IMF gives thumbs up to Malaysia

imf-malaysiaKUALA LUMPUR: The International Monetary Fund (IMF) has projected Malaysia’s real gross domestic product (GDP) growth to be at 5.5%–6% for 2017, better than expected.

The financial sector is resilient and real GDP growth for 2018 is projected at 5.0–5.5%, according to a statement posted on the IMF website.

An IMF team, led by Nada Choueiri, visited Kuala Lumpur and Putrajaya from Nov 28 to Dec 8, and exchanged views with senior officials of the government and Bank Negara Malaysia. It also met with representatives from the private sector and think tanks.

Choueiri said in the statement posted on Dec 11 that “The Malaysian economy has shown resilience in recent years and continues to perform well. Real GDP growth has surprised on the upside, growing at 5.9% year-over-year in the first three quarters of 2017. For the year as a whole, growth is projected at 5.5 – 6.0%, still driven by domestic demand and robust exports.

“However, core inflation and credit growth are contained. Headline consumer price inflation has gone up on higher oil prices, and is projected at close to 4% for 2017. On the external side, the current account balance surplus has increased, helped by strong exports.”

She said real GDP growth for 2018 was projected at 5.0–5.5%. Saying the cyclical upturn would begin to normalise, Choueiri added the momentum in activity was expected to remain strong in the first half of the year, supported by domestic demand and continued strength in global trade.

Headline inflation is expected to decline to the 3.0–3.5% range on lower impact from global oil prices.

“Risks to the near-term outlook are balanced. Strong global demand for electronics, which has benefited Malaysia’s exports, could last longer than anticipated, while downside risks include policy uncertainty in advanced economies and tighter global financial conditions. Going forward, striking the right balance in policies will be key.”

Choueiri said the Malaysian government’s planned pace of fiscal consolidation for 2017-18 was appropriate, and that it would help build buffers and maintain financial market confidence.

In the medium term, she suggested, fiscal policy should follow a gradual consolidation path. However, she said, the current accommodative monetary policy stance with a bias towards reduced accommodation was appropriate.

“The authorities should stand ready to raise the policy rate should leading indicators suggest the emergence of overheating pressures. Continued reliance on exchange rate flexibility and macroeconomic policy adjustments should be the first line of defense against capital flow shocks.”

Welcoming the Malaysian authorities’ consultation with market participants in developing onshore financial markets, she said continuous communication on initiatives to deepen these markets over time would help build more confidence.

“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.”

Choueiri said priority should be given 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 upgrade public infrastructure.