percent of GDP during 2008−2011.
  - Overall household indebtedness to GDP ratio: 77.6 percent in 2011:Q3 (source respective sections).
  - Mortgage lending accounts for around half of total household debt.
  - Unsecured personal loans constitute 16 percent (around 15 percent noted elsewhere) of household debt.
  - Banks’ credit to households through personal financing and credit cards represent less than 10 percent of overall banking system loans.
- Financial strength and buffers:
  - Financial assets amount to 2.3 times total household debts.
  - Household deposits account for 32 percent of financial assets and 75 percent of household debt.
  - Net impaired loan ratio for the household sector: 1.8% at end-2011.
- Banking system soundness indicators:
  - Average capital adequacy ratio (CAR): 14.6 percent (also reported as high CAR around 14.6 percent of the banking system as of end-September 2011).
  - Core (Tier 1) capital: 12.5 percent (12.4 percent reported June 2011 in tables).
  - Nonperforming loans (NPLs): around 2 percent (2.9 percent June 2011 in tables; trend downward).
  - Return on assets: 1.7 (2011).
  - Loan-deposit ratio: 82.5 percent (chart/table series: 81.8–81.3 range).
  - Liquid assets as a share of total assets: around 13.8 percent.
- Prudential and supervisory actions by Bank Negara Malaysia (BNM):
  - November 2010: loan-to-value (LTV) restrictions on third and further residential mortgages (maximum LTV of 70 percent on third and subsequent financing).
  - March 2011: guidelines to banks on credit card debt (including income eligibility criteria and limits on number of cards).
  - November 2011: guidelines requiring consistent measurement and assessment of retail borrowers’ debt service-to-income ratios (DTI).
  - Higher risk weights of 100 percent (from 75 percent) for housing loans with LTV exceeding 90 percent and personal financing with tenure > five years.
  - Guidelines on Responsible Finance issued on 18 November 2011.
  - Central Credit Reference Information System supports underwriting standards.
- Policy stance and monitoring:
  - Recent increase in personal unsecured credit requires continued monitoring.
  - Banks tightening lending standards expected to moderate overall credit growth.
  - With nationwide house prices cooling and slower mortgage growth, no evident need for additional LTV restrictions at this juncture.
  - If necessary, authorities should consider additional measures to limit growth in unsecured lending.
  - Little information on informal lending; reported to be a small share of total credit.

### External financing, exchange rate, reserves, and market volatility
- Market volatility and capital flows:
  - Financial market volatility rose since August 2011 with higher global risk aversion.
  - Foreign investors scaled back exposures, prompting a depreciation of around 8 percent against the U.S. dollar since the beginning of August (year referenced).
  - Cross-currency basis swap spreads widened sharply to about post‑Lehman levels, reflecting market illiquidity and dollar funding pressures.
  - No evidence of a pullback in cross-border bank lending.
  - In August–September 2011 sizable net portfolio outflows led to a decline in equity markets and a weakening of the exchange rate, but no significant reserve losses.
  - Decline in foreign holdings of BNM bills was offset by local investors, isolating liquidity impact and keeping interest rates stable.
- Exchange rate policy:
  - Continue flexible movement while guarding against excessive volatility; two‑sided intervention to smooth disorderly movements is appropriate.
  - Allowing the exchange rate to act as a shock absorber is an option.
  - Authorities do not target a level for the exchange rate or reserves; interventions are two‑way and limited to smoothing volatility.
  - Staff’s CGER estimates suggest the ringgit is still weaker than the level implied by medium‑term fundamentals; authorities question model capacity to capture commodity contributions.
- Reserves and external metrics:
  - Reserves assessed as comfortable:
    - Risk-weighted metric: 166 percent.
    - Benchmark range for this metric considered adequate: 100−150 percent.
  - Gross official reserves (US$ billions): 2007: 101.3; 2008: 91.6; 2009: 96.8; 2010: 106.5; 2011 (Proj.): 119.0; 2012 (Proj.): 131.1.
  - Reserves (in months of following year's imports): 2007: 6.8; 2008: 7.6; 2009: 6.1; 2010: 6.0; 2011 (Proj.): 6.2; 2012 (Proj.): 6.4.
  - Reserves (in percent of short-term debt): e.g., 2011: 389.6; 2012 (Proj.): 436.0.

### Fiscal outlook, positions, and recommendations
- Fiscal outcomes and projections:
  - Federal government deficit target met for 2011: deficit of 5.4 percent of GDP (expected).
  - Staff projection for 2012 federal government budget deficit: 5.1 percent of GDP versus the budget target of 4.7 percent of GDP (staff recommend allowing automatic stabilizers to operate on the revenue side while keeping expenditure ceiling).
  - Under staff projection federal government debt would rise above 55 percent of GDP in the near term.
  - Authorities’ stance: confident of meeting 2012 deficit target; aim for deficit path targeting 3 percent of GDP by 2015; would view a temporary rise above 55 percent of GDP as acceptable under exceptional circumstances.
- Fiscal aggregates (selected percent of GDP):
  - Federal government overall balance: 2007: -3.2; 2008: -4.8; 2009: -7.0; 2010: -5.6; 2011: -5.5; 2012 (Proj.): -5.1.
  - Revenue: 2007: 21.8; 2008: 21.5; 2009: 23.3; 2010: 20.8; 2011: 22.2; 2012 (Proj.): 21.3.
  - Expenditure and net lending: 2007: 25.0; 2008: 26.3; 2009: 30.3; 2010: 26.5; 2011: 27.7; 2012 (Proj.): 26.4.
  - General government gross debt: 2007: 42.7; 2008: 42.8; 2009: 55.4; 2010: 55.4; 2011: 56.6; 2012 (Proj.): 57.5.
- Staff fiscal recommendations:
  - Abide by budget expenditure ceiling but allow automatic stabilizers to operate on the revenue side.
  - Better target budgeted expenditures to the most needy; rationalize subsidies; channel realized savings to items with high fiscal multipliers.
  - Increase fiscal space by: phased reduction of subsidies; broadening of the tax base (including proposed goods and services tax); streamlining wasteful tax incentives; rationalizing operating and development expenditure.
  - Improve fiscal transparency: expand budget coverage, move from discretionary to rules‑based tax incentives, report comprehensively on public‑private partnerships, and prepare a comprehensive fiscal risk assessment.
- Fiscal ROSC and consolidation:
  - Consolidation needs to be faster than under staff baseline to put federal government debt on a declining trajectory; illustrative staff scenario envisages reduction of federal government debt to pre‑crisis level of 42 percent of GDP.

### Policy Theme #1 — Managing spillovers from external risks
- External exposure and transmission:
  - Non-Asian final demand contributes around 38 percent of value added to GDP.
  - Estimates: a 1 percent decline in global growth below the baseline would reduce Malaysian GDP growth by 1.2 percentage points.
- Extreme global financial stress scenario:
  - Foreign investor holdings: some 20 percent of domestic bond market and 22 percent of the equity market.
  - Retail participation through direct holdings and unit trusts: around 45 percent of equity market capitalization.
  - Foreign holdings of bonds: about RM 160 billion (up from RM 126 billion in April 2008), amount to around 45 percent of reserves.
  - Consolidated claims of euro area banks on Malaysia: estimated at 6 percent of GDP.
  - Foreign banks account for around 21 percent of total credit.
- Financial sector resilience and buffers:
  - Total foreign bank claims on domestic banks: 7.4 percent of 2010 GDP and 3.3 percent of total liabilities.
  - Domestic banks’ external assets are 137 percent of liabilities.
  - Loan-to-deposit ratio: 82.5 percent.
  - Overall wholesale funding of domestic banks: 11 percent of liabilities.
  - Cross-border funding comprises only 3.7 percent of bank liabilities.
  - Islamic financial segment: about 20 percent of total banking assets.
  - Malaysia issued a US$2 billion global sukuk in July 2011.
  - Corporate sector cash positions for listed companies: 11.5 percent of liabilities.
  - Large stock of foreign reserves (over 200 percent of total European banks’ claims) enhances ability to mitigate foreign currency liquidity shortages.
- Policy instruments and recommended actions:
  - Room to cut policy rates.
  - Authorities can provide both foreign exchange and domestic currency liquidity.
  - Reactivate measures used in 2008−09 if necessary to ensure orderly market conditions and stabilize confidence.
  - Fiscal measures in a severe downturn should be accompanied by credible medium-term consolidation plans; target support to low-income households and areas with high multipliers; consider guarantees and credit lines to SMEs.

### Policy Theme #2 — Ensuring inclusive and sustainable growth
- Medium-term growth and reform priorities:
  - Staff’s medium-term baseline growth: about 5 percent; raising potential growth above 5 percent requires sustained efforts to boost productivity of human and physical capital.
  - Authorities aim to raise per capita income to at least US$15,000 by the end of the decade.
  - Structural reforms under ETP focus: raise private investment; improve education and skills; improve governance and inclusiveness; promote catalytic investment projects; focus on high value-added manufacturing and services; raise incomes of the poorest households; reform public finances.
  - ETP progress: since October 2010, 113 projects with total value RM 177 billion announced; RM 10 billion of investment realized through October 2011, constituting 64 percent of investments committed for 2011.
- Social protection and pension recommendations:
  - Enhance safety nets: make access to good education and healthcare more equal; consider conditional cash transfers.
    - Example: Bolsa Familia in Brazil covers about 25 percent of the population and costs around 0.4 percent of GDP.
  - Consider introducing an unemployment insurance scheme mainly funded by employers and employees.
  - Press ahead with private defined contribution plans to supplement the Employees Provident Fund (EPF); increase withdrawal age from 55; raise rate of return on EPF investments.
  - October 2010 measure noted: increase overseas investment limit of the EPF to 20 percent.
- Minimum wage considerations:
  - An Act passed July 2011 established the National Minimum Wage Consultative Council to recommend minimum wage rate and coverage.
  - Staff note overall efficacy depends on the rate set and potential disemployment effects; implementation challenges include porous borders and migration to informal sector.
  - Cross‑country context: minimum wage levels in most countries cluster around 40 percent of the average wage, with OECD range 27 percent to 52 percent.

### Debt sustainability (ANNEX I) — public and external debt projections and stress tests
- External debt baseline and projections (external debt, percent of GDP):
  - 2006: 33.5; 2007: 30.3; 2008: 30.6; 2009: 35.2; 2010: 31.0; 2011: 26.6; 2012: 24.6; 2013: 22.4; 2014: 20.3; 2015: 18.3; 2016: 16.3.
  - External debt-to-exports ratio (percent): 2006: 28.7; 2007: 27.6; 2008: 29.7; 2009: 36.5; 2010: 31.8; 2011: 27.9; 2012: 25.8; 2013: 23.8; 2014: 21.5; 2015: 19.4; 2016: 17.3.
  - Gross external financing need (US$ billions): 2006: -6.9; 2007: -12.1; 2008: -19.0; 2009: 1.5; 2010: -0.6; 2011: -0.9; 2012: -1.2; 2013: -1.6; 2014: -3.0; 2015: -5.3; 2016: -7.4.
  - In percent of GDP: 2006: -4.5; 2007: -6.5; 2008: -8.5; 2009: 0.8; 2010: -0.3; 2011: -0.3; 2012: -0.4; 2013: -0.5; 2014: -0.9; 2015: -1.4; 2016: -1.9.
- External debt stress tests:
  - Under scenarios (weaker GDP growth, lower current account, one-time 30 percent depreciation), external debt remains manageable; under some scenarios external debt rises to about 24 percent of GDP in 2016 or spikes to 36 percent in 2012 under a one-time 30 percent depreciation before falling to 24 percent by 2016.
- Public sector debt baseline and vulnerabilities (percent of GDP):
  - Gross public sector debt: 2006: 43.2; 2007: 42.7; 2008: 42.8; 2009: 55.4; 2010: 55.4; 2011: 56.6; 2012: 57.5; 2013: 58.6; 2014: 59.5; 2015: 60.2; 2016: 61.0.
  - Foreign-currency denominated share (percent of GDP): 2006: 4.4; 2007: 3.1; 2008: 2.7; 2009: 2.0; 2010: 2.2; 2011: 1.6; 2012: 1.4; 2013: 1.2; 2014: 1.1; 2015: 1.0; 2016: 0.9.
  - Gross financing need (percent of GDP): 2006: 12.9; 2007: 13.7; 2008: 11.3; 2009: 18.8; 2010: 8.8; 2011: 15.3; 2012: 14.3; 2013: 11.1; 2014: 10.7; 2015: 10.3; 2016: 10.0.
  - Gross financing need (US$ billions): 2006: 20.2; 2007: 25.5; 2008: 25.1; 2009: 36.4; 2010: 21.0; 2011: 41.7; 2012: 41.5; 2013: 34.4; 2014: 35.9; 2015: 37.3; 2016: 39.0.
- Vulnerability tests and outcomes:
  - Debt path highly vulnerable to growth and interest rate shocks.
  - A decline in real GDP growth of about 1½ percentage point relative to the baseline would increase the debt-to-GDP ratio to above 70 percent in 2016.
  - Interest rate shock example: baseline public debt 61 percent; scenario shows rise toward 68 percent.
  - Combined shocks and contingent liability shocks can push public debt higher (combined shock to about 68 percent; real depreciation plus contingent liabilities toward about 70 percent).
- Policy implication:
  - Further budget consolidation needed to place debt on a declining trajectory via phased reduction of subsidies; broadening the tax base; and more targeted and efficient social spending.

### Data, statistics, and surveillance (ANNEX III)
- General assessment:
  - Data provision broadly adequate for surveillance; improvements needed for consolidated public sector statistics and NFPEs, state and local governments.
- National accounts and prices:
  - DOSM compiles annual and quarterly GDP estimates based on 1993 SNA; quarterly data released about two months after reference quarter.
  - Revised CPI introduced January 2011 covering all 14 states with updated weights from 2009/10 household survey.
- Government finance and monetary statistics:
  - Need improved timeliness, detail, and availability on NFPEs and state/local governments; more detailed data on nonlisted NFPEs’ assets and liabilities.
  - MFS broadly conforms to Fund needs; coverage should be expanded to insurance corporations, pension funds, and other financial intermediaries.
  - BNM reports data in STA’s standardized report forms (SRFs).
- Balance of payments:
  - DOSM compiles quarterly BOP estimates in accordance with BPM5 and SDDS; quarterly data released three months after reference quarter.
  - Some omissions: no data shown for capital transfers or acquisition/sale of nonproduced nonfinancial assets; reserve asset transactions include valuation changes.
- Table of Common Indicators (as of November 22, 2011) — selected latest observation dates:
  - Exchange rates: Date of Latest Observation: 11/22/11.
  - International reserve assets and reserve liabilities: Date of Latest Observation: 11/15/11.
  - Broad money: Date of Latest Observation: 09/11; Date Received: 10/11.
  - Consolidated balance sheet of the banking system: Date of Latest Observation: 09/11.
  - GDP/GNP: Date of Latest Observation: 2011:Q3.
  - Gross external debt: Date of Latest Observation: 2011:Q2.

### Key descriptive statistics and headline figures
- Real GDP growth (year-on-year percent change):
  - 2007: 6.5; 2008: 4.8; 2009: -1.6; 2010: 7.2; 2011: 4.7; 2012 (Proj.): 4.0.
- CPI inflation (period average):
  - 2007: 2.0; 2008: 5.4; 2009: 0.6; 2010: 1.7; 2011: 3.2; 2012 (Proj.): 2.5.
- Monetary and credit aggregates (end of period, selected levels and growth):
  - Broad money (end period, millions of ringgit): 2009: 992,052; 2010: 1,007,604; 2011 (Sep): 1,167,484.
  - Credit to private sector (end period, millions of ringgit): 2009: 795,598; 2010: 811,269; 2011 (Sep): 960,321.
  - Broad money (12-month percent change): 2009: 7.7; 2010: 7.7; 2011 (Sep): 12.9.
- External sector headline (US$ billions and percents):
  - Nominal GDP (2010): US$238 billion.
  - Exports, f.o.b. (US$ billions): 2007: 176.3; 2008: 199.2; 2009: 157.3; 2010: 198.8; 2011 (Proj.): 226.9; 2012 (Proj.): 241.7.
  - Imports, f.o.b. (US$ billions): 2007: 138.5; 2008: 147.6; 2009: 117.1; 2010: 157.0; 2011 (Proj.): 179.6; 2012 (Proj.): 193.9.
  - Current account balance (US$ billions): 2007: 29.8; 2008: 39.4; 2009: 31.8; 2010: 27.4; 2011 (Proj.): 31.5; 2012 (Proj.): 31.7.
  - Current account balance (percent of GDP): 2007: 15.9; 2008: 17.7; 2009: 16.5; 2010: 11.5; 2011 (Proj.): 11.5; 2012 (Proj.): 10.8.
  - Total external debt (US$ billions): 2007: 56.7; 2008: 68.2; 2009: 68.0; 2010: 73.7; 2011: 73.3; 2012 (Proj.): 72.2.
  - Total external debt (percent of GDP): 2007: 30.3; 2008: 30.6; 2009: 35.2; 2010: 31.0; 2011: 26.6; 2012 (Proj.): 24.6.
- Labor market and demographics:
  - GDP per capita (2010): US$8,423.
  - Population (2010): 28.3 million.
  - Unemployment rate (2010): 3.3 percent.
- Banking sector soundness indicators (selected series):
  - Regulatory capital to risk-weighted assets: 2007: 14.8; 2008: 16.1; 2009: 18.2; 2010: 17.5; June 2011: 16.6.
  - Regulatory Tier 1 capital to risk-weighted assets: 2007: 10.6; 2008: 11.7; 2009: 14.1; 2010: 13.5; June 2011: 12.4.
  - Nonperforming loans to total gross loans: 2007: 6.5; 2008: 4.8; 2009: 3.6; 2010: 3.4; June 2011: 2.9.
  - Return on assets: 2007: 1.5; 2008: 1.5; 2009: 1.2; 2010: 1.5; 2011: 1.7.
  - Loan-deposit ratio: 2007: 74.1; 2008: 74.7; 2009: 77.9; 2010: 81.3; 2011: 81.8.

### Final policy takeaways and recommended actions
- Monetary and exchange rate policy:
  - Monetary policy stance judged appropriate with room to ease if growth weakens substantially; there is room to cut policy rates.
  - Continue two‑way flexibility of the exchange rate and limit intervention to smooth excessive volatility; allow the exchange rate to act as a shock absorber when appropriate.
- Financial sector and macroprudential policy:
  - Continue close monitoring of household indebtedness, especially unsecured personal loans.
  - Maintain tightened underwriting and affordability assessments; consider additional measures to limit unsecured lending growth if needed.
  - Extraordinary support measures used in 2008−09 can be reinstated if downside risks materialize.
- Fiscal policy:
  - Keep to the 2012 expenditure envelope but allow automatic stabilizers to operate; avoid strict adherence to the budget target if it would significantly drag on growth.
  - Pursue medium-term consolidation: phased subsidy reduction; broaden tax base; better target spending; improve fiscal transparency.
- Structural and social policies for inclusive growth:
  - Implement ambitious structural reforms: improve business climate; enhance competition; upgrade education and skills; create equal opportunities.
  - Strengthen social safety nets: consider conditional cash transfers, unemployment insurance, and expanded pension provision; design a well‑designed minimum wage consistent with broader inclusion objectives.

*Source: INTRODUCTION, MALAYSIA 2011 ARTICLE IV REPORT; 2011 ARTICLE IV REPORT — MALAYSIA; ANNEX I and ANNEX III, as presented in the provided chapter.*

### INTRODUCTION _______________________________________________________________________________________ 3

### INTRODUCTION

### Overview
- Following a strong recovery from the downturn of 2008−09, economic momentum in Malaysia is beginning to ease against a weakening external environment.
- Macroeconomic policies moved toward a less accommodative stance from early 2010, helping keep inflation contained and stabilizing the rapid post-crisis buildup in public debt.
- Key medium-term challenge: raising potential growth and reducing income disparities through sustained structural reforms anchored around medium-term fiscal consolidation.
- Policy considerations to raise inclusiveness: increasing pension benefits and introducing an unemployment insurance scheme.

### Economic context — Growth and inflation
- Economic activity is easing:
  - Private consumption growth remained strong through 2011:Q3 due to robust employment and wage growth.
  - Manufacturing export growth has weakened; commodity exports have remained resilient.
  - Forward-looking sentiment indicators suggest less optimistic near-term prospects.
- Output gap has closed, but inflation remains contained:
  - Core inflation is reported as 2.5 percent.
- External position remains strong:
  - REER broadly stable in the year through July 2011 before recent market volatility.
  - Current account surplus expected to have remained roughly constant in 2011, supported by stronger commodity exports offsetting robust consumption and capital goods imports.

### Financial sector and household indebtedness
- Strong rebound in credit to households increased household indebtedness:
  - Gross household debt rose by 12.3 percentage points to 76 percent of GDP during 2008−2011.
  - Mortgage lending accounts for around half of total household debt.
  - Unsecured personal loans constitute 16 percent of household debt.
- Policy responses and supervisory actions:
  - Bank Negara Malaysia (BNM) introduced loan-to-value (LTV) restrictions on third and further residential mortgages in November 2010.
  - Guidelines to banks on credit card debt were issued in March 2011 (including income eligibility criteria and limits on number of cards).
  - In November 2011, BNM issued guidelines requiring financial institutions to apply a consistent approach to measure and assess retail borrowers’ debt service-to-income ratios (DTI).
- Banking system soundness indicators:
  - Average capital adequacy ratio (CAR) of 14.6 percent.
  - Core capital of 12.5 percent.
  - Nonperforming loans (NPLs) have declined to around 2 percent.
  - Housing prices rose 17 percent nationwide during 2008−10 but have eased more recently.

### External financing and market volatility
- Financial market volatility rose since August 2011 with higher global risk aversion:
  - Foreign investors scaled back exposures, prompting a depreciation of around 8 percent against the U.S. dollar since the beginning of August.
  - Cross-currency basis swap spreads widened sharply to about post-Lehman levels, reflecting market illiquidity and dollar funding pressures.
  - No evidence of a pullback in cross-border bank lending.
- Exchange rate and reserves:
  - Exchange rate policy: continue flexible movement while guarding against excessive volatility; two-sided intervention to smooth disorderly movements is appropriate.
  - Reserves assessed as comfortable based on standard or risk-weighted metrics:
    - Risk-weighted metric reported as 166 percent.
    - Benchmark range for this metric considered adequate is 100−150 percent.
  - No evident need for capital controls to dampen flow volatility.

### Outlook and policies under the baseline — Staff’s views
- Growth projections and drivers:
  - Growth for 2012 is projected at 4 percent.
  - Growth for 2013 is projected at 4.5 percent.
  - Demand for Malaysian exports expected to remain soft in coming quarters, leading to sluggish private investment and industrial production.
  - Impact of Thailand floods expected to be limited; temporary supply chain disruptions likely offset by a shift in production to Malaysia.
  - Robust labor market conditions and fiscal transfers to households expected to support consumption, but high household indebtedness limits debt-financed consumption increases.
  - Weaker exports expected to narrow the current account surplus to 10.8 percent of GDP.
- Risks to the outlook:
  - Risks tilted to the downside.
  - Major downside scenarios: slower recovery in advanced economies, sharp escalation of global financial stress, prolonged supply chain disruptions from Thailand floods.
  - Domestic downside risks: households unable to sustain consumption due to high indebtedness, deterioration in credit quality, and tightening of financing conditions.
  - Upside: swift resolution of the European crisis and faster growth in advanced economies would boost exports.
- Inflation and monetary policy:
  - Under the baseline, inflation expected to continue to moderate.
  - Output gap projected to turn mildly negative, driving core inflation below 2 percent in 2012.
  - Headline inflation expected to average around 2.5 percent.
  - Monetary policy stance judged appropriate with room to ease if growth weakens substantially.
- Exchange rate policy:
  - Continue to allow flexible movement while smoothing excessive volatility via two-sided intervention.
- Credit monitoring and macroprudential stance:
  - Recent increase in personal unsecured credit requires continued monitoring.
  - Banks tightening lending standards expected to moderate overall credit growth.
  - BNM stepped up monitoring and supervision of household debt since 2008, focusing on underwriting, valuation, risk management, and infrastructure.
  - If necessary, authorities should consider additional measures to limit growth in unsecured lending.
  - Little information on informal lending; reported to be a small share of total credit.
  - With nationwide house prices cooling and slower mortgage growth, no evident need for additional LTV restrictions.

### Fiscal outlook and recommendations
- Fiscal stance and near-term trade-offs:
  - Fiscal policy on track to meet the deficit target of 5.4 percent for 2011.
  - Federal government spending on subsidies higher than budgeted due to elevated oil prices, offset by strong commodity-related revenues.
  - Overall revenue growth estimated to be 11 percentage points higher than projected in the budget (due to higher petroleum prices and stronger tax revenues).
- Staff assessment for 2012 budget:
  - Deficit target in the 2012 budget will be difficult to achieve given the projected growth slowdown.
  - Staff recommend authorities abide by budget expenditure ceiling but allow automatic stabilizers to operate on the revenue side.
  - Under these assumptions, staff project the federal government’s budget deficit at 5.1 percent of GDP versus the budget target of 4.7 percent of GDP.
  - Federal government debt would rise above 55 percent of GDP under the staff projection.
  - A more modest fiscal adjustment would help cushion the downturn; keeping strictly to the budget target would add a significant drag on growth.
  - Staff advise better targeting of budgeted expenditures to the most needy, rationalizing subsidies, and channeling realized savings to items with high fiscal multipliers.

### Authorities’ views and actions
- Growth and policy responses:
  - Authorities concurred that growth is likely to ease but emphasized employment would remain supported if external downdraft is contained.
  - They indicated downside from external sources could be mitigated by higher private investment under Economic Transformation Programme (ETP) projects, fiscal transfers in the 2012 budget of 0.3 percent of GDP, rising intraregional trade, and a special off-budget stimulus package of RM 6 billion.
- Monetary and exchange rate policy:
  - Authorities agree inflation will likely ease and monetary policy has room to respond flexibly.
  - Foreign exchange intervention is used to smooth excessive volatility and prevent exchange rate overshooting; no additional macroprudential measures have been used to date.
- Credit growth and household debt:
  - Authorities do not view overall credit growth as posing immediate macroeconomic or financial stability concerns, but agree growth in personal loans needs monitoring.
  - LTV limits on third mortgages seen as effective; overall mortgage lending cooling and requiring no additional LTV restrictions.
  - New guidelines (November 2011) to promote responsible retail lending include standardized computation of income to assess DTI ratios.
  - Authorities consider DTI regulations on overall household debt too blunt to address growth in personal loans (around 15 percent of overall household debt).

*Source: INTRODUCTION, MALAYSIA 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND*

### 21.      The authorities were confident of

### 21.      The authorities were confident of

### Authorities' fiscal stance and confidence
- The authorities were confident of meeting the 2012 deficit target even if growth is lower than expected.
- Given conservative revenue assumptions, they remain optimistic that federal government debt can be kept below 55 percent of GDP in 2012 and over the medium term, based on a deficit path targeting a 3 percent of GDP deficit by 2015.
- The authorities would view a temporary rise in federal government debt above this threshold as acceptable to support growth under exceptional circumstances if downside risks to growth materialize; otherwise, they will ensure that the debt-to-GDP ratio does not exceed 55 percent.

### Policy Theme #1 — Managing the spillovers from external risks: Staff’s assessment
- Malaysia faces considerable downside risks from protracted low growth in the major advanced economies and/or a sharp escalation in global financial stress.
- While monetary policy space and financial policy tools leave Malaysia well positioned to withstand financial spillovers, limited fiscal space would not allow the headwinds to growth to be fully offset.
- Real spillovers from an extended downturn would affect both external and domestic demand:
  - Non-Asian final demand contributes around 38 percent of value added to GDP.
  - Weaker exports would drag on industrial production and investment in both manufacturing and commodity-related sectors, and curtail consumption via lower confidence and disposable incomes in commodity-intensive sectors such as palm oil and supply-chain linked sectors, including SMEs.
  - Overall, estimates suggest that a 1 percent decline in global growth below the baseline would reduce Malaysian GDP growth by 1.2 percentage points.
  - Short-term spillover effects would be larger if unemployment rises or wages fall significantly more than in previous slowdowns.

### Alternative scenario — extreme global financial stress
- An extreme global financial stress scenario would transmit swiftly, largely through reversals in portfolio equity and debt inflows and a pullback in international bank lending.
- Key financial exposure and vulnerability metrics:
  - Foreign investor holdings comprise some 20 percent of the domestic bond market and 22 percent of the equity market.
  - Retail participation through direct holdings and unit trusts is around 45 percent of equity market capitalization.
  - Foreign holdings of bonds have risen markedly to around RM 160 billion from RM 126 billion in April 2008, and amount to around 45 percent of reserves.
  - The consolidated claims of euro area banks on Malaysia are estimated at 6 percent of GDP.
  - Banks from the United Kingdom are the major foreign providers of household credit.
  - Foreign banks account for around 21 percent of total credit.
  - A significant deleveraging by European banks would reduce the supply of trade finance, though local and other foreign banks should be able to step in and offset some of this.

### Financial sector resilience and buffers
- Factors supporting resilience:
  - Total foreign bank claims on domestic banks are low at 7.4 percent of 2010 GDP and 3.3 percent of total liabilities of the latter.
  - Domestic banks’ external assets are 137 percent of liabilities.
  - Loan to deposit ratio is 82.5 percent; overall wholesale funding of domestic banks is relatively low, at 11 percent of liabilities.
  - Cross-border funding comprises only 3.7 percent of bank liabilities.
  - The burgeoning Islamic financial segment holds about 20 percent of total banking assets.
  - Malaysia issued a US$2 billion global sukuk in July 2011, which attracted strong demand.
  - Bank capital and liquidity: high CAR of around 14.6 percent of the banking system as of end-September 2011; liquid assets as a share of total assets at around 13.8 percent.
  - Corporate sector cash positions are 11.5 percent of liabilities for listed companies.
  - The large stock of foreign reserves (over 200 percent of total European banks’ claims) enhances Bank Negara’s ability to mitigate serious foreign currency liquidity shortages.

### Policy instruments and recommended actions
- Monetary, exchange rate and financial policies can help prevent abrupt financial deleveraging and provide a cushion against a downturn:
  - There is room to cut policy rates.
  - Authorities can provide both foreign exchange and domestic currency liquidity.
  - Allowing the exchange rate to act as a shock absorber is an option.
  - Other financial policies deployed in 2008−09 could be reactivated to ensure orderly financial market conditions and stabilize confidence.
- Fiscal policy constraints and recommendations:
  - In the event of a severe downturn, there is only limited room for countercyclical fiscal stimulus given Malaysia’s still high fiscal deficit and federal government debt.
  - Any discretionary measures would need to be accompanied by credible medium-term fiscal consolidation plans to ensure debt can return to a declining path over the medium term.
  - Fiscal measures should aim at supporting low-income households and areas with high multipliers, and could be augmented with guarantees and credit lines to SMEs to support employment and incomes.

### Authorities’ views (summarized)
- The authorities agreed that under a slow global recovery and/or a financial stress scenario, growth could be substantially lower, though strong intraregional demand could mitigate the impact.
- They agreed that the financial sector is well positioned to withstand global financial stress, citing the 2008−09 experience and policy enhancements (including the ability to expand deposit insurance quickly and preemptive measures such as corporate debt restructuring and SME support schemes that remain in place).
- They noted euro area banks’ lending to Malaysia is smaller than in many other Asian economies, and that the robust capital and liquidity positions of domestic banks would help avoid deleveraging pressures and could allow domestic banks to gain market share from foreign banks.
- The authorities emphasized the importance of the macrofinancial feedback loop: falling employment and incomes could prompt banks to scale back lending amid fears of rising NPLs, further dragging on domestic demand.
- They stated that monetary policy could cushion a downturn given anticipated further easing in inflation.
- On fiscal policy, the authorities reiterated that a temporary rise in federal government debt beyond the indicative ceiling of 55 percent of GDP would be acceptable under exceptional circumstances to provide support to economic activity; otherwise they remain committed to the debt-to-GDP ratio not exceeding 55 percent.

### Policy Theme #2 — Ensuring inclusive and sustainable growth (brief)
- Raising Malaysia’s potential growth over the medium term requires improving human capital, facilitating greater competition in product markets, and undertaking structural fiscal reforms; exchange rate appreciation will be essential for rebalancing sources of growth.
- Making growth more inclusive requires enhancing the social safety net.
- Malaysia’s potential growth has slowed over the last decade; the authorities aim to raise per capita income to at least US$15,000 by the end of the decade.
- Reforms aim to raise private investment, improve education and skills, improve governance and inclusiveness, promote catalytic investment projects, focus on high value-added manufacturing and services, raise incomes of the poorest households, and reform public finances.
- Under the ETP: since October 2010, 113 projects with a total value of RM 177 billion have been announced; RM 10 billion of investment was realized through October 2011, constituting only 64 percent of investments committed for 2011.

*Source: 2011 Article IV Report — Malaysia (excerpt).*

### 33.      A minimum wage is being

### _cr1243 - 33.      A minimum wage is being

### Context and immediate policy action
- An Act was passed in July 2011 to set up the National Minimum Wage Consultative Council, charged with making a recommendation to the cabinet on the minimum wage rate and coverage.

### Staff’s views on growth and reform
- Medium‑term growth outlook:
  - Under the staff’s baseline scenario, medium‑term growth is estimated at about 5 percent, with a gradual rebalancing of demand from the tradable to the nontradables sector.
  - Raising potential growth above 5 percent would require sustained efforts to boost the productivity of both human and physical capital.
- Role of the Economic Transformation Programme (ETP):
  - Investments under the ETP would need to be accompanied by broad based reforms to sustainably raise productivity and investment.
  - Short‑term boost to investment can come from contributing a share of risk capital and removing impediments to investment, but broader reforms are needed to generate higher sustained investment, productivity and incomes.
  - Critical areas requiring progress include education and training, governance, and creating equal opportunities for all segments of the population.

### Fiscal framework and recommendations
- Fiscal policy priorities:
  - Increase fiscal space for countercyclical fiscal policies and put federal government debt on a declining trajectory.
  - Remove distortions in the tax and subsidy system.
  - Broadening the tax base through the proposed goods and services tax would help reduce reliance on procyclical oil‑related revenues.
  - Streamline subsidies and wasteful tax incentives and replace them with targeted assistance to the needy.
- Consolidation needs:
  - To achieve the authorities’ projected deficit path and generate sufficient fiscal space, consolidation needs to be faster than under the staff’s baseline.
  - The staff’s medium‑term illustrative reform scenario envisages a reduction in federal government debt to the pre‑crisis level of 42 percent of GDP as a benchmark.
  - Achieving this would be consistent with broadening the tax base, reducing subsidies and rationalizing both operating and development expenditure.
- Fiscal transparency improvements recommended (in line with the 2011 fiscal ROSC):
  - Expand the coverage of the budget to include pension funds and all autonomous entities.
  - Gradually move from discretionary to rules‑based tax incentives.
  - Report comprehensively on public‑private partnerships with a focus on fiscal risks.
  - Include clear information in the budget on new revenue and expenditure initiatives, contingent liabilities and quasi‑fiscal activities.
  - Prepare a comprehensive fiscal risk assessment.

### Social protection and inclusion measures
- Safety nets and pensions:
  - Making growth more inclusive will likely require a multi‑pronged approach to enhancing safety nets.
  - Fiscal policy can play a role by making access to good education and healthcare more equal, including via further use of conditional cash transfers that have proved successful in Brazil and Mexico and not too costly.
    - The Bolsa Familia program in Brazil covers about 25 percent of the population and costs around 0.4 percent of GDP.
  - Consideration could be given to introducing an unemployment insurance scheme that could be mainly funded by employers and employees to avoid burdening the public purse.
  - Relatively low pension replacement ratios point to a need to:
    - Press ahead with the development of private defined contribution plans to supplement the compulsory Employees Provident Fund (EPF).
    - Increase the age that one can withdraw income from EPF accounts from 55.
    - Raise the rate of return on EPF investments.
  - The October 2010 measure to increase the overseas investment limit of the EPF to 20 percent is noted as a welcome first step.

### Minimum wage—efficacy and implementation concerns
- The overall efficacy of a minimum wage remains subject to debate in theory and practice.
- Key considerations:
  - The net effect on low‑skilled workers’ wages depends on the rate that is set and whether it is offset by disemployment effects.
  - Implementation challenges include an economy with porous borders and the ease with which workers can migrate from the formal to informal sector.
  - A minimum wage policy would have to be carefully designed to address these concerns.
- Cross‑country context noted:
  - Minimum wage levels in most countries cluster around 40 percent of the average wage, with a range of 27 percent to 52 percent in OECD countries.

### Exchange rate and rebalancing
- Real effective exchange rate:
  - Appreciation of the real effective exchange rate over the medium term will be a key element of rebalancing the sources of growth.
  - The current account surplus declined from its recent peak of just under 18 percent of GDP in 2008.
  - Staff’s CGER estimates suggest the ringgit is still weaker than the level implied by medium‑term fundamentals.
  - Policy of two‑way flexibility with intervention limited to smoothing excessive volatility should allow for appreciation over the medium term and facilitate allocation of resources towards the nontradables sector, particularly if accompanied by ambitious structural reforms.
- Authorities’ position:
  - Authorities expect the real effective exchange rate to appreciate in line with fundamentals over the medium term while smoothing excessive volatility from short‑term capital flows.
  - They do not target a level for the exchange rate or foreign exchange reserves and emphasize two‑sided intervention.

### Staff appraisal and near‑term projections
- Growth and monetary policy:
  - Growth is projected to slow; overall growth projected at 4 percent in 2012 and 4½ percent in 2013 under the baseline.
  - Headline inflation is projected to ease in 2012 as domestic demand moderates; policy rates should be maintained around current levels, but should be eased if growth prospects worsen significantly.
  - Continue two‑way flexibility of the exchange rate and limit intervention to smooth excessive volatility.
- Fiscal stance for 2012:
  - Authorities should keep to the expenditure envelope in the 2012 federal government budget but allow automatic stabilizers to work on the revenue side.
  - Given the projected growth slowdown under the baseline, this would lead to more modest consolidation than envisaged in the 2012 budget, helping cushion the downturn.
  - As a result, federal government debt would rise above 55 percent in the near term.
  - Subsidy rationalization and more targeted help for the needy would facilitate an increased multiplier effect from fiscal spending.
- Financial sector and risks:
  - High household debt levels need continued monitoring; banks should be vigilant to risks from rapidly‑growing unsecured personal loans.
  - No evidence of excessive house price increases; little need for additional prudential restrictions on mortgage lending at this juncture.
  - Risks to the outlook are mostly external and tilted to the downside: protracted slow growth in major advanced economies and a sharp escalation of financial stress in global markets.
  - Malaysia is well positioned to withstand adverse shocks with room to cut policy rates, ensure liquidity, and let the exchange rate act as a shock absorber, though fiscal consolidation limits the room for a countercyclical fiscal response.
- Medium‑term structural priorities:
  - Ambitious implementation of structural reforms is needed to raise potential growth.
  - Follow up diagnostic work with action on multiple fronts: improve the business climate; reduce distortions to enhance competition and economic flexibility; improve education and upgrade skills; improve governance; create equal opportunities for all segments of society.
  - Structural measures should be complemented by fiscal reforms to reduce distortions and boost countercyclical fiscal space, including implementing fiscal ROSC recommendations to improve fiscal transparency and manage fiscal risks.
- Inclusive growth policy mix emphasized:
  - Reduce inequality with a multi‑pronged approach: replace broad‑based subsidies with targeted assistance; consider conditional cash transfers; unemployment insurance; expanded pension provision designed to minimize fiscal cost; and a well‑designed minimum wage.

*Source: 2011 ARTICLE IV REPORT MALAYSIA — IMF staff and authorities views as presented in the provided chapter.*

### 55.      It is recommended that the next

### _cr1243 - 55.      It is recommended that the next

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12˗month cycle.

### Growth and External Environment
- Finding: "Growth is Slowing Against a Weakening External Environment" — weaker exports are driving down domestic demand.
- Leading indicators: Forward looking sentiment indicators point to a weakening outlook for investment; private consumption has held strong and is expected to remain relatively resilient.
- Inflation: "Inflation had been rising but is peaking" in part reflecting BNM’s preemptive policy tightening since 2010.
- Real GDP growth (year-on-year percent change):
  - 2007: 6.5
  - 2008: 4.8
  - 2009: -1.6
  - 2010: 7.2
  - 2011: 4.7
  - 2012 (Proj.): 4.0
- Real Total Domestic Demand and Export Growth (year-on-year percentage change): reported series show Total domestic demand and Exports with notable divergences during 2008–2011 (charts referenced in source).

### Domestic Demand, Labor Market, and Fiscal Stance
- Credit and financial system: Credit growth remains robust and is buttressed by a sound financial system.
- Labor market: Employment growth and low unemployment support domestic demand.
- Fiscal stance: Slow pace of fiscal consolidation will help maintain domestic demand.
- Fiscal impulse: Fiscal impulse will be positive in 2011 and only mildly negative in 2012 (chart referenced in source).
- Central Government Finances (four-quarter moving average, in billions of ringgit) — trends noted:
  - Revenue, Expenditure, Subsidies series through 2011 projections (charts referenced).
- Fiscal and macro aggregates (selected):
  - Federal government overall balance (percent of GDP): 2007: -3.2; 2008: -4.8; 2009: -7.0; 2010: -5.6; 2011: -5.5; 2012 (Proj.): -5.1
  - Revenue (percent of GDP): 2007: 21.8; 2008: 21.5; 2009: 23.3; 2010: 20.8; 2011: 22.2; 2012 (Proj.): 21.3
  - Expenditure and net lending (percent of GDP): 2007: 25.0; 2008: 26.3; 2009: 30.3; 2010: 26.5; 2011: 27.7; 2012 (Proj.): 26.4
  - Federal government non-oil primary balance (percent of GDP): 2007: -9.2; 2008: -11.7; 2009: -14.5; 2010: -11.0; 2011: -11.1; 2012 (Proj.): -9.9
  - Consolidated public sector overall balance (percent of GDP): 2007: 1.5; 2008: -5.6; 2009: -7.6; 2010: -2.1; 2011: -8.4; 2012 (Proj.): -8.8
  - General government debt (percent of GDP): 2007: 42.7; 2008: 42.8; 2009: 55.4; 2010: 55.4; 2011: 56.6; 2012 (Proj.): 57.5

### Financial Spillovers and External Sector
- Recent episodes: In August–September 2011 Malaysia experienced sizeable net portfolio outflows, leading to a decline in equity markets and a weakening of the exchange rate, but there were no significant reserve losses.
- Domestic mitigation: Decline in foreign holdings of BNM bills was more than offset by local investors, isolating liquidity impact and keeping interest rates stable.
- External indicators and balances (selected):
  - Nominal GDP (2010): US$238 billion
  - Main export (percent of total): electrical & electronic products (39%), commodities (23%)
  - GDP per capita (2010): US$8,423
  - Population (2010): 28.3 million
  - Unemployment rate (2010): 3.3 percent
- Balance of payments (in billions of U.S. dollars):
  - Current account balance: 2007: 29.8; 2008: 39.4; 2009: 31.8; 2010: 27.4; 2011 (Proj.): 31.5; 2012 (Proj.): 31.7
  - Current account balance (percent of GDP): 2007: 15.9; 2008: 17.7; 2009: 16.5; 2010: 11.5; 2011 (Proj.): 11.5; 2012 (Proj.): 10.8
  - Exports, f.o.b. (billions USD): 2007: 176.3; 2008: 199.2; 2009: 157.3; 2010: 198.8; 2011 (Proj.): 226.9; 2012 (Proj.): 241.7
  - Imports, f.o.b. (billions USD): 2007: 138.5; 2008: 147.6; 2009: 117.1; 2010: 157.0; 2011 (Proj.): 179.6; 2012 (Proj.): 193.9
  - Gross official reserves (US$ billions): 2007: 101.3; 2008: 91.6; 2009: 96.8; 2010: 106.5; 2011 (Proj.): 119.0; 2012 (Proj.): 131.1
  - Reserves (in months of following year's imports): 2007: 6.8; 2008: 7.6; 2009: 6.1; 2010: 6.0; 2011 (Proj.): 6.2; 2012 (Proj.): 6.4

### Exposure to European Banks and Financial System Resilience
- Regional comparison: European bank claims as a share of GDP are among the highest regionally, but the majority of those claims are from non euro area banks.
- Claims composition:
  - Over two thirds of total foreign bank claims are accounted for by local affiliates, which are largely domestically funded.
  - Most foreign bank claims are with the nonfinancial public and private sectors.
- Funding structure: Share of wholesale funding of banks is low and declining; European bank claims are small compared with domestic banks’ assets, suggesting local banks may be able to offset moderate deleveraging by European banks.
- Indicators (selected):
  - Foreign banks' claims on selected Asian countries (As of June 2011, in percent of 2010 GDP) — Malaysia among higher exposures (chart referenced).
  - Cross-border vs. local claims of foreign affiliates: cross-border claims share and local claims share reported for 2007–Jun-11 (chart referenced).
  - Structure of domestic banks funding (percent of total): Customer deposits vs. Wholesale from 2007–2010 (chart referenced).
  - Foreign claims in percent of domestic commercial banks' assets: Total claims vs. European banks 2007–Jun-11 (chart referenced).

### Banking Sector Soundness
- Selected financial soundness indicators (percent), 2007–June 2011:
  - Regulatory capital to risk-weighted assets: 2007: 14.8; 2008: 16.1; 2009: 18.2; 2010: 17.5; June 2011: 16.6
  - Regulatory Tier 1 capital to risk-weighted assets: 2007: 10.6; 2008: 11.7; 2009: 14.1; 2010: 13.5; June 2011: 12.4
  - Nonperforming loans to total gross loans: 2007: 6.5; 2008: 4.8; 2009: 3.6; 2010: 3.4; June 2011: 2.9
  - Return on assets: 2007: 1.5; 2008: 1.5; 2009: 1.2; 2010: 1.5; 2011: 1.7
  - Loan-deposit ratio: 2007: 74.1; 2008: 74.7; 2009: 77.9; 2010: 81.3; 2011: 81.8

### Monetary and Credit Aggregates
- Monetary survey (end of period, in millions of ringgit) highlights (2009–2011):
  - Broad money (end period): 2009: 992,052; 2010: 1,007,604; 2011 (Sep): 1,167,484
  - Credit to private sector (end period): 2009: 795,598; 2010: 811,269; 2011 (Sep): 960,321
  - Broad money (12-month percent change): 2009: 7.7; 2010: 7.7; 2011 (Sep): 12.9
- Interest rates and policy: Policy rate (as of December 12) and Taylor rule implied rates compared across regional economies (chart referenced).

### Selected Medium-Term Projections and Framework (2007–16)
- Real GDP growth (percent change) projection series:
  - 2011: 4.0 (table shows 2011 and medium-term trajectory)
  - 2012–2016: projections include 4.5, 5.0, 5.0, 5.0 for selected years (see Table 4 for full annual series)
- CPI inflation (period average) projections:
  - 2011: 2.5; 2012–2016: 2.5 (projected flat)
- Gross domestic investment (percent of GDP) projected around 21.8 in 2011 and gradually rising toward 22.2 by 2016 (Table 4).

### Key Tables and Memoranda (selected headline figures)
- Table 1 (Selected Economic and Financial Indicators, 2007–12) includes:
  - Real GDP (percent change): 2007: 6.5; 2008: 4.8; 2009: -1.6; 2010: 7.2; 2011: 4.7; 2012 (Proj.): 4.0
  - CPI inflation (period average): 2007: 2.0; 2008: 5.4; 2009: 0.6; 2010: 1.7; 2011: 3.2; 2012 (Proj.): 2.5
  - Broad money (M3) 2/ (as of October 2011) and credit series reported (see table).
- Table 2 (Indicators of External Vulnerability, 2007–11) contains external vulnerability metrics including short-term external debt, reserves ratios, and financial market indicators (KLCI, yields).
- Table 3 (Balance of Payments, 2007–12) contains detailed current account, capital and financial account, and memorandum items including export value growth, export volume growth, import value growth, terms of trade.
- Table 4 (Illustrative Medium-Term Macroeconomic Framework, 2007–16) provides multi-year projections for real sector, saving and investment, fiscal sector, balance of payments, reserves, and debt indicators.
- Table 5 (Summary of Federal Government Operations and Stock Positions, 2007–12) gives nominal and percent-of-GDP series for revenues, expenditures, net lending/borrowing, liabilities, and memorandum items (nominal GDP in millions of ringgit).
- Table 6 (Monetary Survey, 2009–11) gives detailed monetary aggregate levels and growth rates.
- Table 7 (Banks' Financial Soundness Indicators, 2007–11) reports capital adequacy, asset quality, profitability, liquidity, sensitivity to market risk, and sectoral loan distributions.

*Prepared by Asia and Pacific Department; December 23, 2011.*

### ANNEX I: MALAYSIA—MEDIUM TERM DEBT

### ANNEX I: MALAYSIA—MEDIUM TERM DEBT SUSTAINABILITY ANALYSIS

### External debt: baseline projection and stress tests
- Baseline: external debt expected to fall to just over 16 percent of GDP by 2016.
- Change: a 10 percentage point decline in the external debt to GDP ratio from 2011 to 2016, mostly reflecting sustained current account surpluses and some shift towards domestic debt.
- Baseline series (external debt, in percent of GDP): 2006: 33.5; 2007: 30.3; 2008: 30.6; 2009: 35.2; 2010: 31.0; 2011: 26.6; 2012: 24.6; 2013: 22.4; 2014: 20.3; 2015: 18.3; 2016: 16.3.
- External debt-to-exports ratio (in percent): 2006: 28.7; 2007: 27.6; 2008: 29.7; 2009: 36.5; 2010: 31.8; 2011: 27.9; 2012: 25.8; 2013: 23.8; 2014: 21.5; 2015: 19.4; 2016: 17.3.
- Gross external financing need (in billions of U.S. dollars): 2006: -6.9; 2007: -12.1; 2008: -19.0; 2009: 1.5; 2010: -0.6; 2011: -0.9; 2012: -1.2; 2013: -1.6; 2014: -3.0; 2015: -5.3; 2016: -7.4. In percent of GDP: 2006: -4.5; 2007: -6.5; 2008: -8.5; 2009: 0.8; 2010: -0.3; 2011: -0.3; 2012: -0.4; 2013: -0.5; 2014: -0.9; 2015: -1.4; 2016: -1.9.
- Stress tests:
  - Under weaker GDP growth, a lower current account deficit, and a one-time 30 percent depreciation of the ringgit, external debt would remain manageable.
  - Under these scenarios, the external debt to GDP ratio rises above the baseline by modest margins to about 24 percent of GDP in 2016.
  - Exchange rate depreciation scenario: external debt ratio would rise sharply to 36 percent of GDP in 2012, but would subsequently fall to 24 percent of GDP by 2016.

### Public (general government / public sector) debt: baseline projection and vulnerabilities
- Baseline: gross public sector debt expected to rise to about 61 percent of GDP by 2016.
- Baseline public sector debt series (in percent of GDP): 2006: 43.2; 2007: 42.7; 2008: 42.8; 2009: 55.4; 2010: 55.4; 2011: 56.6; 2012: 57.5; 2013: 58.6; 2014: 59.5; 2015: 60.2; 2016: 61.0.
- Of which foreign-currency denominated (in percent of GDP): 2006: 4.4; 2007: 3.1; 2008: 2.7; 2009: 2.0; 2010: 2.2; 2011: 1.6; 2012: 1.4; 2013: 1.2; 2014: 1.1; 2015: 1.0; 2016: 0.9.
- Gross financing need (in percent of GDP): 2006: 12.9; 2007: 13.7; 2008: 11.3; 2009: 18.8; 2010: 8.8; 2011: 15.3; 2012: 14.3; 2013: 11.1; 2014: 10.7; 2015: 10.3; 2016: 10.0.
- Gross financing need (in billions of U.S. dollars): 2006: 20.2; 2007: 25.5; 2008: 25.1; 2009: 36.4; 2010: 21.0; 2011: 41.7; 2012: 41.5; 2013: 34.4; 2014: 35.9; 2015: 37.3; 2016: 39.0.
- Vulnerabilities and bound tests:
  - Debt path is highly vulnerable to growth and interest rate shocks.
  - A decline in real GDP growth of about 1½ percentage point relative to the baseline would increase the debt to GDP ratio to above 70 percent in 2016.
  - Interest rate shock example: baseline public debt 61 percent; scenario interest rate shock shows a rise toward 68 percent (figure annotation).
  - Combined shocks and contingent liability shocks can push public debt higher (scenario annotations include combined shock to about 68 percent and real depreciation plus contingent liabilities to about 70 percent).

### Key macroeconomic and debt dynamics assumptions (selected)
- Real GDP growth (in percent) baseline path: 2006: 5.8; 2007: 6.5; 2008: 4.8; 2009: -1.6; 2010: 7.2; 2011: 4.7; 2012: 4.0; 2013: 4.5; 2014: 5.0; 2015: 5.0; 2016: 5.0.
- GDP deflator in U.S. dollars (change in percent): 2006: 7.5; 2007: 11.8; 2008: 13.6; 2009: -11.9; 2010: 15.0; 2011: 5.2; 2012–2016: 2.7 (each year).
- Nominal external interest rate (in percent): 2006: 4.5; 2007: 4.4; 2008: 5.0; 2009: 4.0; 2010: 3.6; 2011: 4.2; 2012: 0.5; 2013: 3.3; 2014: 3.3; 2015: 3.3; 2016: 3.4; (table continues: 3.5; 3.6 annotations).
- Current account balance, excluding interest payments (in percent of GDP): 2006: 18.1; 2007: 17.2; 2008: 19.0; 2009: 17.9; 2010: 12.5; 2011: 14.8; 2012: 3.4; 2013: 12.3; 2014: 11.6; 2015: 10.8; 2016: 10.2; (further years: 9.8; 9.2 annotations).
- Primary deficit (public sector, in percent of GDP): 2006: -0.1; 2007: 0.5; 2008: 1.5; 2009: 3.2; 2010: 1.6; 2011: 2.9; 2012: 2.2; 2013: 2.4; 2014: 2.2; 2015: 1.9; 2016: 1.8.
- Revenue and grants (percent of GDP): 2006: 25.0; 2007: 25.3; 2008: 25.5; 2009: 27.1; 2010: 24.8; 2011: 25.5; 2012: 24.4; 2013: 24.1; 2014: 23.7; 2015: 23.3; 2016: 23.0.

### Identified risks, scenarios, and historical comparisons
- Individual shocks applied in bound tests include permanent one-half standard deviation shocks to real interest rate, growth rate, and current account balance; and a one-time real depreciation of 30 percent (defined as nominal depreciation minus domestic inflation based on GDP deflator).
- Historical averages and scenarios: figures show ten-year historical averages used to project debt dynamics five years ahead; historical series are shown for comparison in charts and tables.
- Examples of scenario outcomes:
  - Growth shock scenario annotations show baseline external debt 16 percent, scenario values moving to about 20 percent (figure annotations).
  - Current account shock scenario annotated baseline 16 percent, scenario about 24 percent.
  - Combined shock scenario annotated baseline 16 percent, scenario about 22 percent.
  - Public debt combined shock raises debt from baseline 61 percent toward 68 percent (figure annotations).
  - Public debt real depreciation and contingent liabilities shock annotated baseline 61 percent, scenario about 62–70 percent depending on shock composition.

### Policy recommendations and implications
- Further budget consolidation efforts are needed to put the debt to GDP ratio on a declining trajectory over the medium term through clearly articulated revenue and expenditure measures, including:
  - a phased reduction of subsidies;
  - broadening of the tax base;
  - more targeted and efficient social spending.
- These measures are presented as necessary to mitigate vulnerability to growth and interest rate shocks, and to stabilize public debt dynamics.

*Sources: International Monetary Fund, country desk data; and staff estimates.*

### ANNEX III: MALAYSIA—STATISTICAL ISSUES

### ANNEX III: MALAYSIA—STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance
- General: Data provision is broadly adequate for surveillance. Further efforts to improve statistics for the consolidated public sector are necessary.
- National accounts:
  - DOSM compiles and publishes annual and quarterly estimates of GDP by activity and by expenditure at current and constant prices, and annual estimates for gross disposable income, saving, and net lending for the economy based on the 1993 SNA.
  - Quarterly data are released about two months after the reference quarter.
- Price statistics:
  - CPI and PPI are available on a timely and comprehensive basis.
  - A revised CPI was introduced in January 2011; it covers all 14 states and features a more disaggregated consumption basket and updated expenditure weights based on a 2009/10 comprehensive household income and expenditure survey.
- Government finance statistics:
  - Need to improve timeliness, detail, and availability of data on NFPEs and the state and local governments.
  - Desirable: more detailed data on nonlisted NFPEs’ assets and liabilities and domestic and foreign financing by type of debt instrument and holder.
  - Efforts require continued close collaboration among the Economic Planning Unit (EPU), the Treasury, and Bank Negara Malaysia (BNM).
  - Need to disseminate more information on public private partnerships.
- Monetary statistics:
  - MFS are reported on a timely and regular basis and are broadly in conformity with the Fund’s data needs.
  - Need to improve institutional coverage of financial corporations, sectorization of the domestic economy, and classification and valuation of financial instruments to ensure full adherence to the IMF’s Monetary and Financial Statistics Manual.
  - Coverage should be expanded to include insurance corporations, pension funds, and other financial intermediaries.
  - MFS missions of January 2004 and 2005 developed an integrated monetary database for BNM, STA, and APD.
  - BNM reports data in STA’s standardized report forms (SRFs); MFS based on SRFs are published in the quarterly IFS Supplement on Monetary and Financial Statistics.
- Balance of payments:
  - DOSM compiles and publishes quarterly BOP estimates in accordance with BPM5 and the SDDS.
  - Quarterly data are released three months after the reference quarter.
  - No data are shown for capital transfers or acquisition/sale of nonproduced nonfinancial assets.
  - Transactions in reserve assets are computed as differences in amounts outstanding and thus include valuation changes.
  - International investment position data on other investment—assets and liabilities—are reported only in aggregate form.

### II. Data Standards and Quality
- Malaysia subscribes to the Special Data Dissemination Standard (SDDS).
- It is using a timeliness flexibility option for general government operations (within six quarter lags after the end of reference year).

### Malaysia: Table of Common Indicators Required for Surveillance (As of November 22, 2011)
- Exchange rates
  - Date of Latest Observation: 11/22/11
  - Date Received: 11/22/11
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International reserve assets and reserve liabilities of the monetary authorities1
  - Date of Latest Observation: 11/15/11
  - Date Received: 11/22/11
  - Frequency of Data: Bi W
  - Frequency of Reporting: Bi W
  - Frequency of Publication: Bi W
- Reserve/base money
  - Date of Latest Observation: 11/15/11
  - Date Received: 11/22/11
  - Frequency of Data: Bi W
  - Frequency of Reporting: Bi W
  - Frequency of Publication: Bi W
- Broad money
  - Date of Latest Observation: 09/11
  - Date Received: 10/11
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Central bank balance sheet
  - Date of Latest Observation: 11/15/11
  - Date Received: 11/22/11
  - Frequency of Data: Bi W
  - Frequency of Reporting: Bi W
  - Frequency of Publication: Bi W
- Consolidated balance sheet of the banking system
  - Date of Latest Observation: 09/11
  - Date Received: 10/11
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Interest rates2
  - Date of Latest Observation: 11/22/11
  - Date Received: 11/22/11
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: M
- Consumer price index
  - Date of Latest Observation: 09/11
  - Date Received: 10/11
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Revenue, expenditure, balance and composition of financing3 —general government4
  - Date of Latest Observation: 2010
  - Date Received: 2011
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- Revenue, expenditure, balance and composition of financing3 —federal government
  - Date of Latest Observation: 2011:Q2
  - Date Received: 11/22/11
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Stocks of central government and central government guaranteed debt5
  - Date of Latest Observation: 2011:Q2
  - Date Received: 11/22/11
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- External current account balance
  - Date of Latest Observation: 2011:Q3
  - Date Received: 11/11
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Exports and imports of goods and services
  - Date of Latest Observation: 09/11
  - Date Received: 11/11
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- GDP/GNP
  - Date of Latest Observation: 2011:Q3
  - Date Received: 11/11
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Gross external debt
  - Date of Latest Observation: 2011:Q2
  - Date Received: 08/11
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q

Footnotes included in table:
- 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- 2 Both market based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.
- 3 Foreign, domestic bank, and domestic nonbank financing is only available on an annual basis.
- 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- 5 Including currency and maturity composition.
- 6 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A).

### Key findings from the Public Information Notice and Selected Indicators (excerpts)
- Outlook and growth:
  - GDP growth projected to slow to 4 percent in 2012.
  - Growth (percent change): Real GDP 6.5 (2007), 4.8 (2008), -1.6 (2009), 7.2 (2010), 4.7 (2011), 4.0 (2012).
  - Total domestic demand: 9.4 (2007), 5.8 (2008), -2.4 (2009), 12.4 (2010), 5.9 (2011), 4.5 (2012).
  - Consumption: 9.7 (2007), 9.0 (2008), 1.3 (2009), 5.2 (2010), 6.3 (2011), 3.8 (2012).
  - Private consumption: 10.5 (2007), 8.7 (2008), 0.7 (2009), 6.5 (2010), 6.0 (2011), 3.7 (2012).
  - Gross capital formation: 8.4 (2007), -2.9 (2008), -13.8 (2009), 38.3 (2010), 4.8 (2011), 6.6 (2012).
- Saving and investment (percent of GDP):
  - Gross domestic investment: 21.6 (2007), 19.3 (2008), 14.4 (2009), 21.4 (2010), 21.8 (2011), 21.8 (2012).
  - Gross national saving: 37.5 (2007), 37.0 (2008), 30.9 (2009), 32.9 (2010), 33.3 (2011), 32.6 (2012).
- Fiscal sector (percent of GDP):
  - Federal government overall balance: -3.2 (2007), -4.8 (2008), -7.0 (2009), -5.6 (2010), -5.5 (2011), -5.1 (2012).
  - Revenue: 21.8 (2007), 21.5 (2008), 23.3 (2009), 20.8 (2010), 22.2 (2011), 21.3 (2012).
  - Expenditure and net lending: 25.0 (2007), 26.3 (2008), 30.3 (2009), 26.5 (2010), 27.7 (2011), 26.4 (2012).
  - Federal government non-oil primary balance: -9.2 (2007), -11.7 (2008), -14.5 (2009), -11.0 (2010), -11.1 (2011), -9.9 (2012).
  - Consolidated public sector overall balance1/: 1.5 (2007), -5.6 (2008), -7.6 (2009), -2.1 (2010), -8.4 (2011), -8.8 (2012).
  - General government gross debt: 42.7 (2007), 42.8 (2008), 55.4 (2009), 55.4 (2010), 56.6 (2011), 57.5 (2012).
- Inflation and unemployment (period average, percent):
  - CPI inflation: 2.0 (2007), 5.4 (2008), 0.6 (2009), 1.7 (2010), 3.2 (2011), 2.5 (2012).
  - Unemployment rate: 3.2 (2007), 3.3 (2008), 3.7 (2009), 3.4 (2010), 3.2 (2011), 3.1 (2012).
- Money and credit (end of period, percentage change):
  - Broad money (M3): 7.9 (2007), 10.5 (2008), 7.7 (2009), 7.3 (2010), 14.4 (2011).
  - Credit to private sector: 7.9 (2007), 12.9 (2008), 6.2 (2009), 9.7 (2010), 12.2 (2011).
  - Three-month interbank rate (percent): 3.6 (2007), 3.4 (2008), 2.2 (2009), 3.0 (2010), 3.2 (2011).
- Balance of payments (US$ billions):
  - Trade balance: 37.7 (2007), 51.5 (2008), 40.2 (2009), 41.9 (2010), 47.4 (2011), 47.8 (2012).
  - Exports, f.o.b.: 176.3 (2007), 199.2 (2008), 157.3 (2009), 198.8 (2010), 226.9 (2011), 241.7 (2012).
  - Imports, f.o.b.: 138.5 (2007), 147.6 (2008), 117.1 (2009), 157.0 (2010), 179.6 (2011), 193.9 (2012).
  - Services and income account: -3.3 (2007), -6.9 (2008), -2.8 (2009), -7.7 (2010), -9.0 (2011), -9.2 (2012).
  - Current account balance: 29.8 (2007), 39.4 (2008), 31.8 (2009), 27.4 (2010), 31.5 (2011), 31.7 (2012).
    - (In percent of GDP): 15.9 (2007), 17.7 (2008), 16.5 (2009), 11.5 (2010), 11.5 (2011), 10.8 (2012).
  - Capital and financial account balance: -11.3 (2007), -35.7 (2008), -22.8 (2009), -6.2 (2010), -19.1 (2011), -19.6 (2012).
  - Overall balance: 13.2 (2007), -5.5 (2008), 3.9 (2009), 9.7 (2010), 12.5 (2011), 12.1 (2012).
  - Gross official reserves (US$ billions): 101.3 (2007), 91.6 (2008), 96.8 (2009), 106.5 (2010), 119.0 (2011), 131.1 (2012).
    - (In months of following year's imports): 6.8 (2007), 7.6 (2008), 6.1 (2009), 6.0 (2010), 6.2 (2011), 6.4 (2012).
    - (In percent of short-term debt)2/: 495.4 (2007), 274.9 (2008), 362.1 (2009), 347.0 (2010), 389.6 (2011), 436.0 (2012).
  - Total external debt (US$ billions): 56.7 (2007), 68.2 (2008), 68.0 (2009), 73.7 (2010), 73.3 (2011), 72.2 (2012).
    - (In percent of GDP): 30.3 (2007), 30.6 (2008), 35.2 (2009), 31.0 (2010), 26.6 (2011), 24.6 (2012).
  - Short-term external debt (percent of total)2/: 36.1 (2007), 48.9 (2008), 39.3 (2009), 41.7 (2010), 41.7 (2011), 41.6 (2012).
  - Debt-service ratio (In percent of exports of goods and services): 3.6 (2007), 2.8 (2008), 6.6 (2009), 2.7 (2010), 2.7 (2011), 2.6 (2012).

### Policy-relevant observations and recommendations (from Executive Board and authorities’ statements)
- Monetary policy:
  - Directors supported the current stance of monetary policy and saw room for lowering the policy rate if growth prospects worsen significantly.
  - Letting the exchange rate move flexibly in line with fundamentals while limiting excessive volatility would allow the real exchange rate to appreciate over the medium term.
- Fiscal policy:
  - Consolidating public finances remains a high priority.
  - Given projected slowdown in growth and relatively high public debt, scope for discretionary fiscal support appears limited.
  - Directors encouraged allowing automatic stabilizers to operate and anchoring any temporary stimulus around a medium term consolidation path.
  - Recommended: better target expenditure, broaden the tax base, and enhance fiscal transparency as recommended in the fiscal ROSCs.
- Structural reforms:
  - Continue reforms to raise growth potential and achieve more balanced and inclusive growth.
  - Priorities: improve business climate, enhance competition, upgrade workers’ skills, and create economic opportunities for all Malaysians.
  - Strengthen social safety nets, including a well designed minimum wage.
- Financial sector:
  - Financial system remains sound and well capitalized.
  - Household indebtedness increase warrants close monitoring.
  - Directors welcomed prudential measures, including guidelines to ensure borrowers’ debt is in line with incomes.
  - In case downside risks materialize, extraordinary support measures similar to those in 2008−09 could be reinstated.
- Data/statistics:
  - Further efforts needed to improve statistics for the consolidated public sector, NFPEs, state and local governments, and for expanded coverage in MFS to include insurance corporations, pension funds, and other intermediaries.

*Source: ANNEX III: MALAYSIA—STATISTICAL ISSUES (As of November 22, 2011) and related sections of the 2011 Article IV documents.*

### 6. Public confidence in the financial system was also preserved. The financial market

### _cr1243 - 6. Public confidence in the financial system was also preserved. The financial market

### Financial system resilience and market confidence
- Public confidence in the financial system was preserved; the financial market absorbed increased volatility from concerns about sovereign risk in the US and Euro area.
- Malaysian banks’ (including Labuan banks) exposure to the Euro area account for less than one fifth of total external exposures.
- More than half of these direct European exposure were with the EU-3 countries.
- European banks in Malaysia fund their operations domestically, with the bulk of these being in the form of domestic deposits which account for more than 80% of their total funding.
- European banks in Malaysia are locally incorporated subsidiaries, which helps “isolate” risks emanating from their parent companies.

### Household indebtedness and household sector health
- Overall household indebtedness to GDP ratio: 77.6 percent in the third quarter of 2011.
- Bulk of household debt directed toward asset accumulation (residential properties and vehicles).
- Banks’ credit to households through personal financing and credit cards: increased at a faster pace but continued to represent less than 10 percent of overall banking system loans, unchanged from 2010.
- Household financial strength and buffers:
  - Financial assets amount to 2.3 times of total household debts.
  - Sustained growth in income levels and a low unemployment rate have strengthened capacity to undertake borrowings.
  - A high savings rate supported by continued growth in deposits of households.
  - Household deposit accounts for 32 percent of financial assets and 75 percent of debt of households.
- Net impaired loan ratio for the household sector: 1.8% at end-2011.

### Prudential measures and regulatory initiatives for household sector sustainability
- Central Credit Reference Information System supports continued underwriting standards by financial institutions.
- Pre-emptive measures implemented by BNM include:
  - Revised credit card guidelines.
  - Intensified supervisory focus.
  - Implemented a maximum loan-to-value (LTV) ratio of 70 percent on the third and subsequent financing facility for the purchase of houses.
  - Higher risk weights of 100 percent (from 75 percent) for capital charge on housing loans with LTV exceeding 90 percent and personal financing with tenure of more than five years.
- Guidelines on Responsible Finance issued by BNM on 18 November 2011 to promote responsible behaviours and practices by lenders and households; focus on strengthening rigour of affordability assessments and ensuring more consistent practices across the industry.
- Similar guidelines issued to cooperatives by the Co-operative Commission of Malaysia.

### Financial Sector Blueprint and Islamic finance
- Financial Sector Blueprint 2011 – 2020 unveiled in December 2011 to guide the financial system’s role as a driver and catalyst of economic growth.
- Blueprint builds on the Financial Sector Masterplan (2001 - 2010); recommendations have been successfully completed or are being implemented on an ongoing basis.
- Islamic finance industry continues sustainable growth; measures undertaken include strengthening prudential and regulatory framework, strategic collaboration with global partners, and operationalisation of the International Islamic Liquidity Management Corporation for more efficient cross-border liquidity management.

### Fiscal policy and debt management
- Fiscal deficit outcome and projection:
  - Government expected to register a better-than-expected lower fiscal deficit of 5.4 percent of GDP in 2011.
  - Malaysia expects to achieve a lower fiscal deficit of 4.7 percent of GDP in 2012.
- Debt rule and flexibility:
  - Government committed to ensuring total debt level (domestic and external) not exceeding 55 percent of GDP.
  - Authorities view a temporary rise in Federal Government debt level (above the 55 percent to GDP threshold) as acceptable to support aggregate demand if growth deteriorates.
- Authorities emphasize improving fiscal position while remaining supportive of growth and maintaining fiscal discipline and medium-term fiscal targets.

### Exchange rate policy and valuation assessment
- Managed float exchange rate policy continued to balance stability and flexibility; focus on maintaining orderly foreign exchange market conditions and avoiding misalignment against fundamentals.
- Authorities do not have a particular target for the exchange rate level; intervention operations have been two-way and limited to ensuring orderly market conditions and preventing extremes in currency volatility.
- Ringgit developments:
  - Ringgit reached a new high in July 2011, an appreciation of 29% since the adoption of the managed float in July 2005.
  - The appreciating trend was interrupted in the second half of 2011 due to mounting concerns in the global economy.
  - The modest depreciation in 2011 only partially reversed the cumulative appreciation of 9% appreciation in 2009 and 2010.
- Authorities question the capacity of model-based IMF valuation estimates to capture country-specific features (including significant contribution of non-renewable commodities such as oil to the trade balance) and note the IMF assessment on potential undervaluation is not corroborated with qualitative evidence given low inflation and no evidence of persistent imbalances.

### Structural reforms and growth potential
- Government has comprehensive structural reform plans (Government Transformation Programme and Economic Transformation Programme (ETP)) to address structural issues and create a globally competitive enabling environment to accelerate transformation into a high-income economy by 2020.
- Since the launch of the ETP in October 2010, total committed investments (up to the year 2020) amount to around USD58 billion.

### Final remarks and risk monitoring
- Malaysia has embarked on a far-reaching reform agenda to elevate growth and development.
- Authorities are mindful of significant downside risks from the challenging global environment and will closely monitor external developments and respond as appropriate.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1243.pdf*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1243.pdf_