Malaysia's Economy: Getting Closer to High-Income Status

IMF News, March 7, 2018

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Malaysia’s economy continues to perform strongly and is on its way to achieving high-income status.
To reach the finish line, authorities will need to step up reforms to boost productivity and raise living standards for its 32 million citizens.

Growth was 5.8 percent in 2017.
Projected growth is 5.3 percent for 2018.
Growth drivers identified:
- Strong global demand for electronics.
- Improved terms of trade for commodities, such as oil and gas.
- Strong employment supporting private consumption.
- Investment contributing to growth.

The plan charts a path toward advanced economy status and greater inclusion.
Core objectives: increasing productivity and encouraging more innovation.
Six strategic pillars touch on equity, inclusiveness, environmental sustainability, human capital development, and infrastructure.
Emphasis on labor market outcomes:
- Increase labor’s share of income.
- Increase female labor force participation.
- Increase skilled labor employment.
- Improve education quality and match skills to industry needs.

Federal government deficit reduced from 3.4 percent of GDP in 2014 to 3 percent of GDP in 2017.
Deficit reduction was achieved mainly through expenditure cuts; the introduction of a Goods and Services Tax in 2015 also helped.
IMF advice:
- Maintain gradual fiscal consolidation.
- Continue to increase revenue to protect social and development spending.

Household debt to GDP ratio was 84.6 percent for 2017.
Observations:
- Household borrowing can support standards of living and economic growth by allowing spending when income is insufficient.
- Rapid increases in household debt relative to economic growth or very high levels can create vulnerabilities for households and the banking sector in the event of an unexpected economic shock.
- Risks are reduced if households possess sizable assets, which the IMF notes is the case in Malaysia.
- Conclusion: household debt per se is not negative, but it needs to be watched carefully.

Female employment grew at an annual rate of about 4½ percent between 2010 and 2016.
This growth more than tripled women’s contribution to real GDP growth, relative to 2001-08.
Counterfactual estimate: if the female labor force participation rate had not changed since 2012, real GDP would have been about 1 percent lower in 2016 compared with what it actually was that year.
Current participation rates:
- Female labor force participation: just above 54 percent.
- Male labor force participation: about 80 percent.
Policy implication: increasing female labor force participation remains important to raise labor input and support long-term growth.

Findings:
- Malaysia is performing strongly and is well on the way to achieving high-income status.
- Growth outperformed expectations in 2017 and is projected to remain robust in 2018.
- Structural priorities in the 11th Malaysia Plan align with productivity and inclusion goals.
- Fiscal consolidation has reduced the deficit, but reliance on spending cuts suggests a shift toward revenue measures would help protect social and development spending.
- Household debt is high at 84.6 percent of GDP for 2017 and warrants careful monitoring, though household assets mitigate some risks.
- Greater female labor force participation has materially contributed to GDP and remains a key lever for future growth.
Policy recommendations:
- Step up reforms to boost productivity and raise living standards.
- Maintain gradual fiscal consolidation while increasing revenues to safeguard social and development spending.
- Monitor household debt dynamics and household asset positions to mitigate financial-sector and household risks.
- Continue policies to increase female labor force participation and improve labor market outcomes, skills, and education quality.

Source: Malaysia's Economy: Getting Closer to High-Income Status (March 7, 2018).