KUALA LUMPUR: The International Monetary Fund has praised Malaysia’s economic resilience and acknowledges that a comprehensive structural reform agenda is needed to help the country achieve high-income status and inclusive economic development.
The fund also expects the country’s real gross domestic product (GDP) to grow 4.7 per cent this year, driven by domestic demand.
“The Malaysian economy has shown resilience in recent years and continues to perform well,” said Nada Choueiri, who led the IMF team which was here and Putrajaya from November 29 to December 12 for discussions with government officials.
“Real GDP growth is moderating in line with expectations and is projected at 4.7 per cent for 2018, driven by domestic demand,” she added.
Choueiri noted that headline inflation was declining and was expected to average around 1.1 per cent this year.
“Credit growth has rebounded recently, and capital outflows have been manageable. The current account surplus is projected to decline to 2.1 per cent of GDP,” he said.
The IMF believes Malaysia’s fiscal policy should will show a gradual consolidation path making room for increased pro-growth social spending.
The country’s revenues should be strengthened while maintaining the current broadly neutral monetary policy stance is appropriate.
The IMF’s fact-finding mission also concluded that a comprehensive structural reform agenda, along the lines laid out in the Mid-Term Review of the Eleventh Malaysia Plan, was needed to help Malaysia achieve high-income status and inclusive economic development.
In addition, the IMF team finds that priority should be given to effective implementation of policies that lift productivity growth by, among others include improving education, accelerating innovation and technology adoption and encouraging a move up the value chain.
"Looking ahead, real GDP growth is projected at 4.5 to 5.0 percent in 2019, with domestic demand remaining the main driver of growth, while the US tariffs on imports from China are expected to have an overall adverse impact on Malaysia’s growth.
Inflation should average 2.2 percent, as the effect of GST removal dissipates," she noted.
Choueiri also viewed the country's the risks to the growth outlook were to the downside.
On the external side, she said Malaysia was vulnerable to rising protectionism, a sharp tightening of global financial conditions, and weaker-than-expected growth in trading partners.
Domestically, contingent liabilities could necessitate additional measures to ensure medium-term fiscal sustainability.
“While 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.
"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, making room for increased social spending to support inclusive growth," she said.
The IMF team will prepare a staff report and present it to the executive board of the IMF in February 2019.
Touching on stability, Choueiri said Malaysia’s monetary policy framework had 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, she said.
“The financial system seems well positioned to cope with standard shocks. Bank profitability and liquidity are sound, and the corporate sector is only moderately leveraged.
"Household debt is high, but declining as a share of GDP, and risks in the housing market appear manageable. Although the financial sector is resilient at present, the authorities’ close monitoring and active consideration of measures to mitigate risks are welcome," Choueiri said.