IMF sees stable growth in M’sia over medium term

  • Economy
  • Tuesday, 12 Mar 2019

The index for Malaysia weakened to 64 from 75 as respondents expressed concern about consumer sentiment. A reading above 50 indicates a positive outlook.

PETALING JAYA: Malaysia’s economic growth is expected to stabilise in 2019 and over the medium term, with inflation picking up and the current account surplus continuing to narrow, the International Monetary Fund (IMF) said.

In conclusion of the 2019 Article IV consultation with Malaysia, the IMF said domestic demand would remain the main driver of growth, with private consumption and investment supported by an improved business environment and investor confidence.

“This would counter-balance the negative drag from the external environment and fiscal consolidation, leaving growth flat at 4.7% in 2019 and close to potential (about 4.75%) over the medium term.

“Inflation would rise above 2% in 2019, as the effect of the goods and services tax (GST) removal dissipates and oil subsidies become targeted.

“Over the medium term, growth is expected to converge to potential and inflation would remain subdued,” said the IMF.

Malaysia’s growth has averaged above 5% over the past five years, leading to a higher per capita income and reducing poverty.

The nation’s economy continues to perform well despite external headwinds and is now moderating – estimated at 4.7% in 2018.

This is underpinned by robust domestic and external demand.

Headline inflation dropped from an average of 3.7% in 2017 to an estimated 1% in 2018 as the domestic fuel price adjustment was suspended, the zero-rated GST was replaced by the narrower-base sales and service tax (SST), and food price inflation declined.Additionally, the credit-to-gross domestic product (GDP) ratio is declining.

On the external side, the current account surplus was estimated at 2.2% of GDP in 2018, having gradually narrowed in recent years as growth drivers have shifted towards domestic demand.

The executive board of directors concurred that while the medium-term outlook remains favourable, risks are tilted to the downside, stemming primarily from the external environment.

“They encouraged the authorities to continue implementing credible macroeconomic policies while safeguarding growth and financial stability, and undertaking structural reforms to boost sustainable, inclusive growth.

“The directors agreed with the planned gradual pace of fiscal consolidation in 2019 and over the medium term to support debt reduction and strengthen fiscal buffers.

“They encouraged the authorities to embed the medium-term fiscal path in a strengthened fiscal framework that would rely on credible revenue and expenditure measures,” said the IMF.

Noting Malaysia’s low tax revenue ratio, the directors emphasised that revenue mobilisation should be a priority, not only to support medium-term consolidation, but also to help finance needed expenditure to achieve government priorities identified under the mid-term review of the Eleventh Malaysia Plan.

The directors welcomed continued efforts to increase fiscal transparency and supported the broadly neutral monetary policy stance.

Going forward, domestic economic and financial conditions should continue to guide monetary policy decisions, with exchange rate flexibility the first line of defence against shocks.

Risks to the growth outlook stem largely from external factors.

The IMF said that Malaysia’s highly open economy would be vulnerable to rising protectionism, weaker-than-expected growth in trading partners, or a significant slowdown in China.

A sharp tightening of global financial conditions could cause financial stress, while lower-than-projected oil prices could reduce exports and growth.

Domestically, contingent liabilities could necessitate additional measures to ensure medium-term fiscal sustainability, while delays or resistance to the governance reform agenda could undermine confidence, leading to lower investment and growth.

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