AS far as endorsements go, it could not have come from a better source. The Malaysian government and its key monetary policy agency, Bank Negara Malaysia (BNM) continue to attract plaudits from the International Monetary Fund (IMF) for their handling of the country’s economy and monetary policy.
The preliminary findings of a report by a high-level IMF team that visited Kuala Lumpur in November and December suggested that Malaysia’s economy has outperformed in 2017. The report, for IMF’s 2018 Article IV Consultation on Malaysia, will be presented to the IMF Executive Board next February.
Malaysia’s real gross domestic product (GDP) growth, for instance, has surprised the IMF team with its impressive steady upward trend and is projected by the Fund to reach 5.5 per cent to 6.0 per cent for 2017, driven primarily by strong domestic demand and robust exports. IMF had forecast a GDP growth of 4.2 per cent for Malaysia in April this year.
GDP is the most commonly used single measure of a country’s overall economic activity and represents the total value of final goods and services produced within a country during a specified time period, such as one year.
“The Malaysian economy,” stressed Nada Choueiri, the mission leader of the IMF Team, “has shown resilience in recent years and continues to perform well. Real GDP growth has surprised on the upside, growing at 5.9 per cent year-over-year in the first three quarters of 2017. For the year as a whole, growth is projected at 5.5–6.0 per cent, still driven by domestic demand and robust exports. On the external side, the current account balance surplus has increased, helped by strong exports”.
The good news is that real GDP growth is projected to maintain a sustainable level at between 5.0 per cent and 5.5 per cent for 2018, albeit IMF expects this upturn to “begin to normalise” from the 6.0 per cent projection for 2017, akin to a market correction. Similarly, this momentum in economic activity, according to the IMF team, “is expected to remain strong in the first half of the year, supported by domestic demand and continued strength in global trade”.
The Article IV Consultation is a key component of the IMF’s surveillance tools for monitoring the financial stability and strength of economic activities of member countries. It complements IMF’s broader Financial Sector Action Plan (FSAP), which assesses the strength and effectiveness of regulation and supervision of, among others, the banking, capital market and insurance sectors in a member country.
However, headline consumer price inflation has gone up on higher oil prices, and is projected at close to 4.0 per cent for the year. But, the IMF team believes that core inflation and credit growth are contained.
“Headline inflation is expected to decline to the 3.0 per cent to 3.5 per cent range on lower impact from global oil prices. Fiscal (tax) policy should follow a gradual consolidation path prioritising adjustment through higher revenues, making room for increased pro-growth social spending. The authorities’ comprehensive structural reform agenda, laid out in the 11th Malaysia Plan, focuses on supporting higher productivity and improving labour market outcomes, which would help boost medium-term growth and improve living standards,” said the IMF team in its initial assessment.
Choueiri said Putrajaya should give priority to policies to encourage female labour force participation; improve the quality of education and skills; improve vocational and technical training to reduce labour market skill mismatches; encourage research and development; and update public infrastructure.
Fiscal consolidation remains an important agenda for the Malaysian government. At the autumn annual meetings of the IMF/World Bank Group in Washington DC in October, Second Finance Minister Datuk Seri Johari Abdul Ghani, in his statement to the Plenary Session, confirmed that: “Malaysia is on track to achieve its 3.0 per cent GDP fiscal deficit target for 2017, and the government remains committed towards achieving a near-balanced budget by the year 2020.”
A major boost for the Treasury’s coffers has been the improved collection of the Goods and Services Tax (GST), implemented in April 2015, coupled with subsidy rationalisation and productivity enhancement. This, according to Johari, has cushioned the revenue loss due to prolonged low global oil prices.
There is also implicit praise for BNM’s handling of monetary policy and its regulation and supervision of the banking and insurance sectors. “The financial sector is resilient. Bank profitability and liquidity are sound, and corporate access to credit remains healthy. While housing price growth has moderated, pockets of risks exist in exposures to household mortgages and the property development sector. However, their impact on macro-financial stability appears contained,” said Choueiri.
On the back of the strong economic and financial fundamentals, the IMF team urges the Malaysian government and BNM to stand ready to raise the policy (interest and profit) rates should there be any whiff of the economy and banking sector overheating. Here, continued reliance on exchange rate flexibility and macroeconomic policy adjustments should be the first line of defence against capital flow shocks.
The IMF team also praised the government for regularly consulting market participants in developing onshore financial markets and the introduction of new regulations and standards.
Mushtak Parker is an independent London-based economist and writer.