## _cr1558 ## Source details **Canonical URL:** [_cr1558](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1558.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1558.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1558.pdf.json) --- ### Growth and exports — recent developments and outlook - Growth accelerated to 5.9 percent in 2014. - Growth is expected to moderate to 4.8 percent in 2015. - Activity drivers: - Recovery of exports and continued strong private demand in 2014. - 2015: activity led by private investment in the non-oil sector; private consumption likely to moderate. - External and financial developments: - Residential property loan growth close to 14 percent in September (2014). - Deposit growth slowed to the single digits; domestic liquidity conditions beginning to tighten. - Ringgit: cumulative depreciation by year-end of about 6.3 percent since January 2014; depreciated by 10 percent from mid‑August to end‑December 2014 amid oil price falls. - Reserves declined by over US$15 billion between mid‑August to end‑December 2014 amid capital outflows. - Projections and channels: - Lower energy costs characterized as a large negative terms of trade shock for Malaysia but only a modest negative impact on growth as non‑oil sector should be stimulated. - GST implementation will increase headline inflation on introduction in April 2015 (one‑off effect of 0.7–0.9 percent); lower fuel prices and subdued underlying inflation will mitigate the impact. ### Risks to the baseline - Risks tilted to the downside. - External risks: - Protracted slower growth in advanced economies and emerging markets would slow Malaysia through the trade channel. - Sizeable foreign holdings of local currency assets expose Malaysia to capital flow volatility; a surge in global volatility could induce investor retrenchment. - Malaysia vulnerable to contagion and volatility in a disorderly adjustment to persistent dollar strength; export‑oriented manufacturing may benefit. - Domestic risks: - Fiscal reform momentum could slow; maintaining path to balance the budget by 2020 is important. - Larger-than-expected impact from lower oil and gas prices could damp growth via delayed investment, higher real interest rates, narrower current account surplus, and need for additional fiscal measures. - Financial vulnerabilities from high household debt and elevated house prices despite recent cooling signs. ### Fiscal policy: reforms, outturns, and medium-term strategy - Key 2014 reforms: - Remaining fuel subsidies on RON95 gasoline and diesel removed on December 1, 2014. - RON95 petrol and diesel prices set monthly to track international oil prices. - GST implementation scheduled for April 2015 is on track. - Sugar subsidies removed; electricity prices increased by 15 percent in January 2014. - 2014 budget outturn: - On track to meet 2014 federal budget deficit target of 3.5 percent (down from 3.9 percent in 2013). - Revenues exceeded budget; higher wage bill and higher development spending offset lower subsidy spending. - 2015 budget revision (January 20, 2015): - Originally based on Brent crude oil price of US$100 and targeted deficit of 3 percent of GDP. - Revised to assume an oil price of US$55 (average Tapis crude price of US$61); revised deficit target 3.2 percent of GDP. - Removal of fuel subsidies expected to bring savings of RM10.7 billion (0.9 percent of GDP), offset by lower oil and gas revenues. - Measures to ease GST impact: reductions in individual and corporate income taxes and SME tax reductions between 1–3 percentage points; only a small net positive revenue impact from GST is expected in 2015. - If Tapis oil prices fall below US$60, the budget would face a net loss requiring additional measures. - Staff recommendations and observations: - Staff welcomes GST for broadening the fiscal base and reducing reliance on volatile oil and gas revenues; encourages saving any upside GST revenue. - Suggest gradually narrowing exempt and zero‑rated items and notes room to gradually raise GST above Malaysia’s 6 percent rate. - Recommend continued subsidy rationalization, consider imposing GST on fuels and accounting for carbon content. - Enhanced protection for the poor: elimination of fuel subsidies freed resources; 2015 budget increases cash transfers to households earning less than RM4,000 per month; authorities reviewing overlapping cash transfer programs. - Medium‑term goal: balance the budget by 2020 and reduce federal debt to near pre‑crisis levels; feasible measures include broadening GST base or increasing rate, rationalizing subsidies from public enterprises, and operational expenditure restraint. - Fiscal framework improvements urged: publish medium‑term fiscal framework; adopt a fiscal risks management framework and publish an annual fiscal risks statement; reduce use of supplementary budgets; increase transparency for GLCs. ### Monetary policy and macroprudential stance - Monetary policy actions and stance: - Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) in July 2014 (first increase since May 2011) and has since paused. - Staff view: prudent to move from accommodative toward a neutral stance once global uncertainty dissipates; calibration important to avoid further financial imbalances or over‑correction. - Contingency: if global financial volatility causes large capital outflows and liquidity squeeze, BNM should provide liquidity to maintain orderly markets. - Liquidity and rates: - Market‑driven tightening of domestic liquidity underway amid capital outflows and slowed deposit growth; phased LCR implementation beginning in June 2015. - No evidence of generalized price pressures; GST expected to raise headline inflation 0.7–0.9 percent one‑off. - Macroprudential framework and measures: - Monetary policy should continue to be complemented by macroprudential policies. - Macroprudential measures since 2010 include RPGT changes, LTV caps, enhanced risk‑weights, responsible financing guidelines, caps on credit cards, maximum mortgage term rules, prohibition of DIBS, and an enhanced framework for risk‑based pricing (effective March 2014). - Measures have succeeded in lowering personal credit growth, reducing speculative property market behavior, and slowing loan applications and approvals. - Staff notes additional measures such as LTV caps on first and second mortgages may be needed. - Financial vulnerabilities and indicators: - Credit increased by over 60 percent since end‑2009; credit‑to‑GDP ratio above long‑term trend. - Real interest rates on deposits negative since 2009. - Household debt grown rapidly since 2008; just over half owed on residential property; about 70 percent of mortgages are variable rate. - NBFI lending to households doubled since 2009 and accounted for about 20 percent of household debt at end‑2013. - Since 2008, house prices increased by 60 percent, outpacing income and rental growth. - Asset quality improved: nonperforming loan ratio 1.8 percent (Jun. 2014) compared with 6 percent at end‑2007; provisioning ratio just over 100 percent. - BNM requirement: by end 2015 banks maintain, on aggregate, collective impairment provisions and regulatory reserves of at least 1.2 percent of total outstanding loans (net of individual impairment provisions). ### External sector, reserves, and capital flow volatility - Current account and REER: - Current account surplus shrank from 11 percent of GDP in 2011 to an estimated 3.5 percent of GDP in 2014. - Staff assesses the cyclically‑adjusted current account gap for 2014 at about 3 percent of GDP and REER undervaluation by about 10 percent (consistent with identified current account gap). - Medium‑term staff projection: current account surplus to decline to 2 percent of GDP as external rebalancing continues and lower oil and gas prices reduce the trade surplus. - Reserves and adequacy: - Foreign reserves at about 85 percent of the Fund’s reserve‑adequacy metric; assessed to be adequate given exchange rate flexibility. - Official reserves (end‑December 2014) covered 81 percent of short‑term external debt and 27 percent of broad money. - Capital flows: - Portfolio flows volatile in 2014 with large net inflows in Q2 followed by outflows later in 2014. - Net outflows about 7 percent of GDP in first three quarters of 2014; portfolio outflows accounted for more than 2 percent of GDP. - Malaysia’s flexible exchange rate, domestic‑currency borrowing, current account surplus, substantial official reserves, and large domestic investors (e.g., Employee Provident Fund) provide resilience. ### Impact of lower oil and gas prices (Appendix 2 summary) - Structure and exposures: - Services 55.2 percent, Manufacturing 24.5 percent, Mining 8.1 percent, Agriculture 7.1 percent of GDP (2013). - Exports over 70 percent of GDP; three quarters manufactures; oil and gas about 14 percent. - Production, processing and exports of energy products and other commodities amounted to 15 percent of GDP in 2014 and contributed a net surplus of about 6 percentage points of GDP to the trade balance. - Oil and gas revenue of the federal government amounted to about 30 percent of total revenue. - Crude oil and natural gas: - Tapis oil averaged about US$10 above IMF’s average spot price during 2014; futures indicate Tapis crude average price of US$64 in 2015. - Malaysia’s crude oil production for first 11 months in 2014 about 590,000 bbl/d. - Proven gas reserves 83 trillion cubic feet; production 2.3 Tcf in 2013; LNG exports 1.2 Tcf in 2013. - Quantified effects: - Lower energy prices expected to be a drag on energy production but only modest negative overall effect on growth. - At crude oil prices in the US$65–75 range, domestic energy users face about same cost of energy as before subsidy elimination; situation changes if Tapis prices remain below US$60. - Tapis crude prices reached a low of US$ 55 on January 6, 2015. - Lower energy prices estimated to reduce oil and gas trade surplus by about 1¼ percent of GDP in 2015. - Current account projected at about 2.9 percent of GDP in 2015. - With projected average Tapis price of US$61, savings from subsidy removal smaller than reduction in oil and gas revenues, prompting Budget revision on January 20, 2015. - Permanently lower oil and gas prices imply substantial medium‑term budget effects; fiscal consolidation would rely on broad‑based taxes (GST) and additional spending rationalization. ### External sector assessment and staff preferred REER estimate (Appendix 4) - EBA findings (October 2014 data): - 2014 current account norm: 0.2 percent of GDP; 2014 current account balance: 3.5 percent of GDP; 2014 cyclically adjusted current account balance: 4.5 percent of GDP. - EBA‑estimated gap: 4.3 percentage points of GDP (identified policy gaps about 1.1 percent of GDP; unexplained residual 3.2 percent). - EBA REER regression: REER estimated 29 percent below levels warranted by fundamentals and desirable policies (24 percent unexplained residual). - Staff preferred REER undervaluation estimate: about 10.3 percent (based on elasticity approach with semi‑elasticity η_CA = -0.29). ### External debt sustainability (Appendix 6) - Summary and baseline projection: - External debt relatively high but expected to fall to about 56.8 percent of GDP by 2019 (baseline 2019: 56.8). - Baseline external debt path (selected years): 2014: 69.4; 2015: 69.5; 2016: 67.3; 2017: 63.9; 2018: 59.6; 2019: 56.8. - Stress scenario: one‑time 30 percent real depreciation in 2015 would spike debt ratio to about 90 percent of GDP on impact, falling to 75 percent by 2019. - Key figures (selected): - Debt‑stabilizing non‑interest current account: -0.6 (percent of GDP). - External debt‑to‑exports ratio (2014): 86.0 (percent). - Gross external financing need (2014): 117.5 (billions of U.S. dollars); as percent of GDP (2014): 35.5. - Macroeconomic assumptions (selected): - Real GDP growth projections include 2014: 5.6; 2015: 4.8; subsequent years ~5.0. - Nominal external interest rate sample values include 2015: 4.0; 2016: 5.1; 2017: 5.7. ### Macroprudential measures timeline and effects - Major measures since 2010 (selected, with exact entries preserved): - January 2010: Reintroduced 5 percent Real Property Gains Tax (RPGT) for properties sold in less than 5 years. - November 2010: Imposed LTV caps of 70 percent on third and subsequent mortgages. - February 2011: Capital risk‑weights raised to 100 percent for mortgages with LTVs exceeding 90 percent and for long‑tenure personal loans. - March 2011: Minimum income eligibility for new credit card holders set at RM 24,000 per annum; limits on issuers and maximum credit per issuer. - December 2011: LTV cap of 60 percent on housing loans for corporates. - January 2012: Guidelines on responsible financing and DSR computation based on net income. - July 2013: Maximum mortgage term of 35 years and maximum tenure of 10 years on financing extended for personal use; prohibited pre‑approved personal financing products. - January 2014: Distinguished RPGT for Malaysians, foreigners and corporates; increased minimum house price for foreigners to RM 1,000,000; banned Developers Interest Bearing Scheme (DIBS). - Outcomes: - Macroprudential measures successful in curbing personal loan growth, moderating house price growth, and improving loan application/approval trends. ### Staff appraisal, structural priorities, and policy advice - Staff appraisal highlights: - Economy performing well; Malaysia on track to reach high income status by 2020; robust domestic demand driving noninflationary growth amid uncertain external conditions. - Fiscal reforms commended: floating RON95 petrol and diesel prices and implementing GST in April 2015 support fiscal targets. - Fiscal implementation risks receded; 2015 budget revision timely and pragmatic given energy price changes. - Structural priorities recommended: - Improve infrastructure, upgrade education quality, boost research and development spending, raise effectiveness in generating home‑grown innovation, and increase female labor force participation. - Continue financial sector development, greater financial inclusion, and strengthen social safety net. - Accelerate regional integration (including AEC in 2015) to unlock growth; TPP example: estimated income gain of 6 percent relative to status quo (staff example). - Policy advice summary (Appendix 1): - Fiscal: bring down debt to sustainable levels (pre‑2008 levels by 2020), strengthen macro‑fiscal framework, broaden tax bases (GST) and rationalize tax incentives, phase out subsidies and replace with targeted cash transfers. - Monetary/financial: begin normalizing monetary conditions while accounting for external uncertainty; continue macroprudential policies; strengthen cross‑border supervisory cooperation. - Structural: scale up infrastructure, reform education, strengthen social safety net, develop defined contribution private pensions and consider raising withdrawal age from EPF. ### Data adequacy, AML/CFT, and surveillance - Data adequacy: - Data provision broadly adequate for surveillance; further improvements needed for consolidated general government and public sector statistics, NFPEs, and state/local government data. - National accounts, CPI, PPI, MFS, and balance of payments compiled and published with noted areas for coverage and timeliness improvements. - AML/CFT: - November 2014: on‑site assessment by the Asia Pacific Group (APG) under FATF new methodology; LEG participated; final report scheduled for APG July 2015 Plenary. - FATF admitted Malaysia as an observer country in October 2014; working toward full membership requirements. ### Key tables and headline numeric indicators (selected exact figures) - Real GDP (percent change): 2010: 7.4; 2011: 5.2; 2012: 5.6; 2013: 4.7; 2014: 5.9; 2015 (Proj.): 4.8. - CPI inflation (period average): 2010: 1.7; 2011: 3.2; 2012: 1.7; 2013: 2.1; 2014: 3.1; 2015 (Proj.): 3.2. - Federal government overall balance (percent of GDP): 2014: -3.5; 2015 (Proj.): -3.2; 2020 (target): -1.5 (Table 4 projections show progressive improvement to -1.5 by 2020). - Nominal GDP (2013): US$313 billion; Nominal GDP (2015 projection): US$359 billion. - Household debt (percent of GDP): 2010: 74.5; 2011: 76.2; 2012: 81.2; 2013: 86.6. - Current account (percent of GDP): 2010: 10.9; 2011: 11.6; 2012: 5.8; 2013: 4.0; 2014: 3.5; 2015 (Proj.): 2.9. - Gross official reserves (US$ billions): 2014: 116.1; 2015 (Proj.): 123.8. - Total external debt (US$ billions): 2014: 230.0; 2015 (Proj.): 249.7. - Nonperforming loan ratio: 1.8 percent (Jun. 2014). - Regulatory capital to risk‑weighted assets (Jun. 2014): 14.6; Regulatory Tier 1 capital to risk‑weighted assets (Jun. 2014): 12.9. - Loan‑to‑deposit ratio (end‑Nov. 2014): 86.6 percent (compared with 84.6 percent at end‑2013); loan‑deposit ratio (Jun. 2014, Table 7): 85.8. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 1. Growth and Exports ____________________________________________________________________________ 17 ### 1. Growth and Exports ### Recent developments - Growth accelerated to 5.9 percent in 2014 as recovery of exports and continued strong private demand offset mild headwinds from lower public spending. - Private investment is supported by accommodative financial conditions and long term public investment programs. - Strong employment and wage growth supported private consumption. - Removal of fuel subsidies pushed inflation above its historical average without signs of more generalized inflationary pressures, despite a positive output gap. - Residential property loan growth was close to 14 percent in September. - Deposit growth has slowed to the single digits and domestic liquidity conditions are beginning to tighten. - The ringgit appreciated against the U.S. dollar through mid-August but subsequently depreciated by 10 percent as oil prices fell, for a cumulative depreciation by year-end of about 6.3 percent since January 2014, with further depreciation pressures in early January 2015. - Reserves declined by over US$15 billion between mid-August to end-December 2014 amid capital outflows. ### Outlook - Growth is expected to moderate to 4.8 percent in 2015. - Activity will be led by growth in private investment in the non-oil sector, likely to benefit from lower energy costs. - Private consumption growth is likely to moderate due to combined effects of lower commodity prices, the impact of GST, and slower credit growth. - The projected decline in average crude oil prices for 2015 compared to 2014 is characterized as a large negative terms of trade shock for Malaysia. - Only a modest negative impact on growth is expected as lower energy costs should stimulate the non-oil sector and boost activity in Malaysia’s main trading partners. - Financial conditions remain accommodative but are tightening, a trend expected to continue in 2015 and become a drag on growth, particularly private consumption. - GST implementation will increase inflation on introduction in April 2015 but lower fuel prices, subdued underlying inflation, and a narrowing output gap will mitigate the impact. ### Risks - Risks to the baseline are tilted to the downside. - External risks: - A protracted period of slower growth in advanced economies and emerging markets would slow Malaysia through the trade channel with second round effects on domestic demand. - Sizeable foreign holdings of local currency assets expose Malaysia to volatility in international capital flows; a surge in global volatility could induce investor retrenchment from Malaysian assets. - Mitigants: Malaysia’s flexible exchange rate, ample monetary policy credibility, well timed fiscal adjustment, and financial cushions from large official reserves and institutional savings. - Malaysia could be vulnerable to contagion and financial volatility in the case of a disorderly adjustment to persistent dollar strength, although the export-oriented manufacturing sector is likely to benefit. - Domestic risks: - Fiscal reform momentum could slow; maintaining the path to balance the budget by 2020 is important. - The impact of lower global oil and gas prices could be larger, dampening growth through delayed investment plans and higher real interest rates; the current account surplus could narrow and additional measures may be needed to meet fiscal targets. - Financial vulnerabilities remain due to high household debt and elevated house prices despite signs of cooling in the housing market and curtailed personal lending growth. ### Authorities’ views - Authorities broadly agreed with staff’s assessment. - They expect growth to remain steady in 2015, led by private demand; private consumption to expand but at a more moderate rate following GST and other price adjustments. - Slower household credit growth is not expected to significantly impact consumption provided economic growth is sustained. - Investment in the oil and gas sector could be affected if oil prices remain low for an extended period; oil and gas account for less than 20 percent of private investment while services and manufacturing contributed 80 percent of growth in investment in 2013. - Commodity and resource-based exports will be affected by lower commodity prices; non-resource based manufacturing exports, which account for 53 percent of total exports, are expected to support export growth. - Authorities view external risks as significant given recovery uncertainties in advanced economies and potential global financial market turbulence. - On financial sector risks, authorities are less concerned than staff, citing moderated credit and house price growth and effects of targeted macroprudential measures. Stress tests indicate bank balance sheets are resilient, including to large changes in house prices and interest rates. ### Fiscal policy: timely and decisive moves - Key fiscal reforms in 2014: - Remaining fuel subsidies on RON95 gasoline and diesel were removed on December 1, 2014. - Earlier moves included floating RON97 premium petrol in 2010 and price increases in September 2013 and October 2014 (20 sen per liter, about 10 percent each) for diesel and RON95 petrol. - Prices for RON95 petrol and diesel are now set monthly to track international oil prices. - GST implementation scheduled for April 2015 is on track. - Other subsidies are being reformed and budget transfers better targeted. - 2014 budget outturn: - Malaysia is on track to meet the 2014 federal budget deficit target of 3.5 percent, down from 3.9 percent in 2013. - Revenues exceeded budget due to stronger growth and higher oil and gas production despite weakening oil and gas prices. - Over-performance on revenue was matched by higher-than-budgeted wage bill and higher development spending; subsidy spending was lower. - 2015 budget: - Originally based on Brent crude oil price of US$100 and targeted a budget deficit of 3 percent of GDP. - Revised on January 20 to assume an oil price of US$55 (average Tapis crude price of US$61) and dismantling of fuel subsidies announced on December 1. - Revised budget deficit target changed to 3.2 percent of GDP in 2015, owing to additional expenditures related to floods affecting 200,000 people, partly offset by reduction in lower priority operational spending. - Measures to ease GST impact include reductions in individual and corporate income taxes as well as the SME tax of between 1–3 percentage points; only a small net positive revenue impact from GST is expected in 2015. - Removal of fuel subsidies expected to bring in savings of RM10.7 billion (0.9 percent of GDP); this saving will be offset by lower oil and gas revenues in the baseline scenario. - If Tapis oil prices fall below US$60, the budget would face a net loss, requiring additional measures to meet the deficit target. - GST recommendations and observations: - Staff welcomes GST as it broadens the fiscal base and reduces reliance on volatile oil and gas revenues. - GST registration for the credit-invoice procedure is running ahead of projections. - Staff encourages authorities to save any upside GST revenue. - Effectiveness could be enhanced by gradually narrowing the list of exempt and zero-rated items; fewer exemptions would also improve cross-checking and compliance. - There is room to gradually raise the GST rate; Malaysia’s 6 percent GST rate is noted as the lowest in the region. - Subsidy rationalization: - Elimination of diesel and RON95 petrol subsidies is welcomed; gaps between market and subsidized prices were small when prices were floated. - Sugar subsidies removed and electricity prices increased by 15 percent in January 2014. - LPG use in fishing and transportation remains subsidized at an estimated cost of RM2 billion (0.2 percent of GDP) in 2015. - Future considerations: imposing GST on fuels and taking into account carbon content to address environmental and climate change effects. - Enhanced protection for the poor: - Untargeted fuel subsidies were regressive: top two quintiles received 60 percent of subsidies while the bottom decile received 3 percent. - Elimination of fuel subsidies freed resources to support the poor. - 2015 budget increases cash transfers to poorer households (those earning less than RM4,000 per month); authorities are reviewing overlapping and fragmented cash transfer programs. - Medium-term fiscal strategy: - Goal to balance the budget by 2020 to reduce federal debt to near pre-crisis levels. - Balancing the budget requires continued efforts amid declining oil revenues relative to GDP and rising expenditure commitments. - If oil price decline is permanent, more measures would be required to meet fiscal targets; feasible given GST implementation and removal of consumer fuel subsidies. - Potential additional measures: broadening GST base or increasing the rate, rationalizing subsidies from public enterprises (e.g., electricity and gas), and operational expenditure restraint. - Automatic stabilizers and countercyclical policies could be employed if the economy slows more than expected; adjustment could be stretched beyond 2020. - Fiscal framework improvements: - Creation of the Fiscal Policy Committee and reduced size of supplementary budgets strengthened top-down macro-fiscal control. - Move toward performance-based budgeting and piloting of accrual accounting in 2015 ahead of full implementation in 2016. - Recommendations: publish medium-term fiscal framework; adopt a fiscal risks management framework and publish an annual fiscal risks statement; reduce further use of supplementary budgets. - Increased transparency for Government-linked Corporates (GLCs) is encouraged. ### Monetary policy: getting the balance right - Bank Negara Malaysia (BNM) raised its Overnight Policy Rate (OPR) in July 2014, the first increase since May 2011. - BNM has since adopted a wait-and-see attitude; this cautious stance is considered appropriate given lower expected inflation, slowdown in domestic economic growth, and increased uncertainty in the domestic and global outlook. - Market-driven tightening of domestic liquidity is underway amidst capital outflows and intensified bank competition for deposits following slowdown in deposit growth and ahead of phased implementation of the Liquidity Coverage Ratio (LCR) beginning in June 2015. - No evidence of generalized price pressures; GST introduction expected to push headline inflation up by 0.7–0.9 percent as a one-off fiscal shock. - Staff view: prudent to move from current accommodative stance toward a neutral stance to maintain price stability and curb financial imbalances once global uncertainty dissipates. - Calibration challenge: too slow a pace risks further build-up of financial imbalances; too fast risks over-correction of the real economy. - Contingency: if global financial volatility leads to large capital outflows and a squeeze on liquidity, BNM should stand ready to provide liquidity to maintain orderly market conditions and prevent excessive tightening in monetary conditions. *IMF staff report excerpt: “Recent Developments, Outlook, and Risks” and sections on Fiscal and Monetary Policy from the Malaysia Article IV staff report.* ### 15. Macroprudential policies. Monetary policy should continue to be complemented by ### _cr1558 - 15. Macroprudential policies. Monetary policy should continue to be complemented by ### Macroprudential framework and recent stance - Monetary policy should continue to be complemented by macroprudential policies. - Until the rate tightening in July, and with the strength of the domestic recovery uncertain, BNM appropriately relied on macroprudential policies to dampen financial risks. - BNM’s macroprudential policies were aimed at reducing credit and house price increases and enhancing the resilience of the banking system. ### Authorities’ views on monetary policy - The authorities viewed the current monetary policy stance as appropriate to maintaining price stability and consistent with sustainable growth prospects. - The step towards monetary policy normalization in July 2014 reflected assessments at the time of lower downside risks to growth and an increase in upside risks to inflation, and considered risks of destabilizing financial imbalances. - Their policy setting took into account: increased uncertainty since the summer in the growth outlook in major advanced and emerging markets economies; the fall in oil and commodity prices; and the heightened risk of global financial volatility along with a moderating risk of domestic financial imbalances. - Further adjustments remain contingent on new information. ### Leverage and systemic risks - Malaysia’s financial system is strong and well diversified; Malaysian banks are well-capitalized and profitable. - Financial sector vulnerabilities reflect several years of rapid credit growth and significant increase in leverage. - Credit has increased by over 60 percent since end-2009 and the ratio of credit-to-GDP is above long-term trend. - Real interest rates on deposits have been negative since 2009. - Deposit growth has slowed while savings in financial products have grown strongly, raising concerns about disintermediation and excessive financial risk-taking. ### Household debt and housing market - Household debt has grown rapidly since 2008, reflecting growth in both mortgages and personal credit. - Just over half the debt is owed on residential property, of which about 70 percent are variable rate mortgages. - NBFI lending to households has doubled since 2009 and accounted for about 20 percent of household debt at end-2013. - Since 2008, house prices have increased by 60 percent, outpacing income and rental growth. - Mitigating factors: household financial assets at just over twice household debt; strong financial buffers. - Distributional vulnerability: lower income borrowers are more highly leveraged. - Recent cooling in the housing market could be temporary, reflecting property re-pricing ahead of GST implementation and the prohibition of Interest Capitalization Schemes. - Macroprudential measures have been successful in curbing risks: personal loan growth slowed after measures targeting NBFIs in July 2013 and tighter caps on debt-service ratios for lower income households. - An enhanced framework for risk-based pricing (effective March 2014) is helping reduce loan applications and approvals. - Staff notes that additional macro-prudential measures, such as LTV caps on second and first mortgages, may be needed. ### Corporate sector debt and external corporate exposure - Corporate sector debt has increased and is now close to the average for other Asian countries. - Debt securities and sukuk markets are an important source of financing. - Debt issuance is mostly long term and ringgit denominated with limited holding by foreigners. - Nonfinancial private offshore external debt is about 9 percent of GDP. - Resident companies with foreign currency exposure either hedge using onshore banks or have a natural hedge of foreign currency earnings. - On aggregate, corporate solvency and liquidity ratios appear comfortable. ### Asset quality and provisioning - Asset quality continues to improve: nonperforming loan ratio of 1.8 percent compared with 6 percent at end-2007. - Decline in amounts of impaired loans confirmed improvement; vintage analysis shows default rates by months-on-book declining for loans originating in later periods. - Provisioning is adequate with a ratio just over 100 percent. - To address a gradual decline in collective impairment provisioning, BNM will require that by end 2015, banks maintain, on aggregate, collective impairment provisions and regulatory reserves of at least 1.2 percent of total outstanding loans (net of individual impairment provisions). - Risk-informed price standards (effective March 2014) require banks to articulate costs and expected losses for different retail loan and financing product segments and ensure alignment with banks’ risk management plans. ### Disintermediation and funding pressures - Deposit growth has been trending down since end-2011: 7.8 percent y-o-y at end November 2014, compared with 8.3 percent at end-2013. - Growth in deposits by individuals declined to 3.8 percent at end November, compared with 6.0 percent at end-2013. - Combined with strong loan growth, the loan-to-deposit ratio rose to 86.6 percent at end-November 2014 compared with 84.6 percent at end-2013. - Banks remain predominately deposit funded but slow system-wide deposit growth along with pending Basel III LCR implementation is nudging up deposit interest rates. - The new reference rate framework for loan pricing (effective 2015) should ensure higher funding costs are passed on to retail lending rates, although mortgage market competition could offset this. - Policy recommendation: A higher policy rate would help by increasing deposit rates, encouraging savings to remain in the banking system, and curbing the pace of disintermediation and leverage growth. ### Foreign currency exposure and overseas operations - Overseas operations of domestic banks expanded within Asia, primarily into Indonesia and Singapore; total assets of overseas subsidiaries and branches grew by 16.3 percent during 2013. - Overseas assets are dominated by loans and plain vanilla debt securities and largely funded by local currency deposits, limiting cross-border funding risks. - Malaysian banks are primarily deposit-funded; however, foreign currency borrowing has increased to meet customers’ needs and for foreign currency liquidity management. ### Authorities’ view on financial vulnerabilities - Authorities view financial sector vulnerabilities as having moderated, citing a slowdown in household debt growth, in lending from the nonbank sector, and a decline in speculative behavior in real estate. - They attribute these developments to macroprudential measures taken by BNM and other agencies in a holistic approach. - Their approach has been deliberately gradual and targeted to avoid over-correction. - Authorities do not see the need for additional policy action at this time; existing measures—risk informed pricing, more rigorous borrower affordability assessment, supervisory vigilance over underwriting practices, and additional capital requirements—remain effective. - Authorities consider slowing deposit growth a natural consequence of financial sector development. ### External sector assessment and reserves - Current account surplus shrank from 11 percent of GDP in 2011 to an estimated 3.5 percent of GDP in 2014. - The surplus was reduced in the second half of 2014 reflecting lower crude oil and gas prices, although manufacturing exports increased and imports fell. - Staff assesses the gap between the cyclically-adjusted current account and its norm for 2014 to be about 3 percent of GDP and Malaysia’s real effective exchange rate (REER) to be by about 10 percent (consistent with the identified current account gap). - In the medium term, staff projects the current account surplus to decline to 2 percent of GDP as external rebalancing continues and lower oil and gas prices reduce the oil and gas trade surplus. - Foreign reserves, at about 85 percent of the Fund’s reserve-adequacy metric, are assessed to be adequate given exchange rate flexibility. ### Capital flow volatility and resilience - Malaysia’s open economy is affected by swings in international capital flows; portfolio flows were volatile in 2014 with large net inflows in Q2 followed by outflows later in 2014. - The real economy was largely unaffected due to deep, liquid financial markets and flexible exchange rate. - Flexible exchange rate and domestic-currency borrowing help avoid currency mismatch problems associated with “original sin” and create more balanced risk-sharing with foreign creditors during risk-off episodes. - Current account surplus, substantial official reserves, and domestic investors (notably the Employee Provident Fund) provide resilience and can offset foreign outflows. ### Sustaining growth and structural priorities - Malaysia’s growth record: growth averaging over 6 percent since independence; public investment about 14 percent of GDP over the last 10 years, partially funded through PPPs. - Staff supports authorities’ multi-year transformation programs to avoid the middle income trap and reach high income status by 2020. - Key reform priorities: improve infrastructure, upgrade education quality, boost research and development spending, raise effectiveness in generating home-grown innovation, and increase female labor force participation. - Continued financial sector development, greater financial inclusion, and a strong social safety net are important complements. - Continued economic openness and deeper regional integration (including AEC in 2015) are integral to the reform strategy. - Example provided: income gain for Malaysia from the Trans-Pacific Partnership (TPP) estimated at 6 percent relative to the status quo. ### Staff appraisal and fiscal reforms - Outlook: Economy continues to perform well and Malaysia is on track to reach high income status by 2020; robust domestic demand is driving strong, noninflationary growth amid uncertain external conditions and declining commodity prices. Inflation remains subdued. - Fiscal reforms: Authorities commended for using full employment, low inflation and falling energy prices to implement ambitious fiscal reforms to diversify revenue away from oil and gas and raise the efficiency and equity of public spending. - Fiscal implementation risks have receded; recent revision of the 2015 federal budget is viewed as timely and pragmatic given international energy price changes. - Policy actions: floating RON95 petrol and diesel prices and implementing GST in April 2015 support fiscal targets. - Recommended institutional improvement: authorities would benefit from a fiscal risks management framework, including publication of an annual fiscal risks statement. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 32. Monetary policy. BNM took a step at normalizing monetary conditions in July but has since ### _cr1558 - 32. Monetary policy. BNM took a step at normalizing monetary conditions in July but has since ### Monetary policy - BNM took a step at normalizing monetary conditions in July but has since paused. - This cautious stance is appropriate for now taking into consideration lower expected inflation, the slowdown in domestic economic growth, and increased uncertainty surrounding the domestic and global outlook. - Staff considers it prudent to move to a neutral monetary policy stance as soon as the uncertainty in the external environment dissipates. - However, should the global financial markets turn turbulent, leading to capital outflows and a squeeze on domestic liquidity, BNM should stand ready to provide liquidity to maintain orderly market conditions and avoid an excessive tightening in monetary conditions. ### Managing financial sector risks - Despite the recent deceleration of growth in credit and housing prices, risks of financial imbalances remain elevated, the result of a prolonged period of extraordinarily low real interest rates and the consequent buildup of leverage in the economy. - The authorities are to be commended for successful implementation of macroprudential policies to date; these have succeeded in lowering personal credit growth and reducing speculative behavior in the property market. - However, with interest rate normalization on hold due to heightened global uncertainty, additional macroprudential measures may be needed to contain financial sector risks. ### Structural reforms - Favorable domestic economic conditions offer a window of opportunity to continue structural reforms in the context of the 11th Malaysia Plan now under preparation. - The prospect of lower potential growth in the advanced economies makes it more challenging to sustain strong noninflationary growth and provides additional impetus to the pursuit of structural reforms to raise productivity growth. - What is needed is to increase innovation activity, raise the quality of education, address youth unemployment, and increase female labor force participation. - Malaysia also stands to benefit from its outward economic orientation and the strengthening of regional economic and financial integration underway, including the creation of the AEC in 2015 and other regional trade initiatives. - Accelerating the pace of regional integration should help unlock Malaysia’s and ASEAN’s economic potential. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1558.pdf* ### 35. It is recommended that the next Article IV consultation with Malaysia take place on a ### _cr1558 - 35. It is recommended that the next Article IV consultation with Malaysia take place on a ### Growth and exports - "Growth is robust... with domestic demand buoyant and a positive contribution from net exports." - "The strong pickup in investment, which is growing at its fastest rate since the Asian crisis, has been a key driver, but investment remains below its pre-Asian crisis levels." - "The current account surplus narrowed again as net exports of goods weakened and the income deficit widened." - "Exports grew strongly in the first half of the year but subsequently weakened." - "Imports of intermediate goods grew strongly in the second half of the year." - Table 1: Real GDP (percent change) — 2010: 7.4; 2011: 5.2; 2012: 5.6; 2013: 4.7; 2014: 5.9; 2015: 4.8. - Table 1: Gross capital formation — 2010: 25.3; 2011: 3.0; 2012: 20.3; 2013: 4.9; 2014: 3.0; 2015: 5.9. - Table 1: Current account balance (in billions of U.S. dollars) — 2010: 33.5; 2011: 17.6; 2012: 12.3; 2013: 11.7; 2014: 10.4. ### Inflation and domestic resource constraints - "Inflation remains low, although subsidy rationalization and administered price adjustments pushed up headline inflation in October 2014." - "Core inflation remains subdued but was higher than in 2013..." - "...while producer price inflation has fallen and is now negative." - "The labor market remains tight with low unemployment and ... strong wage pressures. A positive output gap opened up at end-2013." - Table 1: CPI inflation (period average) — 2010: 1.7; 2011: 3.2; 2012: 1.7; 2013: 2.1; 2014: 3.1; 2015: 3.2. - Table 1: Unemployment rate — 2010: 3.3; 2011: 3.1; 2012: 3.0; 2013: 3.1; 2014: 3.0; 2015: 3.0. ### Monetary developments - "Market interest rates have increased... although real rates declined, as inflation picked up. Real deposit rates are negative..." - "Banking system deposit growth has slowed down." - "Policy rates are well calibrated to current conditions." - "BNM has ample space to ease policy in a downside scenario." - Table 2: Total liquidity (M3: percent change, 12-month basis) — 2009: 9.2; 2010: 6.8; 2011: 14.3; 2012: 9.0; 2013: 8.1; 2014: 7.1. - Table 2: Private sector credit (percent change, 12-month basis) — 2009: 6.2; 2010: 9.7; 2011: 12.1; 2012: 11.9; 2013: 9.9; 2014: 9.3. - Table 2: Treasury bill interest rate (percent, 12-month average) — 2009: 2.1; 2010: 2.6; 2011: 2.9; 2012: 3.2; 2013: 3.2; 2014: 3.9. ### Fiscal policy developments - "The budget deficit is expected to decline in 2014−2015... even as revenue declines." - "Expenditure is expected to decline with the recent subsidy reforms... while federal development spending increases slightly." - "Under staff’s baseline projection, federal government debt would decline to below 50 percent in the medium-term." - "Subsidy reform in the second half of 2014 has secured critical reduction in spending." - Table 1 (percent of GDP): Federal government overall balance 1/ — 2010: -5.3; 2011: -4.8; 2012: -5.2; 2013: -4.3; 2014: -3.5; 2015: -3.2. - Table 4 (fiscal sector percent of GDP projections): Federal government overall balance — 2014: -3.5; 2015: -3.2; 2016: -2.6; 2017: -2.5; 2018: -2.1; 2019: -1.9; 2020: -1.5. - Table 5 (Statement of Government Operations): Revenue — 2010: 158,453; 2011: 185,419; 2012: 200,913; 2013: 208,001; 2014: 223,562; 2015 (Proj.): 223,104. - Table 5: Expenditure — 2010: 200,729; 2011: 227,511; 2012: 250,015; 2013: 250,574; 2014: 261,545; 2015 (Proj.): 260,140. ### Public sector fiscal stance and prospects - "The public sector balance has turned into a persistent deficit since 2008... driven mainly by a decline in the net operating surplus of NFPEs and higher current spending." - "Development spending (in particular by NFPEs) increased during the crisis and again in 2012, contributing to the public sector deficit." - "Federal government loan guarantees, a significant part of which is for NFPEs, have increased considerably since 2009." - "The oil and gas sector has been an important driver of capital expenditure by NFPEs which has shifted towards domestic projects in recent years." - "The deficit of both the public and the federal government is expected to fall in the next medium term." - Table 4: Federal government non-oil primary balance — 2011: -10.2; 2012: -10.6; 2013: -9.0; 2014: -7.5; 2015: -5.0; 2016: -4.2; 2017: -4.0; 2018: -3.4; 2019: -3.0; 2020: -2.5. - Table 5 (Memorandum): Cyclically adjusted balance (percent of potential GDP) — 2010: -4.8; 2011: -4.9; 2012: -5.5; 2013: -4.5; 2014: -3.9; 2015: -2.8. ### Capital flows and external position - "Capital inflows have been volatile. The outflows after May 2013 reversed early this year, but resumed recently." - "The exchange rate has appreciated in the first part of the year and depreciated sharply recently." - "Reserves declined since May 2013." - "The equity market declined in the last part of the year. Foreign holdings of debt securities declined." - Table 3: Current account balance (billions of U.S. dollars) — 2010: 33.5; 2011: 17.6; 2012: 12.7; 2013: 11.7; 2014: 10.4; 2015 (Proj.): 9.4. - Table 2: Gross official reserves (in billions of U.S. dollars) — 2009: 96.7; 2010: 106.5; 2011: 133.6; 2012: 139.7; 2013: 134.9; 2014: 116.1. - Table 2: Total external debt (in billions of U.S. dollars) — 2009: 113.4; 2010: 141.8; 2011: 169.4; 2012: 196.2; 2013: 211.7; 2014: 230.0. - Table 3: Capital and financial account balance (billions of U.S. dollars) — 2010: -6.2; 2011: 7.6; 2012: -7.4; 2013: -5.0; 2014: -30.5; 2015 (Proj.): -2.7. ### Financial sector developments - "Aggregate credit growth has slowed down. Household credit growth has also slowed down but remains stronger than credit to businesses." - "The banking system is well capitalized, while credit quality has steadily improved." - "Claims by foreign banks in Malaysia are high as a share of GDP... however, they reflect mostly claims by local affiliates of Singaporean and UK banks and are deposit funded." - "Corporate leverage has declined significantly since the Asian Crisis." - Table 7 (Jun. 2014): Regulatory capital to risk-weighted assets — 14.6; Regulatory Tier 1 capital to risk-weighted assets — 12.9. - Table 7: Nonperforming loans to total gross loans — 2009: 3.6; 2010: 3.4; 2011: 2.7; 2012: 2.0; 2013: 1.8; 2014 (Jun.): 1.8. - Table 6 (Monetary Survey): Credit to private sector — 2010: 988,555; 2011: 1,108,437; 2012: 1,223,492; 2013: 1,309,768; 2014: (net foreign assets entry shows 320,047). ### Household debt and housing market - "Housing and personal loans have grown rapidly, although personal lending growth has slowed considerably." - "As a result, household debt has increased and... is high compared to other countries... and is above the ratio in countries with a similar GDP per capita." - "Loan approvals and applications have declined; a first sign of property market cooling." - "High household financial assets mitigate the vulnerability from growing household debt." - Table 1: Household debt (in percent of GDP) — 2010: 74.5; 2011: 76.2; 2012: 81.2; 2013: 86.6. - "House prices have risen steadily... outpacing incomes and rents." - "Although population growth is strong this cannot fully explain the increase in house prices compared with other countries." - "However, there are tentative signs of cooling in the housing market in Kuala Lumpur. Residential supply is increasing... and is particularly strong in Johor and has recently recovered in KL." - Table 1: House prices (percentage change) — 2010: 6.9; 2011: 9.8; 2012: 11.8; 2013: 10.9. ### Financial soundness indicators - "Malaysian banks’ capital buffers are strong... but one-year liquidity coverage could improve further." - "Lending in proportion to deposits is reasonable... while asset quality is moderately high." - "Banks are profitable ... but interest rate spreads have fallen." - Table 7: Return on assets — 2009: 1.2; 2010: 1.5; 2011: 1.5; 2012: 1.6; 2013: 1.5; 2014 (Jun.): 1.6. - Table 7: Loan-deposit ratio 2/ — 2009: 77.9; 2010: 81.3; 2011: 80.9; 2012: 82.1; 2013: 84.6; 2014 (Jun.): 85.8. - Table 10 (Figure captions): "One-year liquidity coverage could improve further." ### Selected economic and external indicators (high-level figures) - Table 1: Nominal GDP (2013): US$313 billion. - Table 1: Main export (percent of total): electrical & electronic products (39%), commodities (23%). - Table 1: GDP per capita (2013): US$10,468. - Table 1: Population (2013): 29.9 million. - Table 1: Unemployment rate (2013): 3.1 percent. - Table 3: Exports, f.o.b. — 2010: 199.0; 2011: 228.6; 2012: 222.1; 2013: 215.5; 2014: 226.3; 2015 (Proj.): 228.6. - Table 3: Imports, f.o.b. — 2010: 156.6; 2011: 179.1; 2012: 181.6; 2013: 181.2; 2014: 190.8; 2015 (Proj.): 195.5. ### Macroprudential measures since 2010 - January 2010: Reintroduced 5 percent Real Property Gains Tax (RPGT) for properties sold in less than 5 years. - January 2010: Imposed a 5 percent RPGT on properties sold within 5 years. - November 2010: Imposed LTV caps of 70 percent on third and subsequent mortgages. - February 2011: Capital risk-weights were raised to 100 percent for mortgages with LTVs exceeding 90 percent and were also raised for personal loans with a tenure of more than 5 years. - March 2011: The minimum income eligibility for new credit card holders was set at RM 24,000 per annum. Cardholders earning less than RM 36,000 per annum were limited to two credit card issuers and the maximum credit per issuer capped at two times monthly income. - December 2011: Introduced an LTV cap of 60 percent on housing loans for corporates. - January 2012: Issued guidelines on responsible financing and the computation of debt service ratios (DSR) based on a borrower's net income. - January 2012: Increased the RPGT rate to 10 percent on properties sold in less than 2 years and 5 percent RPGT for properties sold between 3 and 5 years. The minimum house price for foreigners was increased to RM500,000 from RM 250,000. - January 2013: Increased the RPGT rate to 15 percent on properties sold before 2 years and to 10 percent on properties sold between 3 and 5 years. - July 2013: Imposed a maximum mortgage term of 35 years and a maximum tenure of 10 years on financing extended for personal use. Prohibited the offering of pre-approved personal financing products. - January 2014: Distinguished between RPGT for Malaysians, foreigners and corporates. For foreigners, the RGPT is 30 percent for properties sold before 5 years and 5 percent after 5 years. For Malaysians, the RPGT is 30 percent for properties sold up to 2 years; 20 percent up to 3 years; 15 percent up to 4 years; after 5 years 0 percent for individuals and 5 percent for corporates. Increased minimum house price for foreigners to RM 1,000,000. Banned Developers Interest Bearing Scheme (DIBS). *Source: IMF staff report content as provided in the supplied PDF excerpt.* ### Appendix 1. Malaysia—Staff Policy Advice ### Appendix 1. Malaysia—Staff Policy Advice ### Fiscal - Policy advice: - Bring down debt to sustainable levels (e.g., pre-2008 levels by 2020) and articulate credible revenue and spending measures to achieve that target (2012 and 2013). - Strengthen macro-fiscal framework and public financial management and issue a statement of fiscal risks (2012 and 2013). - Broaden tax bases by implementing a GST and rationalizing tax incentives (2012 and 2013). - Phase out subsidies and replace with targeted cash transfers to the needy (2012 and 2013). - Implementation and outcomes: - The authorities’ medium term fiscal consolidation and reform plans remain on track. - Federal deficit reduced to 3.5 percent of GDP in 2014. - Targeting a fiscal deficit of 3.2 percent of GDP by 2015 and a balanced budget by 2020. - Developing a medium term budget framework and established a Fiscal Policy Committee (FPC) that strengthened top down macro-fiscal control. - Federal government and most GLCs increasingly transparent, but further progress needed, including publication of the authorities’ medium term fiscal framework and DSA and a fiscal risks statement. - Multi-year plans to adopt outcomes based budgeting; piloting accrual accounting in 2015 ahead of full adoption in 2016. - GST implementation in April 2015 remains on track. - Authorities undertaking a study on the effectiveness and costs of tax incentives. - In 2014 authorities raised electricity tariffs by 15 percent in January and increased diesel and RON95 prices by 10 percent in October; on December 1 they floated fuel prices. - Authorities are reviewing cash transfer schemes to better target poorer segments. ### Monetary and Financial Policies - Policy advice: - Begin normalizing monetary conditions, accounting for external uncertainty and safeguarding domestic financial stability (2012 and 2013). - Continue to employ macroprudential policies to dampen financial risks from rapid credit growth to households and enhance monitoring; strengthen monitoring through granular data on household assets and liabilities (2012 and 2013). - Continue to monitor regional exposures; deepen cooperation between home and host supervisors and strengthen crisis prevention and mitigation mechanisms as outlined in Malaysia’s Financial Sector Blueprint (2012 and 2013). - Implementation and outcomes: - The authorities raised their overnight policy rate by 25 bps in July and then paused, consistent with a benign inflation outlook, declining energy prices and increased global uncertainty. - Continued use of a variety of macroprudential measures and introduced an enhanced framework for risk-based pricing to deal with rising household indebtedness. - Efforts reduced risks from credit growth and house price increases and increased banking system resilience, evidenced by slowing personal credit growth and reduction in loan applications and approvals. - Continued cross-border supervisory collaboration; adoption of the CMIM amendment and conversion of AMRO to an international organization in 2014 noted as first steps in strengthening regional surveillance and crisis prevention. ### Structural - Policy advice: - Boost growth, productivity and inclusiveness by scaling up infrastructure and reforming the education system to improve educational attainment, upgrade skills and human capital, and retain Malaysian-grown talent (2012 and 2013). - Strengthen the social safety net to make government policies more inclusive and help reduce precautionary savings and narrow the current account surplus (2012 and 2013). - Develop defined contribution private pension plans and increase the age of withdrawal from EPF accounts from 55. Increase the retirement age for public workers to 60, in line with the private sector (2012). Provide an option for workers to receive their pensions in the form of annuities (2012). - Implementation and outcomes: - Progress on multi-year transformation programs including the Economic Transformation Program and Government Transformation Program. - Reformed the Ministry of Education in accordance with the Malaysian Education Blueprint 2013−25. - Elimination of fuel subsidies and improved targeting of cash transfers expected to strengthen the budget and make policies more inclusive. - A private retirement scheme (defined contribution) has been introduced. - Retirement age for private workers increased to 60 from 55, although workers can still withdraw savings from the EPF at 55. ### Appendix 2. Malaysia―The Impact of Lower Oil Prices ### Overview and structure of the economy - Malaysia’s GDP composition, 2013 (In percent): - Services: 55.2% - Manufacturing: 24.5% - Mining: 8.1% - Agriculture: 7.1% - Other: 5.1% - Exports amount to over 70 percent of GDP, of which three quarters are manufactures and oil and gas about 14 percent. - Production, processing and exports of energy products and other commodities amounted to 15 percent of GDP in 2014 and contributed a net surplus of about 6 percentage points of GDP to the trade balance. - Oil and gas revenue of the federal government amounted to about 30 percent of total revenue. ### Crude oil - Background: - Malaysia produces a light sweet crude oil called Tapis; during 2014, Tapis oil averaged about US$10 above the IMF’s average spot price for crude oil. - Futures markets indicate a Tapis crude average price of US$64 in 2015. - Oil production: - Malaysia’s crude oil production for the first 11 months in 2014 was about 590,000 barrels per day (bbl/d), down from a peak of about 844,000 bbl/d in early 2000s. - Oil consumption and exports: - Malaysia remained a net exporter of crude oil and products in 2013, with exports of 240,000 bb/d in 2013 and imports of 183,000 bb/d. - Primary export destinations include Australia, India, Thailand and Japan. ### Natural gas - Proven gas reserves of 83 trillion cubic feet, the third largest in Asia. - Production reached 2.3 Tcf per year in 2013. - Domestic consumption shares: - Power generation: 50 percent - Industry: 33 percent - Malaysia is the world’s second largest exporter of LNG after Qatar with exports reaching 1.2 Tcf in 2013. - Major LNG export destinations: - Japan: 60 percent - Korea: 17 percent - Taiwan Province of China: 12 percent - China: 11 percent - Most natural gas exports are subject to medium and long term contracts tied to spot crude prices for Japan (JCC); prices for Malaysia’s LNG exports tend to follow those of the JCC with a lag of about 3–5 months. ### Bottom line: effects of lower oil and gas prices - Growth and inflation: - Malaysia’s diversified production structure makes the economy resilient to energy shocks; recent oil price declines expected to be a drag on energy production but only a modest negative overall effect on growth. - Empirical work (Selected Issues Paper) using a VAR approach confirms modest negative overall growth effects from supply-driven reductions in energy prices. - At crude oil prices in the US$65–75 range, domestic energy users face about the same cost of energy as before fuel subsidies were eliminated; this would change if Tapis oil prices remain below US$60. - Tapis crude prices reached a low of US$ 55 on January 6, 2015. - Improved prospects in the United States and a weaker exchange rate should provide a fillip to Malaysia’s export-oriented manufacturing sector. - Lower inflation in advanced economies tends to reduce inflationary pressures in Malaysia but may be offset by exchange rate depreciation. - Current account: - Lower energy prices are estimated to reduce Malaysia’s oil and gas trade surplus by about 1¼ percent of GDP in 2015. - Oil and gas volumes unlikely to be affected due to long-term contracts and Malaysia being a low cost gas producer. - Export earnings from crude palm oil will also be somewhat reduced. - Expansion of manufacturing exports, boosted by stronger US demand, should partially offset the reduction. - Current account projected at about 2.9 percent of GDP in 2015. - Budget: - The 2015 budget was formulated with an underlying assumption of US$105 per barrel for Tapis oil. - Oil and gas revenues (royalties, income tax and dividends) amount to 30 percent of the total. - With a projected average Tapis oil price of US$61, savings from subsidy removal are smaller than the reduction in oil and gas revenues, necessitating the Budget revision announced on January 20, 2015. - If oil prices remain below this threshold, revenue loss would be larger and additional measures needed to meet the deficit target of 3.2 percent of GDP. - A permanently lower oil and gas prices will have substantial medium term effects on the budget and fiscal consolidation would have to rely on broad-based taxes, such as the GST, and additional spending rationalization. ### Appendix 3. Malaysia—Risk Assessment Matrix (Potential deviations from the baseline) - Risk: Side-effects from global financial conditions: a surge in financial volatility. - Likelihood and transmission: High. Investors could reallocate assets away from Malaysia, resulting in capital flow reversals and depreciation of the Ringgit; weaker global growth would reduce export volumes and commodity prices with second round effects on domestic demand. - Expected impact: Medium. Malaysia could be vulnerable to contagion and experience capital outflows in a disorderly adjustment. - Recommended policy responses: - Allow the exchange rate to act as a shock absorber, intervening only to smooth excessive volatility. - Provide liquidity support (including in FX) if needed. - Given limited fiscal space, any fiscal expansion should be temporary, well-targeted, and anchored in a credible medium term consolidation plan. - Risk: Side-effects from global financial conditions: financial imbalances from protracted period of low interest rates continue to build. - Likelihood and transmission: Medium. Malaysia would continue to experience strong capital inflows, putting upward pressure on the exchange rate and fueling growth in leverage. - Expected impact: Low to Medium. Higher household and corporate debt would increase vulnerability; continued rapid credit growth could fuel asset price bubbles. - Recommended policy responses: - Faster fiscal consolidation to offset expansionary impact. - Use macroprudential policies to curb growing domestic financial risks. - Closely monitor rapid growth in shadow banking. - Risk: Side-effects from global financial conditions: persistent dollar strength. - Likelihood and transmission: Medium. Main impact through trade channels; a depreciated domestic currency would boost exports. - Expected impact: Low to Medium. External debt is primarily local currency denominated, reducing balance sheet effects; resident companies with foreign currency exposure are hedged or have natural hedges. - Recommended policy responses: - Allow exchange rate flexibility; intervene only to smooth excessive volatility. - Risk: Protracted period of slower growth in advanced economies and emerging markets. - Likelihood and transmission: High. Trade (volume and price) would be dominant channel with adverse second round effects on domestic demand. - Expected impact: Low to Medium. Prolonged weakness would damp domestic demand, lower growth, increase unemployment, dampen housing and asset prices and weaken bank, corporate and sovereign balance sheets. - Recommended policy responses: - Carefully selected infrastructure projects and structural reforms to increase productivity. - Policy space to provide long-lived cushion is limited; adjust to slower medium-term growth. - Risk: Implementation risks associated with fiscal consolidation and reforms envisaged in the 2014 and 2015 budgets (including GST introduction). - Likelihood and transmission: Low to Medium. Political, design, and execution risks could affect credibility. - Expected impact: Medium to High. Failure to implement reforms could raise sovereign financing costs and interest rates, exacerbate public debt concerns and risk credit downgrade. - Recommended policy responses: - Allow exchange rate to act as shock absorber, intervene only to smooth excessive volatility. - Ensure credible fiscal resolve to avoid capital outflows and higher financing costs. - Risk: Sharp decline in house prices in a rising global interest rate environment. - Likelihood and transmission: Low to Medium. Rapid house price growth in recent years increases vulnerability. - Expected impact: Medium. Weaker household and bank balance sheets, negative wealth and confidence effects. - Context and responses: - Household debt is 86 percent of GDP with one half mortgages; offsetting factors include high household financial assets. - Policy options include monetary policy easing, exchange rate flexibility, and a temporary fiscal stimulus anchored in a credible medium term fiscal sustainability framework. *Source: IMF staff summaries from the 2012 and 2013 Article IV Consultations and related appendices.* ### Appendix 4. Malaysia—External Sector Assessment ### Appendix 4. Malaysia—External Sector Assessment ### Overview of External Sector Developments - Malaysia has undergone a large external rebalancing in recent years; its current account surplus declined by about 8 percentage points since 2011, to an estimated 3.5 percent of GDP in 2014. - Narrowing of the current account is largely structural: broad-based boost in investment (higher investment-to-GDP ratio) and strong domestic consumption growth. - Rebalancing by the rest of the world and declines in energy and other commodity prices also contributed to the current account adjustment. ### Current Account (CA) — Saving and Investment Balance - Current account surplus: estimated 3.5 percent of GDP in 2014. - Savings rate: - About 38 percent of GDP before the crisis (pre-2008). - Declined to 35 percent of GDP in 2008. - Estimated about 31 percent of GDP in 2014. - Gross domestic investment: - 22 percent of GDP in 2008. - Estimated about 27 percent of GDP in 2014. - Drivers: - Fall in savings driven by robust private consumption growth fueled by rapid credit growth and lower commodity incomes. - Investment rise driven by investment in large ETP-related projects that are highly import intensive. - Policy-relevant observation: - Sustained and substantial increase in investment could ease supply bottlenecks, boost productivity, and support modernization and income growth. ### Real Effective Exchange Rate (REER) - Ringgit movements in 2014: - Strengthened by about 4 percent against the U.S. dollar during the first eight months of 2014. - Depreciated by about 10 percent between September and end-2014 amid sharp declines in energy prices, weakening commodity prices, and a stronger U.S. dollar. - In the absence of large inflation differential movements, nominal depreciation of the ringgit leads to real depreciation. - Multilateral effective exchange rate fluctuations were smaller than bilateral ringgit–U.S. dollar movements because other trading-partner currencies moved similarly against the dollar. ### Financial Account and Reserve Accumulation - Capital flow characteristics: - Volatile capital flows reflecting global risk aversion shifts, low policy rates in advanced economies, and Malaysia’s fundamentals and deep financial markets. - Malaysia has typically recorded net capital outflows. - Gross FDI flows are large although net FDI flows are generally small; growing importance as a direct investor abroad. - 2014 (first three quarters) net flows: - Net outflows about 7 percent of GDP. - Portfolio outflows accounting for more than 2 percent of GDP. - Official reserves (end-December 2014): - About 85 percent of the IMF’s composite reserve adequacy metric. - Covered 81 percent of short-term external debt. - Covered 27 percent of broad money. - Assessment: current reserve levels are adequate; no need for additional accumulation for precautionary purposes. - BNM intervention: seeks to limit excess exchange rate volatility and has generally been two-sided. - FX liberalization: greater flexibility for resident companies to undertake foreign direct investment abroad and obtain loans from related resident and nonresident companies. - Net international investment position (NIIP): -4.8 percent of GDP at end-2013. - Gross liabilities: about 142 percent of GDP at end-2013 (including ringgit- and foreign-currency denominated liabilities). - Total external debt (September 2014): 70 percent of GDP; of which 50 percent is short-term debt. - Foreign-currency debt: 45 percent of GDP. - Rapid increase in ringgit-denominated debt held by nonresidents, notably Malaysian government securities. - Puzzle: Malaysia’s slightly negative NIIP despite large current account surpluses in the last decade—valuation adjustments and possible current account measurement issues may be factors. ### Standard Benchmarks (EBA and REER) - EBA (regression-based) findings (based on data and projections as of October 2014): - Estimated 2014 current account norm for Malaysia: 0.2 percent of GDP (adjusted for relative output gaps and commodity terms of trade). - 2014 current account balance: 3.5 percent of GDP. - 2014 cyclically adjusted current account balance: 4.5 percent of GDP. - Resulting EBA-estimated gap: 4.3 percentage points of GDP. - Contribution of identified policy gaps: about 1.1 percent of GDP. - Unexplained residual: 3.2 percent of GDP. - Staff assessment of the current account gap: in the order of 4 percentage points of GDP (taking into account factors not well captured by EBA). - EBA REER regression approach: - EBA estimates REER to be 29 percent below levels warranted by fundamentals and desirable policies (most of gap, 24 percent, is unexplained residual). - Staff preferred REER undervaluation estimate: - About 10.3 percent (based on elasticity approach using semi-elasticity of current account w.r.t. REER = -0.29). - Semi-elasticity details: - η_CA = -0.29 computed with η_Xnc = -0.82, η_M = 0.26, s_Xnc = 58.2 percent, s_Xc = 16.8 percent, s_M = 61 percent. ### The Role of Fiscal Consolidation - Fiscal consolidation effect on the current account: - Staff estimates that every 1 percentage point improvement in the fiscal balance could strengthen the current account by 0.4 percentage point (composition of adjustment matters). - Composition effects: - Impact depends on how measures affect private saving and investment. - Fuel subsidy rationalization likely to have a positive direct effect on the current account. - Macroeconomic implication: a stronger fiscal position increases external sector sustainability. ### The Role of Oil and Gas Exports - Oil and gas trade surplus: estimated 5.7 percent of GDP in 2014. - Current account excluding oil and gas: estimated deficit of 2.2 percent of GDP in 2014. - Two salient aspects for resource exporters: - Intergenerational perspective: optimal to save part of nonrenewable resource earnings, increasing current account balance. - Longevity of resources matters: per Permanent Income Hypothesis, short-lived income increases should be primarily saved. - EBA estimate of oil and gas reserves contribution to current account norm: about 1.7 percent of GDP. ### Malaysia: Quantitative External Sector Assessment — Overall Assessment - Structural drivers: elevated current account surplus reflects structural factors that boost private savings and constrain public investment. - Policy implications: - Stronger social safety nets and removal of investment bottlenecks would help rebalance the economy toward domestic-demand-led growth and moderate the current account surplus. - Commodity price developments: - Sharp reduction in energy prices in second half of 2014 (not fully captured in current EBA) should, if sustained, narrow Malaysia’s oil and gas trade surplus and reduce the current account gap. - Exchange rate impact: - A sustained real depreciation should boost noncommodity exports and reduce imports, offsetting deterioration in the energy trade balance. *Source: Appendix 4. Malaysia—External Sector Assessment (IMF staff report content as provided).* ### Appendix 6. Malaysia—External Debt Sustainability Analysis ### Appendix 6. Malaysia—External Debt Sustainability Analysis ### Summary - Malaysia’s external debt is relatively high at present but is expected to remain on a steady downward trend over the medium term, falling to about 57 percent of GDP by 2019. - The 12 percentage point decline in the external debt to GDP ratio from 2014 to 2019 mostly reflects sustained current account surplus. - Stress tests indicate that external debt would remain manageable under a variety of shocks, including weaker GDP growth, a lower current account balance, and a one-time 30 percent depreciation of the ringgit. - Under most scenarios, the external debt to GDP ratio rises above the baseline over the projection period by only modest margins. - In the exchange rate depreciation scenario, the debt ratio would rise sharply to about 90 percent of GDP on impact, but would subsequently fall to 75 percent of GDP by 2019. ### Stress tests and scenarios - Individual shocks are permanent one-half standard deviation shocks (figure notes). - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance (figure notes). - One-time real depreciation of 30 percent occurs in 2015 (figure notes). - Historical scenarios: historical averages calculated over ten-year period and used to project debt dynamics five years ahead (figure notes). ### Key figures and projections (selected, percent of GDP unless otherwise indicated) - Debt-stabilizing non-interest current account: -0.6 - Baseline: external debt (2010–2019): - 2010: 57.3 - 2011: 58.5 - 2012: 64.3 - 2013: 67.6 - 2014: 69.4 - 2015: 69.5 - 2016: 67.3 - 2017: 63.9 - 2018: 59.6 - 2019: 56.8 - Change in external debt (2010–2019): - 2010: 1.2 - 2011: 1.3 - 2012: 5.8 - 2013: 3.2 - 2014: 1.8 - 2015: 0.1 - 2016: -2.2 - 2017: -3.4 - 2018: -4.3 - 2019: -2.8 - Identified external debt-creating flows (sum of components) (2010–2019): - 2010: -17.6 - 2011: -17.5 - 2012: -5.2 - 2013: -5.4 - 2014: -4.8 - 2015: -3.5 - 2016: -3.5 - 2017: -3.9 - 2018: -3.8 - 2019: -3.4 - Current account deficit, excluding interest payments (2010–2019): - 2010: -12.8 - 2011: -13.5 - 2012: -7.8 - 2013: -6.0 - 2014: -5.8 - 2015: -5.5 - 2016: -5.6 - 2017: -5.7 - 2018: -5.4 - 2019: -5.1 - Deficit in balance of goods and services (2010–2019): - 2010: -17.0 - 2011: -16.4 - 2012: -11.6 - 2013: -9.2 - 2014: -8.4 - 2015: -6.7 - 2016: -6.9 - 2017: -6.7 - 2018: -6.3 - 2019: -6.2 - Exports (2010–2019): - 2010: 93.3 - 2011: 91.5 - 2012: 85.3 - 2013: 81.7 - 2014: 80.7 - 2015: 75.6 - 2016: 74.6 - 2017: 72.3 - 2018: 70.0 - 2019: 67.4 - Imports (2010–2019): - 2010: 76.3 - 2011: 75.1 - 2012: 73.7 - 2013: 72.5 - 2014: 72.3 - 2015: 68.9 - 2016: 67.7 - 2017: 65.7 - 2018: 63.6 - 2019: 61.2 - Net nondebt creating capital inflows (negative) (2010–2019): - 2010: 2.8 - 2011: 1.7 - 2012: 3.7 - 2013: 0.7 - 2014: 2.5 - 2015: 2.5 - 2016: 2.0 - 2017: 1.3 - 2018: 1.1 - 2019: 1.3 - Automatic debt dynamics (2010–2019): - 2010: -7.6 - 2011: -5.6 - 2012: -1.1 - 2013: -0.1 - 2014: -1.5 - 2015: -0.5 - 2016: 0.1 - 2017: 0.5 - 2018: 0.5 - 2019: 0.4 - Contribution from nominal interest rate (2010–2019): 1.9, 1.9, 2.0, 2.1, 2.3, 2.6, 3.2, 3.5, 3.4, 3.1 - Contribution from real GDP growth (2010–2019): -3.4, -2.5, -3.1, -3.0, -3.8, -3.1, -3.1, -3.1, -2.9, -2.7 - Contribution from price and exchange rate changes (2010–2019): -6.1, -5.0, 0.0, 0.8, ... - Residual, including change in gross foreign assets (2010–2019): 18.8, 18.7, 11.0, 8.6, 6.6, 3.6, 1.3, 0.6, -0.5, 0.6 - External debt-to-exports ratio (in percent) (2010–2019): 61.4, 64.0, 75.5, 82.8, 86.0, 91.9, 90.2, 88.4, 85.2, 84.3 - Gross external financing need (in billions of U.S. dollars) (2009–2019 entries): 37.2, 54.6, 88.3, 105.0, 117.5, 132.8, 148.1, 156.1, 162.6, 164.5 - Gross external financing need (in percent of GDP) (2010–2019): 15.0, 18.9, 29.0, 33.5, 35.5, 37.0, 37.9, 36.3, 34.5, 31.7 ### Scenario with key variables at their historical averages (10‑Year) - Baseline external debt: 69.4 - Scenario projections (10-Year, historical averages): 57.9, 45.1, 32.9, 20.2, 9.2, 0.9 (table entries under scenario with key variables at their historical averages) ### Key macroeconomic assumptions underlying baseline (selected) - Real GDP growth (in percent): historical average 7.4; standard deviation 5.2; projections and assumptions by year include 5.6, 4.7, 5.0, 2.5, 5.9, 4.8, 4.9, 5.0, 5.0, 5.0 - GDP deflator in U.S. dollars (change in percent): historical average 13.9; standard deviation 11.1; sample values include -0.2, -2.0, 6.0, 8.1, 0.0, 3.4, 3.7, 4.7, 4.5, 4.7 - Nominal external interest rate (in percent): historical average 4.1; standard deviation 3.9; sample values include 3.6, 3.3, 3.8, 0.3, 3.6, 4.0, 5.1, 5.7, 5.8, 5.7 - Growth of exports (U.S. dollar terms, in percent): historical average 24.9; standard deviation 14.6; sample values include -1.8, -1.6, 8.9, 13.2, 4.6, 1.5, 7.4, 6.6, 6.2, 5.9 - Growth of imports (U.S. dollar terms, in percent): historical average 31.3; standard deviation 15.0; sample values include 3.4, 1.0, 9.8, 13.6, 5.5, 3.3, 7.0, 6.6, 6.4, 5.7 - Current account balance, excluding interest payments (in percent of GDP): historical average 12.8; standard deviation 13.5; sample values include 7.8, 6.0, 14.0, 4.2, 5.8, 5.5, 5.6, 5.7, 5.4, 5.1 - Net nondebt creating capital inflows (in percent of GDP): historical average -2.8; standard deviation -1.7; sample values include -3.7, -0.7, -1.5, 3.6, -2.5, -2.5, -2.0, -1.3, -1.1, -1.3 ### Analytical notes (as presented) - Debt dynamics formula and definitions provided: automatic debt dynamics derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms; g = real GDP growth rate. - Contribution from price and exchange rate changes defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator). - Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. - Malaysia made a methodological change to external debt statistics; the new methodology begins in 2009. *Source: Appendix 6. Malaysia—External Debt Sustainability Analysis (IMF staff report content provided).* ### 2013. Technical assistance missions on Government Financial Statistics were conducted during 2014. ### _cr1558 - 2013. Technical assistance missions on Government Financial Statistics were conducted during 2014. ### Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) - In November 2014, Malaysia’s AML/CFT regime was the subject of an on-site assessment by the Asia Pacific Group on Money Laundering (APG) under the new methodology of the Financial Action Task Force (FATF). - LEG participated in the assessment and is contributing to the final report, which is scheduled for discussion in APG’s July 2015 Plenary. - FATF admitted Malaysia as an observer country in October 2014, and is working with authorities towards meeting all requirements for full FATF membership. ### Resident Representation - Resident Representative/Advisor: None. ### I. Assessment of Data Adequacy for Surveillance — General - Data provision is broadly adequate for surveillance. - Further efforts are necessary to improve statistics for the consolidated general government and public sector. ### 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. - The 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 uses updated expenditure weights based on a 2009/10 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: dissemination of more detailed data on nonlisted NFPEs’ assets and liabilities and domestic and foreign financing by type of debt instrument and holder. - Efforts require continued 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. - Needs: 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 the SRFs are published in the quarterly IFS Supplement on Monetary and Financial Statistics. ### Balance of payments - DOSM compiles and publishes quarterly balance of payments estimates in accordance with BPM6 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. - IIP 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 January 23, 2015) — Selected entries - Exchange rates: Date of Latest Observation 1/23/2015; Date Received 1/23/2015; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 1/22/2015; Date Received 1/22/2015; Frequency Bi W; Frequency of Reporting Bi W; Frequency of Publication Bi W. - Broad money: Date of Latest Observation 11/14; Date Received 1/9/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consumer price index: Date of Latest Observation 12/14; Date Received 1/15; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Revenue, expenditure, balance and composition of financing — general government: Date of Latest Observation 2013 2014 AAA (note: uses SDDS timeliness flexibility). - GDP/GNP: Date of Latest Observation 2014:Q3; Date Received 11/14; Frequency QQQ. ### Press Release No. 15/88 — IMF Article IV Consultation (March 3, 2015; Article IV concluded February 13, 2015) - 2014 performance and near-term outlook: - Growth accelerated to 5.9 percent in 2014. - Inflation contained to 3.1 percent in 2014 despite subsidy removals and electricity tariff increases. - Investment reached 26.8 percent of GDP in 2014. - Growth expected to moderate to 4.8 percent in 2015. - Headline inflation expected to increase slightly to 3.2 percent in 2015 from 3.1 percent in 2014. - Fiscal policy and reforms: - Federal budget deficit ceiling revised to 3.2 percent from 3.0 percent of GDP in response to the decline in international crude oil prices. - Authorities removed remaining gasoline and diesel subsidies in 2014 and raised electricity tariffs earlier in 2014. - GST is on track to be introduced in April (2015). - Subsidy reform together with the GST expected to broaden the federal revenue base and diversify away from oil and gas revenues. - Strengthening of social safety net and better targeted cash transfers are integral to fiscal strategy. - Progress in reforming fiscal institutions and reducing the size of supplementary budgets. - Monetary policy and financial stability: - BNM began normalizing monetary conditions in July (2014) but paused thereafter. - BNM’s cautious wait-and-see stance considered appropriate given lower expected inflation and slowdown in domestic growth. - Recommendation: prudent move to a neutral monetary policy stance as external uncertainty dissipates. - Financial system considered sound and well-placed to withstand stresses; high household debt and large foreign investor participation warrant vigilance. - Flexible exchange rate and substantial financial buffers provide lines of defense against capital flow volatility. - Structural reform priorities: - Increase innovation, raise the quality of education, address youth unemployment, and increase female labor force participation. - Accelerate regional integration (ASEAN Economic Community in 2015) and trade initiatives. ### Executive Board Assessment — Key messages - Directors agreed that Malaysia’s economic prospects remain favorable, with risks from softening external demand, volatile capital flows, and lower commodity prices. - Directors commended fiscal prudence and removal of poorly-targeted fuel subsidies. - Caution: a prolonged period of depressed commodity prices may require further fiscal adjustment; encouraged broadening the revenue base, phasing out remaining untargeted subsidies, and improving public financial management and social transfers. - Monetary stance: current accommodative stance appropriate given subdued inflation; BNM’s cautious policy commended. - Financial sector: sound regulatory and supervisory framework; high household debt warrants vigilance; additional macroprudential measures could be needed if low interest rates lead to excessive leverage. - External position: ongoing reduction of current account surplus welcomed; staff assessment that external position remains somewhat stronger than warranted by medium-term fundamentals noted as uncertain. - Directors praised Malaysia’s strides in economic development and the role of regional integration in supporting transition to high-income status. ### Table 1. Malaysia: Selected Economic and Financial Indicators, 2010–15 — Key figures and projections - Nominal GDP (2013): US$313 billion - Main export (percent of total): electrical & electronic products (39%), commodities (23%) - GDP per capita (2013): US$10,468 - Population (2013): 29.9 million - Unemployment rate (2013): 3.1 percent Selected series (Est. Proj. columns shown as 2014 and 2015 where applicable): - Real GDP (percent change): 2010 7.4; 2011 5.2; 2012 5.6; 2013 4.7; 2014 5.9; 2015 4.8 - Total domestic demand: 2010 11.1; 2011 7.1; 2012 11.1; 2013 6.4; 2014 5.5; 2015 5.4 - Private consumption: 2010 6.9; 2011 6.9; 2012 8.2; 2013 7.2; 2014 7.6; 2015 6.2 - Gross capital formation: 2010 25.3; 2011 3.0; 2012 20.3; 2013 4.9; 2014 3.0; 2015 5.9 - Gross domestic investment (percent of GDP): 2010 23.3; 2011 23.2; 2012 25.9; 2013 26.1; 2014 26.8; 2015 27.6 - Gross national saving (percent of GDP): 2010 34.2; 2011 34.8; 2012 31.7; 2013 30.1; 2014 30.3; 2015 30.5 - Federal government overall balance 1/: 2010 -5.3; 2011 -4.8; 2012 -5.2; 2013 -4.3; 2014 -3.5; 2015 -3.2 - Revenue (percent of GDP): 2010 19.9; 2011 20.9; 2012 21.3; 2013 21.1; 2014 20.7; 2015 19.3 - Expenditure and net lending (percent of GDP): 2010 25.2; 2011 25.7; 2012 26.5; 2013 25.4; 2014 24.2; 2015 22.5 - Federal government non-oil primary balance (percent of GDP): 2010 -10.4; 2011 -10.2; 2012 -10.6; 2013 -9.0; 2014 -7.5; 2015 -5.0 - Consolidated public sector overall balance 2/: 2010 -2.6; 2011 -3.4; 2012 -5.6; 2013 -6.2; 2014 -5.2; 2015 -4.7 - General government debt (percent of GDP): 2010 53.5; 2011 54.2; 2012 56.2; 2013 57.7; 2014 56.4; 2015 55.9 - CPI inflation (period average): 2010 1.7; 2011 3.2; 2012 1.7; 2013 2.1; 2014 3.1; 2015 3.2 - Unemployment rate: 2010 3.3; 2011 3.1; 2012 3.0; 2013 3.1; 2014 3.0; 2015 3.0 - Total liquidity (M3) (end of period, percentage change): 2010 6.8; 2011 14.3; 2012 9.0; 2013 8.1; 2014 7.1; 2015 ... - Credit to private sector (end of period, percentage change): 2010 9.7; 2011 12.1; 2012 11.9; 2013 9.9; 2014 9.3; 2015 ... - Three-month interbank rate (in percent): 2010 3.0; 2011 3.2; 2012 3.2; 2013 3.2; 2014 3.9; 2015 ... - Corporate debt (in percent of GDP) 3/: 2010 52.5; 2011 45.3; 2012 47.6; 2013 54.4; 2014 57.7; 2015 ... - Household debt (in percent of GDP): 2010 74.5; 2011 76.2; 2012 81.2; 2013 86.6; 2014 ...; 2015 ... - House prices (percentage change): 2010 6.9; 2011 9.8; 2012 11.8; 2013 10.9; 2014 ...; 2015 ... - Current account balance (US$ billions): 2010 27.1; 2011 33.5; 2012 17.6; 2013 12.3; 2014 11.7; 2015 10.4 - Current account (percent of GDP): 2010 10.9; 2011 11.6; 2012 5.8; 2013 4.0; 2014 3.5; 2015 2.9 - Gross official reserves (US$ billions): 2010 106.5; 2011 133.6; 2012 139.7; 2013 134.9; 2014 116.1; 2015 123.8 - Total external debt (US$ billions): 2010 141.8; 2011 169.4; 2012 196.2; 2013 211.7; 2014 230.0; 2015 249.7 - Total external debt (percent of GDP): 2010 57.3; 2011 58.5; 2012 64.3; 2013 67.6; 2014 69.4; 2015 69.5 - Nominal GDP (in billions of US$): 2010 248; 2011 289; 2012 305; 2013 313; 2014 331; 2015 359 Notes included in the table: - 1/ Based on staff's estimate of the federal government fiscal balance using GFSM 2001, which differs from the authorities' cash-based measure of the fiscal deficit. - 2/ Capital expenditure in the budget includes foreign fixed assets and other items, such as purchase of shares and land, which are excluded from public investment in the national accounts. - 3/ Nonfinancial corporates by parent nationality. - 4/ By remaining maturity. - 5/ On foreign currency denominated debt only. ### Statement by Malaysia’s Executive Director and Advisor (February 13, 2015) — Highlights - Authorities projected 2015 growth between 4.5% and 5.5%, driven mainly by domestic demand. - Private consumption supported by rising incomes, stable employment, and additional disposable income from lower oil prices. - Investment activity projected resilient with broad-based capital spending by private and public sectors offsetting lower oil and gas-related investment. - Mining sector accounts for 8% of GDP; services 55% share of GDP; manufacturing 25% share of GDP. - Commodities account for 23% of gross exports; manufactured goods 76% of gross exports. - Employment: commodity sectors 13% of total employment; services 60%; manufacturing 17%. - In 2013, 83% of growth in total investment came from services and manufacturing sectors. - Current account balance expected to narrow but remain in surplus; manufactured exports expected to expand. *Source: IMF staff report and related sections as provided in the content unit.* ### 5. Given the significant degree of integration with the global economy and financial ### 5. Given the significant degree of integration with the global economy and financial markets, Malaysia has experienced increased volatility in recent months amid shifts in global liquidity and heightened uncertainty, particularly with regard to global growth prospects and the decline in commodity prices. ### External environment and market volatility - Malaysia experienced increased volatility amid shifts in global liquidity and heightened uncertainty, particularly regarding global growth prospects and the decline in commodity prices. - Consequences observed: - Capital flow reversals. - Depreciation of the Malaysian ringgit. - Similar developments affected other emerging economies. - Mitigating factors and policy buffers: - Well-developed financial markets and well-capitalized banking institutions allowed effective intermediation of flow reversals without adversely affecting real economic activity. - Greater exchange rate flexibility. - A healthy level of international reserves. - Availability of a wide range of monetary instruments. - Policy focus going forward: - Maintain orderly financial market conditions. - Mitigate risks of abrupt adjustments to the exchange rate over a short period to minimize disruptions to the real economy. - Maintain a sufficient reserves buffer in an open economy. ### Monetary Policy - Current stance: - The monetary policy stance remains accommodative and is assessed to be appropriate given the balance of risks to the outlook for domestic growth and inflation. - Rationale and risks: - Consideration given to greater downside risks from the external environment and lower than anticipated inflation going forward. - The Monetary Policy Committee (MPC) of BNM will continue to carefully assess external developments and their implications for the Malaysian economy. - The MPC will monitor risks of destabilizing financial imbalances to ensure consistency with longer-term sustainability of Malaysian economic growth. ### Fiscal Policy - Fiscal consolidation record: - Authorities committed to fiscal consolidation, targeting a balanced budget by 2020. - Government consistently achieved its annual fiscal targets since the target announcement. - Fiscal consolidation strategy included reforms to broaden the Government’s revenue base and reduce reliance on oil-related revenue. - Share of oil related revenue to total Federal Government revenue fell from around 40% in 2009 to 30% in 2013. - Response to lower oil prices and near-term trajectory: - Proposed mix of expenditure-optimization and revenue-enhancement measures to keep consolidation on track. - Fiscal deficit expected to decline from 3.5% of GDP in 2014 to 3.2% of GDP in 2015, marking the sixth consecutive decrease in the fiscal deficit to GDP. - This is more gradual than the earlier announced fiscal deficit target of 3%, but consolidation course remains intact. - Federal Government debt-to-GDP ratio will be contained within 55%. - Structural fiscal reforms and measures: - Removal of fuel subsidies and greater optimization of supplies and services expenditure. - Introduction of a broad-based and more efficient Goods and Services Tax (GST) on target to be introduced in April 2015. - Implementation of accrual accounting and adoption of outcome-based budgeting. - Fiscal resources to be geared towards high value-added investments, human capital development, and enhancing public sector delivery. - Social considerations: - Fiscal reforms and resource management to be pursued without undermining economic growth and well-being of the population, particularly low-income and vulnerable groups. ### Financial Sector - System resilience and intermediation: - Financial stability preserved in 2014, supported by financial strength and capital buffers at system and institutional levels. - Stress tests demonstrated resilience of the banking system to major economic and financial market shocks. - Recent market volatility did not disrupt financial intermediation; lending activities continued smoothly. - Businesses, including small and medium enterprises, continue to have access to financing from banking institutions and the capital market. - Banking system liquidity remains ample. - Household sector and indebtedness: - Growth in household debt moderated since its peak in 2010, underpinned by moderation in personal financing. - Risks from household indebtedness remain manageable, supported by strong overall household financial capacity and continued improvement in quality of new household debt. - Aggregate household financial assets remained healthy at 2.2 times of household debt. - Likelihood of material impact on financial system stability from household exposures remains low given strong capitalization and financial strength of financial institutions. - Deposit growth and investment shifts: - Banking system deposit growth moderated largely due to: - Growing investment abroad by large domestic institutional investors such as pension and provident funds and asset and fund management companies for revenue diversification. - Increased investments in higher yielding assets such as unit trust funds for wealth management and retirement savings by households via institutional fund/asset managers. - Macroprudential measures and outcomes: - Measures introduced in 2010-2013 yielded positive results: growth in personal financing by the non-bank financial sector slowed, and growth in house prices moderated. - Measures included: - Enhancing responsible lending practices by key credit providers. - Increasing the property gains tax. - Prohibiting development and financing of property projects with elements of interest capitalization schemes. - Requirements on greater transparency in property prices by developers. - Targeted approach favored over broad-based LTV ratio limits to curb speculative purchases while preserving access for first time home buyers and those buying a second house for wealth diversification. - Authorities deem current macroprudential measures sufficient but maintain heightened surveillance and supervisory vigilance and stand ready to act preemptively against any resurgent build-up of risks. - Legal and regulatory enhancements: - Enactment of the AMLATFA (Amendment) Bill addressing money laundering and terrorist financing risks. - Enactment of the Netting of Financial Agreements Act establishing Malaysia as a netting friendly jurisdiction. ### Regional initiatives - ASEAN leadership and integration: - Malaysia’s chairmanship of ASEAN in 2015 coincides with the expected establishment of the ASEAN Economic Community 2015 (AEC 2015) by the end of the year. - AEC 2015 aims to create a single market and production base, entailing reduction or elimination of tariffs and progressive liberalization and removal of barriers to trade and services. - As ASEAN chair in 2015, Malaysia will help develop the region’s 10-year post-integration plan to steer ASEAN’s growth strategies from 2016 to 2025. ### Reforms to enhance growth potential - Recent and ongoing reforms to reach high-income status by 2020: - Implemented reforms include raising the retirement age, implementing the minimum wage policy, and enhancing education quality through the National Education Blueprint. - Future reforms include tabling the Companies Bill 2014 introducing provisions relating to Corporate Insolvency Law and implementing measures to improve logistics and enhance trade facilitation. ### Final remarks and outlook - Global risks and resilience: - Global economy facing important shifts; commodity price shock is sizable with considerable uncertainty about global growth prospects and adverse investor sentiment. - Malaysian economy described as well-diversified and better able to weather shocks with greater resilience. - Macroeconomic position: - Economic fundamentals characterized as sound after decades of policy efforts to address vulnerabilities and build buffers. - Short-term growth may be affected, but economy expected to continue performing well driven by the private sector across a diversified range of activities. - Employment remains strong and incomes are rising. - Inflation expected to remain anchored. - Current account balance expected to remain in surplus. - External position described as intact, with international reserves at healthy levels and external debt within prudent limits. ### Authorities' note - The authorities agree to the publication of the full suite of reports, covering the 2014 Malaysia Article IV Staff Report and the Selected Issues Papers. *IMF staff report excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1558.pdf_