IMF Executive Board Concludes 2020 Article IV Consultation with Malaysia
February 27, 2020
On February 7, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Malaysia.
Malaysia’s economy is stable despite domestic and external challenges. Growth has averaged just under 5 percent over the past 5 years, leading to higher per capita income. Economic growth has held up, and is estimated at 4.5 percent in 2019, driven by domestic demand. Headline inflation moderated from an average of 1 percent in 2018 to 0.7 percent in 2019, reflecting declining global oil prices, moderating wage growth, and the impact of replacing the GST with the smaller-base SST in 2018. Credit growth is moderating. On the external side, the current account surplus is estimated to have increased to 3.5 percent of GDP in 2019, driven by a temporary decline in capital imports and an improvement in the primary income account.
Growth is expected to remain stable in 2020 and to rebound in the medium term, with inflation slightly higher and the current account declining. Domestic demand will be the main driver of growth, with stable employment and income growth supporting private consumption. Private investment will gradually pick up as the business environment continues to improve and external uncertainties dissipate. Headline inflation is expected to increase to slightly over 2 percent as domestic demand rises, the base effect of the consumption tax regime change vanishes, and fuel subsidies become targeted. The current account surplus is expected to narrow to 2.7 percent of GDP as capital imports resume. Over the medium term, growth should converge to potential (just below 5 percent) and inflation remain under control, while the current account surplus continues to moderate.
Risks to the growth outlook are, on balance, to the downside. Malaysia’s highly open economy is vulnerable to escalating trade actions and weaker-than-expected trading partners’ growth. An abrupt deterioration in market sentiment towards emerging markets could lead to tighter financial conditions. However, a durable truce that may follow the recent signature of the phase-one deal between the US and China is an upside risk. Domestically, contingent liabilities could pose fiscal risks and a sharp drop in real estate prices or a deterioration in household debt service ability could affect growth and financial stability, while domestic policy uncertainty could reduce investment.
Executive Board Assessment [2]
Executive Directors welcomed that the Malaysian economy has been stable despite internal and external challenges. Directors recognized the progress made on the reform agenda and encouraged the authorities to remain committed to governance and structural reforms. To address the risks facing the economy, Directors recommended that policy priorities ahead should continue to focus on a medium-term fiscal consolidation plan, while safeguarding growth and financial stability.
Directors welcomed the planned pace of fiscal consolidation and encouraged the authorities to identify well-defined spending and revenue measures to support this adjustment, including in the context of the upcoming medium-term revenue strategy preparation. They also encouraged the authorities to push ahead with the adoption of a Fiscal Responsibility Act, and with plans to improve debt management, public procurement, and the public investment framework.
Directors supported the broadly neutral monetary policy stance, given a closing output gap and broadly neutral financial conditions. They agreed that monetary policy should remain data dependent. Directors commended the authorities’ commitment to exchange rate flexibility as well as recent initiatives to deepen the FX markets and encouraged them to explore further options in this area, as this would enhance the ability of the exchange rate to act as a shock absorber. In general, they advised the authorities to continue to review the effectiveness of FX market measures and consider gradual phasing out of such measures.
Directors agreed that the financial sector is stable, and that profitability, capitalization and asset quality of banks are sound. However, they noted that household debt is high compared to peers, with pockets of vulnerability among lower-income groups. Directors advised the authorities to closely monitor risks in the real estate and household sectors. Further enhancing the macroprudential toolkit would be helpful. Directors commended the ongoing efforts to strengthen financial literacy and manage cyber risks and climate change risks to the financial sector.
Directors commended the authorities’ progress in developing and implementing governance reforms. They stressed the importance of sustaining the momentum and anchoring the reforms in legislation, particularly to help secure the independence of anti-corruption institutions, freedom of information, and to establish an asset declaration system. Further strengthening the AML/CFT framework will also be important.
Directors underscored that continued structural reforms aimed at raising investment and productivity are important to safeguard macroeconomic and financial stability and help address the external imbalances over the medium term. They supported the authorities’ emphasis on raising productivity as it would help achieve high-income status and inclusive growth. Directors advised that priority be given to enhancing the business environment and improving access to credit for SMEs; promoting trade openness; enhancing the quality of and access to education; encouraging innovation, including through digitalization of the economy; and boosting female labor participation.
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Table 1. Malaysia: Selected Economic and Financial Indicators, 2015-21 |
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Nominal GDP (2019): US$364 billion |
Population (2018): 32.4 million |
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GDP per capita (2019, current prices): US$11,173 |
Poverty rate (2017, national poverty line): 0.4 percent |
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Unemployment rate (2019): 3.4 percent |
Adult literacy rate (2018): 95.9 percent |
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Main goods exports (share in total, 2018): electrical & electronics (37.7 percent), commodities (15.6 percent), and petroleum products (7.5 percent). |
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Est. |
Proj. |
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2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
|
|
Real GDP (percent change) |
5.0 |
4.4 |
5.7 |
4.7 |
4.5 |
4.5 |
4.9 |
|
Total domestic demand 1/ |
5.8 |
4.8 |
6.5 |
4.3 |
3.4 |
5.6 |
6.3 |
|
Private consumption |
5.9 |
5.9 |
6.9 |
8.0 |
7.0 |
6.2 |
5.4 |
|
Public consumption |
4.5 |
1.1 |
5.5 |
3.3 |
1.7 |
1.9 |
1.9 |
|
Private investment |
7.6 |
4.5 |
9.0 |
4.3 |
1.0 |
3.0 |
5.0 |
|
Public gross fixed capital formation |
-2.8 |
-1.0 |
0.3 |
-5.0 |
-11.4 |
4.8 |
7.5 |
|
Net exports (contribution to growth, percentage points) |
-0.3 |
0.0 |
-0.3 |
0.8 |
1.4 |
-0.7 |
-0.9 |
|
Saving and investment (in percent of GDP) |
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Gross domestic investment |
25.4 |
26.0 |
25.6 |
23.6 |
22.0 |
22.1 |
22.9 |
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Gross national saving |
28.4 |
28.4 |
28.4 |
25.7 |
25.5 |
24.8 |
24.8 |
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Fiscal sector (in percent of GDP) 2/ |
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Federal government overall balance |
-3.2 |
-3.1 |
-2.9 |
-3.7 |
-3.4 |
-3.2 |
-3.0 |
|
Revenue |
18.6 |
17.0 |
16.1 |
16.1 |
17.4 |
15.1 |
15.1 |
|
Expenditure and net lending |
21.8 |
20.1 |
19.0 |
19.8 |
18.3 |
18.3 |
18.1 |
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Tax refunds (Arrears) 3/ |
2.4 |
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Federal government non-oil primary balance |
-5.1 |
-3.4 |
-3.4 |
-5.3 |
-6.6 |
-4.1 |
-4.1 |
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Consolidated public sector overall balance 4/ |
-7.6 |
-5.0 |
-3.6 |
-4.6 |
-6.3 |
-5.6 |
-5.2 |
|
General government debt 4/ |
57.0 |
55.8 |
54.4 |
55.6 |
57.1 |
57.0 |
56.5 |
|
Of which: federal government debt |
53.6 |
51.9 |
50.1 |
51.2 |
52.7 |
52.6 |
52.1 |
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Inflation and unemployment (annual average, in percent) |
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CPI inflation |
2.1 |
2.1 |
3.7 |
1.0 |
0.7 |
2.1 |
2.1 |
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CPI inflation (excluding food and energy) |
3.2 |
2.6 |
1.6 |
0.4 |
1.2 |
2.0 |
2.1 |
|
Unemployment rate |
3.2 |
3.5 |
3.4 |
3.3 |
3.4 |
3.4 |
3.4 |
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Macrofinancial variables (end of period) |
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Broad money (percentage change) 5/ |
3.0 |
2.7 |
4.8 |
7.7 |
4.8 |
6.7 |
7.1 |
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Credit to private sector (percentage change) 5/ |
8.6 |
5.3 |
5.4 |
8.3 |
5.4 |
7.1 |
7.1 |
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Credit-to-GDP ratio (in percent) 6/ 7/ |
132.5 |
131.9 |
126.7 |
130.1 |
130.9 |
131.4 |
131.4 |
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Credit-to-GDP gap (in percent) 6/ 7/ |
13.5 |
9.4 |
2.5 |
1.7 |
0.6 |
… |
… |
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Overnight policy rate (in percent) |
3.25 |
3.00 |
3.00 |
3.25 |
3.00 |
… |
… |
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Three-month interbank rate (in percent) |
3.8 |
3.4 |
3.5 |
3.6 |
3.3 |
… |
… |
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Nonfinancial corporate sector debt (in percent of GDP) 8/ |
105.0 |
108.0 |
101.5 |
103.0 |
99.4 |
… |
… |
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Nonfinancial corporate sector debt issuance (in percent of GDP) |
2.6 |
3.1 |
3.3 |
2.0 |
1.4 |
… |
… |
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Household debt (in percent of GDP) 8/ |
86.9 |
86.5 |
82.7 |
82.0 |
81.9 |
… |
… |
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Household financial assets (in percent of GDP) 8/ |
180.1 |
178.6 |
176.5 |
175.8 |
… |
… |
… |
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House prices (percentage change) |
7.4 |
7.1 |
6.5 |
3.3 |
1.5 |
… |
… |
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Exchange rates (period average) |
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Malaysian ringgit/U.S. dollar |
3.91 |
4.15 |
4.30 |
4.04 |
4.16 |
… |
… |
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Real effective exchange rate (percentage change) |
-8.5 |
-3.4 |
-1.6 |
4.1 |
-2.0 |
… |
… |
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Balance of payments (in billions of U.S. dollars) 6/ |
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Current account balance |
9.0 |
7.2 |
8.9 |
7.5 |
12.7 |
10.3 |
7.9 |
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(In percent of GDP) |
3.0 |
2.4 |
2.8 |
2.1 |
3.5 |
2.7 |
1.9 |
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Goods balance |
28.0 |
24.6 |
27.2 |
29.5 |
28.5 |
27.1 |
26.0 |
|
Services balance |
-5.3 |
-4.6 |
-5.3 |
-4.5 |
-2.3 |
-2.5 |
-3.2 |
|
Income balance |
-13.7 |
-12.8 |
-13.0 |
-17.6 |
-13.5 |
-14.3 |
-14.9 |
|
Capital and financial account balance |
-14.5 |
0.0 |
-1.1 |
4.6 |
-9.2 |
-7.4 |
-4.5 |
|
Of which: Direct investment |
-0.5 |
3.3 |
3.8 |
2.8 |
4.5 |
4.6 |
4.7 |
|
Errors and omissions |
-8.3 |
-5.8 |
-4.0 |
-10.2 |
-1.5 |
0.0 |
0.0 |
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Overall balance |
-13.7 |
1.4 |
3.8 |
1.9 |
2.0 |
2.9 |
3.4 |
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Gross official reserves (US$ billions) 6/ 9/ |
95.3 |
94.5 |
102.4 |
101.4 |
103.4 |
106.4 |
109.8 |
|
(In months of following year's imports of goods and nonfactor services) |
6.3 |
5.6 |
5.6 |
5.8 |
5.7 |
5.6 |
5.5 |
|
(In percent of short-term debt by original maturity) |
116.2 |
112.2 |
117.8 |
103.4 |
104.2 |
112.6 |
118.6 |
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(In percent of short-term debt by remaining maturity) |
74.4 |
83.2 |
93.7 |
84.9 |
85.5 |
91.3 |
95.4 |
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Total external debt (in billions of U.S. dollars) 6/ 9/ |
195.0 |
203.8 |
218.8 |
223.8 |
227.0 |
224.7 |
225.4 |
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(In percent of GDP) |
64.7 |
67.7 |
68.6 |
62.4 |
62.4 |
58.7 |
54.9 |
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Of which: short-term (in percent of total, original maturity) |
42.0 |
41.3 |
39.7 |
43.8 |
43.7 |
42.0 |
41.1 |
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short-term (in percent of total, remaining maturity) |
65.7 |
55.7 |
50.0 |
53.4 |
53.3 |
51.9 |
51.1 |
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Debt service ratio 6/ |
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(In percent of exports of goods and services) 10/ |
21.5 |
23.4 |
14.0 |
10.6 |
10.9 |
10.7 |
10.4 |
|
(In percent of exports of goods and nonfactor services) |
22.7 |
24.8 |
14.8 |
11.2 |
11.6 |
11.4 |
11.1 |
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Memorandum items: |
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Nominal GDP (in billions of ringgit) |
1,177 |
1,250 |
1,372 |
1,447 |
1,516 |
1,617 |
1,731 |
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Sources: Data provided by the authorities; CEIC Data Co. Ltd.; World Bank; UNESCO; and IMF, Integrated Monetary Database and staff estimates. |
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1/ Based on data provided by the authorities except for 2015 data which is estimated using splicing methodology by IMF. |
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2/ Cash basis. The authorities plan to adopt accrual basis by 2021. For 2019, overall and primary balance includes the payment of outstanding tax refund (arrears) amounting to RM37 billion. |
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3/ Tax refunds in 2019 are allocated for payment of outstanding tax refunds. |
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4/ Consolidated public sector includes general government and nonfinancial public enterprises (NFPEs). General government includes federal government, state and local governments, and statutory bodies. |
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5/ Based on data provided by the authorities but follows compilation methodology used in IMF's Integrated Monetary Database. Credit to private sector in 2018 onwards includes data for a newly licensed commercial bank from April 2018. The impact of this bank is excluded in the calculation of credit gap. |
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6/ IMF staff estimates. U.S. dollar values are estimated using official data published in national currency. |
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7/ Based on a broader measure of liquidity. Credit gap is estimated on quarterly data from 2000, using one-sided Hodrick-Prescott filter with a large parameter. |
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8/ Revisions in historical data reflect the change in base year for nominal GDP (from 2010=100 to 2015=100). |
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9/ The decrease in short-term debt by remaining maturity in 2017 was partly due to the implementation of an improved data compilation system that corrected previous overestimation. |
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10/ Includes receipts under the primary income account. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www-imf-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .
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