IMF Concludes 2013 Article IV Consultation Mission to Malaysia

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Press Release No. 13/510
December 16, 2013

An International Monetary Fund (IMF) team, led by Alex Mourmouras, Mission Chief for Malaysia, visited Kuala Lumpur and Penang during December 4-16, 2013, to conduct discussions for the 2013 Article IV Consultation with Malaysia. The team exchanged views with the Government of Malaysia and Bank Negara Malaysia (BNM), and met with a wide range of representatives from the private sector, think tanks and academia. Based on the visit, a staff report will be prepared and presented to the Executive Board of the IMF for discussion in February 2014.

At the conclusion of the visit, Mr. Mourmouras issued the following statement:

“The mission commends the authorities for their adept economic management in the context of a difficult external environment for Malaysia in 2013. In particular, the economy exhibited remarkable resilience in weathering the global financial turbulence in mid-year, reflecting the depth of Malaysia’s financial markets and the role of its exchange rate as a shock absorber, coupled with BNM’s strategy of intervening to avoid excessive volatility.

“Malaysia’s near-term growth prospects are favorable. Real GDP growth picked up in the third quarter, and is projected to have reached about 4½ percent by the end of 2013. This growth momentum is likely to be sustained into 2014, underpinned by a pickup in private investment and stronger exports, which will more than offset mild headwinds from fiscal consolidation. The current account surplus is projected to narrow to about 3½ percent of GDP in 2013, and stabilize at around this level in 2014. Underlying inflationary pressures are subdued, but headline inflation rose to 2.6 percent year-on-year in September, reflecting cuts in fuel subsidies. The ongoing phased reduction of fuel subsidies will contribute to a small rise in inflation, from 2 percent in 2013, to nearly 3 percent in 2014.

“The Federal Government is on track to reach its fiscal deficit target of 4 percent of GDP in 2013. The 2014 federal deficit target of 3½ percent of GDP is feasible if, as assumed in the mission’s baseline, growth in current spending is contained within a tight envelope. The Government has taken important steps to strengthen fiscal management and policy in order to reduce debt and rebuild fiscal buffers. The mission welcomes the timely and comprehensive fiscal reform package comprising the establishment of a high-level Fiscal Policy Committee, fuel and electricity subsidy rationalization, and the introduction of Goods and Services Tax (GST) in April 2015, and supports the authorities’ target to reduce the federal deficit to 3 percent by 2015 and to about zero by 2020. To mitigate the impact on the poor, the authorities are implementing the cash transfer program to the lower income groups and are examining ways to increase its targeting.

“Inflationary expectations are well anchored; however, vigilance will be required in order to preempt second round effects associated with the implementation of the minimum wage, subsidy cuts, and GST introduction. Also, the growth outlook is subject to downside risks, reflecting the uncertain external environment. Should the growth outlook deteriorate significantly, there is ample room for BNM to use monetary policy to support growth. However, relatively high fiscal deficit and public debt levels afford limited space for a sustained countercyclical fiscal response. Any fiscal stimulus should be temporary, targeted, and anchored in a credible medium term fiscal consolidation program. Structural reforms and the all-important subsidy rationalization and GST implementation should not be delayed or compromised.

“Malaysia’s financial system is well-placed to withstand potential stresses, with strong capital and liquidity buffers. Non-performing loans are relatively low and asset quality has been improving over the past few years. Nevertheless, ongoing global volatility, high household debt levels and other risks warrant continued vigilance. In that context, the mission welcomes steps taken by the authorities to strengthen financial supervision. Since November 2010, BNM has implemented a series of macroprudential policy measures, which are aimed at slowing property price inflation and credit growth. This has been complemented by measures in the 2014 Budget to increase real estate taxes while providing support for low income home buyers. The Financial Services Act and the Islamic Financial Services Act that came into force in July 2013 provides BNM with additional powers to supervise financial conglomerates.

“The mission commends the authorities for implementing an extensive agenda of structural reforms to strengthen growth and make it more inclusive, as elaborated in a number of multiyear transformation programs. Efforts to upgrade human capital, foster technological readiness, inject greater competition into product markets, and transform the Government are important ingredients in this regard. Of critical importance is the program to improve educational attainment to meet the talent needs of the economy.

“Finally, the team would like to thank the officials of the Government of Malaysia, Bank Negara Malaysia, think tanks, private sector representatives and academics for the open and constructive discussions. We would also like to thank the authorities for their generous hospitality during our stay. We look forward to continued close cooperation with Malaysia.”

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