It said on Tuesday while the cyclical upturn will begin to normalise, momentum in activity is 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% to 3.5% range on lower impact from global oil prices,” it said.
As for 2017, the IMF said the 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-on-year in the first three quarters of 2017. For the year as a whole, growth is projected at 5.5% to 6%, still driven by domestic demand and robust exports.
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, it said.
The IMF issued the report following the conclusion of its preliminary findings after a visit to Malaysia between Nov 28 to Dec 8,2017.
The team was led by Nada Choueiri and they visited Kuala Lumpur and Putrajaya to conduct discussions for the 2018 Article IV Consultation with Malaysia.
The team exchanged views with senior officials of the Government of Malaysia and Bank Negara Malaysia (BNM), and met with representatives from the private sector and think tanks.
On the outlook, the IMF said 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.
“The government’s planned pace of fiscal consolidation for 2017–2018 is appropriate, and will help build buffers and maintain financial market confidence.
“In the medium term, fiscal policy should follow a gradual consolidation path, and the composition of adjustment could be improved to make it more revenue based and to make room for the structural reforms and increased social spending for inclusive growth. Medium term fiscal targets should be better communicated.
“The current accommodative monetary policy stance with a bias towards reduced accommodation is appropriate, given above–potential growth but still stable core inflation. 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.
“The authorities’ emphasis on consultation with market participants in developing onshore financial markets is welcome. Continuous communication on initiatives to deepen these markets over time would help further build 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.
“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.
“Priority should be given to policies to: encourage female labor force participation; improve the quality of education and skills; improve vocational and technical training to reduce labor market skill mismatches; encourage R&D; and update public infrastructure,” it said.