Press Release No. 19/466

IMF Staff Completes 2020 Article IV Consultation Visit to Malaysia

December 17, 2019

• The Malaysian authorities are making progress on their reform agenda. Real GDP growth is projected at 4.5 percent for 2019, underpinned by domestic demand.
• The 2020 budget strikes a balance between fiscal consolidation and growth. The current monetary policy stance is appropriate.
• Accelerating the authorities’ structural reform agenda is important to boost productivity and help achieve high income status.

An International Monetary Fund (IMF) team, led by Nada Choueiri, visited Kuala Lumpur and Putrajaya from December 5 to December 17, 2019, to conduct discussions for the 2020 Article IV Consultation with Malaysia. At the conclusion of the visit, Ms. Choueiri issued the following statement:

“The Malaysian authorities are making progress on their reform agenda. Real GDP growth is holding up and is projected at 4.5 percent for 2019, driven by domestic demand. Headline inflation is expected to remain subdued at slightly under 1 percent this year. Credit growth has moderated recently, and capital flows have been manageable. The current account surplus is projected to increase to 3.5 percent of GDP in 2019.

“Looking ahead, real GDP growth is projected stable at 4.5 percent in 2020, with domestic demand remaining the main driver of growth, while continued trade tensions between the U.S. and China are expected to have an overall adverse impact on Malaysia’s growth. Inflation should average 2.1 percent as the effect of the GST removal vanishes.

“The risks to the growth outlook are, on balance, to the downside. On the external side, Malaysia is vulnerable to escalating trade tensions, an abrupt deterioration in market sentiment towards emerging markets, and weaker-than-expected trading partners growth, but the finalization of a sustainable phase-one deal between the US and China is an upside risk. Domestically, a sharp drop in real estate prices or a deterioration in household debt service ability are downside risks.

“The fiscal adjustment planned for 2019 is on track and the 2020 budget strikes a balance between fiscal consolidation and growth. The authorities’ commitment to medium term fiscal consolidation is welcome and would create space for increased social spending and help achieve inclusive growth. In this context, identifying specific revenue and spending measures to support medium term fiscal consolidation is a priority.

“Malaysia’s monetary policy framework has performed well, delivering price stability and robust growth in recent years. The current monetary policy stance is appropriate in the context of a closing output gap. In case of adverse shocks, the policy response could be a combination of use of available fiscal and monetary policy space and exchange rate flexibility.

“The financial sector is stable. Banks are well capitalized, profitability has been maintained and asset quality is sound. Household debt is high compared to peers and the real estate sector represents a vulnerability. The authorities’ close monitoring of these risks is welcome.

“The authorities have made progress in governance reforms, including by launching the National Anti-Corruption Plan. It is important to sustain the momentum and anchor reforms in appropriate legislation.

“Acceleration of the authorities’ structural reform agenda would boost productivity and help achieve high income status. Priority measures in this area include: (i) continue to promote trade openness; (ii) continue to improve the business environment by facilitating SME access to credit; (iii) enhance the quality of and access to education; (iv) encourage innovation and technology adoption; and (v) boost female labor force participation.

“The IMF team would like to thank the officials of the Government of Malaysia and Bank Negara Malaysia, as well as representatives from think tanks, NGOs, and the private sector for the helpful discussions. We would also like to thank the authorities for their warm hospitality during our stay. We look forward to maintaining a close and productive relationship with Malaysia. The IMF team will prepare a staff report and present it to the Executive Board of the IMF, currently expected in February 2020.”