Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Malaysia
IMF News, March 20, 2006
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- Published: March 20, 2006
Background and recent macroeconomic developments
- Date of PIN: March 20, 2006. Executive Board conclusion date: March 13, 2006.
- 2005 real GDP growth is estimated at 5¼ percent.
- Economic drivers in 2005:
- Buoyant private consumption and recovery in private fixed investment more than offset lower government spending.
- Headline inflation rose due to administered price adjustments; core inflation remained subdued.
- External position and resilience (2005):
- Current account is estimated to have exceeded 14 percent of GDP.
- Reserves sufficient to cover 6 months of imports and four times short-term external debt by remaining maturity.
- Foreign direct investment continued to recover; earlier portfolio inflows were reversed as expectation of exchange rate appreciation receded.
- Foreign exchange regulations were eased further.
- Exchange rate and monetary policy:
- Exit from the exchange rate peg on July 21, 2005.
- Ringgit cumulative appreciation of 2½ percent against the US dollar since exit.
- Bank Negara Malaysia raised its policy interest rate twice by 55 basis points since last November; stance remains accommodative.
- Fiscal developments (2005):
- Federal government deficit likely declined to 3¾ percent of GDP.
- Surplus of the consolidated public sector stabilized at about 4 percent of GDP, aided by large nonfinancial enterprises' surpluses from high world oil prices.
- Federal government non-oil primary deficit estimated at 7 percent of GDP.
- Public sector gross debt expected to have dropped to below 60 percent of GDP at end-2005.
- Financial sector and structural reforms:
- Banking system capital adequacy remained strong; asset quality improved.
- New deposit insurance system introduced.
- Measures taken to open the financial system to foreign competition.
- Corporate sector profitability still weak by historical and regional standards.
- Extensive Government-Linked Companies (GLC) reform program aimed at better profitability, performance, and corporate governance.
- Investment climate improvements: streamlining business approval procedures and land administration.
Executive Board assessment — main findings and outlook
- Directors commended the authorities for a skillful, pragmatic, and fully owned stance of sound macroeconomic policies and continued structural reforms.
- Near-term outlook: generally favorable; recovery of private investment and domestic consumption expected to drive broad-based expansion.
- Main downside risk: effects of continued high oil prices on trading partners' demand for Malaysia's exports.
- Exchange rate regime exit:
- Smooth exit of the ringgit from its peg to the U.S. dollar was welcomed as a vital first step toward greater exchange rate flexibility.
- Directors encouraged authorities to utilize the flexibility to facilitate adjustment to structural changes and contribute to an orderly resolution of global imbalances.
- Authorities committed to allowing the exchange rate to be determined by economic fundamentals; Bank Negara Malaysia intends to pursue intervention policy aimed at reducing volatility while avoiding sustained one-sided intervention.
- Directors asked staff and authorities to continue analyzing the appropriate value of the ringgit and its impact on the economy given inherent imprecision in estimating equilibrium exchange rates.
- Monetary policy framework:
- Price stability should remain the primary objective.
- Most Directors noted the focus on using interest rates to achieve price stability has served Malaysia well.
- Recent increases in the overnight policy rate were welcomed, along with steps to enhance communication to anchor inflation expectations.
- Most Directors felt the current framework is sufficiently flexible for greater exchange rate flexibility provided communication continues to be enhanced, including by publication of a measure of core inflation at the same frequency as monetary policy statements.
- Fiscal policy and oil revenue management:
- Strong fiscal revenues from oil and gas improved consolidated public sector position, but gradual reduction of the federal government deficit is needed.
- Directors recommended:
- Raising the efficiency of the tax system, including by introducing a revenue-neutral value-added goods and services tax, and streamlining tax incentives.
- Phasing out fuel subsidies and replacing them with well-targeted support for the most-affected poor.
- Directors welcomed the recent substantial increase in retail fuel prices to reduce budgetary pressures and encourage efficient energy use.
- Recommendation to set a medium-term fiscal framework to sustain deficit reduction and safeguard oil and gas wealth.
- Consideration recommended for establishing a petroleum fund fully integrated into the budget with clear rules on deposit and withdrawal of hydrocarbon revenues; the fund would help ensure effective oversight of the national oil company.
- Financial sector policy recommendations:
- Financial sector considered sound; decline in nonperforming loans and stronger capital adequacy ratios welcomed.
- Continue strengthening financial sector surveillance, especially lending to households and small and medium-size enterprises, and over the growing Islamic banking sector.
- Enhanced risk management places domestic banks on stronger footing to compete with foreign banks.
- Plans to lift restrictions on foreign participation in the banking sector gradually beginning in 2007 were welcomed.
- Structural reforms and GLCs:
- Importance of deepening structural reforms to sustain private investment recovery, enhance efficiency, and sustain medium-term growth.
- Support for authorities' emphasis on enhancing the investment climate, upgrading human capital, and reforming GLCs.
- Recommendation to reduce the social obligations and privileges of GLCs to allow them to be run on a fully commercial basis and open new fields for private sector initiatives.
- Welcomed efforts to improve governance, public service delivery, and the quality of and access to tertiary education.
Key statistics and projections (selected)
- Real GDP growth: 2005 est. 5.3; 2006 proj. 5.5.
- Real GDP growth by year: 2000: 8.9; 2001: 0.3; 2002: 4.4; 2003: 5.4; 2004: 7.1; 2005: 5.3; 2006: 5.5.
- Real domestic demand: 2005: 5.0; 2006 proj.: 5.9.
- CPI inflation (period average) 2005: 3.1.
- Gross domestic investment (percent of GDP) 2005: 20.6; 2006 proj.: 20.8.
- Gross national saving (percent of GDP) 2005: 34.9; 2006 proj.: 35.0.
- Federal government overall balance (percent of GDP): 2005: -3.7; 2006 proj.: -3.4.
- Federal government non-oil primary balance (percent of GDP) estimated at -7.0 (series shows values: -6.6, -7.9, -7.0, -6.9).
- Consolidated public sector overall balance (percent of GDP): 2004: 4.1; 2005: 3.5.
- Total public sector debt (percent of GDP): 2005: 59.2; 2006 proj.: 57.8.
- Broad money (M3) percent change 2005: 10.2.
- Three-month interbank rate (period average, in percent): historical values include 3.2, 3.3, 2.8.
- Trade balance (USD billions): 2005: 33.2.
- Exports, f.o.b. (USD billions): 2005: 140.1; 2006 proj.: 152.7.
- Imports, f.o.b. (USD billions): 2005: 108.6; 2006 proj.: 119.6.
- Services and income balance (USD billions) 2005: -7.7; 2006 proj.: -7.5.
- Current account balance (USD billions): 2005: 18.9; 2006 proj.: 20.5.
- Current account balance (percent of GDP): 2005: 14.3; 2006 proj.: 14.2.
- Gross official reserves (USD billions): 2005: 85.4.
- Reserves (in months of following year's imports of GNFS): 2005: 6.0.
- Reserves (percent of short-term debt) 2005: 413.1; 2006 proj.: 479.5.
- Total external debt (USD billions): historical and projected values include 52.9, 55.4, 46.9, 51.9, 51.3, 47.2, 44.6, 40.0, 38.2 (table entries).
- Short-term external debt (percent of total): 2005: 32.3.
- Debt-service ratio (percent of exports of goods and services): 2005: 4.5.
- Nominal GDP (in billions of ringgit): 2005: 500; 2006 proj.: 545.
Public Information Notice No. 06/30 — IMF Executive Board conclusion on the 2005 Article IV consultation with Malaysia.