IMF Staff Completes 2019 Article IV Consultation to Malaysia

IMF News, December 12, 2018

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Press Release No. 18/471 — December 12, 2018.
An IMF team, led by Nada Choueiri, visited Kuala Lumpur and Putrajaya from November 29 to December 12, 2018, to conduct discussions for the 2019 Article IV Consultation with Malaysia.
Statement conveys preliminary findings of the IMF staff team; views are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
The IMF team will prepare a staff report and present it to the Executive Board of the IMF, currently expected in February 2019.

Real GDP growth is projected at 4.7 percent for 2018, driven by domestic demand.
Real GDP growth is projected at 4.5 to 5.0 percent in 2019, with domestic demand remaining the main driver.
Headline inflation is declining and is expected to average around 1.1 percent in 2018.
Inflation should average 2.2 percent in 2019, as the effect of GST removal dissipates.
Credit growth has rebounded recently, and capital outflows have been manageable.
The current account surplus is projected to decline to 2.1 percent of GDP.
The U.S. tariffs on imports from China are expected to have an overall adverse impact on Malaysia’s growth.

External risks:
- Rising protectionism.
- A sharp tightening of global financial conditions.
- Weaker-than-expected growth in trading partners.
Domestic risks:
- Contingent liabilities could necessitate additional measures to ensure medium-term fiscal sustainability.
Overall assessment: The risks to the growth outlook are to the downside.

The budget deficit projected for 2018 represents a delay to the fiscal adjustment.
The government's planned pace of fiscal consolidation for 2019 is appropriate and will help build buffers and maintain financial market confidence.
Policy recommendations:
- In the medium term, fiscal policy should follow a gradual consolidation path.
- The composition of adjustment should be improved to make it more revenue based.
- Make room for increased social spending to support inclusive growth.
- Revenues should be strengthened.

Malaysia’s monetary policy framework has performed well, delivering price and output stability.
The current broadly neutral monetary policy stance is appropriate given close-to-potential growth, no inflationary pressures, and gradually tightening financial conditions.
Continued reliance on exchange rate flexibility and macroeconomic policy adjustments should be the first line of defense against external shocks.
Maintaining the current broadly neutral monetary policy stance is appropriate.

The financial system seems well positioned to cope with standard shocks.
Bank profitability and liquidity are sound.
The corporate sector is only moderately leveraged.
Household debt is high, but declining as a share of GDP.
Risks in the housing market appear manageable.
Authorities’ close monitoring and active consideration of measures to mitigate risks are welcome.

A comprehensive structural reform agenda, along the lines laid out in the Mid-Term Review of the Eleventh Malaysia Plan, is needed to help Malaysia achieve high-income status and inclusive economic development.
Priority reforms to lift productivity growth should include:
- Improving education.
- Accelerating innovation and technology adoption.
- Encouraging a move up the value chain.
Governance reforms could help improve transparency and accountability and the efficiency of public services.
It will be important to sustain momentum in governance reforms and anchor them in appropriate legislation to secure the independence of key institutions and strengthen checks and balances.

The IMF team thanked officials of the Government of Malaysia and Bank Negara Malaysia, as well as representatives from think tanks, NGOs, and the private sector for helpful discussions, and thanked the authorities for their generous hospitality during the stay.

IMF Communications Department — PRESS OFFICER: Ting Yan; Phone: +1 202 623-7100; Email: MEDIA@IMF.org