On February 7, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 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.
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.
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://www.imf.org/external/np/sec/misc/qualifiers.htm.