KUALA LUMPUR: The International Monetary Fund (IMF) sees the Malaysian economy growing by 6.5% this year, underpinned by the manufacturing and construction sectors but overall recovery is expected to be uneven across sectors.
In its report issued on Wednesday, it said the recovery would hinge on an improvement in both domestic and external demand.
IMF said a strong recovery in 2021 remains subject to considerable downside risks and noted that macroeconomic policies should remain supportive until the recovery is fully entrenched.
As for inflation, it expected it to be at 2% and the current account surplus is on course to decline as demand for pandemic-related products starts receding and the rebound in domestic demand raises imports.
However, it cautioned if the Covid-19 pandemic intensifies and there is a materialisation of other risks, these could derail the recovery.
“A protracted spread of the virus could prompt the authorities to tighten health and physical distancing measures, with negative impact on growth.
“Also on the downside, Malaysia’s open economy is vulnerable to escalating trade tensions and weaker-than-expected growth in trading partners, ” it said.
IMF also said the domestic policy uncertainty could also dampen business confidence and investment, with negative impact on economy activity. On the upside, faster-than expected deployment of Covid-19 vaccines could raise growth.
As for the banking system, the IMF agreed it remains sound. Nevertheless, they encouraged the supervisory authorities to remain alert to deterioration in banks’ asset quality in the near term and called for close monitoring of the high level of household debt as loan moratoria are phased out.
The IMF welcomed the Malaysian authorities’ well-coordinated policy response to the pandemic which, together with sizable buffers, has helped mitigate the macro-financial impact of the crisis.
It also welcomed the authorities’ commitment to fiscal reform and medium-term consolidation.
“Spending rationalisation and revenue-increasing measures will be necessary to help rebuild fiscal buffers once the recovery is fully cemented, ” it said and also urged the authorities to start preparing for such measures and noted that adoption of the Fiscal Responsibility Act would help better anchor public finances.
The IMF also supported the accommodative monetary policy stance and welcomed Malaysia’s continued efforts to deepen domestic forex markets through expanded availability of hedging instruments and other initiatives.
The IMF encouraged the authorities to continue allowing the exchange rate to cushion shocks to the economy.
It said Malaysia’s external position is stronger than warranted by economic fundamentals and desirable policies.
It called for policies to strengthen social safety nets and encourage private investment and productivity growth, which would also help with external rebalancing.